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The original documents are located in Box 16, folder "Federal Energy Administration -
Wallace and Wallace Entitlements Request" of the Philip Buchen Files at the Gerald R.
Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 16 of the Philip Buchen Files at the Gerald R. Ford Presidential Library
File
THE WHITE HOUSE
WASHINGTON
May 27, 1976
MEMORANDUM FOR:
PHIL BUCHEN
FROM:
KEN LAZARUS &
SUBJECT:
FEA Matter/Wallace & Wallace
Entitlements Request
Attached are copies of the following:
Tab A -- A memorandum dated May 14 from the
General Counsel at FEA to Frank Zarb on
the "Legality of Utilizing the Entitlements
Program to Provide Financial Assistance
to 'Refinery-Constructors'.
Tab B -- A letter dated May 10 from John Hill to
Chairman Ribicoff of the Senate Government
Operations Committee.
Tab C -- A letter to Mr. Charles Wallace from Frank
Zarb dated May 21.
Upon review of these materials, I reached the following conclusions:
(1) There is no sound legal footing under current law to allow
compliance with the request of Mr. Wallace. (2) Although FEA
has not formally opposed legislation introduced by Senator Allen
to satisfy the request of Mr. Wallace, John Hill's letter makes
clear that the proposal has substantial shortcomings. (3) The
possibility of a loan guarantee, also mentioned in Hill's letter,
likewise presents substantial problems. (4) It would appear that
there is nothing further which can be done at this time by our
office on Mr. Wallace's request.
FORD i LIBRARY GERVID
TAB
A
FEDERAL
ENERGY
FEDERAL ENERGY ADMINISTRATION
WASHINGTON, D.C. 20461
INGY
MAY 14 1976
OFFICE OF THE GENERAL COUNSEL
MEMORANDUM FOR: FRANK G. ZARB
Administrator
FROM: Michael F. Butler
mFB
General Counsel
SUBJECT: Legality of Utilizing the Entitlements
Program to Provide Financial Assistance
to "Refinery-Constructors"
I.
Issue Presented
The issue this memorandum addresses is whether the FEA
- has the authority, under existing legislation, to provide
entitlements benefits beyond those provided by the current
program to a limited category of persons ("refinery-
constructors") who are in the business of marketing petroleum
products and who have under construction new refinery capa-
city.
II. Statement of Facts
While the entitlements benefits considered herein would
accrue to all persons within a prescribed refinery-constructor
category, the chief proponent is and the most immediate
beneficiary would be Wallace & Wallace Chemical & Oil Corpora-
tion ("Wallace & Wallace"), whose proposal involves creation
of a refinery-constructor category of entitlements benefi-
ciaries narrowly defined to include only firms like Wallace &
Wallace that are importing crude oil for processing and have
a refinery under construction. Therefore, a brief description
of Wallace & Wallace's circumstances, as representative of the
class in general, is appropriate.
Wallace & Wallace is presently a retailer of fuel oil
that is attempting to construct a 150, 000 barrel-per-day
refinery in Alabama. Site preparation for the refinery has
been under way since late 1973 and various other related
commitments have been made, but no construction of the
refinery structure has commenced because adequate financing
for the project has not yet been obtained.
FORD
GERALD
LIBRARY
- 2 -
The firm has a long-term crude oil supply contract with
Venezuela to lift at least 10,000 barrels per day and a proc-
essing agreement with Mobil Oil Corporation under which Mobil
has agreed to refine the Venezuelan crude during the period
in which the Wallace & Wallace refinery is under construction.
Wallace & Wallace will retail the heating oil and other prod-
ucts, if any, that will be processed for it by Mobil.
Wallace Wallace has not yet lifted or had processed any
Venezuelan crude oil, but it states that it is in a position
to do so promptly if adequate additional entitlements relief
is provided.
Pursuant to the current Entitlements Program regulations,
Wallace & Wallace is able to receive the full benefit of
entitlement sales for the Mobil processed crude oil, since
Mobil has agreed to reduce the processing fee by the amount
of such benefits, which it is allowed to do under a provision
of the entitlements regulations promulgated at the urging of
- Wallace & Wallace. See 10 C.F.R. §§ 211.67 (1), 211.67 (m) (1) (i) (A),
and 211.67 (m) (1) (ii) (A). Moreover, if the Entitlements Pro-
gram is still in. effect at the time the Wallace & Wallace
refinery comes on stream, it will be a full participant in
that program, on an equal footing with other refiners.
It
will also be allowed to participate fully in the crude
buy/sell program to the extent it is able to demonstrate that
adequate supplies of crude oil are not available from other
sources. See 10 C.F.R. § 211.65 (b).
Wallace & Wallace's retail operation currently purchases
product from suppliers. with whom it also competes, such
.5
Amerada Hess. It is not clear whether having crude oil
refined by Mobil pursuant to a processing agreement will
reduce the current product costs of Wallace & Wallace's
retail operation, but in any event the firm alleges that its
per unit costs will still be too high to allow it to compete
effectively against firms like Hess. Moreover, Wallace &
Wallace alleges that lenders are unwilling to provide the
capital necessary to finance construction of the refinery
unless the firm achieves a significant increase in its cur-
rent operating profits. The amount OL additional financial
assistance that Wallace & Wallace urges be provided to
qualified refinery-constructors would be the difference
between, on the one hand, such a firm's total costs plus an
industry-wide average profit ($.84 per barrel currently) and,
on the other hand, the firm's total yield without such addi-
tional entitlements relief. In Wallace & Wallace's case,
FORD is LIBRARY GERALD
- 3 -
case, that difference would be approximately $.60 per barrel,
or a total of $180,000, for the month of April 1976. Wallace &
Wallace does not allege that its current retail operations
are unprofitable, but only that they are not earning suffi-
cient profits to enable it to obtain the financing to con-
struct a refinery.
III. Conclusion
There is a substantial likelihood that, if challenged,
an amendment to the Entitlements Program to provide additional
entitlements benefits to refinery-constructors would be held
by the courts to be in excess of the FEA's legislative
authority.
IV. Discussion
The request that the FEA provide entitlements to a
- limited category of "refinery-constructors" in order to
further the goal of increasing U.S. refining capacity and
increasing competition in the refining industry must initially
be considered within the statutory confines of the Emergency
Petroleum Allocation Act of 1973, as amended ("EPAA").
Accordingly, the important threshold question to address is
whether the EPAA provides the agency with authority to grant
the relief sought.
In Section 4 (a) of the EPAA, Congress has provided the
FEA with authority to regulate the allocation and pricing of
crude oil and refined petroleum products. In Section 4 (b) (1),
Congress has set forth a number of objectives which the
FEA's Section 4 (a) allocation and pricing regulations should
achieve "to the maximum extent practicable." In upholding
the Entitlements Program, the Temporary Emergency Court of
Appeals ("TECA") has stated that FEA's Section 4 (a) authority
must be read together with the objectives of Section 4 (b).
See Cities Service Co. V. FEA,
F.2d
(T.E.C.A.,
December 31, 1975), rehearing denied,
F.2d
(January 28,
1976) / Pasco, Inc. V. FEA, 525 F.2d 1391 (T.E.C.A. 1975).
On February 27, 1976, Cities Service Company filed a
petition in the Supreme Court to seek review of the TECA
decision upholding the Entitlements Program. It will probably
be at least another month before the Supreme Court decides
[footnote continued on next page]
GERALD FORD LIBRARY
- 4 1.
