oversight

U.S. Oil Companies' Involvement in the International Energy Program

Published by the Government Accountability Office on 1977-10-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               -   Ne   to    e released outsi7-, -
                 ,-h
               =:S           COlre
                             o     xP        on the basis of so-.... ,




o-    .,,,     REPORT OF THE
 .
"'~          I".-COMPTROLLERR
              -                 GENERA
                --OF THEi UNITED STATES



               U.S. Oil Companies'
               Involvement In The
               International Energy Program
               .The Energy Policy and Conservation Act
               allows U.S. oil companies to participate in
               the International Energy Program, with
               Government monitoring to prevent anti-
               competitive activities.
               This repcrt discusses that monitoring during
               a 1976 test of the Program's system to allo-
               cate oil during an emergency.




                HRD-77-154                                       OCTOBER 21, 1977
                 COMPTROLLER @iERAiAL OF THE UNITED   rTA'e
                            wAdkP=Toe ec. uu
                                           M




8-178205

The Honorable Benjamin S. Rosenthal
Chairman, Subcommittee on Commerce,
  Consumer, and Monetary Affairs
Committee on Government Operations
House of Representative3
Dear Mr.   Chairman:
     In your letter of March 24, 1977, you noted that the
Subcommittee is reviewing the Federal Trade Commission's
joint role with the Justice Department, in monitoring
petroleum companies' activities under a voluntary agreement
entered into pursuant to the International Energy Program.
You requested that we study the Commission's monitoring role.
Specifically you asked for information on the:
     --Background of Commission employees assigned to the
       International Energy Program activity. (See p. 6.)
     --Allocation systems test conducted in October and
       November 1976. (See p. 8.)
     --Security of data during the test.              (See p. 15.)
     --Federal Trade Commission's evaluation of its own
       monitoring performance. (See p. 24.)
     --Benefits and risks of the test.           (See p. 22.)
     --Classification of documents.          (See p. 25.)
Appendix I contains the information you requested. Appendix
II is a list of the 31 oil companies that participated in
the test.

     We noted several areas related to the allocation sys-
tems test which deserve congressional attention. We are
recommending that the Congress consider the anticompetitive
impact of confidential and proprietary data (see p. 27) and
clarify the monitoring responsibility of Federal lrade Com-
mission and Justice Department employees (see p. 28).
B-178205


     Certain other information you requested has already
been provided to the Subcommittee by separate letter dated
October 4, 1977. This information concerned:          .:
     -- The names of Commission employees responsible
        for monitoring International Energy Program -ac-.
        tivity.
     --The names and job descriptions.of oil company em-
       ployees who served during the tast as members of the
       Industry Supply Advisory Group.
     --The names of Commission and Justice Department
       employees who monitored'the test.
     --Leave patterns of Commission employees attending
       International Energy Program activities: in foreign
       countries,
     --Leyout of the area where the test occurred.
     We interviewed officials of the Federal Trade Commis-
sion, the Federal Energy Administration, and the Departments
of Justice and State; reviewed Federal Trade Commission
files relating to its monitoring responsibility under the
voluntary agreement; and reviewed the Federal Energy Ad-
ministration's 'full and complete record" of the alloca-
tion systems test as required by the Energy Policy and
Conservation Act of 1975. We also wrote to officials of the
International Energy Agency and participating oil.companies
for information not available from U.S. Government sources.
      In accordance with your Subcommittee's request, we
have not asked the Federal Trade Commission, or any other
agency discussed in this report, to formally comment on
the matters covered by the report. The report's contents,
however, have been discussed with Federal Trade Commission
and Federal Energy Administration officials, and their
informal comments have been incorporated in the report
where appropriate.
     As arranged with your office, unless you publicly
announce its contents earlier, we plan no further




                              2
B-178205

distribution of this report until 30 days from the
date of the report. At that time we will send copies
to interested parties and make copies available to
others upon request.

                                 pparby
                                   E      your      A




                             Comptroller General
                             of the United States




                             3
              APPENDIX I

U.S. OIL COMPANIES' INVOLVEMENT IN THE

      INTERNATIONAL ENERGY PROGRAM




          I
APPENDIX I                                        APPENDIX I


                           ABBREVIATIONS
EPC Act      Energy Policy and Conservation Act
FEA          Federal Energy Administration
FTC          Federal Trade Commission
GAO       General Accounting Office
ICRC      Interagency Classification Review Conmitice
IEA       International Energy Agency
IEP       International Energy Program
ISAG      Industry Supply Advisory Group
OECD      Organization for Economic Cooperation and
            Development
APPENDIX I                                              APPENDIX I

             U.S. OIL COMPANIES'       INVOLVEMENT IN THE
                  INTERNATIONAL ENERGY PROGRAM
INTRODUCTION
     On November 18, 1974, the United States and 15 cther
oil consuming countries entered into an agreement on an
International Energy Program (IEP). The agreement was
the product of the Washington Energy Conference of 1974,
which was held to develop plans for coping with crises such
as that accompanying the 1973 Arab oil embargo. The con-
ference's primary aim was to devise a mechanism for sharing
,il supplies in the event of future supply disruptions.
     The objectives of the IEP are:
     --Development of measures to meet future oil supply
       emergencies through (1) attainment of emergency
       self-sufficiency in oil supplies, (2) demand
       restraint programs, and (3) allocation of available
       oil among member countries.
     --Promotion of cooperative relations with oil producing
       countries and with other oil consuming countries.
     --Development of an information system on the
       international oil market and a framework for con-
       sultation with international oil companies.
     --Development and implementation of a long-term
       cc¢ peration program to reduce dependence on imported
       cil.
     There are now 19 signatories to the IEP agreement, and
all are members of the Organization for Economic Cooperation
and Development (OECD). The agreement also established an
International Energy Agency (IEA) to implement the provi-
sions of the IEP. IEA is an autonomous branch of the OECD
and is located in OECD's Paris offices.
Industry involvement
     The composers of the 'IEP agreement found that the co-
operation and expertise of the international oil companies
was essential to the successful functioning of an interna-
tional allocation system. Accordingly, discussions were
held with a number of these companies on ways they could




                                   2
 APPENDIX T                                       APPENDIX I




 assist in implementing the IEP. As a result of these dis-
 cus3ions, three main industry groups--the Reporting Company
 Group, the Industry Working Party, and the Industry Advisory
 Board--were created to provide advice and assistance to the
 IEA.

     By April 1975 IEA had developed a preliminary concept
of industry assistance in emergency oil sharing among par-
ticipating countries. The concept provided for reporting
international oil supply data to IEA by about 3G oil com-
panies and voluntary action by these companies under IEA
guidance and coordination to assist in :llocating available
oil. It tas estimated that these reporting companies handled
80 to 90 percent of the international trade in free world
oil.  These companies subsequently formed IEA's Reporting
Company Group.

     The Industry Working Party was organized to assist
inimplementing the general information system on the
international oil market.   Under this system, the partici-
pating countries are required to make available to the IEA
Secretariat precise data on various subjects relating to
oil company operations.   The Industry Working Party assists
in identifying such data and developing an appropriate
reporting zystem.

     The Industry Advisory Board was established to provide
advice and consultation on emergency,oil sharing and related
matters as assigned by the IEA. The board considers
policy aspects of these subjects and refers technical
questions to one of the board's three subcommittees for
study.

