Mr. MAVROULES. The first panel this morning will consist of Mr. Marc Sisk, on behalf of Tosco Corp.; Phillip Chisholm, executive vice president, Petroleum Marketers Association; and Jack Blum, on behalf of the Independent Gasoline Marketers Council.

Welcome, gentlemen. And, Mr. Sisk, if you would begin, please. TESTIMONY OF MARCUS W. SISK, JR., ATTORNEY AT LAW, BOWMAN, CONNER, TOUHEY & PETRILLO, ON BEHALF OF TOSCO CORP.

Mr. SISK. Good morning, Mr. Chairman. My name is Marc Sisk. I am here on behalf of Tosco Corporation. Mr. Charles Eddy of Tosco Corp. was invited to testify and had planned to testify this morning. He was detained in California and could not attend, and he asked me to deliver his statement. I hope the subcommittee will accept me as a substitute.

Mr. MAVROULES. No question.

Mr. SISK. Tosco Corp. is the largest independent petroleum refiner on the U.S. West Coast. The company's principal business is supplying motor gasoline and diesel fuel to independent marketers in California and the Pacific Northwest. Tosco owns and operates a 126,000-barrel-per-day plant, known as the Avon Refinery, located near Martinez, CA, on the San Francisco Bay. The Avon Refinery relies heavily on Alaska North Slope crude oil and has been a major refiner of ANS crude since August 1977 when this oil was first produced and shipped through the TAPS. During this period Tosco has processed an average of nearly 40,000 barrels per day of ANS crude oil at the Avon Refinery, representing approximately one-half of the refinery's total crude oil runs and about 3 percent of total ANS production over that period.

Since 1977, Tosco has paid more than $600 million in TAPS transportation charges to its ANS crude oil suppliers pursuant to the terms of its supply contracts. Under these contracts, Tosco has very substantial potential rights to refunds from the suppliers to the extent that the TAPS tariff rates are ultimately found to be excessive.

Resolution and payment of Tosco's potential refund rights would be facilitated by Mr. Bedell's bill, H.R. 245, which provides for a prompt and equitable disposition of the TAPS proceeding currently pending before the Federal Energy Regulatory Commission. The bill's application of the original cost methodology already used by FERC in the regulation of natural gas pipelines and electric utilities would provide a reasonable tariff, and the provision for expedited, administrative and judicial proceedings would terminate the unnecessarily protracted proceeding which afford TAPS owners the opportunity to avoid the obligation to refund excessive pipeline charges. Tosco, therefore, strongly supports the proposed legislation.

We would also like to take this opportunity to comment on the proposed settlement to the TAPS proceeding which has been submitted to the FERC by Arco Pipe Line Company and BP Pipelines Inc., the U.S. Department of Justice, and the State of Alaska. Tosco objects to the provision of the proposed settlement which arbitrarily cuts off any claims for refunds for petroleum delivered prior to

January 1, 1982. Most of Tosco's refund rights arise from crude oil transactions prior to 1982 and would simply be dropped by the proposed settlement.

The principal basis for Tosco's rights to refunds of TAPS tariff overcharges are the contracts between Tosco and its ANS producers/suppliers. These agreements have the effect of placing Tosco in the shoes of its ANS suppliers with respect to the TAPS tariff refunds. Since 1977, Tosco has purchased ANS crude oil under several contracts which generally provide that the prices charged for ANS crude oil include transportation costs which are subject to adjustment. The parties to these contracts have acknowledged that the TAPS tariffs are provisional in nature and that subsequent adjustment in costs would be made based on the final TAPS tariffs. In addition, the Mandatory Petroleum Price Regulations which were in effect from late 1973 through January 1981, provide a basis for reimbursement to Tosco based on excess TAPS tariff payments. If Tosco's suppliers were to receive tariff refunds, reimbursement to Tosco may be necessary to avoid causing the wellhead price of ANS crude to exceed permissible levels during certain periods.

If the proposed settlement were applied to the other TAPS owners, the effect on Tosco would be to preclude refunds of substantial amounts of overcharges for the pre-1982 period. Tosco has relied for nearly 7 years on the eventual refund of overcharges for all periods by paying contractual prices for ANS crude which contemplated adjustments when a lawful tariff was established. To eliminate pre-1982 refunds now would be an abdication of FERC's ratemaking responsibility and a serious breach of the trust placed in FERC by Tosco and other ANS purchasers and shippers.

