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companies were reduced by $32 million and all necessary contracts signed. The Subcommittee, though pleased with any cost savings generated as a result of its activities, still finds the crucial question to be whether Defense is overpaying for its petroleum products. Accord ingly, I have asked the General Accounting Office to make a thorough examination into procurement practices of DFSC to determine what is being done to eliminate defective procedures and practices. I have also asked the Federal Energy Administration to make a full and complete investigation into whether the major oil companies were and are presently loading a disproportionate amount of "pass through” charges to government contracts.

In closing, let me again thank Senator Charles H. Percy, the ranking minority member, and minority staff for their cooperation.

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I. Introduction

The subcommittee's jurisdiction---

The scope and purpose of the staff study

II. The magnitude of defense oil purchases--

III. A shift from competitive bill to negotiated contracts necessitates

data supporting price reasonableness..

The governing standards.

The shift to a negotiated basis in 1973...

IV. Negotiations or giveaways: Government personnel and techniques

questioned

Government buyers lacked experience.

Failure to obtain cost and pricing data..

Trade publications dictate prices paid by Government-

Failure to use a cost/price analyst-

1. Newr Complications: The mandatory allocation program and the

Federal Energy Administration regulations..

Mandatory allocation program--

Buyers lacked knowledge of FEA regulations-

FEA audit requested---

Disproportionate allocation of increased cost to DOD-

Results of FEA audit.-

II. Negotiated prices for July-December 1974 contracts again ignore

cost and pricing data and rely on trade publications.-

May 1974 waiver request..

Waiver request denied ----

Wairers request renewed in June 1974.--

Trade publication data used in July 1974 purchases..

VII. Oil procurement practices cost the Government millions of dollars-

Staff review of July 1974 jet fuel contracts.

The products involved.-

How DFSC approached pricing---

Staff review of jet fuel purchased by airlines.

A justification for different pricing ?-

VIII. Defense takes a hard line on 1975 contracts-

Change in pricing procedures---

DOD petroleum requirements set.

Change in procurement requirements.

The companies respond--

IX. The hard line softens as the deadline approaches.

Cost accounting standards--

Meeting with CASB staff_

Mobil waiver requested.-

Mobil waiver denied.

Legal interpretation requested from FEA

FEA issues legal interpretation.-

Justice Department action threatened.

Issues of exemptions discussed.

Availability of FEA data--

New waiver requested.-

Waivers again denied.

Pago

37

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X. The subcommittee acts-

Letters to Gulf and Mobil.
Gulf criticized..
Gulf modifies position--
DSA receives data---
Current status of data received.
$32 million saving to DOD...

GAO to review data----
XI. Findings and recommendations.-

Findings
Recommendations

37 38 38 38 39 39 41 41 43

I. INTRODUCTION

The Department of Defense, through the Defense Fuel Supply Center of the Defense Supply Agency, purchases refined petroleum products required to service United States military forces throughout the world. These supplies are currently purchased on a 6-month basis from both domestic oil suppliers and the largest multinational oil companies.

THE SUBCOMMITTEE'S JURISDICTION

On March 1, 1974, the 93d Congress, 2d session, adopted Senate Resolution 269, which charged the Senate Permanent Subcommittee on Investigations of the Committee on Government Operations with authority to investigate the efficiency, economy and effectiveness of all agencies and departments of the Government involved in the control and management of energy shortages. The Subcommittee was also directed to examine the pricing of energy in all forms and the management of tax, import, pricing, and other policies affecting energy supplies. This Subcommittee authority was extended to the 94th Congress by S. Res. 111, adopted March 17, 1975.

THE SCOPE AND PURPOSE OF THE STAFF STUDY

The Subcommittee has studied the profits, prices, taxes and activities of the major oil companies since mid-1973.

In November 1973 the Subcommittee issued a staff study and held hearings on causes of fuel shortages prior to the Arab embargo, with a detailed examination being made of advice given to the executive branch by the major oil companies with regard to imports, petroleum shortages and other pertinent matters. An analysis was also made of refinery runs and how they contributed to the shortages.

In January 1974 representatives of the seven largest United States oil companies presented three days of testimony before the Subcommittee on the accuracy of statistical data supplied the government as well as information on inventories, imports, refinery runs, stocks of crude oil and refined petroleum products, taxes, profits, international dealings and many other matters.

In April 1974 the Subcommittee held hearings on the responsibilities of the Department of Defense and the major oil companies in the cutoff of oil to our military-especially our Sixth Fleet—in the aftermath of the 1973 Arab-Israeli War.

In November 1974 the Subcommittee released a staff study, based on the tax returns of the seven largest oil companies for 1968-1972 which showed that for each of these years the seven major oil companies aggregated had an effective tax rate—the percentage of net income actually paid in federal income taxes—of 5 percent or less.

In December 1974 the Subcommittee began to study the possibility of the cutoff of oil to our military by the major oil companies--particularly to overseas locations--because the companies refused to sign contracts with clauses requiring the submission of cost and pricing data and the adherence to cost accounting standards.

The Subcommittee, through numerous meetings and exchanges with personnel of DOD and other governmental agencies and representatives of the major oil companies, was able to act as a catalyst to insure the uninterrupted flow of oil to the military.

In the course of this investigation, the Subcommittee began to study whether the Government was paying a reasonable price for the petroleum products it purchased under military procurement practices. This was of particular concern because of the apparent failure of responsible procurement personnel to obtain relevant data on the prices charged from the oil companies making sales to the Department of Defense. Such data would have assisted government contracting officers in determining price reasonableness.

In probing this price question, Subcommittee staff examined records of the Office of Installations and Logistics, of the Assistant Secretary of Defense, the Defense Supply Agency, of the Department of Defense, the Defense Fuel Supply Center of the Defense Supply Agency, the Federal Energy Administration, and the Cost Accounting Standards Board.

The staff study draws on these documents, interviews and other materials to present an insight into the petroleum procurement practices of the Department of Defense.

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