B-151248, APRIL 26, 1963, 42 COMP. GEN. 595

B-151248: Apr 26, 1963

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THE COST OF REPAIRING A DAMAGED TURBINE FURNISHED BY THE MANUFACTURER AND LITIGATION BY THE ELECTRIC COOPERATIVE TO RECOVER SUCH COSTS ARE INCLUDED IN THE PURCHASE PRICE AND CHARGED TO THE SOUTHWESTERN POWER ADMINISTRATION CONTINUING FUND. THE FACTS GIVING RISE TO THE QUESTION ARE SET FORTH BELOW. IT WAS MUTUALLY AGREED THAT N.W. THE ADMINISTRATIVE ASSISTANT SECRETARY STATES THAT THE CONTRACT PRICE TO BE PAID BY SPA WAS SUBJECT TO ADJUSTMENT AND COMPUTED TO REIMBURSE N.W. IN SEPTEMBER 1960 IT WAS DISCOVERED THAT ONE OF THE 20. MAINTAINED THAT THE DEFECT WAS DUE TO FAULTY DESIGN AND UNDER PROTEST CONTRACTED WITH WESTINGHOUSE FOR THE REPAIR OF THE TURBINE. IT IS STATED IN THE LETTER THAT SUCH PAYMENTS BY SPA WERE PROPERLY CHARGED AGAINST THE CONTINUING FUND AS PART OF THE COST OF PURCHASING POWER.

B-151248, APRIL 26, 1963, 42 COMP. GEN. 595

APPROPRIATIONS - INTERIOR DEPARTMENT - AVAILABILITY - LITIGATION COSTS INCIDENT TO BENEFICIAL INTEREST WHERE UNDER A POWER PURCHASE CONTRACT, SUBJECT TO PRICE ADJUSTMENT AND REIMBURSEMENT FOR PLANT OPERATION AND MAINTENANCE COSTS, INCLUDING OVERHEAD AND ADMINISTRATION, THE COST OF REPAIRING A DAMAGED TURBINE FURNISHED BY THE MANUFACTURER AND LITIGATION BY THE ELECTRIC COOPERATIVE TO RECOVER SUCH COSTS ARE INCLUDED IN THE PURCHASE PRICE AND CHARGED TO THE SOUTHWESTERN POWER ADMINISTRATION CONTINUING FUND, THE ADMINISTRATION, WHEN THE CONTRACT BECOMES INOPERATIVE, ALTHOUGH NOT A PARTY TO THE ACTION, HAVING A BENEFICIAL INTEREST MAY ARRANGE TO REIMBURSE THE ATTORNEYS TO CONTINUE THE LITIGATION, AND THE LITIGATION COSTS HAVING ARISEN INCIDENT TO THE PURCHASE OF THE POWER MAY BE CONSIDERED ADJUSTMENT OF THE CONTRACT PRICE AND CHARGED TO THE CONTINUING FUND, PROVIDED THE ELECTRIC COOPERATIVE AGREES NOT TO RETAIN ANY PART OF THE SUM RECOVERED INCIDENT TO THE TRIAL OR SETTLEMENT OF THE CASE.

TO THE SECRETARY OF THE INTERIOR, APRIL 26, 1963:

LETTER OF APRIL 5, 1963, FROM THE ADMINISTRATIVE ASSISTANT SECRETARY OF THE INTERIOR PRESENTS THE FOLLOWING QUESTION FOR OUR DECISION:

WOULD YOU BE REQUIRED TO OBJECT TO PAYMENT OUT OF THE SOUTHWESTERN POWER ADMINISTRATION CONTINUING FUND OR O AND M APPROPRIATIONS TO REIMBURSE ATTORNEYS RETAINED BY N.W. ELECTRIC COOPERATIVE FOR COSTS INCURRED INCIDENT TO THE TRIAL OR SETTLEMENT OF A CASE INVOLVING N.W. AND WESTINGHOUSE ELECTRIC CORPORATION WHEREIN SOUTHWESTERN POWER ADMINISTRATION, ALTHOUGH NOT A PARTY TO THE ACTION, NEVERTHELESS HAS A BENEFICIAL INTEREST?

THE FACTS GIVING RISE TO THE QUESTION ARE SET FORTH BELOW.

UNDER THE SOUTHWESTERN POWER ADMINISTRATION (SPA/-N.W. ELECTRIC POWER COOPERATIVE, INC. (N.W.) CONTRACT OF NOVEMBER 23, 1949 (ISPA 296), IT WAS MUTUALLY AGREED THAT N.W. WOULD CONSTRUCT A 40,000 KILOWATT GENERATING PLANT AND THAT SPA WOULD PURCHASE THE OUTPUT OF SUCH PLANT. THE ADMINISTRATIVE ASSISTANT SECRETARY STATES THAT THE CONTRACT PRICE TO BE PAID BY SPA WAS SUBJECT TO ADJUSTMENT AND COMPUTED TO REIMBURSE N.W. FOR ALL COSTS INCURRED IN THE OPERATION AND MAINTENANCE OF THE INCLUDING OVERHEAD AND ADMINISTRATIVE COSTS.