However, Section 4 (b) (1) of the EPAA does not provide,
and no court decision has ever held, that FEA has the
authority to take any action it desires in order to achieve
a Section 4 (b) (1) objective. For example, FEA does not have
the authority to take any action it chooses to "foster com-
petition" in the petroleum industry, although that goal is
mentioned in Section 4 (b) (1) (D) of the EPAA. Rather, the
agency is required, in carrying out the allocation and price
control authority of Section 4 (a), to do so in a manner that
would, to the maximum extent practicable, achieve the various
objectives stated in Section 4 (b) (1) */ In this respect,
the TECA has stated that none of the EPAA's nine objectives
should be elevated to the level of a mandatory requirement,
and "the balancing of all objectives is required 'to effec-
tuate maximum achievement of their competing interests.'"
Pasco, Inc. V. FEA, supra, 525 F. 2d at 1397, quoting from
Air Transport Ass'n V. FEO, 520 F.2d 1339 (T.E.C.A. 1975). It
is thus clear that FEA does not possess unbridled authority
- to subsidize, or to require other oil companies to subsidize,
the construction of a refinery, even though the new refinery
might foster competition in the industry and thereby help
achieve a Section 4 (b) (1) objective.
Against this background, any proposed amendment to the
Entitlements Program must be considered in the context of the
basis upon which the program has until now been upheld in
the courts. The Entitlements Program has been challenged in
the courts by the major oil companies as a "subsidy" program
beyond the agency's price and allocation authority. As it
is presently being administered, however, the Entitlements
Program has a direct relationship to the allocation and
pricing authority of Section 4 (a) because it allocates old
oil to reduce the crude cost and product price disparities
[footnote continued from previous page]
whether it will review the TECA decision. If the Supreme
Court decides to do so, it would be six more months before
the Court could hear argument on the matter and another two
to three months from then before a decision would be issued.
This is clear from the introductory language of Sec-
tion 4 (b) (1) itself, which reads "[t]he regulation under
subsection (a), to the maximum extent practicable, shall pro-
vide, for " (emphasis added), and then lists the various FORD
objectives.
GERALD
LIBRARY
- 5 -
caused by the two-tier (now three-tier) pricing system for
crude oil. In effect it spreads the advantage of having
access to old oil -- an advantage entirely created by FEA
when it imposed price controls on old oil -- to all refiners
on a pro rata basis. Given these direct pricing and allo-
cation functions, the Entitlements Program has withstood
vigorous court challenges essentially because of the elimi-
nation of cost distortions that it achieves. In this con-
nection, the TECA stated in Pasco, Inc. V. FEA:
"The regulation, by granting entitlements
to those refiners with old oil ratios below
the national ratio due to their own high pro-
duction of new, released and stripper well oil,
merely provides for the continuation of the
monetary incentive which was a fundamental
part of the 'two-tier' pricing system. The
correction of economic distortion and unfair
competitive conditions occasioned by the 'two-
tier' system was considered essential by
Congress and the FEA.
This court finds
ample support for the entitlements regulation
as promulgated by the FEA and considering the
urgent need for action, the implementing
agency's program for achieving the varied
objectives of the Allocation Act was certainly
rational and neither arbitrary, capricious,
nor beyond the authority of the agency."
525 F.2d at 1402 (emphasis added).
Accordingly, it is clear that the Entitlements Program's
validity hinges on its crude oil "cost equalization"*/
function.
/ Although the term "cost equalization" is often used as a
shorthand expression in connection with the Entitlements Pro-
gram, it should be understood that the program does not pur-
port to equalize any costs other than crude oil costs and
that, even with respect to crude oil costs, it only eliminates
cost disparities created by the two-tier pricing system. It
is not designed to eliminate crude oil cost disparities based
on quality differentials, vertical integration, transportation,
a particular refiner's ability to negotiate a lower price, etc.
1 i LIBRARY
- 6 -
The Congress has also specifically recognized the Entitle-
ments Program as a program to remove cost distortions. When
the program was being developed 1974, Congress, in extending
the EPAA, observed that the EPAA "provides ample authority
for the FEA to institute a system of price equalization to
provide for all segments of the industry to benefit from
lower-priced domestic oil." S. Rep. No. 93-1032, 93d Cong.,
2d Sess. at 2 (August 9, 1974) ; H.R. Rep. No. 93-1443, 93d Cong.,
2d Sess. at 3 (October 8, 1974). Further, during House and
Senate oversight hearings on the EPAA in the spring of 1975,
the FEA presented to Congress a detailed description of the
rationale for the Entitlements Program. It stated in perti-
nent part:
"The FEA adopted the final regulations
for its old oil allocation program (the
entitlements program) in November 1974. The
program is designed to equalize substantially
costs of crude oil for domestic refiners and
to enable independent refiners and marketers
who depend heavily upon high cost crude to
remain competitive with those having lower
crude costs. FEA's rationale underlying its
adoption of the program was that some refiners --
including the major oil companies, as a class
enjoyed far greater access to price controlled
old oil than certain other refiners --- including
small and independent refiners, as a class.
Thus, while the basic Entitlements Program itself is
clearly lawful, the careful wording of the above quotations
indicates that the courts, the Congress and even the FEA it-
self in the past have concluded that the FEA does not possess
unlimited legal authority to use the program in any manner it
deems appropriate to achieve any single objective of Sec-
tion 4 (b) (.1) of the EPAA. Rather, based on the FEA's rationale
Testimony of Robert E. Montgomery, Jr. and Gorman C. Smith
at hearings before the House Subcommittee on Energy and Power,
Committee on Insular Affairs, S. Rep. No. 94-17, 94th Cong.,
1st Sess. at 459 (March 12, 1975) testimony of Frank G. Zarb
at hearings before the Senate Committee on Interior and In-
sular Affairs, S. Rep. No. 94-16, 94th Cong., 1st Sess. at 525
(May 19, 1975).
GERALD FORD LIBRARY
- 7 -
for the Entitlements Program, congressional recognition
thereof and court decisions upholding the program's validity,
it appears likely that the courts will require any modifica-
tion of the Entitlements Program to be in furtherance of the
program's underlying objective of removing cost distortions
caused by two-tier pricing or otherwise to bear some direct
relationship to the FEA's allocation and price control
authority.
It would be difficult to justify the proposed assistance
to refinery-constructors as removing the disparities of the
two-tier price structure. Indeed, as noted above, for a
refiner -constructor such as Wallace & Wallace that is having
imported crude oil processed by another refiner pending
completion of its refinery, such cost equalization is achieved
under current regulations, which allow the firm to receive
full entitlements benefits for such crude oil. The proposed
amendment would provide additional financial relief that
-
would allow a refinery-constructor to offset not only the
high cost of its crude oil, but also to offset all other costs,
including its so-called "non-product" costs, that went
it from earning a net profit that is equal to the rage in
the industry. Subsidizing these latter costs goes the
stated goal of the Entitlements Program and the ground upon
which it mas been upheld in the courts. It also a not
appear to have any significant relationship with and other
aspect of FEA's price and allocatic control authority under
Section 4 (a). The refinery-constructor amendment would in
effect use the Entitlements Program as a subsidy to achieve
a general Section 4 (b) (1) objective, and would therefore
appear to be an act of doubtful validity.