     In the event of an-emergency, an additional industry
group--the Industry Supply Advisory Group (ISAG)--would
be primarily responsible for carrying out the actual
allocation procedures within IEA guidelines and under
the direction of the IEA Secretariat.

      From the outset, the involvement of the international
oil companies in the IEP has Laised antitrust questions.
The concern relates generally to the industry advisory
groups but more particularly to the use of oil company
participants on the ISAG to coordinate the actual alloca-
tion of oil among participating countries during an emer-
gency. Meetings among competing oil companies for deter-
mining market allocations raise significant antitrust
questions.


                              3
APPENDIX I                                        APPENDIX I


     The U.S. Government found it necessary t, adopt anti-
trust policies that would protect competiti.on and also
encourage the cooperative action by U.S. oil companies
deemed necessary to achieve the objectives of the IEP
Accordingly, the U.S. oil companies participating in the
IEP entered into a voluntary agreement which was developed
by the Federal Energy Administration (PEA) and the Depart-
ment of State in cooperation with the Department of Justice
and the Federal Trade Commission (FTC).   In exchange for
protection from antitrust prosecution, the participating
U.S. oil companies voluntarily agrefd to certain monitoring
and recordkeeping requirements. Tae agreement was approved
on April 2, 1975, under authority of the Defense Production
Act of 1950 (50 app. U.S.C. 2061). The act allowed the
President to grant limited exemptions from U.S. antitrust
laws for the purpose of forming voluntary agreements
to further the objectives of the act.
     On December 22, 1975, the Energy Policy and Conserva-
tion Act (EPC Act) (42 U.S.C. 6201) was enacted because,
among other things, Congress believed that effective anti-
trust oversight would require arrangements beyond those
contemplated in the Defense Production Act. Provisions of
Section 252 of the BPC Act are more closely tailored to
the problems of the IEP. Instead of an antitrust immunity,
the EPC Act provides that U.S. oil company participants in
a voluntary agreement, and their designated affiliates, have
available an antitrust defense. If civil or criminal action
is ever initiated under U.S. antitrust laws or similar State
laws challenging their actions, the participants will be
able to defend such actions as part of developing or carry-
ing out a voluntary agreement or plan of action which is
implementing the allocation and information provisions of
the IEP.
     The EPC Act also required the development of a new
voluntary agreement to reflect the expanded antitrust
concern. A new voluntary agreement, developed by FEA,
the Departments of Justice and State, and FTC, became
effective on March 21, 1976. The new voluntary agreement
covers oil companies' participation in the IEP but does
not, with certain exceptions, cover acts which' affect
producing, refining, transporting, or marketing petroleum
in the United States.
IEA activities
     Since its creation IEA has engaged in a number of
activities aimed at implementing the IEP. To date a major

                              4
APPENDIX I                                         APPENDIX I



result of the Industry Advisory Board's work has been to
develop an emergency management.manual which contains
operating rules and procedures.governing the allocation
process. This manual, also .describes the structure of
the emergency management organization.

      IEA has conducted two tests of its data collection and
 analysis system. For the.first in 1975, IEA obtained, from
ireporting companies, on a form known as Questionnaire A,
Idata on the companies' actual production, imports and ex-
 ports, and other oil supply data. The-information was cate-
gorized by producing countryand by'IEP participating country
 for January to June, 1975.   IEA conductedthe second test in
1976.. Data covered June and July 1976. Data submitted to
£EA dur.ing,.these tests were made available only to the IEA
Secretariat.

     The agency also tested its emergency allocation system
in the fall of 1976. A detailed cdiussion of this test
begins on page 8.

     IEA plans a third test of its data collection and
analysis system during the fall of 1977 and another alloca-
tion systems test around Mlay 1978.

ROLE OF FTC

     The EPC Act gave FTC a number of Lesponsibilities
with respect.to the IEP. The act requires that the FTC
(jointly with the Justice Department):

     --Participate in developing, and, when practica-
       ble, in carrying ott voluntary agreements and
       plans of action to implemfit the allocation and
       information provisions of the IEP.

     --Monitor the development and implementation of
       voluntary agreements and plans of action to
       promote competition and to prevent anticompeti-
       tive practices and effects, while substantially
       achieving the purpose of the IEP.

     --Submit to the Congress and the President,.at
       least once every 6 months, a report on the impact
       of oil company participation in the IEP on com-
       petition and small business.

The act also directs FTC to consult with the Justice
Department and FEA regarding (1) developing standards


                              5
APPENDIX I                                       APPENDIX I




and procedures to carry out voluntary agreements or plans
of action, (2) approving, modifying, or revoking such
agreements and filat ;, and (3) promulgating rules concerning
records' maintenance.
     FTC first became involved in the IEP in early 1975. At
that time, the Commission provided limited input on develop-
ing the original voluntary agreement under the Defense
Production Act. With enactment of the EPC Act in December
1975, PTC's involvement increased. FTC participated in
drafting the March 1976 agreement and the rEA regulations
governing oil company participation in the IBP. Other IEP-
related activities of FTC included attending the fall 1976
allocation systems test and ISA-sponsored meetings pursuant
to its oversight responsibilities under the EPC Act.
     Also, FTC has submitted three reports (September 17,
1976, and March 21 and September 21, 1577) to the Congress
and the President assessing the impact of oil company part.'-
cipation in the IEP on competition and small business.
Background of FTC employees
assigned to ISP activrities
     FTC currently has four staff members--an Assistant
Director and three staff attorneys--who work part-time
monitoring IEP activities. Their involvement in this func-
tion varies with the level of IEP activity. Only one of
the FTC attorneys had had exposure to international petro-
leum matters prior to assignment ko the IEP activity.
Apparently employees were selected as monitors for a
variety of reasons. A synopsis of each employee's
background follows.
    Assistant Director
     This employee joined FTC in September 1976, with
immediate previous experience in a private law firm in
Washington, D.C. His 6 years of experience in the private
sector gave him an antitrust background arc lncluded some
international antitrust matters   These Pacts weighed in




                              6
APPENDIX I                                      APPENDIX I



his selection. The Director of the Bureau of'Competition 1/
said that exposure to international petroleum matters had-
not been considered in assigning the Assistant Ditector-to
head the IEP activity.. The. AssistantDirector. is also.in
charge of many ofthe'Bureau!s :other energy-related matters,
including.preparingrepports on competition in the energy in-
dustry, furnishing advice'to the Department.of Transportation
under the!Deepwater Port2'ct'of 1974 (33 U.S.C. 1501), and
supervising law enforcement .investigations.
     Monitor A

     This employee has been with.FTC in the antitrust field
since 1963-. Until 1975 he primarily investigated anticompe-
titive activities of various companies. None of his cases
or other matters involved the oil industry.as such. Most
concerned illegal acquisitions in the food industry.
     During the summer of 1975, this.mo0.itor was assigned to
FTC's energy unit as'a' iaison'with oth'~r. Federal agencies
regarding energy matters. 'Later'be :.,assigned to be an
IEP monitor. He believes. that his knowledge of government,
experience in.monitoring and'surveillance, facility in
French, general knowledge of European company law, and 10
years prior experience in Paris as an international lawyer
all influenced his assignment to the IEP matter.
     He participated in the drafting of the March 1976
voluntary agreement as well as the FFA regulations governing
oil company participation in the IEP.
     Monitor B
     This employee has a background in international trade.
Specifically hired to participate in the IEP in June 1976,
he had previously served as an attorney advisor with the
U.S. International Trade Commission. During his 2 1/2
years with that Commission, his major duties included
advising the Commissioners on unfair competitive methods
and international trade.


