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Aggregate prices for No. 2 oils will remain

unchanged by the exemption itself.

Prices

can, however, be expected to rise over time

as the result of increased domestic and

foreign crude costs.

(5)

Exemption of No. 2 oils from the price and allocation

regulations is consistent with the attainment of the

objectives set forth in section 4(b) (1) of the EPAA.

Since an adequate supply is anticipated, the

continued allocation and pricing of No. 2

oils are not necessary to protect the public

health, safety and welfare, and the national

defense (Section 4(b) (1) (A)); the maintenance

of all public services (Section 4(b) (1) (B));

the maintenance of agricultural operations

[Section 4 (b) (1) (C)); or the maintenance of

exploration for and production or extraction

of fuels and minerals (Section 4 (b) (1) (G)).

Adequate supply and the positive effects of

increased competition insure that the exemption

is consistent with the equitable distribution

of crude oil, residual fuel oil and refined

petroleum products (Section 4 (b) (1) (F)] and

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oil to U.S. refineries (Section 4 (b) (1) (E)).

Because the regulations issued pursuant to

the EPAA are designed to deal primarily with

shortage conditions, the exemption is not

only consistent with but, in the current
period of ample supplies, should actually

facilitate the attainment of the objectives

of preservation of an economically sound

petroleum industry (Section 4 (b) (1) (D));

economic efficiency (Section 4 (b) (1) (H)); and minimization of economic distortions, inflexibility,

and interference with market mechanisms

(Section 4 (b) (1) (I)).

The Findings and Views also state FEA's views concerning the potential economic impacts of exempting No. 2 oils from

the Mandatory Petroleum Allocation and Price Regulations.

It is not anticipated that there will be any adverse state

or regional impacts resulting from the proposed exemption. In fact, governmental units which use large quantities of No. 2 oils will find that exemption will permit them to use

competitive bids more easily.

In addition, FEA anticipates

no adverse economic impacts on the availability of consumer goods or services, the gross national product, small business

or the supply and availability of energy resources as fuel or feedstock for industry. FEA expects that the exemption

will have a positive effect on competition.

The exemption

is likewise expected not to cause an adverse effect on

employment or consumer prices.

FEA's analysis of the effects

of the exemption on the rate of unemployment in the U.S.,

on

the Consumer Price Index and on the implicit price deflator

for the gross national product are set forth in detail in

the Findings and Views.

Allocation of Increased Crude Oil Costs

to No. 2 Oils

The refiners' cost allocation formulae of S212.83(c)

provide that the portion of a refiner's total increased

costs of crude oil and increased non-product costs which are

incurred in a month of measurement and which are attributable

on a proportionate volumetric basis to the quantity of

exempt products produced from crude oil must be excluded

from the amount of increased costs which may be passed

through in prices charged for covered (i.e., non-exempt)

products.

Increased costs incurred with respect to purchases

of exempt products are excluded from the total of increased

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beginning with the month prior to the effective date of the

exemption of a product and attributable to that exempt

product from being passed through in prices charged for non

exempt products.

The notice of proposed rulemaking noted

the substantial amounts of unrecovered increased costs

currently allocable to maximum allowable prices for middle

distillates and the fact that these increased costs could

be reallocated under current price rules to maximum allowable prices for gasoline prior to the effective date of the

exemption of middle distillates.

FEA therefore proposed to

limit the reallocation of any increased costs attributable to

No. 2 oils, effective as of the date of the April 21 notice.

FEA requested comments on both the extent and the effective

date of this proposed limitation in light of the seasonal

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opposition was voiced by refiners which stated that: (1) the

limitation would be inconsistent with the general feature of

the price rules permitting more than a proportionate amount

of increased costs to be recovered in gasoline prices; and (2) the limitation would penalize refiners by causing them to lose unrecovered costs. Although the refiner price rules do permit a disproportionate allocation of increased costs to gasoline prices, in no event do the price rules permit

increased costs attributable to exempt products to be recovered in lawful prices charged for covered products; and while it

is true that the limitation would prohibit the recovery of

these costs in gasoline prices, it does not follow that

these costs are "lost".

Such costs may be recovered without

any restrictions whatsoever in prices charged for the exempt middle distillates to which they are properly attributable. Accordingly, the refiner price rules are amended to prohibit

the reallocation of increased costs attributable to No. 2

oils, effective April 21, 1976.

Other conforming amendments

to the price regulations of Part 212 are also being adopted

to reflect the exemption of No. 2 oils.

On April 28, 1976, FEA adopted reallocation of increased

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product costs provisions for resellers which granted them

the same pricing flexibility previously restricted to refiners.

The same reasons which have convinced FEA that the refiner

price rules should be amended to prohibit the reallocation of banked costs attributable to No. 2 oils, effective April

21, 1976, are equally applicable to resellers.

Therefore,

conforming changes have been made to the reseller regulations

in S 212.93(i) (2).

Authority Delegated to the Governor of Puerto Rico

On March 7, 1974 the Administrator of FEA (then FEO)

delegated to the Governor of the Commonwealth of Puerto Rico

all authority previously delegated to the Administrator of

FEO by section 3(a) of Executive Order 11748 with respect to

the allocation of several refined petroleum products, including

middle distillate, within the Commonwealth of Puerto Rico.

The March 7 delegation of authority, insofar as it applies

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