Bulk Fuel Pricing:
DOD Needs to Reevaluate Its Approach to Better Manage the Effect of Market Fluctuations
GAO-14-595: Published: Jul 8, 2014. Publicly Released: Jul 8, 2014.
What GAO Found
During fiscal years 2009 through 2013, the Department of Defense's (DOD) actual costs for bulk fuel differed considerably from its budget estimates, largely because of fluctuations in fuel price in the open market. During this period, DOD underestimated its costs for 3 years and overestimated them for 2 years as shown below. GAO identified two factors that contributed to the differences between estimated and actual costs—(1) fuel price fluctuations and (2) differences between the military services' estimated fuel requirements and their actual fuel consumption. GAO's analysis showed that the differences between the price DOD paid for fuel and the price it charged its fuel customers—the standard price—accounted for, on average, 74 percent of the difference between estimated and actual costs. Specifically, of the three components of the standard price that DOD sets each fiscal year—crude oil, refinement markup, and nonproduct costs, such as transportation and facilities maintenance costs—differences in the price of crude oil accounted for most of the difference between estimated and actual fuel costs in fiscal years 2009 and 2010. In fiscal years 2011 through 2013, the refinement markup accounted for most of the difference. Differences between the services' estimated fuel requirements and actual fuel consumption accounted for an average of 26 percent of the difference between estimated and actual fuel costs.
Estimated vs. Actual Fuel Costs, Fiscal Years (FY) 2009 through 2013
Since 2004, DOD has conducted reviews of aspects of its bulk fuel program to determine whether adjustments should be made, including managing acquisition strategies, managing working capital funds, and budgeting for cost fluctuations. However, it has not updated its approach to reflect current market conditions or documented its rationale for the assumptions it uses in estimating the standard price. GAO's Cost Estimating and Assessment Guide and Office of Management and Budget guidance state that a cost estimate should be updated regularly to reflect changes to assumptions and actual costs, so that it always reflects current conditions. Furthermore, cost estimates should be supported by detailed documentation that describes how they were derived. Reevaluating its approach for estimating the standard price would allow DOD to develop more informed estimates and better position it to minimize risks and uncertainty resulting from changing market conditions. Further, documenting the rationale for its assumptions would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price.
Why GAO Did This Study
DOD purchases bulk fuel and sells it to customers, including the military services. Each fiscal year, DOD sets a standard price for budgeting purposes, endeavoring to closely approximate the price it will pay when it buys the fuel almost a year later. If this price is different than the standard price, DOD may need to take actions to manage its working capital funds—funds used to purchase fuel and other commodities that are reimbursed through sales.
Senate Report 113-44, accompanying a bill for the National Defense Authorization Act for FY 2014, mandated GAO to review DOD's approach for establishing its bulk fuel pricing. This report discusses, among other things, (1) how estimated bulk fuel costs have compared to actual costs since FY 2009 and the factors that have contributed to any differences; and (2) the extent to which DOD has considered options for adjusting its approach to estimating bulk fuel costs and managing working capital funds in light of any differences between estimated and actual fuel costs. GAO compared estimated and actual fuel costs for FY 2009 through 2013 and analyzed DOD actions to manage working capital funds.
What GAO Recommends
GAO recommends that DOD reevaluate its approach for estimating the components of the standard price and document the rationale for its assumptions. DOD agreed with the first recommendation and partially agreed with the second stating there is a closely-monitored, formal process. GAO continues to believe the recommendation remains valid as discussed in the report.
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Recommendations for Executive Action
Status: Closed - Implemented
Comments: DOD concurred with our recommendation and has completed actions to address the recommendation. Consistent with our recommendation, in December 2014, the Office of the Under Secretary of Defense (Comptroller) adjusted its approach for estimating the refined fuel component of the standard price for the fiscal year 2016 President's budget request. In its revised approach, DOD developed the estimate by utilizing for the first time the Gasoline and Oil Price Index provided by the Office of Management and Budget in its economic assumptions. However, in House Report 114-102, which accompanied a bill for the National Defense Authorization Act for Fiscal Year 2016, the House Armed Services Committee raised concerns with the calculation used by DOD to set the standard price for fiscal year 2016. Specifically, the committee noted that the new calculation is no longer based on estimated market prices for the upcoming fiscal year; rather, the standard price is set on a 2009 funding level adjusted for inflation. Additionally, the price does not take into account the current cash balance of the working-capital fund. For fiscal year 2017, DOD again reevaluated its methodology for establishing the standard price. According to DOD documentation, DOD evaluated three methodologies for developing the fiscal year 2017 standard fuel price, and ultimately selected a methodology that used data provided in the Administration's economic assumptions and data on the most recent 1-year average of actual refined product costs. According to a DOD Comptroller official who oversees the bulk fuel program, several factors underpinned the department's decision to select the fiscal year 2017 standard price methodology. First, leadership within the department felt strongly that fuel pricing should be developed in a consistent manner for each budget cycle that is based on information included in the Administration's economic assumptions. Second, the methodology DOD selected provided an estimate that seemed reasonable compared with the actual fiscal year 2015 average price for refined petroleum products. Finally, the official noted the methodology is based on actual fuel prices that were adjusted to account for projected market changes. By evaluating a range of options and using data from the Administration's economic assumptions and actual refined fuel prices, DOD will be in a better position to develop more-informed estimates and minimize risks and uncertainty resulting from changing market conditions.
Recommendation: To improve DOD's process for setting its standard fuel price, the Secretary of Defense should direct the Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency (DLA), to reevaluate the approach for estimating the components of the standard price.
Agency Affected: Department of Defense
Comments: DOD partially concurred with our recommendation but has not yet completed actions to fully address the recommendation. Consistent with our recommendation, DOD reevaluated its methodology for establishing the fiscal year 2017 standard price and documented parts of the methodology it used. Specifically, DOD detailed the various options it considered, the reasons why it chose the methodology it used, and the calculations it used to arrive at its estimated standard price in an internal Office of the Under Secretary of Defense (Comptroller) memorandum. However, DOD has not documented a process for establishing the standard price in three areas. First, DOD has not documented a formalized process that describes the steps it will take on an annual basis to determine the standard price for future fiscal years. Second, documentation detailing the options DOD considered and the rationale behind the methodology it chose is not available to Congress and its fuel customers. Third, DOD has not document the formal review and approval of the new methodology by senior Comptroller officials. The DOD Comptroller official who is responsible for managing the bulk fuel program stated that the department does not have a similar formal process for determining rates for other commodities and working capital funds. Therefore, the official stated that DOD does not want to make the bulk fuel standard price determination unique and apart from these other commodities. Because of concerns with the quality and transparency of information available to Congressional decision makers and department fuel customers concerning the methodology selected each year and its application to relevant data used in estimating fuel rate prices for the next fiscal year, the Senate Armed Services Committee directed DOD to submit detailed guidance to the congressional defense committees no later than February 1, 2017 that, among other aspects, requires documentation of the rationale for using one methodology over another for estimating the next fiscal year's fuel rate price, to include the limitations and assumptions of underlying data and establishing a timeline for developing annual estimated fuel rate prices for the next fiscal year. Documenting DOD?s assumptions would provide greater transparency and clarify for fuel customers and decision makers regarding the process DOD uses to set the standard price.
Recommendation: To improve DOD's process for setting its standard fuel price, the Secretary of Defense should direct the Office of the Under Secretary of Defense (Comptroller), in coordination with the Defense Logistics Agency (DLA), to document its assumptions, including providing detailed rationale for how it estimates each of these components.
Agency Affected: Department of Defense