1/The Director of FTC's Bureau of Competition at the time
  of our field work is no longer with the Commission. His
  resignation was effective June 30, 1977. All references
  to statements by the Bureau Director refer to the former
  Director.

                              7
APPENDIX I                                       APPENDIX I



     He has monitored most IEA-sponsored meetings and other
activities in foreign countries.

     Monitor C

     In his employment with the Commission since 1975, this
monitor has dealt with energy-related matters. Before the
IEP assignment, his FTC experience had exposed him to matters
addressed by the IEP. For example, one of his major responsi-
bilities at FTC was ~o report on competitive problems asso-
ciated with applications for licenses under the-Deepwater
Port Act of 1974. In this connection, he reviewed materials
relating to international oil supply patterns and tanker
logistics which, according to this FTC employee, increased
his familiarity with competitive issues raised by oil com-
panies' actions under the IEP.

     His other responsibilities have involved developing FTC
staff reports on the coal and solar photovoltaic .nergy in-
dustries, analyzing legislation concerning the energy indus-
try, and presiding at investigational hearings involving
utility and diversified energy company witnesses.

     As the most recently assigned staff member of the IEP
activity, to date he has reviewed pertinent documents and
attended various IEA-sponsored meetings. This official also
speaks fluent French and German.

Monitor training and FaC staffing plans

     The FTC monitors have not been trained for their IEP
responsibilities. The Director of the Bureau of Competition
said that the FTC attorneys assigned as IEP monitors need
not be experts in international petroleum matters to conduct
their responsibilities effectively. He believed that anti-
trust background and experience coupled with intelligent and
logical reasoning are sufficient qualifications.

     Although the Assistant Director wants to increase the
staff, the Bureau Director said that FTC has no plans to do
so.  He believes the present staff is performing adequately.
He pointed out that IEP activity has now leveled off, and
existing staff can handle the workload effectively.

ALLOCATION SYSTEMS TEST

     The allocation systems test was conducted in Paris
from October 4 to November 18, 1976, to assess IEA's ability
to respond to an emergency supply disruption. Specifically,
APPENDIX I                                          APPENDIX I



the test's two main purposes were to assess certain aspects
of the 'data'systems' proceduresaand rules relating to allo-
cation'and to evaluate the'p'roposed .emergency management
organization with respect to the'roles'of the ISAG, REA
Secretariat, and IEA Allocation Coordinator. Limited test-
ing was conducted of communications between reporting com-
panies and the IBA Secretariat and the ISAG and of the
physical facilities within the IEA's Paris headquarters.
     Although the allocation systems test was largely de-
signed by the Industry Advisory Board, the IEA Secretariat
had overall responsibility for conducting.the test. -In an
actual emergency, the Secretariat would activ.te the emer-
gency system.. A member of"the Secretariat's staff served
as the IEA Allocation Coordinator' during the test' and was
responsible for supervising and guiding the allocation
process.
      During an. emergency, the- ISAG would coordinate, under
the Secretariat's'guidance, the allocation of oil among par-
ticipating" cou-tries.   For, testing purposes, a mock ISAG was
created and staffed with seven oil'company participants, who
were all considered supply experts. "' our U.S. and three
foreign firms were represented. 1/ Before the test was com-
pleted, a total of nine industry participants had served as
ISAG members. The two additional participants, however, came
from two of the seven companies already represented on the
ISAG. All of the ISAG members had been involved in designing
the test.
     Generally, the mock ISAG's responsibilities were
the same as during a real emergency--carrying out actual
allocation procedures under the guidance of the IEA Secre-
tariat. One ISAG member served as manager, and the others
were assigned a group of participating countries and
reporting oil companies for which they were responsible
throughout the test. On the average each member had
three participating countries and four to seven reporting


1/The oil companies represented on the ISAG were Exxon
  Corp., Mobil Oil Corp., Phillips Petroleum Co., Texaco,
  Inc. (all U.S.), British Petroleum Co. Ltd., (Great
  Britain), VEBA - CHEMIE A.G. (West Germany), and Shell
  International Petroleum Co. Ltd. (Holland).



                              9
APPENDIX I                                        APPENDIX I



companies. Members were primarily responsible for maintaining
communications with their respective reporting.companies on
such matters as submission of Questionnaire A data and report-
ing company actions to allocate oil supplies.  Appendix II
is a list of the 31 reporting companies participating in
the test.
     The ISAG manager chaired group meetings and coordinated
individual member's work. The manager also monitored the
test to insure its sxooth and efficient operation.
Limitations of the test
     A key objective of the test was to concentrate on the
basic elements of the allocation system but keep the test
simple. To meet this objective, various parameters of the
system were reduced.
      For example, the test consisted of three 2-week cycles,
each representing 1 calendar month, which. is the length of
an actual emergency cycle as contemplated in the emergency
management manual. The IEA Secretariat also involved as few
people as possible in the test. During an emergency, about
20 ISAG members would be involved as opposed to the seven to
nine mock ISAG members involved during the test. Furthermore,
IEP participating countries did not participate in the test
as they normally would by submitting Questionnaire B, a form
used for reporting generally the. same type of information as
contained in Questionnaire A, but on a country basis. Other
aspects of the allocation systems and procedures were not
subjected to the test, such as liaison between reporting
companies and their affiliates in participating countries
and communications among non-ISAG reporting companies.
Additionally, test limitations prohibited meaningful simula-
tior. of all supply restrictions.
      A final factor which limited the test was the modifica-
tion of Questionnaire A data submitted by reporting companies
during the test. Data received were generally modifications
of the same Questionnaire A data submitted to IEA during the
1975 data collection and analysis system test. According to
U.S. Government monitors, the data had little, if any, com-
mercial sensitivity because they were nearly 1 1/2 years old
at the time of the test, and were modified to conduct the
test.




                             10
APPENDIX I                                             APPENDIX I




Mechanics of the allocation process

      Most data for the allocationsystems test        concerned
worldwide  oil   supply  and demand  for  January  to June 19',75.
With-in this   6-month  period, each  reporting   company  submitted
data (on Questionnaire A) about its production, imports,, and
exports as these factors related to IEA countries.          The cur-
rent reporting    month  and reporting   period' covered  varied   with
each cycle.: For example, the first       cycle had January as the
Current month and covered arrivals (i.e., imports) ix the,
f'irst 3 months of 1975. The second cycle,had February as :the
current month and covered the first 4 months of 1975.           Narh
was the current.month.for the third:cycle which covered the'
5-month period between January and: May 1975.

     A few weeks before the test began, the lEA Executive
Director and the Chairman of the Industry Advisory Board
established simulated supply disruption, constraints-which
were to be introduced-at the beginning f-c-:each 2-week test
cycle.  The constraints were designed so as to bt of suffi-
cient magnitude to.activate:the IEP's emergency sharing
system.  In a real emergency, the system would be activated
based on the IEA Secretariat's findings--and subsequent con-
firmation by the Governing Board (the ruling arm of the IEA)--
that a supply disruption had reduced normal flow of oil to any
participating country by a preestablished percentage. The
severity of disruption constraints varied with each cycle.
Additional constraints, such as destination and routing re-
strictions, tonnage of ships available, pipeline throughput
limitations, and other obstacles and mandates, were also in-
corporated in each disruption scenario.

