B-155720, MAR. 10, 1965

B-155720: Mar 10, 1965

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TO THE HONORABLE SECRETARY OF AGRICULTURE: WE HAVE RECEIVED A LETTER DATED DECEMBER 7. 12/61 ): "* * * RATE REDETERMINATIONS * * * SHALL BE MADE IN ACCORDANCE WITH THE STANDARD METHOD IN USE BY THE FOREST SERVICE FOR TIMBER APPRAISALS * * THE QUESTION FOR RESOLUTION IS WHETHER THE REFERENCE TO A STANDARD METHOD OF TIMBER APPRAISALS SHOULD PROPERLY BE READ AS PERTAINING TO THE METHOD IN USE AT THE TIME OF ADVERTISEMENT OR AT THE TIME OF RATE REDETERMINATION. WHEN APPRAISAL PROCEDURES HAVE BEEN MODIFIED DURING THE INTERVENING PERIOD. YOUR LETTERS STATE THAT PRIOR TO JULY OF 1962 AN ALL-SPECIES AVERAGE MANUFACTURING COST WAS USED TO COMPUTE STUMPAGE RATES. AS A RESULT OF WHICH THE STUMPAGE RATES FOR "DIMENSION SPECIES" WERE INCREASED APPROXIMATELY $4.00 PER THOUSAND BOARD FEET AND THE STUMPAGE RATES FOR "BOARD SPECIES" WERE REDUCED BY ABOUT THE SAME AMOUNT.

B-155720, MAR. 10, 1965

TO THE HONORABLE SECRETARY OF AGRICULTURE:

WE HAVE RECEIVED A LETTER DATED DECEMBER 7, 1964, SIGNED BY THE ASSISTANT SECRETARY, AND A SUPPLEMENTAL LETTER DATED FEBRUARY 9, 1965, WITH ATTACHMENTS, REQUESTING ON BEHALF OF THE FOREST SERVICE OUR VIEWS AS TO THE PROPER INTERPRETATION OF THE FOLLOWING LANGUAGE SET FORTH AT PARAGRAPH 3.B.2 IN THE STANDARD SCHEDULED RATE REDETERMINATION CLAUSE OF TIMBER SALE CONTRACTS (2400-2, P.3A (2), 12/61 ):

"* * * RATE REDETERMINATIONS * * * SHALL BE MADE IN ACCORDANCE WITH THE STANDARD METHOD IN USE BY THE FOREST SERVICE FOR TIMBER APPRAISALS * *

THE QUESTION FOR RESOLUTION IS WHETHER THE REFERENCE TO A STANDARD METHOD OF TIMBER APPRAISALS SHOULD PROPERLY BE READ AS PERTAINING TO THE METHOD IN USE AT THE TIME OF ADVERTISEMENT OR AT THE TIME OF RATE REDETERMINATION, WHEN APPRAISAL PROCEDURES HAVE BEEN MODIFIED DURING THE INTERVENING PERIOD.

YOUR LETTERS STATE THAT PRIOR TO JULY OF 1962 AN ALL-SPECIES AVERAGE MANUFACTURING COST WAS USED TO COMPUTE STUMPAGE RATES. AT THAT TIME THE FOREST SERVICE CHANGED TO AN INDIVIDUAL SPECIES COST BASIS FOR CERTAIN SPECIES, AS A RESULT OF WHICH THE STUMPAGE RATES FOR "DIMENSION SPECIES" WERE INCREASED APPROXIMATELY $4.00 PER THOUSAND BOARD FEET AND THE STUMPAGE RATES FOR "BOARD SPECIES" WERE REDUCED BY ABOUT THE SAME AMOUNT. SEVEN TIMBER PURCHASERS IN WESTERN MONTANA AND NORTHERN IDAHO WHOSE CONTRACTS WERE EXECUTED PRIOR TO JULY 1, 1962, HAVE OBJECTED TO THE APPLICATION OF THE NEW SAWING COST FORMULA TO REDETERMINATIONS OF THEIR CONTRACTUAL OBLIGATIONS AND HAVE THREATENED TO CARRY THEIR PROTESTS TO THE COURTS.

