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War, that we would have seen the last of such questionable
behavior affecting our national security and our foreign
policy. This confidence was apparently unwarranted.

GULF MODIFIES POSITION

On January 3, 1975, after the Jackson statement, Herbert I. Goodman, President of Gulf Oil Trading Company, informed Senator Jackson by letter that his company had agreed to supply the Navy's "Operation Deepfreeze" in Antarctica and enter into a contract with the Department of Defense which included clauses requiring them to supply appropriate cost and pricing data and conform with cost accounting standards established by the Cost Accounting Standards Board.

Upon receipt of the Gulf letter, Senator Jackson issued a statement praising Gulf for its action but said that "his prodding should never have been necessary in such a matter which affects the national interest and national security.”

Senator Jackson said "that he would write all oil companies negotiating with the government for over one billion dollars in business to similarly ask them to contract for the military's immediate needs while complying with all appropriate legal requirements.”

Letters were sent to over 60 companies supplying DOD's fuel needs, asking that they enter into contracts with appropriate clauses.

DSA RECEIVES DATA

On January 15, 1975, Arthur Mendolia, Assistant Secretary of Defense, wrote Senator Jackson:

Partly as a result of the assistance which you and your staff have given us on our problems associated with the procurement of petroleum products, we are beginning to achieve some significant progress. The letter also pointed out that the Defense Supply Agency was now receiving "substantial sales data” from many of the domestic petroleum companies. Secretary Mendolia said:

DSA's analysis of this and other data already available has led them to the conclusion that many of our proposed contracts for domestic requirements now qualify for an exemption from the aforementioned statutes. (P.L. 87-653 (Truth in Negotiation) and P.L. 91-379 (Cost Accounting Standards Rules and Regulations) ] This matter has been discussed fully with DSA, and we agree in the decision to proceed with the award of contracts properly qualifying for exemption. For contracts that do not qualify, we will continue to seek to obtain the cost and pricing data required by P.L. 87-653 and compliance with the Cost Accounting Standards Board regulations. A number of contracts still remain in this category.

CURRENT STATUS OF DATA RECEIVED

In a letter dated March 21, 1974, Dale R. Babione, Deputy Assistant Secretary of Defense (Procurement) advised Mr. Howard Feldman,

Chief Counsel of the Subcommittee that "some sales information" had been supplied to DOD by 47 of the 69 oil companies originally contacted.

Mr. Babione said “this information, together with other available data, enabled DSA to develop a meaningful market analysis which was used as the basis for pricing and which enabled the award of contracts commencing on 19 January 1975."

It was also pointed out by Mr. Babione that procurement of domestic bulk requirements for the January through June 1975 contract period were essentially complete.

“A few partial awards remain to provide 100 percent coverage of all products; however, it is anticipated that these can be processed without difficulty. No critical supply situation exists for any of the products not fully on contract,” Babione said.

$32 MILLION SAVING TO DOD Mr. Babione said the receipt of data from the oil companies "contributed greatly to the establishment of acceptable price ranges which served as a valuable negotiation tool.” It was also stated that because of the data supplied, DOD was able to make substantial reductions from the initial offers of the suppliers. This saving, according to Mr. Babione, amounted to more than $32 million dollars for the purchases by the Government for the period January through June 1975.

GAO TO REVIEW DATA Despite the large savings generated by the Subcommittee's activities, since on many of the contracts contemplated by DOD the cost clauses would not be included, the Subcommittee wanted an independent check to see if such omissions were warranted.

Accordingly, on January 22, 1975, the General Accounting Office was requested in a letter from Senator Jackson to examine data used by DSA in its determination that exemptions were unwarranted.

In his letter to Elmer B. Staats, the Comptroller General, Senator Jackson said:

Since this investigation originally arose because DOD said it did not have enough data to exempt the companies from these legal requirements and that they would have to comply with them, it is my position that we must carefully scrutinize the basis for the DOD determinations that the companies are exempt from such requirements.

Accordingly, I would like the General Accounting Office to examine all of the data presently available to the Defense Supply Agency-data upon which it determined that the companies were exempt from the Truth in Negotiations Act and the Cost Accounting Standards Board regulations—to see if such exemptions are appropriate or if additional cost or pricing data is needed. The Department of Defense has in

formed me that they will cooperate fully in this review. The Subcommittee has not as yet received the results of the General Accounting Office investigation.

XI. FINDINGS AND RECOMMENDATIONS The Department of Defense, through the Defense Fuel Supply Center of the Defense Supply Agency will purchase in fiscal year 1975 approximately $3.5 billion in petroleum products to service United States military forces throughout the world.