The TAPS tariffs have been widely considered to be excessive since the start of ANS production in 1977. The initial tariffs were challenged immediately upon filing and the ICC allowed them to be applied only under the condition that refunds would be made when just and reasonable rates had been determined.

Since that time Tosco has looked to the FERC for protection from excessive TAPS tariffs and the ICC's original refund requirement has provided Tosco and other ANS purchasers and shippers with an assurance that eventually tariff overcharges would be refunded.

Tosco has estimated that its refunds under the methodology incorporated into the proposed TAPS settlement would be approximately $34 million for the period 1977 through 1984. This estimate, by the way, is considerably less than the previous estimate which Tosco made using the methodology adopted by Judge Kane in his decision in phase I of the TAPS proceeding.

The proposed denial of pre-1982 refunds in the proposed settlement would eliminate well over half of Tosco's estimated recovery. Mr. Chairman, Tosco believes that this result is inequitable and unjustified and that the refund denial provision in the proposed settlement is in violation of FERC's responsibility to assure just and reasonable cost-based rates.

Thank you.

Mr. MAVROULES. Thank you for your testimony.

In order to expedite the hearing this morning, because we have the defense bill on the floor this afternoon, I am going to ask that

all panelists first testify, then we will open it up to questions from the subcommittee members.

The next panel member is Phillip Chisholm, executive vice president, Petroleum Marketers Association.

Mr. Chisholm, please.

TESTIMONY OF PHILLIP R. CHISHOLM, EXECUTIVE VICE PRESIDENT, PETROLEUM MARKETERS ASSOCIATION OF AMERICA

Mr. CHISHOLM. Good morning, Mr. Chairman and members of the subcommittee. My name is Phillip R. Chisholm. I am the executive vice president of the Petroleum Marketers Association of America, formerly the National Oil Jobbers Council.

PMAA is a federation of 41 State and regional trade associations representing some 11,000 independent petroleum product marketers. Collectively these marketers sell half of the motor fuel and three-quarters of the home heating oil consumed in America today. While virtually all of these marketers are small businessmen, their cumulative assets would rank them 17th on the Fortune 500 list. I am especially pleased to appear before the subcommittee this morning. This subcommittee has a long history of being interested in issues affecting independent marketers. The subcommittee's ranking member, Mr. Bedell, during his tenure as chairman, established himself as one of the more knowledgeable Members of Congress on petroleum marketing issues. I'm happy to see the fine tradition started by Mr. Bedell continue under the superb leadership of Chairman Mauvroules.

PMAA has long been interested in the issue before the subcommittee today: The appropriate tariff for crude oil transported_via the Trans-Alaskan Pipeline System. Neither PMAA, nor any of its members, is in the business of crude oil production, exploration, or transportation; therefore, our interest in the issue is not a direct one in the sense that the marketers we represent transport crude oil via the TAPS. The thrust of our statement today will not address the appropriate methodology for calculation of the tariff on the pipeline, but rather, on the way whatever methodology is chosen may affect the downstream product marketers that PMAA represents.

The entire petroleum industry has undergone rather dramatic changes in the past 4 years since President Reagan decontrolled crude oil and gasoline. Thousands of dealers and independent marketers have gone out of business. More than 100 refiners have shut down. And there are also significantly fewer major oil companies than there were in 1981.

Admittedly, part of this demise has been a result of the economic repercussions following the recession in 1981 and 1982, the slower recovery that the petroleum industry has experienced, and a declining consumer demand for petroleum products. However, these factors alone do not explain what problems PMAA member marketers have faced. Nor can the standard argument that is advanced by some major integrated companies that the problems marketers are facing are a result of free market forces explain many of the occurrences in the marketplace in recent years.

Petroleum marketers buy their products from refiners at prevailing wholesale prices. Marketers have been told that these prices are established by competition in the wholesale market. Independent marketers take these products and resell them at either the wholesale or retail level. Their success depends on their ability to perform these wholesale and retail functions more cheaply than their competitors, which in some cases are the suppliers. Theoretically, those marketers that can perform these functions least expensively should prosper; those that have higher costs will have difficulty surviving under normal competitive conditions. That is the way marketers believe the free market is supposed to work.

What happens, however, when the retail price of petroleum products is equal to or less than the price the marketer pays at wholesale? The most efficient marketer in the country is unable to compete. But that is precisely the market in which many marketers have found themselves. In fact, according to the Department of Energy, during 1983, the wholesale price charged independent marketers at the wholesale rack was greater than the delivered price charged retail dealers.

