195. Report of the Cabinet Committee on Energy Supplies and Resources Policy1
INTRODUCTION
The importance of energy to a strong and growing economy is clear. As conditions of supplies and reserves of coal, oil and natural gas change and as both defense and peacetime requirements come more clearly into focus, the bearing of Government policies upon energy needs re-examination.
What degree and kind of public regulation is appropriate to the present situation and future outlook? What trade policies for energy supplies will most effectively express the overlapping national needs for adequate protectable supplies in case of war and for encouragement of economic growth of this country and friendly countries elsewhere in the world? What steps may be taken to improve the economic position of the coal industry, now seriously depressed, without penalizing competing industries, as a means of enhancing the ability of that industry to contribute to the national defense? More particularly, should specific changes be made in tax, freight rate, research, government purchasing, or other policies in the energy field?
These and other policy questions press for careful review and decision.
On July 30, 1954, the President established a Cabinet Committee on Energy Supplies and Resources Policy. The Director of the Office of Defense Mobilization was designated as Chairman of this Committee and the heads of the following agencies served as members: Departments of State, Treasury, Defense, Justice, the Interior, Commerce and Labor.
The White House directive respecting the Committee’s assignment included the following specific statements:
“At the direction of the President the Committee will undertake a study to evaluate all factors pertaining to the continued development [Page 513] of energy supplies and resources fuels in the United States, with the aim of strengthening the national defense, providing orderly industrial growth, and assuring supplies for our expanding national economy and for any future emergency.
“The Committee will review factors affecting the requirements and supplies of the major sources of energy including: coal (anthracite, bituminous and lignite, as well as coke, coal tars, and synthetic liquid fuels); petroleum and natural gas.”
The Cabinet Committee has been aided greatly by an able and representative Task Force appointed pursuant to the President’s instructions. The Committee’s recommendations are set forth below.
RECOMMENDATIONS
1. Natural Gas Regulation
We believe the problem of natural gas regulation should be approached from the viewpoint of assuring adequate supplies and the discovery and development of additional reserves to support such supplies, in the interests of national defense, an expanding domestic economy, and reasonable prices to consumers.
To secure these objectives, it is essential to give due consideration to (1) the operations known as the production of natural gas, (2) the transportation of gas in interstate transmission lines, and (3) the distribution of gas in municipalities. Individual companies may engage in more than one of these activities. Each operation of such companies should be treated by like criteria according to its appropriate industry function.
In the production of natural gas it is important that sound conservation practices be continued. This area of conservation management is under the jurisdiction of State conservation commissions. In the interest of a sound fuels policy and the protection of the national defense and consumer interests, in assuring such a continued exploration for and development of adequate reserves as to provide an adequate supply of natural gas, we believe the Federal Government should not control the production, gathering, processing or sale of natural gas prior to its entry into an interstate transmission line.
The interstate transmission of natural gas by interstate transmission lines, and the subsequent sale of such gas for resale is a public utility function and should be under the regulation of the Federal Power Commission. In considering the certification of new lines and applications for increased rates based on new or re-negotiated purchase contracts, the Commission should consider not only the assurance of supply, but also whether the contract prices of the natural gas which the applicant has contracted to buy are the reasonable market field prices.
[Page 514]The several states or their political sub-divisions should continue to provide the public utility regulation of distributing companies in accordance with usual utility practices.
Thus the complete cycle of natural gas production, transmission and utilization will be appropriately regulated: the production and conservation of natural gas by the State conservation commissions; the interstate transmission of natural gas by the Federal Power Commission; and the distribution by the local public utility commissions.
2. Sales Below Cost by Interstate Pipeline Companies
The basic principle regarding the regulation of natural gas and the use of alternative energy sources should be as far as possible that of free choice by the consumer and free and fair competition among suppliers. This, it is confidently thought, will provide most effectively for the assurance and flexibility of energy supply, both for economic growth and strong security readiness. But sales either for resale or direct consumption below actual cost plus a fair proportion of fixed charges which drive out competing fuels constitute unfair competition and are inimical to a sound fuels economy.