UNDER THE PROVISIONS OF 16 U.S.C. 476, THE SECRETARY OF AGRICULTURE MAY SELL TIMBER FROM THE NATIONAL FORESTS FOR NOT LESS THAN THE APPRAISED VALUE THEREOF. TO IMPLEMENT THIS AUTHORITY, A REGULATION, PUBLISHED AT 36 CFR 221.7, REQUIRES:

"ALL SALE CONTRACTS EXCEEDING FIVE YEARS IN DURATION, AND THOSE OF SHORTER DURATION TO THE EXTENT FOUND DESIRABLE BY THE OFFICER AUTHORIZING THE SALE, WILL PROVIDE FOR THE REDETERMINATION OF RATES FOR STUMPAGE * * * AT INTERVALS ORDINARILY OF NOT MORE THAN THREE YEARS, AND OF NOT MORE THAN FIVE YEARS IN ANY CASE, * * *"

WE UNDERSTAND THAT AN APPRAISAL IS MADE OF THE MARKET VALUE OF THE TIMBER TO BE SOLD PRIOR TO ADVERTISING FOR BIDS. THE APPRAISED VALUE MINUS THE ESTIMATED COSTS OF PRODUCTION EQUALS THE CONVERSION VALUE. AFTER DEDUCTION OF A MARGIN FOR PROFIT AND RISK TO THE PURCHASER THE REMAINDER IS THE INDICATED STUMPAGE VALUE OR RETURN TO THE GOVERNMENT UNDER THE PROPOSED CONTRACT. THE REDETERMINATION PROVISION IS DESIGNED TO PERIODICALLY ADJUST CONTRACT STUMPAGE RATES IN ORDER TO BRING THEM INTO LINE WITH CURRENT MARKET VALUE.

THE RECORD BEFORE US, INCLUDING EXCERPTS FROM THE FOREST SERVICE APPRAISAL HANDBOOK WHICH IS AVAILABLE FOR DISTRIBUTION TO TIMBER PURCHASERS UPON REQUEST, DEMONSTRATES THAT DURING MORE THAN FIFTY YEARS OF ADMINISTRATION OF TIMBER SALES CONTRACTS THE FOREST SERVICE HAS CONSISTENTLY TAKEN THE POSITION THAT RATE REDETERMINATIONS WOULD BE MADE UPON THE BASIS OF APPRAISAL PROCEDURES CURRENTLY IN USE AT THE REDETERMINATION DATE. THIS POLICY APPEARS TO BE AN OUTGROWTH OF THE CONVENIENCE INHERENT IN NOT HAVING TO MAINTAIN SIMULTANEOUSLY A MULTIPLICITY OF APPRAISAL TECHNIQUES, THE LOGIC THAT IN THEORY AT LEAST A PARTICULAR STAND OF TIMBER CAN HAVE ONLY ONE FAIR MARKET VALUE AT ANY GIVEN TIME, AND THE INEVITABILITY OF EVOLUTION IN APPRAISAL PROCEDURES CORRESPONDING TO TECHNOLOGICAL ADVANCES AND ACCOUNTING REFINEMENTS PRACTICED BY THE AVERAGE EFFICIENT OPERATOR IN THE VARIOUS LUMBERING AREAS.

ATTORNEYS FOR THE SEVEN TIMBER PURCHASERS HAVE ARGUED THAT THE CONTRACTUAL LANGUAGE UNDER CONSTRUCTION IS AMBIGUOUS REQUIRING THE ADDITION OF A PHRASE SUCH AS EITHER "AT THE TIME OF ADVERTISEMENT" OR "AT THE TIME OF RATE REDETERMINATION" TO MODIFY "IN USE.' THEY ASSERT THAT ANY DEFECT IN THE LANGUAGE OF A CONTRACT PREPARED BY THE GOVERNMENT MUST BE CONSTRUED AGAINST THE GOVERNMENT.

