Joe, we're pleased to have both of you here this morning.

I'm not on this subcommittee, and really came as a courtesy to Joe. But I'm interested in what we're talking about here. No. 1, Mr. Chairman, I think that statements of managers probably ought to be prohibited because really we use that a lot of times as a back door method of legislating when we don't want to face up to the facts in the bill itself. And you've seen that happen, you've seen that in the conference on the National Energy Act time and time again. And we can have the statement of managers say such and such, but that's usually just because the conferees can't agree. And we fuzz it up more by letting the managers make a statement that the courts often use to interpret legislation.

Well anyway I wanted to ask-and I guess these are things I should have asked my staff before I came down-but when we passed the Department of Energy Organization Act, did we transfer FEA's authority to the FERC?

Mr. GIROIR. No, sir. Basically, as I understand it, FEA's regulatory responsibility is now in the Economic Regulatory Administration.

Senator BUMPERS. That's what threw me. I heard Senator Johnston say ERA awhile ago, and I only knew one ERA.

Now your complaint is that ERA apparently has enforcement then, right to review a remedial order, under the legislation. And your first hearing, if you complain, I assume it's before them or some person who will hear it.

Mr. GIROIR. That's correct.

Senator BUMPERS. And then you have to go before the FERC after that. Is that it?

Mr. GIROIR. Well the way that it's presently contemplated under ERA or under the Department's regulations, as I understand it; you will first have an informal conference with the ERA representative and defend your position. You will then have, if you don't agree with the staff

Senator BUMPERS. Joe, let me interrupt you. Give me an example of a remedial order that they might issue, say, against Mid-Continent. You represent Mid-Continent, don't you?

Mr. GIROIR. Yes. Well in this specific case, Mid-Continent made a sale of a bulk sale of petroleum, of diesel fuel to Georgia Power Co. This was the confusing thing-first the Internal Revenue Service, which at that time administered the act which the FEA adopted, came in and said your pricing was correct, you used the proper method; the FEA then came in and said no, it wasn't correct, you used the improper method. You should have used a weighted average on your inventory.

Senator BUMPERS. That's a classic case where ERA and another Federal agency have the same problem with environmental equipment on utility plants. Go ahead.

Mr. GIROIR. Yes, sir.

So at that point then we requested an informal conference with the Jackson, Miss., office. And we went down and reviewed their records, and they showed us some things. And we said we disagree with you. They said well, we disagree with you. And so they enter a proposed remedial order, which we disagreed.

Senator BUMPERS. Said, don't do it any more?

Mr. GIROIR. Said, don't do it any more.

We then had what they called a hearing in Jackson-I mean, in Atlanta, Ga. before the regional administrator, but it was an informal hearing.

Senator BUMPERS. We're still talking about ERA.

Mr. GIROIR. This was the predecessor, FEA, now the ERA, yes, sir. Senator BUMPERS. Well I understand. That would be ERA now. Is that right?

Mr. GIROIR. Yes, sir.

Senator BUMPERS. The procedure would be the same.

Mr. GIROIR. It would be the same now with this exception. The hearing which we had in Atlanta was an infomal hearing; no record kept. Under the proposed regulations of ERA, that would be a fomal hearing with evidence and records, cross-examination, et cetera.

Then it would come to Washington in briefs, record, et cetera, to the ERA. And the ERA would either finalize or not finalize a remedial order.

Then that remedial order would be appealable to the FERC, which would start the procedure all over again. You'd have an opportunity for another hearing, another evidentiary proceeding.

Senator BUMPERS. Is that what they call a "trial de novo," Joe? I mean, do you start all over again with the FERC?

Mr. GIROIR. That would be what is contemplated by the ERA now. What our recommendation is is that you just cut out the trial portion of the ERA, or of the Department of Energy's authorization. Senator BUMPERS. And go directly to the FERC?

Mr. GIROIR. Yes, go directly to the FERC.

Senator BUMPERS. And eliminate that one proceeding?
Mr. GIROIR. Yes, sir.

Senator BUMPERS. Because it's a duplication when you do it. Is that it?

Mr. GIROIR. That's correct. Yes, sir.

Now I might say your reference to a trial de novo I think is in answer to your question of the use of the phrase, "appeal." I don't think the use of the phrase "appeal" is inconsistent with the fact that the FERC is in an adjudicating position. If anything, it's simply a trial de novo.

