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I. INTRODUCTION

The Department of Defense, through the Defense Fuel Supply Center of the Defense Supply Agency, purchases refined petroleum products required to service United States military forces throughout the world. These supplies are currently purchased on a 6-month basis from both domestic oil suppliers and the largest multinational oil companies.

THE SUBCOMMITTEE'S JURISDICTION

On March 1, 1974, the 93d Congress, 2d session, adopted Senate Resolution 269, which charged the Senate Permanent Subcommittee on Investigations of the Committee on Government Operations with authority to investigate the efficiency, economy and effectiveness of all agencies and departments of the Government involved in the control and management of energy shortages. The Subcommittee was also directed to examine the pricing of energy in all forms and the management of tax, import, pricing, and other policies affecting energy supplies. This Subcommittee authority was extended to the 94th Congress by S. Res. 111, adopted March 17, 1975.

THE SCOPE AND PURPOSE OF THE STAFF STUDY

The Subcommittee has studied the profits, prices, taxes and activities of the major oil companies since mid-1973.

In November 1973 the Subcommittee issued a staff study and held hearings on causes of fuel shortages prior to the Arab embargo, with a detailed examination being made of advice given to the executive branch by the major oil companies with regard to imports, petroleum shortages and other pertinent matters. An analysis was also made of refinery runs and how they contributed to the shortages.

In January 1974 representatives of the seven largest United States oil companies presented three days of testimony before the Subcommittee on the accuracy of statistical data supplied the government as well as information on inventories, imports, refinery runs, stocks of crude oil and refined petroleum products, taxes, profits, international dealings and many other matters.

In April 1974 the Subcommittee held hearings on the responsibilities of the Department of Defense and the major oil companies in the cutoff of oil to our military-especially our Sixth Fleet-in the aftermath of the 1973 Arab-Israeli War.

In November 1974 the Subcommittee released a staff study, based on the tax returns of the seven largest oil companies for 1968-1972 which showed that for each of these years the seven major oil companies aggregated had an effective tax rate-the percentage of net income actually paid in federal income taxes-of 5 percent or less.

In December 1974 the Subcommittee began to study the possibility of the cutoff of oil to our military by the major oil companies-particularly to overseas locations-because the companies refused to sign contracts with clauses requiring the submission of cost and pricing data and the adherence to cost accounting standards.

The Subcommittee, through numerous meetings and exchanges with personnel of DOD and other governmental agencies and representatives of the major oil companies, was able to act as a catalyst to insure the uninterrupted flow of oil to the military.

In the course of this investigation, the Subcommittee began to study whether the Government was paying a reasonable price for the petroleum products it purchased under military procurement practices. This was of particular concern because of the apparent failure of responsible procurement personnel to obtain relevant data on the prices charged from the oil companies making sales to the Department of Defense. Such data would have assisted government contracting officers in determining price reasonableness.

In probing this price question, Subcommittee staff examined records of the Office of Installations and Logistics, of the Assistant Secretary of Defense, the Defense Supply Agency, of the Department of Defense, the Defense Fuel Supply Center of the Defense Supply Agency, the Federal Energy Administration, and the Cost Accounting Standards Board.

The staff study draws on these documents, interviews and other materials to present an insight into the petroleum procurement practices of the Department of Defense.

II. THE MAGNITUDE OF DEFENSE OIL PURCHASES

The Defense Fuel Supply Center (DFSC) of the Defense Supply Agency (DSA) of the Department of Defense is the worldwide, integrated materiel manager of bulk petroleum products for the Department of Defense. DFSC has the responsibility to buy, store and transport petroleum products for the many agencies of the Defense establishment. The Center is located at Cameron Station, Virginia. The number of awards and their dollar value for the Center for the period 1965 through 1975 are listed below. The awards include the purchase of petroleum products and service contracts for the storage and transportation of the products.

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The table demonstrates the increasing cost of petroleum products. For example, the dollar value of petroleum products to be purchased in 1975 is more than twice as much as the fuel purchased by the Defense Department at the height of the Vietnam War.

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50-191-75-2

III. A SHIFT FROM COMPETITIVE BID TO NEGOTIATED CONTRACTS NECESSITATES DATA SUPPORTING PRICE REASONABLENESS

THE GOVERNING STANDARDS

The Armed Services Procurement Regulations (ASPR) provide that when contracts are awarded on the basis of advertised competitive bids or when there is adequate competition, little is required to justify the reasonableness of the price. However, when competition is limited or is absent-as in the case of negotiated contracts-it is necessary that the reasonableness of the price be supported. The most satisfactory method of determining whether the price is fair and reasonable is to have the contractor submit detailed information as to what his inhouse costs are going to be and what prices he will have to pay for purchased material and services. With this data in hand, Government officials can negotiate with the contractor on an equal footing. This is the preferred method but, as seen below, the Government sometimes accepts less detailed information and in other situations will waive such requirements entirely.

The requirements for providing such data supporting prices charged the government in negotiated contracts stem from the Truth in Negotiations Act.

The Truth in Negotiations Act (10 U.S.C. 2306) requires that a contractor submit in writing, prior to the award of any negotiated contract of $100,000 or more, cost or pricing data and to certify that the cost or pricing data submitted is accurate, complete and current.1 ASPR 3-807 reiterates this requirement and form DD-663 "Contract Pricing Proposal" is designed for the submission of such cost or pricing data. Since contracts are negotiated on the basis of the data submitted, all contracts (except those exempted or subject to waivers) contain a clause that if the data submitted is inaccurate, incomplete or noncurrent, the price shall be appropriately adjusted. (10 U.S.C. 2306 (f) (4).)

However, a potential contractor may be exempt from the Truth in Negotiations Act if there are:

(1) Established catalog prices of commercial items sold in substantial quantities to the general public;

(2) Established market prices of commercial items sold in substantial quantities to the general public; and

(3) Prices set by law or regulation.2

1 For further disclosure and uniformity in procurement Congress, in 1970. created & Cost Accounting Standards Board to promulgate uniform Cost Accounting Standards for those contracting with the government for its defense needs. The Standards had to be followed in negotiated contracts, with exemptions paralleling those in the Truth in Negotlations Act. Contractors were also required to disclose their cost accounting methods as a condition for contracting and had to agree to price adjustments for failure to comply with cost standards. (See 50 App. U.S.C. 2168).

The same exemptions are provided for the Cost Accounting Standards. (See footnote 1).

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