     At the beginning of each cycle, mock ISAG members and
representatives of the IEA Secretariat attended a meeting--
which % s monitored by U.S. Government employees l/--to dis-
cuss the supply disruption scenario and the constraints and
underlying assumptions relating to it. After resolving any
issues arising during this meeting, the disruption scenario
was transmitted via telex to the 31 reporting companies.


I/Employees from FTC, FEA, and the Departments of Justice
  and State monitored the test. The EPC Act specifically
  assigned antitrust monitoring to FTC and the Department
  of Justice.




                                   11
  APPENDIX I
                                                     APPENDIX I




       Th7. hypothetical supply disruptions
 test were production or export             established for the
                                  restrictions imposed by various
 producing countries on various types
 destinlation restric ions (for example,of crude oil and assumed
 crude/oil produced .n one country        a requirement that
                                     not be exported- to another
 count ry).

      Based on the constraints outlined
                                        in the disruption
sce ario, each reporting company
                                  completed a Questionnaire A
and telexed it to the IEA Secretariat.
agg/regated (i.e., the data could        These data were dis-
                                  be related to individual
re orting companies).

      During each cycle, ISAG members
m dified Questionnaire A data from      had access to incoming,
                                      the reporting companies.
B/efore the data could be further
./.ecretariat, the members reviewed reviewed and used by the IEA
 naire As for consistency and obvioustheir respective Question-
                                        errors. Throughout the
 test, the mock ISAG members were
                                    wmiddle men' between the IEA
 Secretariat and reporting oil companies.-
      Having undergone the mock ISAC
                                       review, the Question-
naire A forms were furnished to
along with other IEA reports and the IEA Secretariat for use--
                                   statistics l/--in computing
allocation rights or obligations
                                  of participating countries.
The first step in this process was
ing country's supply right, using computing each participat-
oil consumption, emergency reserves,a formula involving prior
                                        and demand restraint
measures.   If a participating country's supply
its total normal domestic production              right exceeded
(i.e., its available supplies),         plus actual net imports
                                 that country was designated
to have an allocation right, that
                                    country's entitlement during
the test.   If a country's supply right was
available supplies, the country               less than its
                                 had an allocation obligation--
the amount it would have to supply
                                     to other participating
countries during the test.

     Once the IEA Secretariat determined
                                          the allocation rights
and obligations of participating
                                  countries, the information
was relayed via telex through the
                                   mock ISAG to the reporting
coFwanies. These companies were
                                  then asked to reallocate

1/Other reports and statistics
                               include
  normally submitted by participating Questionnaire B--
                                       countries, but devised
  by IEA for test purposes and Questionnaire
  Oil and Gas Questionnaire--which            D--Quarterl,,
                                   give details of a coui
  historical supply and demand elements.



                             12
APPENDIX I                                           APPENDIX I



their- supplies, or more:- specifically,  -to balance the
allocation-.rights. and: obligations. - Thls exercises involved
a series-of' (1)' voluntary-offers'by-repor-ting companies to
either'divert.oil shipments from-on':destination to another
or to; receive shipehents'offered by other: companies'-, and'
(2) rearrangements'iwithin 'individual' companies' -supply-
systems.' The'lIEA Secretariat', assisted-'by the mock ISAG,
evaluated, 'accepted, or rejectedl these-'offers as necessary
to balance the participating countries" allocation rights and
obligations.' 'Additional'-'offers' were;'solicited as necessary
(the; second-and third'"cycle Questionnaire As- reflected the
accepted'of'fers of the, preceding 'cycle: or cycles). This
process continued until the. rights and obligations were-- '
balanced maximally. This completed the allocation process.
Monitoring the test
      During . the allocation systems test, ISAG members held
formal group meetings', communicated-with'each other'by tele-
phone'0or interpersonally, worked' individually in-' their of-
fices, and-communicated with 'their- assigned' reporting com-
panies' by'telex and' telephone. Section 252(c)(3) 'of the EPC
Act states:
     HA full and complete record, and where prac-
     ticable a verbatim transcript, shall be kept
     of any meeting-held, and a full and' complete
     record shall be kept of any communications
     (other than in a meeting) made, between or
     among participants or potential participants,
     to develop, or carry out a voluntary agree-
     ment or a plan of action * * *.'

The antitrust defense called for in section 2'52(f)(1) does
not apply if full and complete records are not kept. To
satisfy this recordkeeping requirement, the encire allocation
systems test was considered one meeting.
     Before the test, the verbatim transcript was deemed un-
practicable. Recognizing this limitation, the PEA, in co-
operation with FTC and Justice, developed a document entitled
'Guidelines for Recordkeeping by U.S. Companies Participating
in the Allocation Systems Test.' This document accompanied
the PEA Administrator's letter to an oil company approving
its participation in the 'test.




                              13
APPENDIX I                                        APPENDIX I


     The guidelines gave U.S. Government employeeu responsi-
bility for keeping full and complete records of each formal
meeting. Adequate proceedings' monitoring required that
test activities be limited, where possible, to assigned
offices and conference rooms. The guidelines further pro-
vided that U.S. Government records of formal-meetings be sup-
plemented by other records. These were to be prepared by
U.S. oil company participants for telephone or personal com-
munications which had not been monitored by a U.S. Government
employee. U.S. Government monitors devised a form--Daily
Record of Telephone and Direct Oral Communications of Test
ISAG Members--specifically for recording -such -unmonitored
communications.
     The mock ISAG, including the three non-U.S. members,
agreed to keep and submit such records to U.S. Government
monitors. Additionally, all telexes and communications in-
volving a U.S. company were to be incorporated in the U.S.
Government record. Regarding discussions in monitored meet-
ings of confidential data about foreign companies or coun-
tries, U.S. monitors agreed, within the limitations of their
statutory responsibilities, to minimize the inclusion of
precise data in U.S. records.
     The U.S. Government intended to use the test for evaluat-
ing its own monitoring procedures. Thus, U.S. Government
representatives present at the test were allowed discretion
in using alternative recordkeeping procedures, subject to FEA
regulations and the EPC Act.
     Section 252(c)(l)(B) of the EPC Act requires that a
regular full-time Federal employee be present at meetings
for developing or implementing a voluntary agreement or plan
of action pursuant to the IEP. FEA recordkeeping guidelines
do not require the presence of a U.S. Government employee at
each exchange involving a U.S. company ISAG member. However,
U.S. monitors had the option of being present at any communi-
cation involving such company participants. Also, to permit
better monitoring, the guidelines requested that all communi-
cations among U.S. ISAG members be conducted, to the extent
practicable, within OECD headquarters.
     Two types of formal ISAG meetings occurred during the
test--regularly scheduled daily meetings and impromptu meet-
ings called by one or more ISAG members to discuss particular
problems. According to Government monitors, if a Federal em-
ployee was not immediately available to monitor an impromptu
meeting, the meeting was delayed until one was available.
The full ISAG was not represented at all meetings.


