petroleum trade journals as the basis for determining market prices in lieu of DD Form 633-7. Col. Estes said if this request was not granted, he wanted authority for a waiver of cost or pricing data as well as a waiver of the Cost Accounting Standards Clause disclosure statement for all negotiated petroleum contracts of $100,000 or more for delivery beginning July 1, 1974.

According to Estes there was insufficient time to secure DD Form 633-7 or cost or pricing data from the suppliers involved. He said:

4. If DFSC's historical method of using market information cannot be used to substantiate exemption from cost or pricing data and the cost accounting standards, this Center will be unable to consummate contracts in excess of 72,000,000 barrels and one billion dollars of bulk petroleum products (excluding CONUS into-plane, bunkers and posts, camps and stations) for delivery beginning on 1 July 1974. Current domestic contracts for bulk petroleum products expire between 1-15 July 1974, and the majority of the contracts for the overseas petroleum requirements expire on 30 June 1974. DFSC cannot commence negotiations with domestic suppliers until they have been notified by FEA (probably 24 June) of their respective allocations to meet DOD's bulk purchase program for July-December 1974.

5. It is anticipated that many domestic small business firms who supply approximately 25 percent of the total domestic military jet fuel requirements will be unable to claim the exemption contemplated by the Form 633-7 because substantial sales to the general public of the same or similar products are not made by these small business firms. Thus, cost and pricing data will be required unless independent market information is used. Again, it is evident that contracts on this basis cannot be made within the necessary time frame (p. 2).

Another reason given by Col. Estes for the waiver request was the prior refusal on the part of the petroleum companies to supply cost or pricing data or comply with cost accounting standards.

Col. Estes said:

7. It is known the petroleum companies will resist any attempt by DOD to obtain cost or pricing data or compliance with cost accounting standards. Previous attempts have proved unsuccessful and company representatives state in conversations with DFSC personnel that they would refuse to furnish such data. The domestic companies feel that they are already furnishing ample data to the Government, including FEA and IRS audits, and that any additional data and audit would be unconscionable. FEA has informed this Center they are prohibited from sharing this type of data with other government agencies. Since the companies feel that they are being coerced into supplying the product, they are even less inclined to extend any special effort to supply DFSC with the required cost data (p. 3).

TRADE PUBLICATION DATA USED IN JULY 1974 PURCHASES

Despite the June 4, 1974 letter from DSA which said DFSC should no longer utilize trade publications as the sole basis for an exemption from the requirement to obtain certified cost or pricing data, their use was continued in July 1974 when the DoD petroleum purchases for the last six months of 1974 were made.

In June 1974 DFSC was faced with the problem of executing new contracts not only for jet fuel, but for the other petroleum products as the yearly contracts executed in March 1973 had now expired.

The DFSC had been instructed by its parent agency, DSA, that when it negotiated these contracts, it was required by law to obtain certified cost or pricing data from the contractors or, in lieu of that, documentation from the contractors or from independent sources to establish that the contractors prices were market prices being charged to other customers for substantial quantities of the product. The DSA specifically told the DFSC that data in trade publications such as Platt's Oilgram and the Oil Buyers Guide was not sufficient to establish a contractors price as a market price.

Nevertheless, DFSC proceeded in the summer of 1974 to place contracts amounting to almost $2 billion without complying with these instructions and without requiring the contractors to submit certified cost or pricing data or market data.

VII. OIL PROCUREMENT PRACTICES COST THE GOVERN

MENT MILLIONS OF DOLLARS

STAFF REVIEW OF JULY 1974 JET FUEL CONTRACTS

An examination was made by the Subcommittee of about one-third of the large contracts placed by DFSC in the summer of 1974 with special emphasis on the procurement of jet fuel. As pointed out earlier, jet fuel makes up more than half of the total dollar volume of the purchases of DFSC. In a number of files reviewed, there was nothing at all to document what negotiations, if any, had taken place between the contractor and the Government and how the contracting officer had determined that the price was reasonable.

