B-132721, SEP. 4, 1957

B-132721: Sep 4, 1957

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UNITED STATES ATOMIC ENERGY COMMISSION: REFERENCE IS MADE TO THE GENERAL MANAGER'S LETTER OF AUGUST 16. IT IS STATED THAT IN PREVIOUS YEARS COAL FOR HANFORD HAS BEEN PROCURED FROM MORE THAN ONE SUPPLIER. IT APPEARS THAT CERTAIN COAL MINES WHICH HAVE HERETOFORE SUPPLIED COAL TO HANFORD MAY BE REQUIRED TO CLOSE DOWN. IT IS POINTED OUT THAT THE CLOSING OF THESE MINES WOULD NARROW COMPETITION FOR FUTURE COAL PROCUREMENT AND COULD RESULT IN HIGHER FUTURE PRICES. IT IS ALSO POINTED OUT THAT A SO-CALLED "PRICE PROTECTION" CLAUSE IN THE KEMMERER CONTRACT. THE "PRICE PROTECTION" CLAUSE IS SAID TO HAVE BEEN DESIGNED FOR USE IN CONTRACTS CONTAINING PRICE ESCALATION PROVISIONS. WE ARE ASKED WHETHER WE WOULD BE REQUIRED TO OBJECT TO THIS PROCEDURE.

B-132721, SEP. 4, 1957

TO HONORABLE LEWIS L. STRAUSS, CHAIRMAN, UNITED STATES ATOMIC ENERGY COMMISSION:

REFERENCE IS MADE TO THE GENERAL MANAGER'S LETTER OF AUGUST 16, 1957, CONCERNING THE CONTRACT ENTERED INTO BETWEEN THE GENERAL ELECTRIC COMPANY AND THE KEMMERER COAL COMPANY FOR FURNISHING COAL TO THE COMMISSION'S HANFORD FACILITY DURING FISCAL YEAR 1958.

IT IS STATED THAT IN PREVIOUS YEARS COAL FOR HANFORD HAS BEEN PROCURED FROM MORE THAN ONE SUPPLIER. AS A RESULT OF THE AWARD OF ONLY ONE CONTRACT FOR THE FISCAL YEAR 1958, IT APPEARS THAT CERTAIN COAL MINES WHICH HAVE HERETOFORE SUPPLIED COAL TO HANFORD MAY BE REQUIRED TO CLOSE DOWN, INCLUDING THE TWO MINES CLOSEST TO HANFORD. IT IS POINTED OUT THAT THE CLOSING OF THESE MINES WOULD NARROW COMPETITION FOR FUTURE COAL PROCUREMENT AND COULD RESULT IN HIGHER FUTURE PRICES. IT IS ALSO POINTED OUT THAT A SO-CALLED "PRICE PROTECTION" CLAUSE IN THE KEMMERER CONTRACT, UNDER WHICH PURCHASES AT LOWER PRICES MAY BE MADE FROM OTHER SUPPLIERS UNLESS KEMMERER MEETS SUCH LOWER PRICES, HAS CAUSED A PRICE WAR, RESULTING IN THREE REDUCTIONS IN THE ORIGINAL CONTRACT PRICE BY KEMMERER TO MEET OFFERS BY ONE OF THE UNSUCCESSFUL BIDDERS. THE "PRICE PROTECTION" CLAUSE IS SAID TO HAVE BEEN DESIGNED FOR USE IN CONTRACTS CONTAINING PRICE ESCALATION PROVISIONS, RATHER THAN IN FIRM PRICE CONTRACTS SUCH AS THE KEMMERER CONTRACT.