In support of a refinery-constructor amendment, Wallace &
Wallace has raised a number of arguments. First, it has
argued that the legislative history of the Emergency Petro-
leum Allocation Act of 1973, as amended, makes it clear that
Congress established the construction of new refinery capa-
city as a priority national goal and that it intended for the
President, in administering the mandatory allocation and
price control program, to have extremely broad powers to
assist new refiners. They point, for example, to the follow-
ing language in the Conference Committee Report:
"The conferees view the construction of new
refineries, and the expansion of present
i
tunn
GERALD
LIBRARY
- 8 -
refinery capacity, as critically important
factors in maximizing the amount of petroleum
products available to meet domestic demand. "
H.R. Rep. No. 93-628, 93d Cong., 1st Sess., at
30 (1973).
This clear expression of concern about the construction of
new refinery capacity, it is argued, together with the stated
objective in Section 4 (b) (1) (D) of the Act concerning the
priority needs to restore and foster competition in the
refining sector of the industry, indicate authority on the
part of the President to at least make the very limited
extension of the Entitlements Program proposed here.
There is no doubt that it was the intention of Congress
in enacting the EPAA that the FEA would use its best efforts
within its legal authority to promote new refinery construc-
tion. But to state that this was the congressional intent only
- begs the question, which is, what authority did Congress give
the FEA to carry out this intent. Exactly what that authority
was is spelled out in the Conference Report immediately fol-
lowing the above quotation upon which Wallace & Wallace relies:
"The conferees are concerned that refiners may
be hesitant to make the substantial invest-
ments, and other commitments required for the
construction of new refineries and the expan-
sion of existing facilities unless they are
assured of adequate supplies of crude oil for
their facilities. The provisions of Sec-
tion 4 (c) (4) (B), are intended to provide the
President with a means of affording that
assurance.' Id. (emphasis added).
Section 4 (c) (4) (B) of the EPAA reads in pertinent part
as follows:
"The President may, by order, require
such adjustments in the allocations of refined
petroleum products and crude oil established
under the regulation under subsection (a) as
he determines may be reasonably necessary --
*
*
*
= (B) in the case of crude oil (i) to take
into consideration market entry by independent
GERAL
LIBRARY
- 9 -
refiners and small refiners during or subse-
quent to calendar year 1972, or (ii) to take
into consideration expansion or reduction of
refining facilities of such refiners during or
subsequent to calendar year 1972.
"Any adjustments made under this paragraph
may be made only upon a finding that, to the
maximum extent practicable, the objectives of
subsection (b) of this section are attained."
In our judgment, this Section, together with the Con-
ference Report language explaining it, make it clear that the
President has authority with respect to new refineries coming
on stream to change the existing allocation pattern so as to
provide such refineries with adequate supplies. We believe
this also encompasses authority to include a new refiner in
the buy-sell and entitlements programs on an equal footing
with other refiners. Such authority can and will be used
when the Wallace & Wallace refinery comes on stream to assure
that it has an adequate crude oil supply. There is no
indication, however, that Section 4 (c) (4) (B) expands the
President's allocation and price control authority under
Section 4 (a) so as to provide new refiners with assurance
of an industry-wide average profit, and particularly to do
so by requiring other refiners to make up their operating
deficits. If Congress had intended for the FEA to have
authority to carry out the various Section 4 (b) (1) objectives,
such as fostering competition or aiding new refinery con-
struction, by requiring the redistribution of profits in
the industry -- which would have been regulatory authority
broader than that contained in any regulatory program enact
by Congress to date -- it seems that it would have done so
language more precise than that contained in the EPAA.
Second, Wallace & Wallace has argued that a refinery-
constructor amendment would not be significantly different
in principle from product entitlements given to importers,
from the exception relief given to NEPCO, and from the small
refiner bias for refiner-sellers.
Product entitlements are distinguishable from the refinery-
constructor amendment since they are clearly related to the
problem of crude oil cost differentials created by the price
control program. The FEA chose not to impose price controls
on imported crude oil primarily because to do so would promptly
BERALD FORD LIBRARY
- 10 1
dry up this essential source of supply. As noted above,
however, this created a substantial competitive hardship on
refiners that were dependent on foreign sources, which hard-
ship was alleviated by the Entitlements Program. Precisely
the same problem is created with respect to imported products,
which are also deliberately free from price controls.
Importers of residual fuel oil and middle distillates, the
two principal imported products, must compete with domestic
refiners of those products, who of course have a substantial
competitive advantage because of the Entitlements Program and
their access to price-controlled domestic crude oil. Thus,
product entitlements are as directly related to FEA's price
control and allocation program as crude oil entitlements and
can be justified on that basis.
The refinery-constructor amendment is also distinguish-
able from the NEPCO exception decision issued by the Office
of Exceptions and Appeals, which allowed NEPCO as a product
importer to participate in the Entitlements Program even
though product entitlements were not generally made available
at that time. The decision specifically found that NEPCO,
an established and significant factor in the East Coast
residual fuel market, was facing immediate financial hardship
so severe that it would be unable to survive the market-
place, and that this serious hardship was the result of cost
disparities created by the fact that Amerada Hess, a Virgin
Islands refiner, was receiving such considerable financial
benefits under the Entitlements Program that it was able to
sell residual fuel oil at prices well below those of NEPCO,
its principal competitor. New England Petroleum Corp., 2 FEA
11 83,136 (May 2, 1975).
The NEPCO decision was an effort to achieve "cost
equalization" through the exceptions process for a firm that
was not at that time made a participant in the Entitlements
Program directly. While NEPCO was at the time receiving an
advantage over Hess of $1.00 because of the differential
between crude oil and product import fees, the FEA found
/ The decision not to impose price controls on the first
sale of imported crude oil or products was made by the Agency.
The FEA had legislative authority in Section 4 (a) of the EPAA,
however, to impose price controls on imports if it had chosen
to do so.
DERALD FORD LIBRARY
- 11 -
nevertheless that the Entitlements Program gave Hess a net
competitive advantage on its cost of crude oil of $1.40 per
barrel even after NEPCO's advantage on import fees was taken
into account. NEPCO was therefore:allowed to participate in
the Entitlements Program by this amount, but no more. It was
not given benefits that would allow it to exceed the product
cost differential between it and Hess caused by the Entitle-
ments Program, let alone to achieve an industry average profit.
Indeed, even with the entitlements benefits given to it by
FEA, NEPCO has continued to ncur substantial operating losses.
It is our view, therefore, that the exception relief inter-
mittently granted to NEPCO is directly related to input cost
distortions created by FEA's price control program and is
thus distinguishable from the refinery-constructor amendment.
Wallace & Wallace's third contention -- that the
refinery-constructor amendment is similar in principle to the
small refiner bias -- is more difficult to deal with. The
small refiner bias provides, on a sliding-scale basis, pro-
portionately greater entitlements benefits to smaller refiners
than they would otherwise receive if their entitlement issuances
were based solely on their crude oil run levels. The rationale
for the bias was originally explained by the FEA as follows:
"FEA believes that a bias is necessary to
compensate relatively small refiners for
higher operating costs, proportionately
greater capital expenditure requirements,
and the fact that such refiners must, in
many cases, market their products at a
lower price than the products of the major
branded refiners. The bias is historically
consistent with the treatment afforded by
other government programs such as the Oil
Import program, royalty oil sales by U.S.