There are two ways to procure these products. One is by advertised competitive bids. The other is by negotiated contracts.

By its very nature, the advertised bid method would generate competition and hopefully enable the government to obtain products at the most favorable price. Accordingly, ordinarily little or no cost or other data supporting the price of the winner of the competitive bid would be necessary.

On the other hand, negotiated contracts are the result of a give and take process between the government's contracting officer and the potential contractor. As such the contracting officer must be able to obtain backup data for the contractor's price-generally called cost or pricing data-in order to satisfy himself of the reasonableness of the price charged. Such requirements for supporting data are codified in the so-called "Truth in Negotiations Act" and in the Armed Services Procurement Regulations. Waivers of such requirements are to be made only in exceptional cases.

As of January 1, 1973, all bulk purchases of petroleum products by the Defense Fuel Supply Center were made by advertised invitations for bid and by public awards. However, in May of 1973, procurement moved to a negotiated basis. After the Arab embargo of October 1973 and the passage of the Emergency Petroleum Allocation Act in January 1974 these negotiated contracts were mandated.

Despite having procured products on a negotiated basis since May of 1973, DFSC did not request cost or pricing data from the oil companies until September, 1974. The oil companies refused to supply the data and an impasse resulted in December.

With the year drawing to a close and contracts running out, the controversy between the Department of Defense and the oil companies had reached the point that there arose the possibility that some petroleum supplies to the military might be interrupted. At this point the Subcomiittee took an active role in assuring uninterrupted supplies as well as seeking an accommodation between the Department of Defense and the oil companies.

In the course of its activities Subcommittee staff began to make an intensive review of the petroleum procurement policies of the military. The following are the staff's findings and recommendations:

FINDINGS

1. The Defense Fuel Supply Center, prior to 1973, had established a policy of buying petroleum products and particularly jet fuel for military aircraft on a short-term basis by advertised bids. This was

done to obtain the lowest possible prices. This policy contained inherent risks if short supplies and rising prices were encountered. The DFSC failed to recognize in 1973 that a market change in this direction was imminent and DFSC failed to plan or provide for such a contingency.

2. DESČ purchasing personnel were accustomed to handling advertised bids and had little training and experience in direct negotiations with suppliers. They were unprepared to negotiate with suppliers and thus obtain the lowest possible price for the government. Review of DFSC contract files by the Defense Supply Agency, the General Accounting Office and by the Subcommittee staff all disclosed a failure of DFSC personnel to document their price negotiations with suppliers as well as a failure to show how they determined price reasonableness. These conditions had been noted by the Defense Supply Agency in audits conducted in 1974 and before, and they continued throughout 1974. A General Accounting Office survey also found that in all contracts reviewed for the November December period of 1973 the contracting officer had accepted the first price offered by the petroleum supplier with no apparent evidence of any real negotiations.

3. Audits by Defense Supply Agency had disclosed a long-standing deficiency in DFSC's operations in its failure to have available qualified personnel to perform analyses of cost and pricing data and market data for use in determining price reasonableness. This deficiency existed long before 1973 and continued into 1975.

4. Prior to the fall of 1974, DFSC had continually failed to require potential contractors to supply cost or pricing data under the Truth in Negotiations Act and the Armed Services Procurement Regulations and had consistently permitted contractors to avoid supplying such data by obtaining waivers for them even though the Act calls for such waivers only in "exceptional cases."

5. Prior to the fall of 1974, DFSC had erroneously determined fair and reasonable prices to a large extent from trade publications rather · than requiring potential contractors to submit backup data as required by law. Audits of DFSC by the Defense Supply Agency had repeatedly criticized DFSC for their failure to get proper data directly from the suppliers and for reliance on trade publications data. Trade publications data in many cases does not represent real transactions but only bid and asked prices. DFSC persisted in using trade publication data to justify prices in July 1974 even though it was specifically instructed by DSA earlier in 1974 that this procedure was not proper.

6. In 1974, the procurement of petroleum products by DFSC was governed by regulations and allocations of the Federal Energy Administration, but the personnel of DFSC failed to acquaint themselves with the regulations applicable to the purchases they were making.

7. DFSC did not attempt to obtain in 1974 specific information from either oil companies or from the domestic airlines as to quantities and prices of jet fuel sold by major oil companies to the airlines to compare with the prices the major oil companies were charging the Government. DFSC proceeded in July 1974 to award contracts based on trade publications without data from suppliers despite DSA's recommendations to the contrary.

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