IN SEPTEMBER 1960 IT WAS DISCOVERED THAT ONE OF THE 20,000 KILOWATT TURBINE GENERATORS PURCHASED BY N.W. FROM WESTINGHOUSE CONTAINED A CRACKED CASING. N.W. MAINTAINED THAT THE DEFECT WAS DUE TO FAULTY DESIGN AND UNDER PROTEST CONTRACTED WITH WESTINGHOUSE FOR THE REPAIR OF THE TURBINE. N.W. THEREAFTER BROUGHT SUIT AGAINST WESTINGHOUSE SEEKING RECOVERY OF THE COST OF REPAIRS PLUS CERTAIN DAMAGES.

BY LETTER DATED FEBRUARY 23, 1961, N.W. ADVISED SPA OF THE SUIT AGAINST WESTINGHOUSE AND REQUESTED APPROVAL OF A PROCEDURE OF ACCOUNTING FOR THE COSTS OF REPAIR UNDER THE SPA-N.W. CONTRACT. BY LETTER TO N.W. DATED MARCH 13, 1961, SPA AGREED TO THE PROPOSED ACCOUNTING PROCEDURE.

IN ACCORDANCE WITH THE PROCEDURES AGREED UPON, THE CONTRACT PRICE PAID BY SPA FOR THE OUTPUT OF N.W.'S THERMAL PLANT THEREAFTER INCLUDED COSTS INCURRED BY N.W. IN REPAIRING THE TURBINE AND IN CONDUCTING THE LITIGATION TO RECOVER SUCH COSTS. IT IS STATED IN THE LETTER THAT SUCH PAYMENTS BY SPA WERE PROPERLY CHARGED AGAINST THE CONTINUING FUND AS PART OF THE COST OF PURCHASING POWER. ON AUGUST 1, 1962, WHEN THE SPA-N.W. CONTRACT WAS RENDERED INOPERATIVE (BECAUSE OF THE SPA ASSOCIATED CONTRACT), PAYMENTS BY SPA TO N.W. CONNECTED WITH THE REPAIR OF THE TURBINE AND THE LAWSUIT AGAINST WESTINGHOUSE TOTALED $150,863.65, AS FOLLOWS:

CHART

COST OF TURBINE REPAIR- - - - - - - - - - - - - $126,185.43

COST OF LAWSUIT - - - - - - - - - - - - - - - - 12,134.86

COST OF CRATING, SHIPPING, ETC- - - - - - - - - 12,543.36

$150,863.65

BY LETTER DATED AUGUST 7, 1962, N.W. ADVISED SPA, IN EFFECT, THAT SINCE THE SPA-N.W. CONTRACT WAS NO LONGER OPERATIVE, SPA MUST PAY ALL COSTS INVOLVED IN PROCEEDING WITH THE LITIGATION IF SPA DESIRED THE CASE CONTINUED. IN OTHER WORDS, ACCORDING TO THE LETTER, N.W. HAD BEEN REIMBURSED FOR THE COSTS OF REPAIRING THE TURBINES AND HAD NO INCENTIVE TO CONTINUE THE LAWSUIT, PARTICULARLY SINCE SPA WOULD BE ENTITLED TO WHATEVER SUM WAS RECOVERED, AT LEAST TO THE AMOUNT OF REIMBURSEMENTS.

CONFERENCES BETWEEN THE OFFICE OF THE REGIONAL SOLICITOR, TULSA, AND THE ATTORNEYS RETAINED BY N.W. REVEALED THAT THESE ATTORNEYS WOULD BE WILLING TO CONTINUE THE SUIT ON A CONTINGENT FEE BASIS. BY MEMORANDUM DATED JANUARY 23, 1963, THE SOLICITOR AUTHORIZED THE REGIONAL SOLICITOR TO HAVE THE LITIGATION CARRIED ON IN THE NAME OF N.W., UNDER AN ARRANGEMENT WITH THE ATTORNEYS AND PURSUANT TO AGREEMENT BETWEEN N.W. AND SPA WHEREBY N.W. WILL PAY TO SPA ALL MONEYS RECEIVED FROM THE LITIGATION LESS THE AMOUNT OF THE CONTINGENT ATTORNEYS' FEES APPLICABLE TO ANY RECOVERY IN EXCESS OF $20,000 PREVIOUSLY OFFERED BY WESTINGHOUSE IN SETTLEMENT OF THE LAWSUIT.