I think you specifically directed FERC to conduct evidentiary proceedings in the nature of a de novo reconsideration of the entire matter. Senator JOHNSON. Well I can think of no less an authority than the Louisiana law provides for an appeal de novo with a trial de novo from the city court of Shreveport and the first judicial district court. So that's not inconsistent with appeals.

Mr. GIROIR. Yes, sir.

Senator JOHNSTON. If they do it wholly unopposed, they can do it here.

Senator BUMPERS. If you absolutely had to you'd have to understand it. [Laughter.]

They don't even have counties down there. [Laughter.]

Senator JOHNSTON. We used to, but the chamber of commerce wanted to put a little local color in.

Senator BUMPERS. Joe, that's a good explanation for me, and I understand it. And it seems to me that you have a very valid point.

Mr. GIROIR. Thank you, sir.

Senator JOHNSTON. Thank you very much, gentlemen, for excellent testimony.

We are very pleased to welcome next Mr. Clair S. Smith, who is president of P&O Falco, Inc., from Shreveport, La. You'll be interested to know that that's my home town, Senator Hansen.

Senator HANSEN. Well I have long time admired Shreveport, Mr. Chairman.

Senator JOHNSTON. Also I'm glad to welcome as part of the panel, Mr. H. A. True, Jr., of True Oil Co., in Casper, Wyo., and Mr. D. Dale Shaffer, vice president of Western Crude Oil, Inc., of Denver, Colo. And also Mr. Jack Zarrow, executive vice president of Big Heart Pipe Line Corp., Tulsa, Okla.

Gentlemen, we're very pleased to have you. And I guess Mr. Smith, being from Shreveport, would probably lead off, having seniority.

STATEMENTS OF CLAIR S. SMITH, PRESIDENT, P&O FALCO, INC., SHREVEPORT, LA.; H. A. TRUE, JR., VICE PRESIDENT, TRUE OIL COMPANY, CASPER, WYO.; AND D. DALE SHAFFER, VICE PRESIDENT, WESTERN CRUDE OIL, INC., DENVER, COLO.

Mr. SMITH. Thank you, sir. I am Clair Smith from Shreveport, La.. with P&O Falco. And Mr. True is going to read the prepared statement, which represents our feelings as a group. We've compromised, and although we're competitors, we have managed to come up with something that we can agree on.

Senator JOHNSTON. Good.

Mr. TRUE. Thank you.

Our companies are basically independent crude oil gathering companies, that is, we market crude oil from the lease level to the refinery. The operations of our companies extend throughout the Western, Central, Southwestern, and Southern United States. As independent companies, we face similar problems under regulations which are administered by the Department of Energy and share common concerns about the manner in which the Department is seeking to administer and enforce these regulations. We very much appreciate the opportunity to appear before this committee today and our presentation will be brief. At the conclusion, we would welcome the opportunity to answer any questions that the committee may have.

Independent crude oil gathering companies have historically performed many important services for both producers and refiners of crude oil. Our primary function is to accumulate crude oil in sufficient amounts in the field to make transportation and distribution to the refinery efficient and economical. We also perform the important service of locating markets for crude oil gathered at the lease. When a market has been found, the crude oil gatherer provides or arranges transportation to its customers, the refiners. We utilize pipelines, trucks, and barges to provide these transportation services. We also perform general accounting, tax accounting, and division order services; by centralizing these functions, we provide great benefits to thousands of small and independent producers. Thus, the gatherer performs and provides both essential marketing services and vitally important trans

portation services. All independent gatherers, in total, handle about 20 percent of the Nation's domestic crude oil production. The major oil companies handle or control most of the remaining 80 percent.

The services we provide are equally beneficial to both producers and refiners. When the major refiner cannot or will not compete, the crude oil gatherers are often the only companies in a position to match supply with demand. The job requires a detailed knowledge of the needs of particular refineries, extensive information regarding the availability of different types of crude oil and a specialized understanding of the market conditions which will permit economical delivery of the right kind of crude oil to a given refinery. In very simple terms, we gather small quantities of crude oil from a large number of producing wells, determine which refiner needs the volume and quantity of crude we have assembled, and arrange transportation by pipeline, truck, or barge to the refiner in the most efficient manner.