                             14
APPENDIX I                                         APPENDIX I



     Section 252(c)(3).of'the EPC Act also requires that th_
"full and complete record".-kept on.any meetings held pursuant
to developing or carrying oLt a.voluntary agreement or plan
of action be submitted:'to the PEA Administrator. Accordingly,
U.S. Government records-of the test have: bten submitted to
Lhe FEA.  We reviewed records of meetings held during the
test. They.disc.'osed that at. least. one. U.'S. Government rep-
resentative (and o£~en two or three) were'present at every
formal ISAG meeting. In addition to U.S. Government repre-
sentatives, members of the IA. Secretariat. also.attended most
of the ISAG meetings.
Communication among ISAG. members
     The.primary means of communication among ISAG members
were direct (face-to-face) contacts and, to a.lebser extent,
interoffice telephone conversations within-the OECD head-
quarters.  The PEA test records also showed-that limited
communications- 'reo achieved. informally. by memoranda or
notes, usually handwritten,,from one ISAG member to another.
Individual ISAG members and their assigned reporting com-
panies communicated.by long-distance telephone and telex/cable
transmissions.
     These communications--both within. ISAG and between ISAG
and reporting companies--covered many topics, including the
disruption scenario, the validity of certain data items (that
is, production, imports, and so forth) given in Question-
naire A forms, allocation rights and obligations,of partici-
pating countries, and logistical problems associated with a
reporting company's voluntary offers.
Data control
     Section 5(b)(2) of the voluntary agreement provides that
the exchange of confidential or proprietary data between par-
ticipants shall be subject to prior written approval of the
PEA Administrator, after consultation with the Secretary of
State and with concurrence of the Att' rney General, who shall
have consulted with FTC. It provides further that such data
can be exchanged disaggregately only upon determination by
the Administrator, after consulting the same officials, that
such exchange or disclosure is necessary to develop,'prepare,
or test emergency allocation measures. Section 5(b)(4) of the
voluntary agreement and FEA guidelines prohibit an oil company
participant in ISAG from communicating competitively sensitive
data about another company to his own company.


                               15
APPENDIX I                                      APPENDIX I



     In a letter to participating oil companies dated
September 14, 1976, the FBA Administrator approved, pursuant
to section 5(b)(2) of the voluntary agreement, providing
certain confidential and proprietary data necessary for the
fall test. Although during the test U.S. reporting companies
were not authorized to exchange confidential'information with
each other or foreign oil companies, ISAG meibers were allowed
to exchange such information. Approval covered the following
information:
     --Disaggregated first-half 1975 Questionnaire A or B
       data (modified as necessary for the test).
     --Physical capability and operating schedule of a
       refinery, pipeline, or terminal to receive, store,
       process, or throughput specific crude oils; physical
       capability of installations of all types to receive
       and store products.
     --Physical capability of a refinery or installation to
       receive various sized vessels.
     --Main characteristics of crude oil grades and product
       types.
     --Historical and projected crude oil and natural gas
       liquid production data by country, and information
       on supply restrictions and embargoes which may occur
       during an emergency.
     --Such additional information or data necessary to
       implement the oil allocation procedures of the emer-
       gency management manual, including but not limited
       to (1) limitations to allocations resulting from spe-
       cific company cnomercial or marketing practices,
       (2) supply or transportation considerations, not
       including calculations or examples of specific costs,
       or (3) affiliate, third-party, or concessional con-
       tractual arrangements, without disclosing price or
       other financial arrangements.
FEA determined that this data could be provided and exchanged
disaggregately to carry out the test.




                             16
APPENDIX I                                         APPENDIX I




     The approval did not cover;

     -- Confidential or proprietary crude oil   or product
        prices.

     -- Costs or market shares of crude oil or pr6ducts
        (other than described in Questionnaire A or B).

     --Individual company information regarding overall
       or long-term investment, divestment, refining,
       operating, transportation, or marketing programs.

     The FTC offered no objections to the Attorney General's
approving the exchange of data as provided in the PEA ap-
proval letter. FTC based its concurrence on the following:

     --Activities proposed were appropriate and necessary.

     --The test would enable antitrust agencies to develop
       recordkeeping requirements.

     --The data provided would not represent actual company
       information for the first half of 1975.

     --Any proprietary or confidential information was
       subject to specific limitations regarding exchange
       or use by participants.

     --Since no commercial transactions were involved in the
       test, no actual adverse effects on competition could
       result.

The FTC Assistant Director in charge of IEP activities said
that because FEA had approved the exchange, the data should
not be considered confidential for the purposes of the test.
The Assistant Director also said that other publicly avail-
able data should not be considered confidential.

     The FEA approval letter to reporting oil companies
prohibited U.S. ISAG members or employees from supplying parent
companies with confidential or proprietary information about
any other oil company which was obtained through membership
in ISAG.  Industry participants were reminded of this prohibi-
tion several times during the test. FTC monitors are con-
sidering a requirement for future tests that U.S. ISAG members
submit affidavits affirming that they have not disseminated
confidential or proprietary data to their home companies.



                              17
APPENDIX I                                        APPENDIX I



     The principal source of information available to ISAG
members waz modified Questionnaire A data, which Government
monitors did not corsider competitively sensitive. However,
various safeguards were used during the test to restrict the
use of the Questionnaire A data. In commenting on the test,
FTC's former Assistant Director for the IEP activity wrote
to the Commission that:

     "Even though the test involves only mock trans-
     actions the ISAG members will be in constant
     communication with each other and in frequent
     communication with Reporting Companies on sub-
     jects which would be antitrust-sensitive if
     the transactions were real. * * *'

     During the test's first week, ISAG members requested
actual 1975 Questionnaire A data to verify the accuracy of
modified data submitted during the allocation systems test.
Government monitors denied the request because anticompeti-
tive risks outweighed the need for access to the data.

     All data received by the IEA from reporting companies,
both during the allocation systems test and in previous
data tests, were stored in the same computer system at IEA's
headquarters. However, allocation systems test-related data
were recorded and maintained on a separate computer disc.

     The computer room was located on the second floor of the
OECD building and staffed by members of the OECD Data Process-
ing Division. Printouts were delivered to ISAG members by
IEA Secretariat staff.  ISAG members were not allowed access
to the computer room. A fixed number of printout copies
was made and distributed to oil company participants. The
same number of copies was verified after the test. According
to an IEA Secretariat official, spare copies were generally
not made, but any that were made were subsequently destroyed.

     There were two cathode ray tube terminals operating on
the second floor during the test, but as with the computer
room, ISAG members did not have access to them. A terminal
room on the third floor was used during the test for storing
computer discs.

     At certain stages of the test, three industry telex
operators--non-ISAG members from non-U.S. firms--were avail-
able for assisting in weekend transmissions.  According to
the IEA Secretariat, these operators handled only outgoing
telex transmissions, concerning participating countries'
allocation rights or obligations and their total imports.