Geological Survey and the Small Business
Administration program. It is also con-
sidered necessary to preserve the competitive
viability of this class of refiners."
This bias is obviously distinguishable from the proposed
refinery-constructor amendment on the ground that it is
designed only to maintain the competitive viability of existing
refiners and not to promote increased competition by new
entrants. Moreover, the small refiner bias stops far short
of guaranteeing that each small refiner earns the industry-
wide net profit, as the refinery-constructor amendment would.
is
FORD
GERALD
LIBRARY
- 12 -
A final distinguishing factor is that the inefficiencies of
small refineries are easier to determine for purposes of a
rule. applicable to an entire class. Such inefficiencies
would not vary to as great a degree from firm to firm as
would competitive disadvantages as between different
refinery-constructors. However, it is in fact true that
the small refiner bias and the proposed refinery-constructor
amendment are similar in that both arguably can be viewed as
use of the Entitlements Program to eliminate operat: g, or
non-product, cost disparities among refiners, and certainly
both go beyond the basic purpose of the program to eliminate
cost disparities created artificially by the FEA's two-tier
crude oil pricing system.
The small refiner bias has never been the specific
subject of a court decision, even in the cases brought by the
major refiners to challenge the program in general. In view
of the small refiner bias' departure from the most significant
underlying justification for the Entitlements Program, the
Agency's firm rational basis for the rule (i.e., the historic
preference under the Oil Import Program and the documented
inefficiencies of smaller refineries) would be of utmost
importance in any defense of the bias in court. Even these
rationale, however, would not be available in the defense of
a refinery-constructor amendment. Thus, the provisions for
a small refiner bias cannot provide a basis for concluding
that a refinery-constructor amendment would be within the
Agency's legislative authority.
V.
Conclusion
In conclusion, it is the legal opinion of this office
that a refinery-constructor amendment as presently proposed
runs a substantial risk of being declared unlawful if
challenged in the courts. As you can see from the foregoing
analysis, the issue would be one of first impression, and it
is often difficult to predict the outcome of such cases,
particularly when the construction of an Act as broad and
general as the EPAA is involved. However, considering the
significant departure the refinery-constructor amendment
would make from the underlying basis of the Entitlements Pro-
gram and the fact that the amendment standing alone can
correctly be characterized as a scheme whereby the Government
would be requiring established firms to underwrite the con-
struction of new refineries by their competitors by guaranteeing
FORD
GERALD
LIBRARY
- 13 -
such new entrants an average net profit, we believe on balance
that. such far-reaching authority cannot be inferred from the
EPAA, which to be sure has broadly. stated objectives to be
kept in mind, but what basically contains only price control
and allocation authority.
BERRED FORD LIBRARY
TAB
B
FORD j LIBRARY GERALD
FEDERAL
ENERGY
FEDERAL ENERGY ADMINISTRATION
WASHINGTON, D.C. 20-161
ADMINISTRATION
MAY 10 1976
OFFICE OF THE ADMINISTRATOR
Honorable Abraham A. Ribicoff
Chairman, Committee on Government
Operations
United States Senate
Washington, D.C. 20515
Dear Mr. Chairman:
At the hearings of the Senate Government Operations Committee
on April 28, 1976 on the FEA Act extension, Frank Zarb was
asked a number of questions by Senator James B. Allen regarding
the construction of a "grass roots" refinery in Tuskegee,
Alabama by Wallace & Wallace Chemical & Oil Corporation and
was asked to comment on a proposal by Senator Allen to amend
the FEA Act to provide the FEA with authority to assist in
the construction of such refineries. Mr. Zarb answered these
requests in part and asked for the opportunity to submit
additional comments for the record. This letter provides
those additional comments.
Background
Before addressing Senator Allen's specific questions, you
might find it useful if I provided some background on the
entire Wallace & Wallace matter to put the answers to your
questions in perspective.
Wallace & Wallace is currently a retail distributor of fuel
oil in the New York City area. The firm, which is black-
owned, was one of the first participants in the Small Business
Administration's Section 8 (a) program for minority enter-
prises and is therefore a priority supplier to a number of
federal government installations in New York. In order to
allow the firm to participate in the 8 (a) program, FEA has
from time-to-time given it the necessary exceptions from
the. mandatory petroleum allocation program.
Wallace & Wallace's plan is to construct a 150,000 barrel-
per-day refinery near Tuskegee, Alabama that would allow it
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to refine the products it now sells at retail and to expand
its marketing business. The firm has acquired and is in the
process of preparing the site, and it has completed a feasi-
bility study on a refinery that would include certain tech-
nologically-advanced desulphurization equipment. Actual
construction of the refinery has not commenced, however, due
to a lack of adequate financing.
Wallace & Wallace has stated that in anticipation of the
refinery construction and to assure a future source of crude
oil, it has entered into a contract with the Venezuelan
government to purchase 10,000 barrels per day of crude oil,
which amount can increase over time. (If FEA's crude oil allo-
cation program is still in effect when the refinery comes on
stream, Wallace & Wallace would also be assured of adequate
crude oil supplies through that program.) The contract
requires Wallace & Wallace to begin lifting oil immediately,
but the Venezuelans have held off enforcing that provisión
until Wallace & Wallace can arrange a suitable means by which
the oil can be processed pending completion of the refinery.
Wallace & Wallace has obtained a commitment from Mobil Oil
Company to have the crude oil processed in one of Mobil's
refineries for a processing fee that allows Mobil to cover
its expenses and earn a profit. Wallace & Wallace has not
yet commenced processing any oil under the agreement, however.
Wallace & Wallace is asking the FEA to help it obtain financing
to construct its refinery by giving it additional benefits
under the FEA's so-called "entitlements program." That
program was instituted in December 1974 to offset the cost
disparities caused by the two-tier price control system for
crude oil then in effect, which in general controllen the price
of established domestic production (so-called "old" oil) but
which left new domestic production (so-called "new" oil) free
to sell at market prices in order to provide an incentive to
increased domestic production. Imported oil also sold at
market prices, of course. This two-tier system of low old
oil prices, on the one hand, and higher market prices for
new and imported oil, on the other hand, provided the necessary
balance between the goals of minimizing the inflationary
impact of oil shortages and the stimulation of increased
production. At the same time, however, it caused severe com-
petitive disadvantages to those domestic refiners that were
dependent upon imported oil or new domestic oil, and created
substantial advantages for those refiners that were supplied
with low-priced old oil.
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The entitlements program was designed to eliminate these com-
petitive advantages and disadvantages to refiners caused by
the two-tier price system. Its basic idea is that every
refiner is "entitled" to the same percentage of cheap old oil
and expensive new or imported oil. But instead of physically
transferring quantities of old and new oil to achieve a balance
(which would have been impossible), it was done by cash
adjustments between refiners. In simplified form, every
month a national old oil supply ratio was computed, which was
the percentage of old oil used in all refineries for that
month. Refiners who processed more than their share of old
oil were required to purchase an "entitlement" for each
barrel of oil they processed in excess of their proportionate
share. Refiners with less old oil than the national ratio
old "entitlements" for the total number of barrels they
processed that was less than their proportionate amount. Each
entitlement is assigned a value by the FEA that is equal to
the difference between the national weighted average price of
old oil and the weighted average price at which all other oil
is sold in the U.S. The entitlement value for January 1976,
the last month of the two-tier price system, was $8.09. The
entitlements program has the effect, therefore, of allocating
old oil on a pro rata basis among all refiners, but does so
by giving refiners the option of exchanging money to achieve
the same effect rather than physically transporting trude oil.
