the Government contract at 45 cents, then his cost, in determining his profits subject to renegotiation, was based upon 45-cent cotton.

That just seems an inhuman penalty, because, if he had sold it at a profit, that would not have been subject to renegotiation. If he wanted to be patriotic and use that good grade and staple of cotton, which he bought, the entire 15 cents was taken away from him.

I can see no justification whatsoever for this present act not including a provision similar to the one that Senator George put into the 1943 act relating to the inventory profits on all these agricultural commodities.

Furthermore, you will work discrimination in this situation as between a contractor who is on a last-in and first-out basis, of valuing his inventories on a contractor who is on a first-in and first-out basis. The contractor who is on the last-in and first-out basis will secure preferential treatment in renegotiation over a first-in and first-out contractor.

It is highly important, if you are going to renegotiate these standard commercial articles which are highly competitive-I hope you do not, but if you are, you put these contractors on an equality-of-treatment basis in determining costs.

I do want to make one suggestion to you as to the form of the legislation. The legislation in the 1943 act was rather complicated in its administration. It need not have been, but as the Price Adjustment Board worked it out, they made it exceedingly complicated. I know what you had in mind, Senator George, I know what Mr. Stam had in mind in drafting the committee report, but they perverted it considerably when it came to the administration of it.

And so, in addition to considering that actual legislation which was put in the 1943 act, I make this suggestion to you, as possibly simpler legislation to accomplish the same purpose.

After the first sentence in section 103 (f) of the bill, the following language could well be inserted:

In determining costs allocable to such contracts in connection with raw materials of the type described in section 106 (a) (2) of the act, used in making goods for such contracts, the fair market price for such raw materials as of the date the contract is entered into shall be used.

You see, 106 (a) (2) deals with agricultural commodities, wheat, corn, tobacco, and this would implement that section in making the cost current, at the time the contract is taken, be the cost factor in determining the profits from that contract subject to renegotiation. I thank you, gentlemen.

Senator BUTLER. If an individual who had a Government contract and made a long profit because of an inventory, a cheap inventory that he had on hand, if he was not renegotiated, even he would yield up most of that profit in his excess profits tax, would he not?

Mr. BARKER. That is right, sir; that is the type of normal excess profits which should be subject to an excess profits tax. We are not trying to deny that fact; but the minute you have one cent of excess profits, the Government takes 100 percent of it. By the little, simple expedient of selling that to an outsider, rather than using it in Government goods, he could have his profit, subject to excess profits tax, and buy new cotton or new grain and use the cost current at the time he takes the contract. It is simple equity, so far as I can see, and I do not see that there is any justification for not following the principles

that we used in the 1943 act, and which I know from experience in handling renegotiation proceedings was the only way to establish equality of treatment between various contractors.

The CHAIRMAN. Thank you.

Mr. BARKER. Thank you.

The CHAIRMAN. We will now hear from Mr. Wesley E. Disney, representing the Western Oil and Gas Association.

Will you please come forward and identify yourself for the record? STATEMENT OF WESLEY E. DISNEY, INDEPENDENT NATURAL GAS ASSOCIATION OF AMERICA, WASHINGTON, D. C.

Mr. DISNEY. I am Wesley E. Disney, 501 World Center Building, Washington, D. C. I appear on behalf of the Indpependent Natural Gas Association of America, a trade association composed of producers of natural gas, royalty owners of natural gas interests, distributors of natural gas, and interstate and intrastate natural gas pipeline companies, as well as the Western Oil and Gas Association, chiefly composed of producers in the Western States.

We believe that the World War II law is equitable and workable, so far as the points I am about to make here.

Senator CONNALLY. You mean, the law in 1943?

Mr. DISNEY. Yes. I refer specifically to section 403 (i) (1) (B), which provides for the exemption of

any contract or subcontract for the production of a mine, oil or gas well, or other mineral or natural depoist, or timber, which has not been processed, refined or treated beyond the first form or state suitable for industrial use.

As you are aware, the section also exempts other raw materials such as agricultural commodities and domestic animals.

Acting under the subsection of the present law which I have quoted, the Renegotiation Board during the last war exempted some 70 or 80 mineral products, including natural gas, as well as such materials as asphalt, feldspar, manganese, oil, talc, and others. The expansion of this list of mining products indicates that it was done in keeping with the spirit of the statute, as well as on account of the administrative difficulties because, obviously, the determination of cost in this large list of raw materials would appear to have been an almost insuperable administrative job.