It is not difficult to find markets where the retail price bears almost no relationship to the wholesale market, but it is becoming more and more frequent when the retail street price minus the relevant Federal and State taxes bears little or no relation to the posted price for crude oil.

Marketers do not believe this is an indication of how a free market works. It has led them to raise legitimate questions about how these phenomena could occur; but more importantly, it has led them to demand that action be taken to halt such practices.

One of the most common perceptions that marketers have is that the major integrated companies have used crude oil profits to subsidize otherwise inefficient marketing operations. The major companies have always vehemently denied this charge alleging that they do make a profit in marketing. But there is no denying that the rate of return for marketing and refining is consistently lower than upstream operations. There is also no denying that this lower rate of return has contributed to the lower values of oil company stocks, which has thus led to many of the hostile takeover attempts in the last several years.

In 1982, considerable attention became focused on the companies with Alaskan North Slope crude production and the ability of these companies, using liberal interpretations of the tax laws, to subsidize their retail marketing network. Specifically, it was alleged that because there was no sales price for ANS crude oil, at least one of the companies was using questionable netback calculations and thus avoiding substantial sums of windfall profits tax. This gave that particular company competitive price advantages on the retail level of several cents a gallon and led to a substantial erosion of the independent marketers' retail market share in those markets in which the company operated.

This competitive advantage was achieved essentially in the following manner. The comparable crude oil for establishing a base price in Alaska was West Texas sour crude oil. The netback price for purposes of arriving at windfall profits tax calculation was attained by deducting the transportation cost of moving the crude oil

from Alaska to the Gulf Coast. This was accomplished by shipping the crude oil via the Trans-Alaskan Pipeline (TAPS) from Prudhoe Bay to Valdez, and shipping the crude oil by tanker from Valdez to the Gulf Coast.

However, much of the crude oil never reached the Gulf Coast. It was refined and sold on the West Coast. At least one company refined 70 percent of its ANS crude oil production on the West Coast, yet deducted the full transportation costs as if the crude oil had, in fact, gone to Texas. In addition, it was believed that some companies were using foreign tax credits against income earned in shipping because as the crude oil moved by tanker from Valdez to the lower 48 States, it traveled at least partially in foreign waters.

These two of the issues-the deductibility of water transportation costs and the foreign tax credit-have been addressed by the Internal Revenue Service and the Congress, respectively. There remains, however, the question of the appropriate tariff for Trans-Alaskan Pipeline.

While there are officially eight owners of the Trans-Alaskan Pipeline, the three principal owners are the same companies that have substantial interests in ANS crude oil production-Exxon, Sohio/BP, and Arco. Exxon and Arco each own approximately 22 percent of the pipeline, while Sohio owns approximately half interest. Therefore, every dollar which can be deducted from a barrel of crude oil for transportation via TAPS is a dollar less in windfall profits tax these companies have to pay and a dollar greater income for each company's respective interest in the pipeline. From a revenue standpoint, the loss to the Government is that windfall profits are taxed at 70 percent, while revenue from the pipeline company is taxed at a maximum rate of 46 percent.

Since TAPS is a common carrier the rates charged for transportation are supposedly regulated by FERC. However, because of protracted litigation and the complexity of the pipeline's ownership, FERC in the last 8 years has not established any rate for the pipeline.

The tariff the companies have, in essence, been charging themselves has been in excess of $6 per barrel. And one does not have to be a mathematical genius to realize that with the initial cost of $10 billion with 1.6 million barrels flowing through the pipeline a day, that the pipeline has repaid itself 3 times in the past 8 years. That is the type of return on investment any small businessman would dream about.

Until FERC or in its absence, Congress-acts, the companies will continue to be free to establish the tariffs at such levels. Hanging in the balance is perhaps millions of dollars of unpaid windfall profits tax.

Recently, a settlement was announced between Arco, the State of Alaska, BP, and the Justice Department relative to the TAPS tariff. This settlement is now at FERC where it is pending approval. This agreement outlines specific tariffs for 1982 through 1985 and establishes a particular methodology for determining maximum tariffs for the life of the pipeline. Also, it is believed that the settlement will relieve Arco of any windfall tax liability relating to excess tariffs charged in previous years if or when a specific methodology of calculating such tariffs is determined.