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]."

IX. THE HARD LINE SOFTENS AS THE DEADLINE

APPROACHES

COST ACCOUNTING STANDARDS

On November 27, 1974, five days after the oil companies were told by Assistant Secretary of Defense Mendolia that they had not supplied data to satisfy the statutory requirements, Mendolia wrote a letter to Elmer B. Staats, Comptroller General of the United States, and also Chairman of the Cost Accounting Standards Board, seeking waivers of the requirements of the oil companies to comply with requirements of the Cost Accounting Standards Board.11

Mendolia explained the waivers were necessary because DFSC was faced with the necessity of awarding "some 70 contracts by December 16, 1974 if we are to avoid interruption in the delivery of necessary fuels and lubricants."

He added:

Our realistic appraisal of the present situation is that most major oil companies will not acquiesce to acceptance of the CAS [Cost Accounting Standards] Clause, and while we have not yet given up hope of obtaining sufficient information from contractors or other sources to establish market prices, we are quite sure this cannot be accomplished by the end of the year. Thus, we anticipate a need for waivers of the CAS Clause to place most contracts covering requirements for the first six months of 1975. In addition, there will be about 24 foreign contracts that will also need to be placed. These are expected to require waivers. We regret having to request the Board to grant Waivers for such a large number of contracts, and such large dollar amounts ($742 million for domestic requirements), but we see no other course of action that we can take at this time.

Although only the Cost Accounting Standards Board could waive its requirements, DOD could waive the cost and pricing data requirements itself. Thus, convincing the CASB to waive its requirements would again enable DFSC to put the companies in the position of not having to supply backup data for their prices or conform to certain cost accounting principles.

MEETING WITH CASB STAFF

On December 5, 1974, Dale Babione, Deputy Assistant Secretary of Defense for Procurement (Installations and Logistics) and other officials met with Harry R. Van Cleve, General Counsel, and Arthur Schoenhaut, Executive Director of the CASB and other CASB staff personnel.

"See footnotes 1 through 3.

Van Cleve prepared a memorandum of the December 5 meeting, dated December 10, 1974.

According to the Van Cleve memorandum, Babione and DOD counsel said that the purpose of the meeting was to discuss informally what the possible reaction of the Cost Accounting Standards Board would be to a request for waivers in contracts for petroleum requirements for the DOD for the first six months of 1975. Babione said DOD proposed to make 71 contracts with 68 firms for its Continental United States requirements, for an estimated $743 million. DFSC also proposed to make 30 contracts for overseas petroleum requirements for an estimated $190 million. Babione explained that the 68 potential contractors for the Continental United States requirements had taken a variety of positions in connection with Truth in Negotiations and Cost Accounting Standards obligations in preliminary discussions with DFSC and DOD. Some stated their sales were at regulated prices; others stated their sales were at market prices of items sold in substantial quantities to the general public. Still others said while they did not qualify for any of the exemptions under the statutes they could not or would not comply with the Cost Accounting Standards and therefore would not accept a contract unless the inclusion of the CAS clause was waived by the CAS Board. Finally a few of the companies stated they were willing to comply with the CAS clause.

Van Cleve noted in his memorandum that Schoenhaut inquired from Babione what the Department of Defense would propose to do with respect to the requirement to submit cost or pricing data in compliance with the Truth in Negotiation Act. Babione replied that, of course. the Department of Defense would waive this requirement whenever a proposed supplier declined to submit it.

According to the Van Cleve memorandum, Schoenhaut explained that the Cost Accounting Standards Board's next meeting was Friday, December 13, and that there was no possibility of another meeting in 1974. Schoenhaut explained also that the staff could not state with any finality what its position would be on the proposed DOD request for waivers, since DOD itself did not have the necessary information on which to submit that request. Schoenhaut added that if the request. were based on the information set forth at this meeting, he could see no alternative to a staff recommendation not to grant the requested waivers.

Van Cleve noted that the DOD representatives asked to adjourn the meeting because they had to go to a meeting with officials of the Federal Energy Administration. Van Cleve said the DOD officials explained that their meeting with FEA would focus on ways in which FEA might make available to DOD the FEA market data of the pricing of petroleum products. DOD apparently hoped that on the basis of the data from FEA, it could determine that the prices proposed to be paid under the DOD contracts were based on items sold in the market in substantial quantities to the general public. This would enable DOD to meet a statutory exemption from the requirements to accept the CAS Clause, Van Cleve said.

Closing out his account of the December 5 meeting, Van Cleve said:

Mr. Babione thanked us for our frankness in addressing this problem; he seemed, however, very surprised to hear that