IT HAS BEEN BROUGHT TO OUR ATTENTION THAT THE FOREST SERVICE HAS MADE MANY CHANGES IN APPRAISAL PROCEDURES OVER THE YEARS, CONSISTENTLY APPLYING THE REVISED METHODS TO REDETERMINATIONS OF OBLIGATIONS UNDER PRE-EXISTING SALES. THE EFFECT OF THE APPLICATION OF THESE REFINEMENTS HAS VARIED, SOME TOTALLY BENEFITING THE TIMBER PURCHASER WITHOUT COMPENSATING BENEFIT TO THE GOVERNMENT, SOME FAVORING TIMBER PURCHASERS ON CERTAIN SALES, BUT NOT ON OTHERS. FOR EXAMPLE, WE SEE BY THE RECORD THAT OF THE TWENTY-TWO OTHER SALES EXECUTED IN REGION 1 PRIOR TO JULY 1, 1962, WHERE RATE REDETERMINATIONS ARE SCHEDULED IN THE NEAR FUTURE, USE OF THE "VARIABLE" METHOD RATHER THAN THE "EQUAL" METHOD FOR DETERMINING MANUFACTURING COSTS WILL YIELD THE GOVERNMENT HIGHER STUMPAGE REVENUE ON TEN SALES, LOWER STUMPAGE REVENUE ON FIVE SALES, AND BASE RATES ON SEVEN SALES. TWO OF THE SEVEN COMPANIES PRESENTLY PROTESTING THE APPLICATION OF THE "VARIABLE" METHOD TO REDETERMINATIONS OF THEIR CONTRACTUAL OBLIGATIONS WILL ACTUALLY BE BENEFITED BY THIS CHANGE IN APPRAISAL TECHNIQUES UPON THE FUTURE REDETERMINATION OF ONE EACH OF THEIR RESPECTIVE TIMBER PURCHASES. (EVERGREEN PRODUCTS COMPANY AND VENEERS, INCORPORATED.)

THE RECORD ALSO SHOWS THAT A BROAD BASE OF TIMBER PURCHASERS HAVE BEEN MADE AWARE OF THE FOREST SERVICE POLICY OF UTILIZING ONLY CURRENT APPRAISAL METHODS IN REDETERMINING STUMPAGE RATES UNDER ANTECEDENT SALES CONTRACTS. THUS MANY TIMBER PURCHASERS HAVE BENEFITED FROM THE INTRODUCTION OF THE SO-CALLED "SALE AS A WHOLE APPRAISAL" TECHNIQUE, A RECENT CHANGE IN THE METHOD OF DETERMINING PROFIT MARGINS WHICH HAS ENTIRELY FAVORED THE INTERESTS OF BUYERS AT THE EXPENSE OF THE GOVERNMENT. "SALE AS A WHOLE" HAS BEEN APPLIED TO ALL SALES AND RATE REDETERMINATIONS SINCE MID-1962. BY THIS RULE ANY EXCESS IN THE CONVERSION RETURN AVAILABLE FROM THE SALE OF HIGH VALUE TIMBER OVER THE MINIMUM PERMISSIBLE STUMPAGE RATE OF $2 PER THOUSAND BOARD FEET MAY BE ALLOCATED TO COMPENSATE FOR WHATEVER DEFICIENCY IN CONVERSION RETURN IS SUSTAINED ON THE SALE OF LOW VALUE TIMBER WITHIN THE CONTEXT OF THE SAME TRANSACTION TO THE EXTENT NECESSARY TO ASSURE THE PURCHASER A FAIR PROFIT ON THE LATTER PART OF THE BARGAIN. WE NOTICE THAT THE STUMPAGE RATE OF ONE OF THE SEVEN PROTESTANTS, THE AMERICAN TIMBER COMPANY, UNDER A SALE EXECUTED IN REGION 1 ON OCTOBER 20, 1961, WAS REDUCED UPON REDETERMINATION IN APRIL OF 1964, AS THE DIRECT RESULT OF THE APPLICATION OF THIS APPRAISAL INNOVATION. STUMPAGE RATES UNDER FOUR ADDITIONAL SALES MADE PRIOR TO JULY OF 1962 TO DIFFERENT PURCHASERS WHICH HAVE NOT YET BEEN REDETERMINED WILL BE AFFECTED BY THE RULE.

SIMILARLY, WHEN THE FOREST SERVICE SHIFTED ITS APPRAISAL BASIS FROM A LOG TO A LUMBER AND PLYWOOD SELLING VALUE BASIS IN THE DOUGLAS-FIR REGION OF OREGON AND WASHINGTON IN 1957 THE INDUSTRY FAILED TO TAKE ISSUE WITH THE UTILIZATION OF THIS NEW PROCEDURE IN THE REDETERMINATION OF RATES UNDER PRE-EXISTING CONTRACTS BECAUSE STUMPAGE RATES WERE UNIFORMLY REDUCED THEREBY.