We believe that the Government, as well as the contracting parties, would be well served by retaining this raw material exemption unchanged as in the proposed law. We have heard of no claim of excessive profits on natural gas or other mineral products in World War II. There is no sound reason for the elimination of the exemption or for the restriction of the exemption, but there are sound, practical reasons for its retention.

The possible instances where renegotiation could be applied to natural gas are relatively few and unimportant. Some of these could be the so-called direct sales, that are not under the jurisdiction of the Federal Power Commission. To illustrate it graphically, a pipeline. from Texas to Detroit that serves a factory, say, in Missouri, their service of that factory is not under the jurisdiction of the Federal Power Commission, but the gate rate of Detroit is under their jurisdiction.

Another instance could arise where fractions, such as butane, and so forth, are extracted from the natural gas for the manufacture of gasoline which, having passed the first stage of processing, would naturally be the subject of renegotiation.

Another instance might possibly arise where oil is produced with the gas and similarly refined for use in the war effort.

regu

Nearly every foot of natural gas sold in the trade is now under lation by State and Federal authorities. The Federal Power Commission is now claiming the right to regulate the price for which pipeline companies may purchase gas in the field-although this is currently disputed-and has since the passage of the Natural Gas Act, had the power to regulate and has regulated the city gas rate of the interstate pipeline. It restricts these earnings to 6 percent, so we already have price control of interstate natural gas. The distributors of natural gas in the cities are regulated by the State regulatory commissions and their rates fixed by that authority, so it is seen that for all practical purposes the price of gas is determined by regulatory authorities.

We understand the goal of any renegotiation law is to prevent excess profits accruing from the manufacture of essential war materials. As I have stated, natural gas is primarily a household commodity, although large quantities have been and can be used to supply war material manufacturing plants. Direct sales of gas of this character are generally uniformly lower than the gate rates fixed by regulatory authorities, for the reason that these sales enable the pipeline companies to maintain their load factor in the months when household demands are not so great. So, taking into consideration the practical realities, we fail to see any good purpose to be served in refusing the exemption of natural gas, regulated as it is by State and Federal authorities.

In view of the complexity of the natural gas business with its leaseholds, pipelines, and other cost facilities, the determination of cost by the Renegotiation Board would indeed be a staggering administrative task, amounting in practical effect to at least some deterrent to production. A conclusion of the then Under Secretary of War, Robert C. Patterson, before the subcommittee of the Committee on Finance, made on September 29-30, 1942, seems to be important here. He gave this subject such close attention that we know of no better authority to quote on the practical operation of the reneogiation law. He said: Moreover with the field thus limited, a more effective job can be done with respect to the contracts and subcontracts covered.

On the other hand, if purchases of standard products and raw materials are included as subcontracts, the problem of administering the statute becomes much more difficult. The number of contracts and contractors might be so large as to make it impossible to reneogiate with all of them. For these reasons the War Department feels that it is probably wiser to define the term "subcontracts" to exclude purchases of raw materials and standard commercial products.

We do not find anything in the history of the Renegotiation Act indicating that the Secretary of War changed his opinion with reference to the exemption of raw materials, but we do find that a year later he spoke with approval of this exemption. In his testimony before this committee on September 20, 1943, he said:

With respect to the restriction of its field of operation in the meanwhile, much has already been done, and from time to time certain additional measures may be appropriate. To summarize the present situation, there have been exempted

from renegotiation under the express terms of the statute, (1) contractors having renegotiable sales aggregating less than $100,000 within a fiscal year; (2) contracts with other departments, with the States, and with foreign governments or agencies thereof; and (3) contracts for products of mines, oil and gas wells, and other natural deposits, and timber, not processed, refined or treated beyond the first form or state suitable for industrial use.

In other words, we have exercised our discretion in a large number of cases. We are not anxious for work. We have plenty of work to do right within the main scope of the renegotiation law and we do not relish expanding the field. Wherever there are other guides, prices are taken care of, say, by public regulatory bodies like public-utility commissions and we are quite content to leave that field to them.

It is believed that these interpretations and policies coincide with the intent of Congress, but it should be noted that they operate to reduce and limit rather than to expand the limits within which renegotiation is presently operating.

And, parenthetically, it appeared to me from the testimony of Mr. Roberts the other day, that it is the express purpose to expand the scope of the Renegotiation Act rather than to leave as it is under the present law.