                             18
APPENDIX I                                      APPENdIX I


     U.S. Government monitors believe that ISAG members
followed all guidelines and legal requirements during the
test. In addition, evidence in PEA test records indicates
that information needed by ISAG members was kept to the
barest minimum.
Nature of records maintained
     Three major types of records were maintained for com-
munications and events relating to the allocation systems
test: (1) U.S. Government records of meetings, (2) the
Daily Record of Tolephone and Direct Oral Communications of
Test ISAG Members, and (3) the ISAG Systems Test Cable Log.
     EPC Act requirements and FEA's recordkeeping guidelines
give U.S. Government monitors responsibility for recording
all formal ISAG meetings held during the test. The record
summarizes-matters discussed during each Leeting. Specifi-
cally, the record contains the date of each meeting, begin-
ning and closing times, list of attendees, the substance of
the meeting, and the Federal employee keeping the record.
Our review of these records in the FEA files showed 236 formal
ISAG meetings were held during the test. Some were as short
as 1 minute.
     Responsibility for compiling U.S. Government records
of meetings was rotated among the Federal employees present
at each test cycle. During the test these records were made
available to ISAG members attending the meeting, the ISAG
legal counsel, 1/ and the Secretariat which inspected them
for accuracy.
     The Daily Record of Telephone'and Direct Oral Communica-
tions of Test ISAG Members was prepared by industry partici-
pants for recording unmonitored communications. Each ISAG
member who engaged in unmonitored communications was to com-
plete this record, indicating his name and company affilia-
tion, the date and approximate time of the contact, the other
party involved and that person's company affiliation, whether
contact was direct or by telephone, the subject matter, and
whether confidential or proprietary data were discussed.
Three hundred and thirty-eight Daily Records were prepared
for the entire test.

l/Two attorneys from an international law firm attended the
  test. Although their firm formally represented only five
  of the seven ISAG companies, they assisted the entire group
  throughout the test in interpreting U.S. law.

                               19
APPENDIX I                                             APPENDIX I




                                                    with the
     A Daily Record was not required for contacts
                                             or for   incomplete
IEA Secretariat or administrative personnel         calls  or
                              incomplete telephone
communications--for example,                           substan-
                     to a secretary  during which  no
those completed only
tial message was transmitted.
                                                   in the PEA
      The Daily Records of ISAG members maintained
                                1,191 unmonitored communica-
files showed ISAG members made by
tions  during the test--480 1/    telephone and 711 by direct
                                                      of oil
contact. By comparison, 23-6 monitored ISAG meetings
company participants occurred  during the test.

                                                     Records indi-
      Notations made in the ISAG members' Daily
                                           data  were  discussed
cated that confidential or proprietary                    14 percent
                           occasions  or  during  about
on about 171 2/ separate
                                         3/  Of  the  171  instances,
of their unmionitored communications.     to  reporting   companies
about  71 percent were  telephone  calls
                                                      other ISAG
and the remaining 29 percent were contacts with              com-
members. Approximately    69 percent  of  the  unmonitored
             concerning  possible  confidential   or proprietary
munications
                                                 A or B data as
data involved a discussion of Questionnaire   categories   of con-
compared to 31 percent for the    remaining
fidential or  proprietary  data.
                                                         by U.S.
     The ISAG Systems Test Cable Log was maintained
                                               of  all  cables
Government monitors and contained a listing
        the IEA  Secretariat  or ISAG  and reporting companies.
between
                                             the cable, the
The log indicated the IEA file number for
                  receiving  parties  and, except  for cables to
transmitting and
                                                       matter.
or from non-U.S. reporting companies, the subject   companies
Copies of all cables to and   from U.S.  reporting
were attached to the log.

                                                           The
 1/Only 22 of these calls were between ISAG members.
   rest were between ISAG and reporting companies.
                                                of the Daily
 2/FEA records included copies, not originals,
             For 29 of the 338 Daily Records,  the column re-
   Records.
                                                 information
   flecting whether confidential or proprietary
   was communicated was illegible.
                                                     or      prop-
 3/This does not necessarily mean that confidential          members
                                      instances.   ISAG
   rietary data were discussed in 171                        do not
                                               records
   emphasized that such notations in the daily
                                           was  in fact      con-
   indicate that the information discussed it might be       regarded
   fidential or proprietary, but only that
   as such.

                                 20
APPENDIX I                                          APPENDIX I




     Other records of the test contained in the FEA files
include informal memoranda and notes among ISAG members,
various U.S. Government memoranda for the record, IEA
Secretariat memoranda, and miscellaneous schedules, tables
and charts: prepared: by members of the ISAG and- Secretariat.

Verification of accuracy of records-

      The Daily Records were collected by the ISAG legal
counsel either at the close of the day during which the com-.
munications occurred or in the morning of the following day.
The legal counsel reviewed the records for- completeness (that
is, to assure that records were submitted by all ISAG members)
before submitting: them to the Government monitors, who usually
received the records no later than the close of business on
the day following: the communication.  In reviewing these rec-
ords,- the monitors focused on data which,-appeared incongruous
or irrelevant to the test.

     According to one Government monitor, the substance of
the Daily Records rarely raised antitrust questions. Since
the monitors' presence at meetings throughout-the test gave
them an understanding and knowledge of the matters being dis-
cussed by ISAG members, the monitors generally did not attempt
to contact the industry participants to verify the substance
of matters discussed. For the same reason, they usually did
not attempt to ascertain the precise nature of confidential
or proprietary data noted in the records.

     FTC and Justice Department monitors said they were
assured that a complete record of the test was maintained
because

     --Federal employees monitored all formal ISAG meetings,

     --Federal employees prepared appropriate test records,

     --ISAG members were required to record all unmonitored
       communications,

     --FTC and Justice Department monitors designed the Daily
       Record form for unmonitored communications, and

     --FTC and Justice Department monitors also helped to
       develop FEA's recordkeeping guidelines.

     FTC and Justice Department monitors, in conjunction with
other Federal employees and IMA Secretariat, periodically


                              21
                                                     APPENDIX I
APPENDIX I


                                       U.S. Government records
reviewed test records, including the            and all telex
of meetings, Daily Records of ISAG members,        With respect
transmissions, for accuracy and completeness.
                                           Department   monitor
to the telex transmissions, one  Justice
                         week of the  test  whether   U.S. Govern-
questioned in the first
                                             for review. An FTC
ment employees were receiving all telexes general  confusion and
                                     the
monitor attributed this concern to                of  the test--
'start-up' problems surrounding  the  beginning
                    were  literally  inundated   with test rec-
Government monitors
                                            overcome, however,
ords. Once the "start-up" problems were with the IEA Secre-
                                  verify
Government monitors were able to               that they were
tariat (who received all incoming telexes) telexes   which were
                       and to review  any
receiving all telexes                         test.
                                     of  the
not reviewed during the first week
                                         knowing the extent of
     Government monitors had no way of
                                     events during the test
unmonitored ISAG communications and
which were not recorded.   They stated, however, that the
                           members was exemplary and that they
behavior of the test ISAG                   and FEA's record-
adhered strictly to EPC Act requirements
                                           the lack of an anti-
keeping guidelines. The monitors cited
                     the EPC Act, admonitions   from the ISAG
trust defense under the almost constant  presence  of U.S.
legal counsel, and                          deter industry
                                        to
Government monitors in the test rooms
participants from not recording all communications.