With the enactment of the Energy Policy and Conservation Act
("EPCA") on December 22, 1975, the FEA on February 1, 1976
created a "three-tier" crude oil pricing system that imposes
"lower tier" ceiling prices of about $5.25 per barrel on old
oil and "upper tier" prices of about $11.28 per barrel on all
other domestic production, and continues to allow imported
crude oil to be sold at market levels. The cutitlements
program was modified to take into account the three-tier
system, but it continues to perform the same basic function
it performed in the past.
As you know, the mandatory controls on crude oil prices expire
on May 31, 1979, and it is FEA's expectation that the price
of domestic oil, both old and new, will approach market levels
by that time. Of course, as the price of domestic oil comes
closer to the market price of oil, the value of an entitle-
ment declines. Consequently, the entitlements program is
expected to have a limited period of operation, approximately
36 months, with a declining value for the entitlements.
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When the Wallace & Wallace refinery becomes operational, it
will at that time automatically become a full participant in
the entitlements program and will receive cash payments for
each barrel of imported or upper-tier domestic oil it refines
in excess of the national average. In addition, it should be
pointed out that even today Wallace & Wallace would be a full
participant in the entitlements program with respect to the
10,000 barrels (or additional amounts) per day it has arranged
to have processed by Mobil if it should decide to institute
that arrangement. Until recently, when a firm had crude oil
refined for it pursuant to a processing agreement, the refiner
received the full entitlements benefits or obligations on the
oil involved. At the specific urging of Wallace & Wallace,
however, FEA amended its regulations to provide that the
refiner may reduce its processing fee by the amount of the
entitlements benefits received on the oil, rather than reflect-
ing those benefits in the prices it charges to its customers
generally, and Mobil has agreed to do so in this instance.
This provides Wallace & Wallace with the full benefit of the
entitlements Wallace & Wallace would receive if it, rather
than Mobil, refined the oil. This will provide Wallace &
Wallace with approximately $2.80 per barrel (entitlements
value of about $8.00, times a national old oil supply ratio
o. about 35 percent) for every barrel processed for it by
Mobil once it starts processing oil under the agreement, or
approximately $840,000 per month ($2.80, times 10,000 barrels,
times 30 days).
Thus, it should be understood that the "refinery-constructor"
amendment to the entitlements program proposed by Wallace &
Wallace would go beyond placing it on an even footing with
current refiners, since the existing regulations do that much.
What is being requested is that firms like Wallace & Wallace
be given an additional amount of entitlements to sell on the
oil processed by another refiner pending construction of its
own refinery, which amount would allow it not only its
proportionate share of access to old oil but would guarantee
it the industry-wide average net profit on the sale of such
processed oil. We have been advised by Wallace & Wallace,
which has relied on data provided by FEA, that in the month
of April the industry-wide average net profit was $.84 per
barrel and that Wallace & Wallace would have earned a net
profit of $.24 per barrel on the oil that would be processed
by Mobil, after receiving the usual entitlements benefits,
which, as noted, amount to about $2.80 per barrel currently.
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Thus, under its proposed amendment, it would have received
in April an additional $.60 per barrel, times 10,000 barrels
per day for 30 days or $180,000 total, from the entitlements
program to bring its profits up to the industry average.
This amount paid to Wallace & Wallace would have come from
other refiners who in effect would be subsidizing Wallace &
Wallace's operations. Wallace & Wallace proposes that the
FEA would compute this amount in a similar manner every
month from data submitted by firms participating in the
entitlements program.
The Legal Basis for a Refinery-Constructor Program
As Mr. Zarb indicated in his testimony before the Government
Operations Committee on April 28, 1976, the FEA does not
believe it has at this time the authorization from Congress
to adopt the refinery-constructor amendment that Wallace &
Wallace has proposed. Our legal staff has thoroughly discussed
this issue With Wallace & Wallace's attorneys and the General
Counsel of FEA has prepared a lengthy memorandum dealing
with their contentions in detail and setting forth his
conclusion that FEA does not have the authority to provide
the benefits sought by Wallace & Wallace. I would be happy
to send you a copy of that memorandum if you wish, but,
to review it briefly, the FEA's legislative authority for the
entitlements program arises from its mandatory price and
allocation authority contained in the Emergency Petroleum
Allocation Act ("EPAA") of 1973, as amended.
The entitlements program has been challenged by a number of
major refiners on the ground, among others, that it exceeded
the FEA's basic price and allocation authority and was in
effect a subsidy program by which the major oil companies
were required to subsidize their competitors. The FEA was
successful, however, in convincing the courts that the
entitlements program was directly intertwined with price and
allocation authority because it was designed to eliminate
economic distortions caused by the two-tier price control
program for crude oil and was in effect a scheme to allocate
among refiners the FEA-created benefits of access to price-
controlled old oil.
In defending the program, the FEA pointed to the fact that
Congress had explicitly recognized the authority of the FEA
to institute an entitlements program that would eliminate
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cost distortions caused by the two-tier price system. When
Congress first extended the EPAA from February 28, 1975 to
August 31, 1975, at which time the entitlements program was
being developed, the reports in both Houses noted that an
amendment specifically authorizing the entitlements program
was unnecessary because the EPAA "provides ample authority
for the FEA to institute a system of price equalization to
provide for all segments of the industry to benefit from
lower-priced domestic oil." S. Rep. No. 93-1082, 93d Cong.,
2d Sess. at 2 (Aug. 9, 1974) (emphasis added) H.R. Rep.
No. 93-1443, 93d Cong., 2d Sess. at 3 (Oct. 8, 1974).
Thus, the FEA has to date been successful in rebutting the
argument that the entitlements program is a subsidy program
for small and independent refiners -- since it only requires
the equitable distribution of benefits conferred by the
FEA's two-tier price system -- and in convincing the courts
that it is an essential component of the regulations promul-
gated under its price and allocation authority. The FEA has
not at any time attempted to defend the entitlements program
as having authorization wholly apart from the price and
allocation authority, and we have serious doubts that such
an argument would be accepted. It is for this reason that
we have concluded that we do not have adequate legislative
authority to promulgate the refinery-constructor amendment,
since such an amendment goes well beyond the crude cost
disparity problem, which is already taken care of by the
present program, and also appears to have no other direct
relationship with the allocation or pricing of crude oil or
petroleum products.
Wallace & Wallace has asserted that such separate authorization
is contained in Section 4 (b) (1) of the Act, which states that
the FEA's regulations shall provide, to the maximum extent
practicable, for a number of objectives, among them being the
"preservation of an economically sound and
competitive petroleum industry; including
the priority needs to restore and foster
competition in the
refining
...
[sector] of such industry, and to preserve
the competitive viability of independent
refiners
"
Wallace & Wallace also points to legislative history to the
effect that Congress had a general desire to encourage the
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construction of increased refinery capacity by the independent
sector. See H.R. Rep. No. 93-628, 93d Cong., 1st Sess:, at
30 (1973).