THE GENERAL MANAGER'S LETTER SUGGESTS THAT IN ORDER TO ALLEVIATE THE PRESENT SITUATION WHICH THREATENS ECONOMIC DISTRESS TO CERTAIN COAL COMMUNITIES IN THE NORTHWEST AND TO ELIMINATE THE CONDITIONS CONDUCIVE TO A PRICE WAR IN THE COAL INDUSTRY IN THAT AREA, IT MIGHT BE POSSIBLE TO MAKE SOME PURCHASES DURING FISCAL 1958 FROM THE UNSUCCESSFUL BIDDERS. SUCH PURCHASES FROM OTHERS WOULD BE MADE AT THE LOWEST PRICE KEMMERER HAS OFFERED TO MEET AND WOULD NOT EXCEED 200,000 TONS. KEMMERER WOULD BE ASKED TO AGREE TO AN APPROPRIATE AMENDMENT TO ITS CONTRACT, WHICH WOULD ALSO DELETE THE "PRICE PROTECTION" CLAUSE AND PROVIDE FOR PAYMENT TO KEMMERER AT THE ORIGINAL CONTRACT RATE. IN THE ABSENCE OF AGREEMENT BY KEMMERER, ITS CONTRACT WOULD BE PARTIALLY TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT UNDER PARAGRAPH 16 OF THE CONTRACT. WE ARE ASKED WHETHER WE WOULD BE REQUIRED TO OBJECT TO THIS PROCEDURE.

AS OUTLINED IN THE GENERAL MANAGER'S LETTER, IT APPEARS THAT IF THE SUGGESTED PROCEDURE CAN BE PUT INTO EFFECT THROUGH AMENDMENT OF THE KEMMERER CONTRACT BY AGREEMENT, THE OVERALL COST TO THE GOVERNMENT WILL NOT BE INCREASED. WE WOULD, THEREFORE, NOT OBJECT TO THIS COURSE OF ACTION. WITH RESPECT TO THE PARTIAL TERMINATION OF THE KEMMERER CONTRACT BY UNILATERAL ACTION, PARAGRAPH 16 OF THAT CONTRACT PERMITS THIS TO BE DONE

"* * * WHENEVER IT SHALL BE DETERMINED THAT SUCH ACTION IS FOR THE BEST INTERESTS OF THE UNITED STATES GOVERNMENT.'

WE, OF COURSE, ARE NOT IN A POSITION TO EVALUATE THE FACTORS IN THE EXISTING SITUATION WHICH MAY BE CONSIDERED AS HARMFUL TO THE BEST INTERESTS OF THE COMMISSION AND THE GOVERNMENT. IF THE COMMISSION MAKES A DETERMINATION UNDER PARAGRAPH 16 OF THE KEMMERER CONTRACT THAT THE INTERESTS OF THE UNITED STATES WOULD BEST BE SERVED BY PARTIAL TERMINATION OF THAT CONTRACT, WE WILL NOT QUESTION THE VALIDITY OF SUCH TERMINATION PAYMENT AS MAY BE NECESSARY.

WE SUGGEST, HOWEVER, BEFORE ANY TERMINATION ACTION IS TAKEN, THAT CONSIDERATION BE GIVEN TO THE QUESTION WHETHER THE KEMMERER CONTRACT IS IN FACT A "REQUIREMENTS" CONTRACT. PARAGRAPH 2 OF THE CONTRACT PROVIDES MERELY THAT KEMMERER AGREES TO SELL AND GENERAL ELECTRIC AGREES TO BUY A QUANTITY OF COAL NOT LESS THAN 39,660 NOR MORE THAN 476,000 TONS FOR THE CONTRACT PERIOD. UNDER THIS LANGUAGE, AND WITHOUT MORE, IT WOULD APPEAR THAT THE MAXIMUM QUANTITY OF COAL GENERAL ELECTRIC IS LEGALLY BOUND TO PURCHASE IS NO MORE THAN 39,660 TONS. IF THE SAME CONTRACT PROVISIONS HAVE BEEN USED IN THE PAST IN MULTIPLE AWARD CONTRACTS TO KEMMERER AND OTHERS, AND IF, AS STATED IN THE FOOTNOTE ON PAGE 2 OF THE GENERAL MANAGER'S LETTER, THE 40,000 TON MINIMUM WAS INSERTED IN THE CONTRACT TO FIX GENERAL ELECTRIC'S OBLIGATION TO PURCHASE, IT SEEMS POSSIBLE THAT THE CONTRACT AS A WHOLE MAY BE CONSTRUED AS OBLIGATING GENERAL ELECTRIC TO PURCHASE NO MORE THAN THAT QUANTITY FROM KEMMERER.