Benefits vs. risks of the test
                                             Bureau of Competi-
      According to the Director of FTC's
                    report  to  the  Congress  and the President
 tion, FTC's second                                 the benefits
                                       evaluating
 on the IEP is a useful vehicle for            does  not directly
                                 this  report
 and risks of the test. While                        that imple-
                          the  test,  it concludes
 address the benefits of                           period (which
                                       reporting
 menting the IEP during the covered          caused  significant
                                       have
 included the test) was unlikely to
                                             businesses.
 adverse effects on competition or small
                                                in passing the EPC
      The Director said that the Congress,
                                             that  the benefits to
 Act, made the legislative determin4ation
                                                in the IEP are
 be derived from oil company participation  effects.   He, there-
 sufficient to risk  any anticompetitive
                                      defenses should be continued
 fore, believed that the antitrust
 subject to continuation of existing controls.
                                                 of the test,
      An FEA monitor, who was present for most        that it
                            a  success.   Recognizing
 believed that the test was
                                        good assessment of some
 was limited, she felt that it gave a
                                                 management
 of the allocation provisions in the emergency
                                      improvement.
 manual and emphasized areas  needing


                                 22
APPENDIX I                                         APPENDIX I



      In this regard, the comments of the IEA Secretariat
closely paralleled those of the FEA monitor. Acknowledging
that more work needs to be done, the Secretariat identified
,two benefits of the tests:
     -It'proved that the emergency allocation system is
       workable.
     --It showed that data reporting by oil companies and
       the processing of that data can function properly.
     A test appraisal report was prepared by the'ISAG follow-
ing completion of the test.-" The report, dated November 18,
1976, outlined several'problems, observations, and recommenda-
tions relating primarily to technical aspects of the test,
such as timing of the first submission of Questionnaires A
and B during an emergency. The IEA Secretariat concurred
with all recommendations and comments contained in the ap-
praisal report.: As a consequence,'the Secretariat is prepar-
ing a composite and comprehensive set of proposed amendments
to the emergency management manual.
      U. S. Government monitor" believed that the test had
little, if any, anticompetitive impact. This belief is
based largely on the nature of the data communicated
during the test. A Justice Department monitor estimated that
about 90 percent of'the data communicated'were Questionnaire A
data--the only data which aroused any antitrust concerns dur-
ing the test. 1/ However, both FTC and Justice Department
monitors believe that the QuestionnaireA. A test data-were not -
competitively sensitive because, as already noted, they were
dated and modified for test purposes. Hence, they concluded
that the test had no discernible effect on competition.
     The possibility of industry participants extrapolating
actual 1975 Questionnaire A data from modified data was con-
sidered by the antitrust monitors. They concluded that extra-
polation could not be made without awareness of the method
used to compute the hypothetical supply disruptions and, even
if ISAG members wanted to try, the time constraints and volume
of work'during the test would-have precluded such attempts.

1/Most of the Questionnaire A communications must have oc-
  curred in monitored ISAG meetings because FEA records
   showed that only 118 of 1,191 unmonitored communications
  '(9.9 percent) concerned Questionnaire A or B data (see
  p. 20.)

                              23
APPENDIX I                                        APPENDIX I




     FTC and the Justice Department monitors believe that
the mock ISAG members may have gained an improved under-
standing of international oil markets as a result of their
participation, but this result is an unavoidable consequence
of oil company involvement in the IEP. They pointed out
that in the event of a real emergency in which current, com-
mercially sensitive data would be exchanged there could con-
ceivably be some adverse effects on competition.

     Because the test did not represent a real emergency in
several important ways, the competitive impact of U.S. oil
company participation in the emergency allocation system
cannot be fully or accurately measured.

FTC evaluation of its
monitoring performance

     FTC has not evaluated its monitoring performance during
the allocation systems test nor do any plans exist to examine
this particular aspect of its responsibility.  It may, how-
ever, be subjected to review, along with other energy-related
activities of FTC. On May 26, 1977, for example, the IEP
activity was cursorily evaluated during FTC's review of its
energy programs. Although discussion during this review ex-
tended to IEP monitoring, it generally centered on assigning
monitoring responsibility between FTC and the Justice
Department.

Antitrust implications of the
1978 allocation systems test

     The IEA Secretariat is planning at least two additional
tests over the next year--another data system test this fall
and another allocation systems test around May 1978. The
Secretariat, oil company participants, and U.S. Government
monitors are currently considering the proprietr of using
the Questionnaire A data which will be collected during the
fall 1977 data system test as the data base for the allocation
systems test next year.  If such data were used, the age of
the Questionnaire A data for next year's test would be only
about 6 months as compared to nearly 18 months for the data
used during the fall 1976 test.

     FTC staff are concerned with the antitrust implications
of using the more current data in future allczation systems
tests and are studying (1) how quickly data of the type sub-
mitted on Questionnaire A become public, (2) how much of the
data used in the next test would be real, and (3) what


                                24
APPENDIX I                                           APPENDIX I


additional steps (including further modification of the data)
could be taken to reduce the antitrust risks without ruining
the test.
CLASSIFICATION OF DOCUMENTS
     The preamble-to Executive Order 11932, dated August 4,
1976, outlines certain criteria used to justify classifying
certain IEA data. The Executive order is entitled 'Classi-
fication of Certain Information and Material Obtained From
Advisory Bodies Created to Implement the International Enel:gy
Program."' The preamble states:
     "[The International Energy] Program is a'substan-
     tial factor in the conduct of our foreign rela-
     tions and an important element of our national
     security. The effectiveness of the Agreement
     depends significantly upon the provision and ex-
     change of information and material by partici-
     pants in advisory bodies created by the Inter-
     national Energy Agency. Confidentiality is
     essential to assure the free ando pen'discussion
     necessary to accomplish the tasks assigned to
     those bodies."
Authority to'classify
     Two Executive orders gave the State Deportment authority
to classify data generated by the IEA. The first Executiv-i -- ..
order 1/ defines security classification categories and limits
those officials to whom classification authority may be dele-
gated.   It was implemented by a National Security Council
directive 2/ which established an Interagency Classification
Review Committee (ICRC) to monitor the Government's classifi-
cation activities.
     The second order, Executive Order 11932, assigned the
Secretary of State the responsibility to classify material
obtained from IEA advisory groups. Under this order, the
following material could be classified:

1/Executive Order 11652, dated March 8, 1972, entitled
  "Classification and Declassification of National Security
  Information and Material."
2/Directive of May 17, 1972, governing the classification,
  downgrading, declassification, and safeguarding of national-
  security information; 37 F.R. 10053, May 19, 1972.


                               25
APPENDIX I                                           APPENDIX I




     --Records of meetings between or among participants or
       potential participants for developing or carrying out
       the voluntary agreement or plan'of action.

     --The voluntary agreement and plan of action.

     --Other records the Attorney General may require parti-
       cipants to keep.

In the order, the President stated that he had consulted the
Attorney General concerning the 'handling and safeguarding
of information and material in the possession of the United
States which has been obtained pursuant to the program.'
During ICRC's review of the proposed Executive order, the
Justice Department approved the order's form and legality. 1/
A Justice Department representative to the ICRC told us that
the Department had considered possible anticompetitive ef-
fects of the order but felt that the national security bene-
fits to be gained outweighed any such anticompetitive effects.
Justice did not consult FTC about the Executive order.
     On March 25, 1977, the State Department proposed regula-
tions 2/ to implement its responsibilities under Executive
Order T1932 and asked for public comment. Neither FTC nor
the Justice Department was consulted on the proposed regula-
tions before their publication in the Federal Register, and
neither provided formal comments.
National security benefits

     State Department officials had discussed various aspects
of the IEP with several congressional committees.   (See testi-
mony of the Deputy Assistant Secretary for Economic  and Busi-
ness Affairs before the Subcommittees on International  Organi-
zation and Movements and on Foreign Economic Policy of the
House Foreign Affairs Committee,'December 18, 1974; and of
the Assistant Secretary for Economic and Business Affairs
before the Subcommittee on Energy and Power of the House
Interstate and Foreign Commerce Committee, February 17,
1975.)  They explained the United States' involvement in the
IEP as follows:


l/Memorandum to ICRC from the Deputy Assistant Attorney Gen-
  eral for Legal Counsel, June 30, 1976.