However, Section 4 (b) (1) of the Act has not been generally
viewed by the FEA or the courts as being a separate, sub-
stantive grant of authority, but only a listing of objec-
tives to be considered and dealt with to the maximum extent
practicable in carrying out the price and allocation authority
under Section 4 (a). Although the EPAA was generally intended
to provide a broad delegation of authority to the President
to deal with the impending embargo, it seems to us highly
unlikely that Congress intended, when it enacted Section 4 (b) (1),
to give the President unlimited authority to take any action
he deemed appropriate to foster competition in the petroleum
industry, without regard to whether such action was related
to his price and allocation authority, and particularly to
take such a drastic step as to require the major integrated
refiners to directly subsidize new entry by their independent
competitors. Indeed, such a construction of the statute
would also require the conclusion that the President currently
has legislative authority to take such other far-reaching
action to promote competition as ordering the breakup of the
major companies or spreading subsidization by the major
firms to the marketing and production sectors of the industry.
We find it difficult to imagine that Congress would have
authorized such drastic measures without language more
specific than that found in the EPAA.
FEA's Views on the Proposed Amendment to the EPAA
Senator Allen asked the FEA to provide the Committee with
its tentative views on his proposed bill that would amend
the EPAA to provide the FEA with legislative authority to
implement a refinery-constructor amendment to its entitlements
program like that proposed by Wallace & Wallace. We are happy
to provide you with our initial reaction, subject, as always,
to clearance by the Office of Management and Budget.
Senator Allen's proposed bill, a copy of which is enclosed,
would amend Section ) (b) of the Federal Energy Administration
Act so as to add a new paragraph (13) containing very broad
language to the effect that the FEA Administrator shall
develop programs to assist and foster the construction of
"grass roots" refineries. There is no specific mention of
the entitlements program in the proposed bill.
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Our comments on the proposed bill are as follows. First,
as a technical matter, we believe any amendments relating to
the FEA's general regulatory authority in the petroleum
industry would most appropriately be accomplished through a
change in the EPAA, not the FEA Act, although we realize
that the latter's extension is now the matter before the
Committee. Among other things, the judicial review provisions
of the two acts are entirely inconsistent, which might result
in serious problems of consistency in litigation. For example,
all cases arising under the entitlements program in general
are initially reviewed in the District Courts, from which
appeals lie in the Temporary Emergency Court of Appeals, but
rulemaking cases involving a refinery-constructor amendment
to that program would bypass the District Courts and would be
reviewed by the Circuit Courts of Appeals, rather than the
T.E.C.A. Moreover, since the FEA Act does not generally
contain substantive regulatory authority, it does not contain
adequate enforcement authority. It should also be noted
that the EPAA and the FEA Act will have different expiration
dates.
Second, the language of the proposed amendment may be too
vague to accomplish the purpose for which it is intended.
For example, the amendment provides that a plan to assist and
foster the construction of new refineries shall "minimize
economic distortion and inequity" while "assuring the
availability of adequate amounts of crude oil for such
facilities in the planning stage," and may include measures
"whereby refiner constructors may participate in the market-
place on the same basis with existing refiners." As noted
above, a firm like Wallace & Wallace may already fully
participate in the entitlements program on the same basis as
other refiners and is assured of having its proportionate
share of crude oil if the FEA allocation program is still in
effect at the time the refinery comes on stream. The relief
it is requesting is in addition to these items, and may there-
fore possibly be construed as being in excess of the benefits
intended to be conferred by your proposed amendment. In our
view more specific authorization language would provide greater
assurance that the courts would not hold the program to be
beyond the agency's authority. In short, we doubt whether
the proposed amendment to the FEA Act would provide sufficient
authority for the benefits which Wallace & Wallace now seeks.
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FEA's Views On Assisting the Construction of
New Refining Capacity
As Mr. Zarb indicated in his testimony, the FEA is in general
agreement with Senator Allen's view that the promotion of
increased domestic refining capacity, particularly by the
independent sector, should be a part of this country's
energy policy. Subject, of course, to clearance by the Office
of Management and Budget, we do, therefore, support in general
the creation of programs that would encourage and provide
incentives for such new refinery construction. However, we
have severe reservations about using the entitlements program
for this purpose.
Mr. Zarb pointed out that, in our opinion, the adoption of a
refinery-constructor amendment to the entitlements program is
not a sound way to deal with the problem. Apart from legal
constraints, a policy of using the entitlements program to
directly subsidize or underwrite the development of a new
refinery by dipping into the entitlement pool twice is, in
FEA's view, neither appropriate nor likely to be effective.
The question of the appropriateness of such a policy stems
from the nature of the entitlements program itself. The
entitlements program involves the transfer of cash to a
= Einer from other refiners, many of whom are smaller than
and are in competition with the transferees. Use of the
revenues of one firm to do anything more than equalize crude
cost differentials caused by Federal regulations --- i.e., to
explicitly favor one refiner over another for Matever purpose --
raises serious policy questions. If not constrained to the
narrowest of objectives (i.e., equalization), the program
could be used to determine who stays in the refining business
and who does not simply by establishing the cash sition of
various parties through adjustments of the entitlements program.
This type of power in the Federal Government, the power to
utilize the revenues of one firm to directly favor its compe-
tition, must be viewed with extreme concern. Moreover, it
should be noted that allowing firms to become entitlement
sellers for reasons not related to removing cost distortichs
will reduce the number of entitlements that would otherwise
be available for sale by other firms, thus distorting the
original purpose of the program.
The question of the effectiveness of using the entitlements
program to underwrite and stimulate the development of a new
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refinery also stems from the nature of the entitlements pro-
gram. The value of an entitlement is a function of the spread
between the selling price of lower tier and upper tier oils.
Since the selling price of lower tier oil is escalating over
time and the amount of lower tier oil in the system is con-
tinually diminishing due to the depletion of old reservoirs
and the replacement of these fields with new, upper tier oil,
the value of each entitlement will decline on a steady path
for the remaining 36 months of the price control program. In
addition to declining values of entitlements, the program will
end on May 31, 1979.
In light of these considerations, the special relief sought
by Wallace & Wallace would not only decline over time, but
also terminate (either through a total loss of value or through
an end of controls) about the time the refinery was to begin
operation. It is unlikely that investors or banks will provide
the equity or debt required to construct the refinery simply
on the basis of such relief. Their concern is return on equacy
or the ability of Wallace & Wallace to retire the debt during
the period the refinery is in operation, and the special
relief sought by Wallace & Wallace will not be available
during that period. If they believe the refinery is econom-
ically viable (i.e., capable of producing a fair return and
retiring the debt), they will finance the project; if not,
they will not finance the project. Relief from a program
that cannot effect the refinery's return on equity or ability
to retire debt because of its diminishing subsidy value and
near-term elimination is not likely to alter their decision.
Finally, the proposed use of the entitlements program would
limit government assistance only to those firms currently in
the oil business and importing crude oil for processing pend-
ing construction of a refinery. It would provide no benefits,
however, to other, equally capable firms willing to enter
the refinery business.
A more direct. approach to the problem would be the creation
of a loan guarantee or other similar program. This would
provide a sufficient protection for banks and other lending
institutions over the life of the loan, and thus provide a
solid basis for obtaining the necessary financing. Such pro-
grams are a faimilar means of providing government support to
the development of critical industries and are generally more
capable of assuring adequate financing, which is at the heart
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of the Wallace & Wallace problem, than would the proposed
amendment to the entitlements program. Although we would
be willing to provide assistance in helping the Committee to
develop such a program, we cannot of course provide you at
this time with assurances that it would receive Administra-
tion support.
