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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 pould 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.

11 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

waivers would not be granted as a routine matter upon an
indication from the Department of Defense that waivers
were desired.

MOBIL WAIVER REQUESTED
On December 5, 1974, the same day DOD officials met with the Cost
Accounting Standards Board staff, Paul Riley, Acting Assistant
Secretary of Defense (Installations and Logistics), wrote a letter to
the Cost Accounting Standards Board requesting a waiver of the ('ost
Accounting Standards Clause on a $6,787,928 contract with the Mobil
Oil Corporation to supply petroleum products to 33 military locations
in Turkey. The contract was for the period January 1, 1975 through
December 31, 1975.

Riley said the waiver was requested because Mobil had refused to accept the Cost Accounting Standards Clause and had also refused to furnish cost and pricing data for the products portion of the contract. Moreover, Mobil had refused to provide market (or published/ catalog) prices necessary to establish an exemption from the inclusion of the Cost Accounting Standards Clause as well as the exemption from the requirements of cost and pricing data.

Riley pointed out the Cost Accounting Standards Clause had not been used in prior contracts due to DFSC's practice of relying upon market information from petroleum trade journals on which to base a market exemption. He added, however, this had recently been changed due to the uncertainties and fluctuations in the current market. Thus, the prices contained in the petroleum trade journals did not represent market prices within the context of the procurement regulations and prospective suppliers were now required to furnish catalog or market prices to enable DFSC to establish exemptions.

Riley said Mobil's position in refusing to include the Cost Iccounting Standards Clause was not unique among the major oil firms. He said the majority of the international oil companies had recently indicated formally or informally to DFSC that they would not agree

to the inclusion of the Cost Accounting Standards Clause in any m negotiated contract. To date, none had agreed to the inclusion of the

clause, Riley said. Some of the firms, Asiatic Petroleum Corporation, Gulf Oil and Exxon International, responded to DFSC's requests for

inclusion of the clause by referring to letters submitted to the Cost | Accounting Standards Board in 1972 which outlined the impracticalities of complying with the Standards.

In requesting the Cost Accounting Standards Board to grant the waiver, Riley said:

On the basis of the foregoing, it is in the best interests of the Government to issue a contract for the supply of these petroleum products to Mobil Oil Corporation without the Cost Accounting Standards Clause as pertains to the product portion.

MOBIL WAIVER DENIED

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On December 13, 1974, Arthur Schoenhaut. Executive Secretary of the Cost Accounting Standards Board, notified Arthur Mendolia, Assistant Secretary of Defense (Installations and Logistics), by letter

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that the Cost Accounting Standards Board had denied the requested Mobil waiver.

Schoenhaut said in his letter "the Board is convinced, on the basis of the present record, that full compliance by Mobil with the CAS Clause is entirely feasible and is required.”

LEGAL INTERPRETATION REQUESTED FROM FEA It was not until December 6, 1974 that the Department of Defense requested a legal interpretation from FEA as to whether, under the statutory provisions applicable to the Mandatory Allocation Program, suppliers of petroleum products to the DOD could be required to accept not only the requirements laid down by the Cost Accounting Standards Board but the requirements of the Truth in Negotiation Act as well. In this same letter of December 6, DOD requested, for the first time,

opinion as to whether or not FEA could make available to DOD certain documentation in their files. DFSC was also aware, as -early as June 1974, that such information was available in FEA files.

Mr. Hoffman, DOD General Counsel, explained why the data was needed:

We have also been seeking to acquire additional pricing information from the Federal Energy Administration to evaluate the availability of the so-called "market prices": exemption. One of the questions raised during our discussions was whether FEA could release to the Department of Defense pricing information presently in its possession or developed as a result of FEA audit. We would appreciate having your legal opinion whether information developed by FEA could be so released.

FEA ISSUES LEGAL INTERPRETATION

On December 17, 1974, Robert E. Montgomery, Jr., General Counsel of FEA, responded to DOD General Counsel's letter of December 6. Montgomery said that both the Truth in Negotiation Act and the Cost Accounting Standards Board, Rules and Regulations were consistent with FEA allocation and price regulations. Therefore, the FEA would not regard the refusal of a supplier to comply with these two statutes as a justification for failure to comply with the allocation regulations.

The FEA General Counsel did not respond to the DOD request for a ruling whether FEA could release to the DOD pricing information in their files.

JUSTICE DEPARTMENT ACTION THREATENED

On December 19, 1974, Arthur I. Mendolia, Assistant Secretary of Defense (Installations and Logistics), wrote a memorandum to General Robinson, the Director of the Defense Supply Agency, and said that in light of the December 17 ruling of FEA“it is now appropriate for you to reinstitute your efforts seeking compliance with Public Law 87-653 [Truth in Negotiations] and Public Law 91–379 (Cost Ac

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