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The following is a tabulation of the average cost of jet fuel per gallon used by the airlines in the period shown as taken from the CAB reports and the average cost of jet fuel purchased by the Fuel Center during the same periods:

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A further breakdown of the military jet fuel purchase is as follows:

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This tabulation shows that before the October embargo, the DFSC was buying jet fuel for 2 cents a gallon less than the domestic airlines. After the embargo, it has paid an average of from 4 cents to 8 cents more per gallon. The actual difference between the average prices paid for jet fuel by DFSC and the average prices shown in the CAB reports may be even greater since the airlines prices usually included transportation and many of the DFSC prices did not include transportation.

If the buyers at the DFSC had been able to purchase jet fuel for the government during the period from July 1, 1973 to December 31, 1974 as effectively as the buyers for the airlines, the government would have saved nearly $600 million.8

DFSC personnel were asked why there was this difference in the prices they paid for jet fuel as compared with the airlines when DFSC had been paying less than the airlines prior to 1973. The first explanation was that some of the airlines had long term contracts and the lower prices in these contracts carried through the embargo and even up to the present. DFSC did not have the protection of such contracts. And this, according to DFSC, would distort the airlines prices, and make their average price seem very low.

This argument raises the question why the DFSC did not have the protection of at least some long-term contracts as a hedge against price increases. DFSC said that it had the policy of buying on a shortterm basis only in order to get the best possible price. This policy may

The total DFSC purchases for this period were 9.673 billion gallons and the commercial airlines average price over the same period was 6.2 cents per gallon lower.

have been successful in the past when petroleum supplies were plentiful. But DFSC had a clear warning in 1973 that the petroleum market was changing. DFSC changed from an advertised bid basis of award to separate negotiations with each supplier. DFSC did nothing else to plan or provide for a potential fuel crisis. Any past savings by DFSC's short-term procurement policy must be offset against the losses incurred when the October embargo found the government without adequate contractual coverage for petroleum products.

In addition, DFSC said it is unable to estimate its jet fuel requirements for a period longer than six months. The size and needs of DOD would seem to question this assumption but it is not within the scope of this study to consider this contention in detail.

But in order to test the DFSC theory that long-term contracts accounted for the differences in average prices paid for jet fuel by Defense and the airlines, Subcommittee staff contacted various airlines. Staff found that not all of the airlines had full coverage of their requirements by long-term contract. Many had only a small percentage of their fuel requirements for 1974 covered by contract. They had to purchase the balance in the open market. By comparing what airlines, substantially unprotected by contracts, had to pay on the open market for their jet fuel with that paid by DFSC, the impact of airline longterm contract commitments on average price is, for all practical purposes, eliminated."

The purchasing agents for three of the major domestic trunk airlines confirmed that a major portion of their jet fuel purchases during 1974 had not been covered by long term-contracts. They advised that the average price they paid for all jet fuel during 1974 ranged from about 24 cents to 27 cents per gallon but, more importantly, they advised that the average price they paid for jet fuel purchased without a contract was about 28 cents per gallon. They, of course, had many purchases at many locations and there were many instances where the airlines had to pay prices both considerably higher and lower than this figure.

They further advised that this average price of 28 cents has remained about the same or even a little higher up to the present time. The airlines informed us that they purchased their requirements from the major oil companies.

From the above information it would appear reasonable to expect that the average price negotiated by the DFSC in 1974 with the major oil companies should have been in the 28 cents range to be comparable with the airlines purchases without contracts.

A review was made, therefore, of the quantities and prices charged by the major oil companies which also sell jet fuel to the domestic airlines. This shows the following quantities and prices for JP-4 and JP-5 charged DFSC during the period July to December 1974 by the oil companies who are the major suppliers of the airlines:

DFSC personnel were asked if any attempt had been made in 1974 to obtain any information about prices from airlines, including prices obtained on purchases without a contract. As stated above, no indication was found of any attempts by DFSC to get any data from airlines for comparison purposes.

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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 .3415 cents per gallon. Thus, based on information received from the airlines, 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 $64 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:

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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 1974 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 advised 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 633-7), 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.

In 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).

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