OTHER CHANGES IN APPRAISAL PROCEDURES WHICH HAVE BEEN APPLIED TO PRE- EXISTING SALES ARE: RAILROAD AND STEAM DONKEY LOGGING CHANGED TO TRUCK AND TRACTOR LOGGING; REFLECTION OF PULP CHIP VALUES; GREEN LUMBER CHANGED TO AIR-DRY, THEN TO KILN-DRIED LUMBER, AS END PRODUCTS; CIRCULAR SAWMILLS CHANGED TO MORE EFFICIENT BAND MILLS; RAILROAD TIES CHANGED TO LUMBER AS AN END PRODUCT; INVESTMENT METHOD OF APPRAISAL CHANGED TO VALUATION FACTOR METHOD, THEN TO PROFIT RATIO METHOD.

IT IS OBVIOUS FROM THE ABOVE DISCUSSION THAT THE FOREST SERVICE HAS CONSISTENTLY APPLIED MODIFICATIONS IN APPRAISAL PROCEDURES TO STUMPAGE RATE REDETERMINATIONS ON PRE-EXISTING SALES. IT HAS BEEN HELD THAT THE RULE REQUIRING AMBIGUOUS PROVISIONS OF A CONTRACT TO BE RESOLVED AGAINST THE DRAFTER IS ONE OF LAST RESORT TO BE INVOKED ONLY AFTER ORDINARY INTERPRETIVE GUIDES HAVE BEEN EXHAUSTED. BOSWELL V. CHAPEL, 298 F.2D 502 (1961); KESK INCORPORATED V. NATIONAL UNION INDEMNITY COMPANY, 224 F.SUPP. 766 (1963); HURD V. ILLINOIS BELL TELEPHONE COMPANY, 136 F.SUPP. 125 (1955), AFFIRMED 234 F.2D 942, CERTIORARI DENIED IN SEYBOLD V. WESTERN ELECTRIC COMPANY, 352 US 918, REHEARING DENIED 352 US 977; 17A CORPUS JURIS SECUNDUM SEC. 324; 3 CORBIN ON CONTRACTS SEC. 559. THE STEADFAST ADHERENCE OVER A LONG PERIOD OF TIME BY THE FOREST SERVICE TO THE AFOREMENTIONED POLICY AND THE NOTORIETY GIVEN THE POLICY IN THE FOREST SERVICE APPRAISAL HANDBOOK RENDER THIS POLICY A CUSTOM AND TRADE USAGE IN GOVERNMENT TIMBER SALES. THE EXISTENCE OF A TRADE USAGE WIDELY UNDERSTOOD BY THE INDUSTRY WILL TAKE PRECEDENCE OVER THE ARBITRARY RULE OF CONSTRUCTION IN THE ASCERTAINMENT OF THE PARTIES' INTENT. THOMPSON V. BALTIMORE AND OHIO RAILROAD COMPANY, 59 F.SUPP. 21 (1945), MODIFIED 155 F.2D 767, CERTIORARI DENIED 329 US 761; J. C. MILLETT COMPANY V. PARK AND TILFORD DISTILLERS CORPORATION, 123 F.SUPP. 484 (1954).

SINCE IT WOULD BE UNREASONABLE TO ASK THE INDUSTRY TO RELINQUISH BENEFITS OBTAINED FROM THE APPLICATION OF THESE VARIOUS MODIFICATIONS AND LIBERALIZATIONS OF THE APPRAISAL PROCEDURES TO REDETERMINATIONS OF PRE- EXISTING SALES, WE BELIEVE THE GOVERNMENT LIKEWISE OUGHT NOT TO BE COMPELLED TO SURRENDER BENEFITS DERIVED FROM THE REASONABLE AND NECESSARY MODERNIZATION OF ITS APPRAISAL RULES. IT IS OUR VIEW THAT, UNDER THE CONTRACT LANGUAGE REFERRED TO BEFORE THE CHIEF OF THE FOREST SERVICE HAS DISCRETION TO UTILIZE MODIFIED APPRAISAL PROCEDURES IN RATE REDETERMINATION PROCEEDINGS UNDER PRE-EXISTING SALES.