The Committee recommends, therefore, that legislation be proposed that will prohibit sales by interstate pipelines either for resale or for direct consumption, which drive out competing fuels because the charges are below actual cost plus a fair proportion of fixed charges.
3. Eminent Domain for Natural Gas Storage
The power of eminent domain for the acquisition of surface and mineral rights for the development of underground storage reservoirs should be granted subject to appropriate safeguards to protect the public safety, including the mining industry.
4. Crude Oil Imports and Residual Fuel Oil Imports
An expanding domestic oil industry, plus a healthy oil industry in friendly countries which help to supply the United States market, constitute basically important elements in the kind of industrial strength which contributes most to a strong national defense. Other energy industries, especially coal, must also maintain a level of operation which will make possible rapid expansion in output should that become necessary. In this complex picture both domestic production and imports have important parts to play; neither should be sacrificed to the other.
Since World War II importation of crude oil and residual fuel oil into the United States has increased substantially, with the result [Page 515] that today these oils supply a significant part of the U.S. market for fuels.
The Committee believes that if the imports of crude and residual oils should exceed significantly the respective proportions that these imports of oils bore to the production of domestic crude oil in 1954, the domestic fuels situation could be so impaired as to endanger the orderly industrial growth which assures the military and civilian supplies and reserves that are necessary to the national defense.
In view of the foregoing, the Committee concludes that in the interest of national defense imports should be limited. It is highly desirable that this be done by voluntary, individual action of those who are importing or those who become importers of crude or residual oil. The Committee believes that every effort should be made and will be made to avoid the necessity of governmental intervention.
The Committee recommends, however, that if in the future the imports of crude oil and residual fuel oils exceed significantly the respective proportions that such imported oils bore to domestic production of crude oil in 1954, appropriate action should be taken.
The Committee recommends further that the desirable proportionate relationships between imports and domestic production be reviewed from time to time in the light of industrial expansion and changing economic and national defense requirements.
In arriving at these conclusions and recommendations, the Committee has taken into consideration the importance to the economies of friendly countries of their oil exports to the United States as well as the importance to the United States of the accessibility of foreign oil supplies both in peace and war.
5. Petroleum Refining Capacity
The Departments of Defense and the Interior should have studies made by their staffs and expert advisors as to the adequacy of present and prospective refinery capacity, both as to amount and dispersal, as well as other factors, to determine the need for any measures to maintain refinery capacity necessary for defense purposes, particularly the capacity operated by small, independent refineries.
6. Tax Incentives
- a.
- Present tax provisions on coal, oil and gas production have been an important factor in encouraging development of energy sources at a pace about in keeping with demand. Further analysis and study by the appropriate branches of the Government should [Page 516] from time to time be made to review the amount and method of making such allowances to maintain proper relationships with continuing changes in other features of the tax law. Any changes which may be proposed in the future must be analyzed in terms of their probable effect on development of domestic resources needed for economic progress and national defense as well as the fiscal and tax policies of the Government.
- b.
- Retroactive tax legislation and special relief provisions should be avoided.
- c.
- Accelerated amortization should be used only to insure the maintenance of a sound mobilization base for energy supplies.
7. Research and Development Program for Coal
We recognize that coal is a great national asset and endorse a cooperative study to determine what research and development could be undertaken. The coal industry and both Federal and State governments should participate in this study and its cost.
8. Unemployment and Business Distress in the Coal Industry
We recognize that serious unemployment and business distress exist in the coal industry and recommend that the Interdepartmental Committee on the Soft Coal Industry be continued for the purpose of developing for Cabinet consideration specific action programs to alleviate these conditions.