Historically, the independent crude oil gatherers have filled gaps left open by the major integrated oil companies. The majors have often terminated gathering and transportation activities in areas where decreasing production has led them to believe that their operations could not be profitable. Independent companies have often come into these areas and acquired the oil gathering systems in the belief that smaller companies would make this kind of operation more efficient and therefore profitable. Stated another way, we believe that our operations are more efficient than those of the major oil companies and we believe that only companies such as ours can provide this vital service at a minimum cost.

Our role is important to the independent producer who operates small wells and to the small refiners who depend upon us to provide their crude oil supplies.

In recent years, our services have also been in demand where crude oil has been discovered in remote areas or in limited quantities. In these cases, the major companies often are unwilling to commit their resources to provide service to the producer and refiner. Because we have been willing to take these risks in serving these areas, we have made it possible to achieve the greatest utilization of existing domestic crude oil production. In this sense, the crude oil gatherer is vitally important to achieving the national energy goals established by Congress.

Finally, it is important to note that the market for crude gathering and transporation services is highly competitive. The availability of alternative means of transportation and alternative markets keeps the margins of the crude oil gatherers low and makes the system highly efficient and competitive.

Crude oil gatherers have been subject to controls since the beginning of the petroleum regulatory program in 1973. We have been regulated, audited, and I might add, heavily burdened by the Government bureaucracy for a period of nearly 5 years. Our frustrations have been compounded by the fact that from the very inception of the program, DOE has had little or no understanding of our activities and, until very recently, has not promulgated regulations which make sense when applied to our businesses.

Because the crude oil gatherers typically purchase crude oil at the lease, the Department considers them "resellers" under the pricing regulations. There are two fundamental problems with this approach.

First, the agency has consistently failed to recognize that the gatherers performs two separate and distinct functions: A transportation function and a marketing function. Regulation of transporation is not within the Department's jurisdiction under the emergency price control legislation. Nevertheless, the agency has asserted jurisdiction and attempts to regulate transportation activities as part of the reseller pricing rules.

The second problem is equally fundamental. Until January 1978, crude oil gatherers were expected to abide by the so-called "reseller" price regulations. These rules were designed to regulate refined product marketers and, in reality, only made sense if applied to retail outlets or small wholesalers of such products.

As the DOE has itself admitted in a series of public notices, the prior rule was "unnecessarily burdensome" to the crude oil gatherer. The DOE has also conceded that the old rule was "not particularly well suited" to permitting us to determine our compliance; this is because the basic terms of the rule have little obvious applicability to our business. As a result, for a period of over 4 years we were forced to live with pricing rules which made little sense to us and whose proper interpretation still remains a matter of guesswork. We have attempted to comply in good faith; where guidance from the Agency has been lacking, we have tried to adopt reasonable approaches. We are confident that we can defend the reasonableness of our interpretations. But what concerns us is how our decisions-made years ago, in good faith, and without the needed guidance-will conform to the arbitrary determinations of today's auditor.

The Agency has promised to clarify how the regulations should have been applied during this prior period, but as I will discuss in a moment, there is simply no way to predict what these supposed "clarifications" will be; further, there is a substantial chance that anything the Agency does will be arbitrary and capricious and, because it will have a retroactive effect, is likely to impose enormous penalties upon our businesses.

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For example, the "reseller regulations" have never asserted that transportation activities of crude oil resellers are subject to regulation. This silence of nearly 4 years has provided substantial evidence that the DOE recognized that it has no authority to regulate transportation activities. Were DOE now to assert that it has had such authority, and apply regulations retroactively, our segment of the industry would suffer a substantial penalty.

From a prospective viewpoint, the Agency has made some progress in developing meaningful regulations.

Effective January 1978, a specific system of regulations was implemented for crude oil resellers, which recognizes that the crude oil gatherers are unique. We welcome these regulations as a step in the right direction. At least we can generally understand what we are required to do under the new rules. We believe, however, that the real answer is to exempt crude oil resellers entirely from the regulations. As I stated earlier, the market for our services is highly competitive and no regulation is necessary to protect the consuming public.

The Department has taken another positive commendable step. On April 11, 1978, it published a notice of inquiry, in which it proposes to modify the crude oil pricing program in such a way as to permit re