2/42 F.R. 17142, March 31, 1977.



                               26
APPENDIX I                                          APPENDIX I


      "The lesson of last winter's oil embargo and the
      subsequent quantum increase in world oil prices
      made clear. the need for- a coordinated approach
      by the. major. oil consuming countries to reduce
      their political and economic vulnerability re-
      sulting from a growing dependence on imported
      oil. The uncoordinated and go-it-alone response
      by most industrialized countries to last winter's
      oil crisis was extremely costly. It caused seri-
      ous economic disruptions in consuming nations,
      including our own, and it seriously strained the
      fabric.of political, economic, and security ties
      within the industrialized world..   *   * *
        ."Thesecurity.and well-being of our nation as
     · well as that of our partners requires that these
       [IEP] initiatives-be irplemented and developed
       to their full potential."
OBE8RVATIO08   AND RECOmMENDATIONS
     We noted several areas related to the allocation systems
test. and ..IA's emergency management system in general which
may pose future problems. These include (1) the anticompeti-
tive impact of confidential and proprietary data, (2) the
monitoring responsibility of FTC and Justice Department em-
ployees, and (3) U.S. Government recordkeeping requirements.
The areas are important because they directly affect the
ability of FTC and the Justice Department to fulfill their
major EPC Act responsibility--moni.toring oil company partici-
pation in the IEP to prevent anticompetitive effects, while
substantially achieving the purpose of the IEP.
Confidential and proprietary data
     The Director of FTC's Bureau of Competition stated that
the Congress, in passing the EPC Act, judged the benefits of
U.S. oil company participation in the IEP to outweigh    ti-
competitive consequences caused by sharing confidenti   or
proprietary data. The Congress had made some assumptions
about the role the oil companies would play and the amount
of confidential material which would be exchanged during an
emergency and during an allocation systems test. The recent
test provides the Congress an opportunity to reexamine some
of those assumptions.
     In judging anticompetitive risks of oil company involve-
ment in an emergency or in future tests, we believe the Con-
gress should consider the competitive sensitivity of

                               27
APPENDIX I                                        APPENDIX I




Questionnaire A data, whether actual or modified. Although
the data exchanged at the last test were not considered com-
petitively sensitive because they were 18 months old, FTC is
now studying how quickly such data loses its competitive sen-
sitivity (i.e., becomes public).

FTC and Justice Department
monitoring of ISAG meetings
     FEA records did not show whether PTC or Justice Department
monitors were present at over a third of the ISAO meetings 1/
held during the test. Instead, FEA and/or State Department
officials monitored these meetings. The absence of FTC and
Justice Department monitors does not conflict with sec-
tion 252(c)(1)(B) of the EPC Act, which only requires the
presence of a regular full-time Federal employee at any meet-
ingz held to develop or carry out a voluntary agreement or
plan of action. However, section 252(e)(1) of the act spe-
cifically assigns the antitrust monitoring responsibility--to
promote competition and to prevent anticompetitive practices
and effects--to FTC and the Attorney General.
     In our opinion, the legislative intent of these esctions
is unclear. Is the presence of a full-time Federal employee
at all meetings intended to satisfy the recordkeeping require-
ments (section 252(c)(3)) of the act, the requirement relating
to promoting competitior and preventing anticompetitive prac-
tices and effects, or boLh? Further, does section 252(e)(1)
require FTC and Justice Department employees to monitor all
formal meetings of oil company participants? It could be
argued that FTC and Justice Department monitors satisfied
the requirements of this section during the test by review-
ing the records of meetings which they did not attend.

     We believe that the Congress should clarify the roles
of the four Federal agencies in monitoring the tests and other
oil company activities in the IEP, especially considering the
anticompetitive risks discussed above.

1/U.S. Government monitors said that during the second and
  third cycles of the test the Federal employees completing
  the record did not always indicate whether other Federal
  employees were present. About 70 percent of the meetings
  where records did not indicate that FTC or Justice Depart-
  ment monitors were present occurred during the second and
  third cycles.



                              28
APPENDIX I                                        APPENDIX I



U.S. Government
recordkeeping requirements
     The ISAG concluded that the FEA recordkeeping guidelines
in effect during the test were burdensome. To some extent
they also inhibited the free flow of its work. The consensus
among ISAG members was that the recordkeeping requirements
would be unworkable in a real emergency. The primary target
of its criticism was the requirement that exchanges of routine
procedural or admlinistrative information had to be recorded.
It, therefore, suggested in its appraisal report that this
requirement be dropped.
     Although FPC and justice Department monitors believe
that FBA's recordxeeping guidelines were adequate for the
test purposes, they also expressed doubt concerning the
guidelines' viability during a real emergency. FTC staff
are currently working with the other agencies to refine the
guidelines. Under consideration is the ISAG suggestion that
routine proceduralor administrative exchanges not be subject
to the recording rules. The guidelines have not been modi-
fied to date, however, due to the problem of defining what
constitutes a procedural communication vis-a-vis a substan-
tive communication.
     FTC staff is also considering whether in some respects
the recordkeeping guidelines should be more strict. This
consideration is based on the fact that there would be more
ISAG members during an actual emergency and, consequently,
more activities (communications) subject to recordkeeping
requirements. However, FTC officials emphasized that
any guidelines finally adopted not be too cumbersome.
     It is important that this problem be resolved. The
success of IEP's emergency allocation system depends on
efficient functioning of the ISAG. On the other hand, ISAG
activities should not circumvent antitrust laws. Thus, any
refinement of existing recordkeeping guidelines should
achieve a satisfactory balance between facilitating the free
flow of ISAG work and insuring compliance with U.S. antitrust
requirements.




                             29
         APPENDIX II

LIST OF THE 31 REPORTING OIL

COMPANIES PARTICIPATING IN THE

  ALLOCATIONS SYSTEMS TEST
 APPENDIX II                                        APPENDIX II

                    LIST OF THE 31 REPORTING OIL
                   COMPANIES PARTICIPATING IN THE
                      ALLOCATION SYSTEMS TEST
   United States                    European           Japanese
 Amerada Bessi              Axel Johnson & Co.,    Indemitsu Kosan
    Corporation                A.B.                  Co. Ltd.
 Ashland Oil,' Inc.         British Petroleum Co. Maruzen Oil Co.
 Atlantic Richfield           Ltd.                   Ltd.
    Company                 Ente Nazionale Idro-
 Caltex Petroleum             carbure
   Corporation              Hispanoil S.A.
 Continental Oil Company    OMV Aktiengesellschaft
 Exxon Corporation          Petrofina S.A.
 Getty Oil Company          Shell International
 Gull Oil Corporation         Petroleum Co. Ltd.
Maratnon Oil Company        Statoil
Mobil Oil Corporation       VESA - CHEMIE A.C.
Murphy Oil Company
Occidental Petroleum
   Corporation
Phillips Petroleum
   Company
Shell Oil Company
Standard Oil Company
   of California
Standard Oil Company of
   :ndiana
Standard Oil Company of
   Ohio
Sun Oil Company
Texaco, Inc.
Union Oil Company
  of California




(20C:2)

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           i