If I can be of further assistance, please do not hesitate
to contact me.
Sincerely,
/8/ John A. Hill
John A. Hill
Acting Administrator
CC: Senator John J. Sparkman
Senator James B. Allen
Senator Jacob K. Javits
Senator James L. Buckley
Representative William Nichols
FORD is LIBRARY 0ERALD
FEDERAL ENERGY ADMINISTRATION
ACT OF 1974
LIBRARY aros's BERALD
Amendment
Functions and Purposes of the Federal Energy Administration
add a new paragraph (13) to Sec. 5 (b) :
(13) Preserve and enhance the competitive environment for the
domestic manufacturing of petroleum products, develop plans
and programs to assist and foster the construction of new small
grass roots refineries and independent grass roots refineries by
issuing regulations which will to the largest degree enhance
the probability of their successful competition and minimize
economic distortion and inequity, particularly, for small refiners
and independent refiners, while assuring the availability of
adequate amounts of crude oil for such facilities in the planning
stage of under construction through the allocation and issuance
of adjusted crude oil receipts in a manner consistent with the
Nation's needs for new refining capacity. In administering any
pricing or allocation authority provide, by rule, measures
encouraging and fostering the construction of new, domestic
refining capacity including measures whereby refiner constructors
may participate in the marketplace on the same basis with existing
refiners.
LIBRARY GIERALD B. FORM
TAB
C
FEDERAL
ENERGY
FEDERAL ENERGY ADMINISTRATION
WASHINGTON, D.C. 20461
ADMINISTRATION
MAY 21 1976
OFFICE OF THE ADMINISTRATOR
Mr. Charles Wallace
President
Wallace & Wallace Chemical
and Oil Company
200-31 Linden Boulevard
St. Albans, New York 11412
Dear Mr. Wallace:
As you know, the FEA has had under consideration for the
past several weeks your proposal for the creation of a
refinery-constructor category of participants in the entitle-
ments program. The proposal would basically allow firms like
yours that are in the process of constructing a "grass roots"
refinery to receive entitlements benefits in an amount that
would allow it to earn the industry-wide average profit on
its current operations. The purpose of this letter is to
provide you with our final position on that issue.
I want you to know that I and my staff support wholeheartedly
your Tuskegee oil refinery project, which we consider to be
a major step forward in carrying out the Administration's
energy policy by providing additional domestic refinery
capacity. Furthermore, as I have told you, I am personally
committed to the principle that minority-owned and operated
projects such as yours deserve every assistance possible
from the Federal Government in order to carry out the Admin-
istration's commitment to provide equal economic opportunity
for all citizens.
Therefore, your proposal has received the fullest considera-
tion by the senior officials of the FEA. As you know, we have
previously amended the entitlements regulations to allow you
to receive the full benefits of the entitlements program on
crude oil you will have processed by Mobil pending construction
of your refinery. I and several members of my staff have
met with you and/or your attorneys and with members of Congress
on several occasions in order to attempt to work out the
policy and legal problems involved in your present proposal.
I have also allowed you full participation in our decision-
making process by permitting you access to draft legal
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opinions and other internal information prior to a final
decision. In short, the FEA has expended substantial staff
effort and the time of senior officials in order to find a
favorable solution to this problem.
However, after exploring every possible alternative, I regret
to have to inform you that the FEA does not bolieve it has
the statutory authority to bend its old oil allocation
(entitlements) program in order to give the kind of economic
support you request. To summarize briefly the legal conclu-
sion, it is the opinion of FEA's General Counse Michael
Butler, that the FEA's authority and mandate to preserve and
foster competition in the refining industry and to encourage
new refining capacity is limited to the context of a price
and allocation program, and does not allow the agency to go
outside that context to create a subsidization program for
new refiners, no matter how laudable the purpose. I have
thoroughly reviewed Mr. Butler's analysis and fully, albeit
reluctantly, concur in it. Mr. Butler's legal analysis is
set forth in a lengthy memorandum to me, a copy of which is
enclosed.
As you may also be aware by now, I was asked during a hearing
of the Senate Government Operations Committee on April 28,
1976, to provide the FEA's views for the record on an amend-
ment to the Federal Energy Administration Act proposed by
Senator James B. Allen of Alabama that would authorize the
FEA to "develop plans and programs to assist and foster the
construction of new small grass roots refineries and inde-
pendent grass roots refineries." Our tentative views,
subject as always to OMB clearance, were provided to the
Chairman of the Committee on May 11, 1976 by John Hill, w.to
was Acting Administrator during my absence from the country
Aside from certain technical deficiencies we saw in Sena-
tor Allen's amendment, we offered the view that mere adjust-
ments to the entitlements program such as those involved in
your proposal were in fact not likely to provide adequate
financial assistance in any event to firms like yours that
are attempting a major refinery project. We reiterated our
view, however, that a government program to assist in the
financing of new refinery capacity by independents should be
seriously considered, and we offered to the Committee the
continued assistance of the FEA in attempting to develop a
loan-guarantee program for economically feasible projects.
Such a program would, of course, be a more direct and positive
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means of attracting private capital than a make-shift appendage
to the entitlements program would be. A copy of Mr. Hill's
submission to the Committee is also enclosed.
In a meeting with Mr. Butler and his staff on April 14, 1976,
you also asked the FEA to look into certain other areas in
which the FEA might be of assistance to the project. The
first was that the FEA amend its entitlements regulations to
move forward the date on which the Wallace & Wallace refinery
would be eligible to receive entitlements from 60 days to
one year prior to commencement of operations. We have sub-
sequently reviewed the regulations carefully and have deter-
mined either that your attorneys have misunderstood our regu-
lations or we misunderstood the proposal. Only the "buy-sell"
crude oil allocation program, which does not involve entitle-
ments, has a provision for participation 60 days in advance of
the allocation quarter in which a refinery comes on stream,
and even that provision only allows the submission of an
application in advance of the commencement of operations, not
the actual receipt of crude oil. See 10 C.F.R. § 211.65(b) (1).
To allow a refiner to receive entitlements up to a year prior
to the actual commencement of operations by a refiner would
of course present the same legal problems that the more limited
refinery-constructor amendment would.
Second, you asked the FEA to consider whether the FEA has
authority under the Defense Production Act of 1950, 50 U.S.C.
App. $ 2061, et seq., to make or guarantee loans to Wallace
Wallace to facilitate the construction of its refinery.
As you know, the FEA has previously considered this issue
and tentatively determined that:
) it does not have
authority under § 2091 to guarantee loans because it has non
been delegated that authority by the President, and it is
doubtful that he could so delegate in light of the fact that
the FEA is not "engaged in procurement for the national
defense" as required by that section; and (2) while it does
have authority to make direct loans of up to $25,000,000
under § 2092 of the Act, it can do so only out of funds appro-
priated for that purpose, and the FEA has no such appropriation.
We would of course consider in detail any analysis your
attorneys may wish to submit in writing on these legal
issues before reaching a final decision.