In none of the files reviewed was there any submission by the contractor of certified cost or pricing data nor any submission of market data or any data as to what the contractor was charging other customers for the same product.

Some of the files contained memoranda of negotiations by the contracting officer. These memoranda generally showed that the award was based on a certification by the contracting officer that he had broad experience in the procurement of petroleum products and that he believed, based on his personal knowledge and experience, that the price was a fair and reasonable one and should be accepted. In some cases, the contracting officer quoted information as to bid and asked prices or posted prices for automobile gasoline or kerosene from Platt's Oilgram or the Oil Buyers Guide to support his conclusion. This was done even though, as previously pointed out in this study, DSA had ruled that it was inappropriate to use this data.

In reviewing the contract files and related information pertaining to the July 1974 jet fuel contract awards, the Subcommittee staff noted the average price for jet fuel was about 31 cents per gallon and that there was a spread in the contract prices for the jet fuel from 20 cents per gallon to 48 cents per gallon. The files reviewed contained no adequate explanation as to why these differences in prices existed. Subcommittee staff undertook to examine the reasonableness of prices paid by DFSC for its jet fuel purchases.

THE PRODUCTS INVOLVED

The staff was informed that the military uses two types of jet fuel: the Air Force uses JP-4 which is the cheapest and most readily available of jet fuels. The Navy uses JP-5 which is substantially the same as Jet-A. the jet fuel used by commercial airlines. It was learned that there are no significant differences in the manufacturing costs of producing any of the jet fuels-military or commercial.

How DFSC APPROACHED PRICING

The parent agency of DFSC, the Defense Supply Agency, had criticized DFSC in the past for using data in trade publications to justify prices. However, DFSC continued to use this data in 1974. In fact, since the trade publications do not carry data on military jet fuel, DFSC used price data from trade publications for different products to justify its jet fuel prices as follows:

For JP-4 fuel, a blend of gasoline and kerosene, DFSC would obtain posted commercial prices for motor gasoline and kerosene. It also obtained data on prices bid and asked by brokers for quantities of motor gasoline on the "spot" market. It took this data and through a formula established a composite range of prices which it compared with the prices being asked by oil companies for JP-4.

The same practices were used for JP-5 fuel.

But this procedure has some obvious defects. The prices in trade. publications do not in many cases represent actual transactions. The quantities of gasoline and kerosene involved in such transactions were not comparable to the quantities of jet fuel being purchased. Prices from individual suppliers could not be compared directly. And, of course, the delivery conditions and end-use of the products on which quotations appeared in trade publications were vastly different from the Government purchases.

STAFF REVIEW OF JET FUEL PURCHASED BY AIRLINES

In its review of the DFSC July 1974 jet fuel contracts, the Subcommittee staff attempted to find similar purchases by other customers which might establish a market price, especially in light of DSA's specific findings that use of trade publication data was inappropriate. The logical starting point seemed to be prices paid by commercial airlines for their jet fuel which, as noted earlier does not differ substantially from military jet fuel. In addition, the volume of jet aircraft fuel purchased annually by the domestic airlines is close to that purchased by the Defense Department: both have been using between six and seven billion gallons of jet fuel annually. Moreover, the delivery conditions are similar, the end use is identical and the major oil companies who sell jet fuel to the airlines sell jet fuel to the Government.

There is no indication that DFSC attempted to obtain data on airline jet fuel prices from either the airlines, or the oil companies. Subcommittee staff obtained some pricing information from the airlines and the Civil Aeronautics Board (CAB).

The CAB issues a monthly report on the cost of jet fuel used by the domestic airlines. This report gives considerable detail as to jet fuel costs by individual airlines, by location, and by quantities used. The Subcommittee staff felt that this report would be useful in determining the market price of jet fuel along with data from either the oil companies or the airlines. The personnel at DFSC were aware of the existence of this data but it was not used by them in their determination of whether a specific price was a fair and reasonable one for the government. Instead they depended upon trade publication data as set out above.