Continuing Mr. Patterson's discussion:

The most cursory review of the foregoing statutory and administrative exemptions clearly a basic and continuing purpose to apply the renegotiation statute only to those activities directly connected with the war effort and the elimination of excessive profits and excessive prices therefrom.

There is no practical way to segregate crude oil in a refinery so that it can be said that the product shipped under Government contract came from a particular ownership of crude oil because the purchases of crude for refinery uses usually come from a great number of sellers. How would you distinguish between integrated refineries (who produce all or a part of the crude they require) and those nonintegrated refineries who purchase all their crude-oil requirements? What provision would be made for the interests of the royalty owner? These and a myriad of other questions that could be propounded indicate that the proponents of the additional language contained in the House bill, namely, the renegotiation authorities, seem to seek to move into that phase of the oil and gas business which has puzzled that business itself for many years and take on a cost-accounting problem that would harass them for a long period of time, to say nothing of the effect produced upon these businesses themselves.

We believe that the exclusion of the language we object to would not expedite any war or defense effort, but would present such complicated administrative tasks that the end would not justify the means; that the war and defense effort would not be aided but impeded to some extent at least by adopting this new and untried language in the Renegotiation Act. We believe that since the Renegotiation Act as it now stands, so far as these exempted raw materials are concerned, operating as it did in World War II, could well be retained in the present law. We know of no inordinate profits being made by the oil and gas business in the last World War by reason of the fact that the present law does not contain any of the new suggestions made in the House bill.

We are very earnest about this, and it seems to me that a vast horde of new employees would have to be engaged in the renegotiation work unless the exemption be left about as it was in the last act. The CHAIRMAN. Were you in the conference, Mr. Disney? Mr. DISNEY. Yes, sir; I was.

The CHAIRMAN. My recollection is that you were.

Mr. DISNEY. Yes, sir.

The CHAIRMAN. Thank you very much.

Are there any questions of Mr. Disney?

Mr. DISNEY. Thank you.

The CHAIRMAN. We will next hear from Mr. Ellsworth C. Alvord, of the United States Chamber of Commerce. Will you please come forward and identify yourself for the record?

STATEMENT OF ELLSWORTH C. ALVORD, CHAIRMAN, COMMITTEE ON FEDERAL FINANCE, CHAMBER OF COMMERCE OF THE UNITED STATES, WASHINGTON, D. C.

Mr. ALVORD. My name is Ellsworth C. Alvord. I appear as chairman of the committee on Federal finance of the United States Chamber of Commerce.

Although I have an outline of my statement, I have not been able to prepare a written statement. I trust the outline will help you somewhat in following my oral remarks. I ask that the outline be included

in the record.

The CHAIRMAN. It will be inserted in the record. (The outline referred to follows:)

OUTLINE OF RECOMMENDATIONS

GENERAL

(1) Mr. Maurice Karker, then Chairman of the War Department Price Adjustment Board, in the hearings in 1943 before the Committee on Ways and Means, stated:

*

"In my judgment * * it [the renegotiation law] is a dangerous and un-American statute * * * "

It was then and is now.

(2) The grant of power to renegotiate realized profits is the delegation of the power to tax. That power should be delegated sparingly and cautiously and surrounded with safeguards.

(3) Price controls, priorities, allocations, and existing and probable tax burdens should be considered in determining the necessity for renegotiation and defining the extent of its application.

(4) Nondefense contracts with the Government are as sacred as private contracts and should be so considered.

SPECIFIC RECOMMENDATIONS

(1) The Renegotiation Act of 1948 should be the starting point of the new legislation.

(2) Renegotiation should be restricted to defense contracts and subcontracts. (3) Renegotiation should be after taxes.

(4) The mandatory exemptions of the 1948 act (and of the prior acts) should be reenacted.

(5) The discretionary exemptions of the 1948 act (and of the prior acts) should be reenacted.

(6) Averaging devices should be adopted, such as the carry-forward and carryback of losses.

(7) Renegotiation on a consolidated basis should be compulsory if requested by the contractor.

(8) The efficient and low-cost producer should receive higher awards. (9) All costs normal to usual business operations, such as advertising and selling expense, should be allocable to renegotiable sales.

(10) As in the case of asserted deficiencies in tax, the contractor should be permitted a review by the Tax Court, before payment, or to bring suit for refund after payment.