Third, you have requested the FEA to include refinery-constructors
and on-going grass roots refineries among the firms that would
be eligible for loan guarantees under the proposed Energy
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Independency Authority Act of 1975, which is still pending
in Congress. Assuming the Act is passed as proposed, the
Wallace & Wallace refinery project might qualify for financing
assistance, especially if what you have described as the
refinery's advanced desulphurization capacity meets the Act's
criteria of uniqueness. However, as I am sure you understand,
there is no assurance that the Act will be passed in its
present form or in time for it to provide any assistance to
your project in a timely manner. Moreover, as presently
proposed, administration of the loan program would be in an
independent government corporation, the Energy Independence
Authority, not the FEA. In connection with the Administra-
tion's efforts to secure passage of the proposed legislation,
the FEA has, however, made some analysis and developed some
very preliminary criteria for loan qualification, but is not,
as you may have been led to believe, developing detailed
regulations to implement the Act if it is passed. We
would of course be happy to have the members of our staff
that have general responsibility for this project meet with
you so that they will be fully aware of your particular
circumstances and requirements.
Finally, you asked Mr. Butler simply for general assurances
by me that the FEA supports the Wallace & Wallace refinery
project and believes it to be fully consistent with the
Administration's energy program. Through this letter and my
discussions with you, I hope I have made that surance
absolutely clear. Our adverse determination on our authority
to use the entitlements program to provide Sinancial backing
for your refinery project should in no way be construed as
indicating that we do not consider the project a deserving
one or that we are not willing to continue to explore alter-
native solutions with a view to getting your project off
the ground.
Sincerely,
Frank G. zaro
Administrator JISBI
Enclosures
FG-65
THE WHITE HOUSE
WASHINGTON
May 19, 1976
MEMORANDUM FOR:
PHIL BUCHEN
FROM:
KEN LAZARUS
SUBJECT:
FEA Matter/ Wallace & Wallace
Entitlements Request
In accordance with your request, I spoke this afternoon with
Glenn Schleede of the Domestic Council staff regarding:
(1) the desirability of Administration support for the project
under consideration by the firm of Wallace & Wallace to construct
a refinery at Tuskegee, Alabama; and (2) the question of whether
FEA can legally provide the firm with entitlements to sell in
order to assist it in becoming a domestic refiner.
Glenn indicated that FEA (in the person of Frank Zarb) was
already on the public record with the view that the agency lacked
authority under the Emergency Petroleum Allocation Act of 1973,
as amended, to grant the relief sought by Wallace & Wallace.
Thus, as a practical matter, it would be difficult to now advance
a contrary position on the question, even assuming Counsel's
Office or Justice disagreed with FEA's legal opinion. At a
minimum, such an approach would increase the already sub-
stantial possibility of litigation over the issue.
Glenn will pursue a legislative alternative with John Hill and Mike
Butler at FEA. In the event he comes up with anything concrete
during my absence on Thursday and Friday, he will contact you
directly. Otherwise, we shall see you on the subject next week.
cc: Jim Cannon -- FYI per Glenn Schleede
Glenn Schleede
FORDO is LIBRARY QERALD
THE WHITE HOUSE
WASHINGTON
May 12, 1976
MEMORANDUM FOR:
KEN LAZARUS
FROM:
PHIL BUCHEN R.
Attached is a file concerning the issue of
whether or not the Federal Energy Administration
has authority under existing legislation to
issue regulations to permit refinery constructors
a special category of entitlements.
Frank Zarb tells me that they would like to do
something to encourage construction of new
refineries but that their General Counsel,
Michael Butler, believes that any action under
existing legislation to do so would trigger
a lawsuit which he does not believe FEA would
win. As a result, FEA is contemplating seeking
an amendment to its statute so as to give FEA
the desired authority.
Frank Zarb indicates that he has no objection
to our reviewing this matter informally to see
if we think legislation is required or whether
existing legislation gives the FEA the necessary
authority.
I would appreciate your comments to me promptly.
Attachment
FORD is LIBRARY GERALD
Wallace and Wallace
Corporation Headquarters
Chemical & Oil Corp.
200-31 LINDEN BOULEVARD
ST. ALBANS, NEW YORK 11412
212-464-3737
May 7, 1976
TELEX 235487 TWX 710-582-2470
General Offices
Mr. Phillip Buchen
Counsellor to the President
1 WORLD TRADE CENTER
The White House
SUITE 8755
Washington, D.C.
NEW YORK, NEW YORK 10068
212-432-0797
Alabama Refinery
Mr. Buchen;
MACON COUNTY ROAD No. 56
TUSKEGEE, ALABAMA
Attached, as per our telecon earlier today, is a copy
of the FEA "Legal Memo" re FEA authority to establish
the Refiner-Constructor category, and my initial response
to that Memo.
These Memos reflect merely the tip of the controversy
that has developed between WWCO and the FEA over the
last two years. I am prepared to brief you on the
details of how and why FEA's position is indefensible.
I have taken the liberty to also include a copy of a
telegram to Admin. Zarb and which clearly dates the
controversy and copies of two letters which speak to
the economic and technical feasibility of the project.
On behalf of Mr. Wallace, the citizens of Tuskegee,
Alabama, and future generations of Americans I thank
you for taking the time and trouble to review these
materials.
Johns
the President
910 Sixteenth St NW
Suite 600
Washington, D.C. 20006
202/785-1593
FORD is LIBRARY GERALD
THE WHITE HOUSE
WASHINGTON
may"
Hild FILL
^7+
May 12, 1976
MEMORANDUM FOR:
KEN LAZARUS
FROM:
PHIL BUCHEN
P.
Attached is a file concerning the issue of
whether or not the Federal Energy Administration
has authority under existing legislation to
issue regulations to permit refinery constructors
a special category of entitlements.
Frank Zarb tells me that they would like to do
something to encourage construction of new
refineries but that their General Counsel,
Michael Butler, believes that any action under
existing legislation to do so would trigger
a lawsuit which he does not believe FEA would
win. As a result, FEA is contemplating seeking
an amendment to its statute so as to give FEA
the desired authority.
Frank Zarb indicates that he has no objection
to our reviewing this matter informally to see
if we think legislation is required or whether
existing legislation gives the FEA the necessary
authority.
I would appreciate your comments to me promptly.
Attachment
FORD & LIBRARY 076870
Wallace and Wallace
Corporation Headquarters
Chemical& Oil Corp.
200-31 LINDEN BOULEVARD
ST. ALBANS, NEW YORK 11412
212-464-3737
May 7, 1976
TELEX 235487 TWX 710-582-2470
General Offices
Mr. Phillip Buchen
Counsellor to the President
1 WORLD TRADE CENTER
The White House
SUITE 8755
Washington, D.C.
NEW YORK, NEW YORK 10068
212-432-0797
Alabama Refinery
Mr. Buchen;
MACON COUNTY ROAD No. 56
TUSKEGEE, ALABAMA
Attached, as per our telecon earlier today, is a copy
of the FEA "Legal Memo" re FEA authority to establish
the Refiner-Constructor category, and my initial response
to that Memo.
These Memos reflect merely the tip of the controversy
that has developed between WWCO and the FEA over the
last two years. I am prepared to brief you on the
details of how and why FEA's position is indefensible.
I have taken the liberty to also include a copy of a
telegram to Admin. Zarb and which clearly dates the
controversy and copies of two letters which speak to
the economic and technical feasibility of the project.
On behalf of Mr. Wallace, the citizens of Tuskegee,
Alabama, and future generations of Americans I thank
you for taking the time and trouble to review these
materials.
Johns
the President
910 Sixteenth St NW
Suite 600
Washington, D.C. 20006
202/785-1593
NORD
GERALD
LIBRARY