9. Coal Freight Rates
In order to maintain coal’s vitality as an instrument of national defense by improving currently its ability to compete with other fuels, the railroads, by voluntary action, and, in the absence thereof, the Interstate Commerce Commission, by compulsory order, should adjust freight rates to the extent necessary to remove the excessive and disproportionate contribution that coal rates are making to meet the cost of other unprofitable services of the railroad industry. Train load rates should be established to reflect the lower costs of such service.
10. Coal Exports
- a.
- The Government should urge foreign governments to reduce discriminatory restrictions against imports of U.S. coal.
- b.
- The Government, when making foreign loans, should use its best efforts to obtain provisions to prevent discrimination against U.S. coal. Discrimination would be judged to exist when U.S. coal imports are disallowed despite its availability at costs no higher than foreign coal.
- c.
- The Government should expedite efforts to establish credits through the Export-Import Bank to foreign banking institutions in countries where there is reasonable prospect of repayment so that American coal exporters can offer more competitive payment terms to foreign customers.
- d.
- Where U.S. coal can be supplied competitively with other available coal, the Government should use its best efforts to enlarge the participation of U.S. coal in the foreign aid program.
- e.
- The Government should compensate for higher shipping costs when incurred as a result of the requirement that 50 percent of all shipments be in United States ships at fair and reasonable United States market rates.
11. Mobilization Requirements for Coke
The Committee believes that present and prospective rates of shutdown and dismantling of slot-type coke ovens will leave inadequate coking capacity to support full mobilization production of steel and other essential war-time industry.
On the basis of national security, coke requirements can only be met if the Office of Defense Mobilization is directed to prepare plans to make the necessary arrangements and tests to expand coke production rapidly in the case of an emergency.
12. Government Fuel Purchasing Policy
In working out a more consistent and equitable coal purchase policy, the following steps should be taken:
- a.
- The Secretary of Labor under the Walsh-Healy Act should pursue his present policy of making determinations of wage standards applicable in the coal producing areas and should establish these standards at the earliest practicable date.
- b.
- The Government agencies shall, to the extent practicable, purchase not less than 75 percent of their estimated annual coal requirements on a contract basis.
- c.
- All Government agencies purchasing coal shall, prior to and after the award of the contract, verify the quality of the coal offered and supplied to the agencies.
- d.
- All Government contracts for the purchase of coal shall contain appropriate escalator clauses which protect the buyer and the seller.
- e.
- In instances where it is not possible for a Government agency to take all the coal for which it has contracted, the deficit shall be apportioned equitably among all participating contract suppliers without penalty to the Government.
- f.
- Coal suppliers shall be required to submit, along with their bids, proof of their ability to produce the requirements at the time the contract is awarded.
- g.
- All coal suppliers to the Government, regardless of size, shall comply with the Federal Coal Mine Safety Act.
- h.
- All transactions with the Government relating to coal purchases and supply shall be public information.
- i.
- The domestic fuel purchasing policies set forth above shall be applied to purchases of coal by companies acting as agents for the Federal government, as well as to purchases made direct by Government agencies.
Prior to the purchase of any fuel by a Federal Government agency having a large annual use of fuel, that agency should request advice from ODM as to how this purchase can contribute to the maintenance of a strong mobilization base within the domestic fuels industry. ODM should be directed by Executive Order to develop a mechanism for accomplishing this objective.
- Source: Eisenhower Library, Cabinet Secretariat Records. Confidential. Submitted to the President under cover of a memorandum of January 18 from Flemming, chairman of the Committee. The Committee revised it in light of suggestions made by the Cabinet members at their meeting of January 21; see supra . The revised report was submitted to the Cabinet under cover of a memorandum of January 27 by Maxwell M. Rabb, Secretary to the Cabinet. At its meeting on January 28, the Cabinet noted the revised report and returned it for further detailed study and subsequent publication at an appropriate date in the name of the Committee. (Cabinet Record of Action, January 31; ibid., Project Clean Up) The revised report was released to the press on February 26.↩