ON FEBRUARY 6 THE REGIONAL SOLICITOR AND HIS ASSISTANT, AND A REPRESENTATIVE OF SPA, CONFERRED WITH N.W.'S ATTORNEYS IN KANSAS CITY. N.W.'S ATTORNEYS ESTIMATED THAT THE COST OF PREPARING FOR TRIAL AND CONTINUING THE SUIT IN N.W.'S NAME WOULD BE ABOUT $10,000 AND OFFERED TO CONTINUE THE LAWSUIT UNDER EITHER OF TWO ARRANGEMENTS:

(1) IF THE ATTORNEYS ADVANCE ALL NECESSARY COSTS OF CONTINUING THE SUIT, ANY RECOVERY IN EXCESS OF $20,000 (THE AMOUNT OFFERED IN SETTLEMENT) LESS THE COSTS ADVANCED BY THE ATTORNEYS, WOULD BE DIVIDED ON THE BASIS OF 50 PERCENT TO THE ATTORNEYS AND 50 PERCENT TO SPA; OR

(2) IF SPA ADVANCES ALL NECESSARY COSTS OF CONTINUING THE LAWSUIT BY REIMBURSING THE ATTORNEYS FOR EXPENDITURES MADE, ANY RECOVERY IN EXCESS OF $20,000, LESS COSTS ADVANCED BY SPA, WOULD BE DIVIDED ON THE BASIS OF 1/3 TO THE ATTORNEYS AND 2/3 TO SPA.

YOUR DEPARTMENT HAS BEEN ADVISED BY THE REGIONAL SOLICITOR THAT THE ARRANGEMENT PROVIDING FOR A CONTINGENT FEE OF 33 1/3 PERCENT WOULD BE OF ADVANTAGE TO THE GOVERNMENT AND THAT SPA SHOULD PROCEED ON THAT BASIS IF FUNDS ARE AVAILABLE FROM WHICH PAYMENTS CAN BE MADE TO N.W.'S ATTORNEYS TO REIMBURSE THEM FOR THE COST OF CONTINUING THE LAWSUIT.

THE APPROPRIATION PROVISIONS REFERRED TO IN THE ADMINISTRATIVE ASSISTANT SECRETARY'S LETTER ARE CONTAINED IN THE PUBLIC WORKS APPROPRIATION ACT, 1963, APPROVED OCTOBER 24, 1962, PUBLIC LAW 87-880, 76 STAT. 1216, 1223, 1224, AND PROVIDE AS FOLLOWS:

OPERATION AND MAINTENANCE

FOR NECESSARY EXPENSES OF OPERATION AND MAINTENANCE OF POWER TRANSMISSION FACILITIES OF MARKETING ELECTRIC POWER AND ENERGY PURSUANT TO THE PROVISIONS OF SECTION 5 OF THE FLOOD CONTROL ACT OF 1944 (16 U.S.C. 825S), AS APPLIED TO THE SOUTHWESTERN POWER AREA, INCLUDING PURCHASE OF NOT TO EXCEED FOUR PASSENGER MOTOR VEHICLES FOR REPLACEMENT ONLY, $1,450,000.

CONTINUING FUND

NOT TO EXCEED $5,000,000 SHALL BE AVAILABLE DURING THE CURRENT FISCAL YEAR FROM THE CONTINUING FUND FOR ALL COSTS IN CONNECTION WITH THE PURCHASE OF ELECTRIC POWER AND ENERGY, AND RETAILS FOR THE USE OF TRANSMISSION FACILITIES.

HAD THE CONTRACT IN QUESTION (ISPA-296) NOT BEEN RENDERED INOPERATIVE ON AUGUST 1, 1962, THE COSTS INVOLVED HERE WOULD HAVE BEEN PAID FROM THE "CONTINUING FUND," IN CONNECTION WITH THE PURCHASE OF POWER, BY INCLUDING SUCH COSTS IN THE CONTRACT PRICE BE PAID BY SPA TO N.W. FOR POWER IN THE YEAR SUCH COSTS WERE PAID BY N.W. WHILE THIS CONTRACT IS NOW INOPERATIVE AND THE PURCHASE OF POWER OR RENTAL OF TRANSMISSION LINES, AS SUCH, IS NOT INVOLVED, THE COST IN QUESTION AROSE INCIDENT TO THE PURCHASE OF POWER UNDER THE CONTRACT. THUS, PAYMENT OF SUCH COST MAY, IN EFFECT, BE CONSIDERED AN ADJUSTMENT OF THE CONTRACT PRICE.

THEREFORE, AND IN VIEW OF THE FACTS AND CIRCUMSTANCES SET FORTH IN THE ADMINISTRATIVE ASSISTANT SECRETARY'S LETTER, WE WOULD NOT OBJECT, IN THIS INSTANCE, TO THE USE OF THE "CONTINUING FUND" TO REIMBURSE ATTORNEYS RETAINED BY N.W. FOR COSTS INCURRED INCIDENT TO THE TRIAL OR SETTLEMENT OF A CASE INVOLVING N.W. AND WESTINGHOUSE ELECTRIC CORPORATION WHEREIN SOUTHWESTERN POWER ADMINISTRATION, ALTHOUGH NOT A PARTY TO THE ACTION, HAS A BENEFICIAL INTEREST, PROVIDED THAT N.W. AGREES IT WILL RETAIN NO PART OF ANY SUM RECOVERED INCIDENT TO TRIAL OR SETTLEMENT OF THE CASE.