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This tabulation shows that the average price DFSC paid to these companies for jet fuel during July through December 1974 was .311.) cents per gallon. Thus, based on information received from the air

lines, if the DFSC buyers had been able to bargain as effectively as | the airlines which had to buy in most part in the open market, the

government would have saved approximately $61 million on these contracts alone. And it must be pointed out that these contracts account for only one-third of the volume purchased for these six months and for only about 10% of the volume purchased for the eighteen month period studied.

Data made available to the Subcommittee as to purchases since January 1975 is incomplete but it is interesting to note the substantial reductions in price in JP-4 contracts executed by DFSC since January 1975 as set out below:

(Cents per gallon)

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Inquiries at the airlines did not show any comparable reductions in their prices since January, 1975. No real explanation was received from DFSC as to why these reductions were achieved since January 1977 but it is felt that the public controversy about the Subcommittee cost and pricing data and the interest of the Subcommittee and the General Accounting Office in these procurements contributed in making the negotiations more effective.

Indeed, DFSC informed the Subcommittee that after the Subcommittee expressed its interest in the type of data available to determine price reasonableness prices were negotiated downward by $32 million.

A JUSTIFICATION FOR DIFFERENT PRICING? Why were the prices for jet fuel charged DFSC in 1974 higher than the domestic airlines? The answer seems to lie in the regulations of the Federal Energy Administration. Under these regulations, the oil companies were permitted to "pass through” higher costs for crude oil and other charges. In 1974 the pass through of costs to some products such as gasoline and home heating oil was limited. On the other hand, some products such as jet fuel had no limitations on pass through costs. Accordingly, the oil companies might have allocated a large share of such costs to aviation fuel. In addition they might have allocated an even higher portion of such costs to the military, as opposed to the commercial airlines.

The staff inquiries showed that DFSC was aware of the possibility that DFSC contracts might be receiving excessive “pass through" costs as far back as April 1974. Some correspondence took place between FEA and DFSC but neither FEA nor DFSC pursued the matter vigorously. FEA, at the end of March 1975, instructed its field offices to begin an investigation to determine whether the oil companies were disproportionately allocating these “pass through” costs to Government contracts. At present, however, FEA has no way of telling whether some purchasers-such as DOD-have been burdened with a disproportionate amount of oil company costs.

VIII. DEFENSE TAKES A HARD LINE ON 1975

CONTRACTS

CHANGE IN PRICING PROCEDURES

On September 9, 1974, Lt. Gen. Wallace H. Robinson, Jr., Director of DSA, sent a memorandum to DFSC and repeated the point that was contained in the earlier June 4 letter that DFSC would have to find a more reliable price indicator than trade journals to justify a market price exemption. It should be recalled that General Robinson had adrised the Assistant Secretary of Defense as early as April 24, 1974 that the DFSC was unable to validate that the prices established by the oil companies selling to the Government were fair and reasonable.

The September 9 memorandum also said certified cost or pricing data must be obtained for contracts amounting to $100,000 or more and the Cost Accounting Standards prescribed by Armed Services Procurement Regulations Section III, Part 12, made applicable thereto, unless an exemption from these requirements as set forth in the ASPR could be justified and documented. General Robinson in his letter said DSA “recognized that compliance with the above regulatory requirements requires efforts heretofore not undertaken." General Robinson referred in his memorandum to a communication from DFSC as recent as August 23, 1974 when the Center reiterated its earlier request to use various trade journals as the basis for determining market prices in lieu of the Claim for Exemption from Submission of Certified Cost or Pricing Data (DD Form 63:3-7), for the upcoming new procurement purchase for the period January-June, 1975. This August 23 letter also stated if this request was not granted then a blanket waiver of the ASPR requirements for cost or pricing data and cost accounting standards clause/disclosure statement was requested.

În support of its request to continue the use of trade journals, the August 23 memorandum said “every segment of the petroleum industry regards Platt's Oilgram and similar publications as accurately reflecting the true petroleum market." In order to corroborate this statement, General Robinson in his September 9 letter said checks were made with firms "petroleum producers, distributors, brokers and retailers, airlines, railroads and utilities. Of those subscribing to Platt's, none used it to determine price reasonableness as the term is used in ASPR. In general, these firms use Platt's and other similar trade publications only as a general, overall indicator of prices and not for making specific price determinations. As stated previously, a more reliable market indicator must be found to justify a market price exemption” (p. 2).

DOD PETROLEUM REQUIREMENTS SET

On September 23, 1974 DFSC sent a letter to the Department of Defense enclosing a detailed allocation plan, for transmittal to FEA, covering DOD petroleum requirements to be supplied from domestic sources during the period January through June 1975.

CHANGE IN PROCUREMENT REQUIREMENTS

The following day, September 24, DFSC finally took steps to implement the changes in their procurement regulations. On September 24, DFSC wrote letters to approximately 70 oil companies to advise them of the change in DFSC's method of procurement and requesting a statement from them as to their willingness to respond formally to the new requirements.

The effect of the September 24 letter was to place the burden on the oil companies for giving information to determine price reasonableness. The letter made clear that the Government would no longer assume that responsibility.

The oil companies were told in future contracts they were required to supply DFSC with cost or pricing data for all negotiated contracts of $100,000 or more and must include the cost accounting standards clauses unless they qualified for the exemptions spelled out earlier which included established catalog or market prices or prices set by law or regulation.

In its letter, DFSC also notified the oil companies that a determination had been made that FEA price regulations did not constitute prices set by law or regulation which would exempt the companies from supplying cost or pricing data and conforming to Cost Accounting Standards.10 Thus, DFSC Procurement personnel were alerted they would no longer be permitted to support determinations of price reasonableness by considering FEA prices as "set by law or regulation.”

THE COMPANIES RESPOND

The oil companies responded negatively.

Following the oil companies' negative responses to the DFSC letter of September 24, another two months elapsed before a recommendation was made by DSA to the Department of Defense to act in the matter.

On November 22, 1974, General Robinson, Director of DSA, in a memorandum to Assistant Secretary of Defense Mendolia, said:

* * in view of our inability to obtain the cooperation of the oil companies with whom we are negotiating, I believe that it is now necessary that the matter be brought to your attention. The preferred course of action is to take action at your level and, if necessary, at the Secretary of Defense level

10 The exemption for "prices set by law or regulation is available generally when a single fixed price or schedule of prices is set by law or regulation for sales by a supplier to all customers or to a class of customers, such as in the case of regulated public utilities. Since the Federal Energy Administration price regulations do not establish such a fixed price or schedule and do not prohibit suppliers from selling at a lesser price than permitted by the FEA regulations, the FEA ceiling price does not prohibit suppliers from selling at a lesser price than permitted by the FEA regulations. (DSA memo to DOD dtd 22 Nov 74)

to obtain acceptance by the oil companies of the requirements of P.L. 87-653 and P.L. 91-379 or to require them to provide in a timely manner, complete accurate and verifiable data to justify a catalog or market price exemption if they believe one exists on any one or a class of procurements of petroleum

products (p.5). On November 22, 1974, the same day Secretary Mendolia received General Robinson's memorandum, he wrote letters to approximately 68 oil companies requesting data from them. Mendolia said the data was required "to assure ourselves of the reasonableness of the negotiated price in every instance.” The oil companies were advised in future procurements “the statutes and regulations governing the awarding of noncompetitive negotiated contracts now pertain . To date, your company has not provided adequate data to satisfy the requirements of PL 87-653 [Truth in Negotiations) and PL 91-379 (Cost Accounting Standards, Rules and Regulations).”

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