B-145436, AUG. 1, 1962

B-145436, AUG. 1, 1962

TO THE SECRETARY OF THE ARMY:

REFERENCE IS MADE TO LETTER DATED OCTOBER 12, 1961, FROM THE ASSISTANT SECRETARY OF THE ARMY (FINANCIAL MANAGEMENT), IN REPLY TO OUR LETTER OF JUNE 14, 1961, REQUESTING ADDITIONAL INFORMATION REGARDING THE CLAIM OF THE CITY OF KETCHIKAN, ALASKA, DOING BUSINESS AS KETCHIKAN PUBLIC UTILITIES (KPU), OF THE RIGHT TO BE PAID FOR REDUCED TELEPHONE INTERCONNECTION SERVICES FURNISHED THE ALASKA COMMUNICATION SYSTEM (ACS), UNITED STATES ARMY SIGNAL CORPS, DURING THE PERIOD JUNE 1, 1960, THROUGH MARCH 31, 1961.

KPU AND ACS EXECUTED SUCCESSIVE AGREEMENTS FROM JANUARY 1, 1958, THROUGH MAY 31, 1960, CALLING FOR PAYMENT BY THE GOVERNMENT FOR SERVICES RENDERED BY THE LOCAL EXCHANGE IN CONNECTION WITH LONG DISTANCE CALLS PLACED OVER THE LONG DISTANCE LINES OPERATED BY ACS. THE CONTRACT WHICH EXPIRED ON MAY 31, 1960, PROVIDED FOR PAYMENT AT THE RATE OF $1.085 PER MESSAGE FOR EACH LONG DISTANCE CALL COMPLETED BY SUBSCRIBERS OF KPU. CERTAIN REDUCTIONS IN THE NUMBER OF CREDITABLE MESSAGES WERE PROVIDED WITH RESPECT TO COLLECT CALLS RECEIVED AND SENT. A RENEWAL CONTRACT WAS NOT ENTERED INTO FOR THE CONTINUED FURNISHING OF THE SERVICES ON, OR PRIOR, TO MAY 31, 1960, BECAUSE THE PARTIES WERE UNABLE TO AGREE UPON THE NEW RATE TO BE PROVIDED THEREIN FOR THE FURNISHING OF THE SERVICES. RELATIVE THERETO, IT IS STATED IN THE CONTRACTING OFFICER'S REPORT OF AUGUST 11, 1960, WHICH WAS FURNISHED TO US IN CONNECTION WITH THE ORIGINAL CLAIM:

"BECAUSE THE BREAKDOWN IN NEGOTIATIONS RESULTED FROM CONFLICTING OPINIONS REGARDING COST DATA, BOTH PARTIES AGREED TO REQUEST THE ARMY AUDIT AGENCY TO CONDUCT A STUDY OF KPU OPERATIONS AND DETERMINE CONTRACTOR COSTS ALLOCABLE TO SERVICE RENDERED PURSUANT TO THE CONTRACT. ARMY AUDIT AGENCY IS PRESENTLY CONDUCTING SUCH A STUDY * * *.' IN FURNISHING ITS REPORT OF AUDIT TO THE COMMANDING OFFICER, HEADQUARTERS, U.S. ARMY ALASKA COMMUNICATION SYSTEM, SEATTLE, WASHINGTON, FOR THE ATTENTION OF THE CONTRACTING OFFICER, BY LETTER OF OCTOBER 13, 1960, THE U.S. ARMY AUDIT AGENCY, SAN FRANCISCO DISTRICT, SEATTLE AREA OFFICE, REFERRED TO THE COMMANDING OFFICER'S LETTER OF JUNE 9, 1960, REQUESTING THE AUDIT. EVALUATING THE RESULTS OF THE AUDIT IN ITS REPORT, AAA STATED:

"2. RESULTS OF AUDIT. THE COST OF OPERATING KETCHIKAN PUBLIC UTILITIES TELEPHONE FACILITIES DURING CALENDAR YEAR 1959 WAS APPROXIMATELY $200,000. CALENDAR YEAR 1960 OPERATIONS CAN BE EXPECTED TO COST APPROXIMATELY $212,500, CALCULATED AS FOLLOWS:

"* * * ON A PER CREDITABLE MESSAGE BASIS, THE COST OF HANDLING 1960 TELEPHONE TOLL TRAFFIC SHOULD APPROXIMATE $1.06254 PER MESSAGE. DETAILED DATE REGARDING THE APPORTIONMENT OF COSTS BETWEEN TOLL AND OTHER TELEPHONE FUNCTIONS AND THE FOREGOING RATE COMPUTATION ARE SHOWN ON FORM BI-511 AND SUPPORTING SCHEDULES ATTACHED AS EXHIBIT B.

"WHILE THE $1.06254 PER MESSAGE RATE WILL BE REASONABLY INDICATIVE OF THE CONTRACTOR'S COSTS OF 1960 TOLL OPERATIONS BASED UPON PRESENT OPERATING POLICIES AND PROCEDURES, THE USE OF THIS RATE FOR INTERCONNECTION SETTLEMENT MAY NOT BE ENTIRELY EQUITABLE TO THE GOVERNMENT. AN ANALYSIS OF THE COMPOSITION OF THIS PER MESSAGE RATE SHOWS THAT THE CONTRACTOR'S COSTS ARE EXCESSIVE IN COMPARISON TO REASONABLE INDUSTRY AVERAGES WITH RESPECT TO THE REVENUE ACCOUNTING AND COMMERCIAL FUNCTIONS TO THE EXTENT OF AT LEAST ?20 PER MESSAGE. * * *

"6.GENERAL COMMENTS.

A. A TELEPHONE MESSAGE TOLL SEPARATION STUDY REQUIRES THE APPORTIONMENT OF PROPERTY COSTS, CERTAIN RESERVES AND APPLICABLE EXPENSES ON THE "ACTUAL USE" BASIS, I.E., TOLL OR OTHER USAGE. INTERCHANGED MESSAGE TOLL TELEPHONE BUSINESS REQUIRES THE USE OF THE CONTRACTOR'S PLANT FACILITIES AND INCURS TRAFFIC, COMMERCIAL, ACCOUNTING, AND GENERAL OFFICE EXPENSE IN CONNECTION WITH THE ORIGINATION AND TERMINATION OF TOLL TRAFFIC. * * *

"/4) AT THE TIME OF OUR AUDIT AND TOLL SEPARATION STUDY, CERTAIN REVENUE ACCOUNTING, COLLECTION AND OTHER COMMERCIAL ACTIVITIES AFFECTED BY TOLL SERVICES WERE NOT BEING PERFORMED BY KETCHIKAN PUBLIC UTILITIES IN THE ABSENCE OF AN INTERCONNECTION AGREEMENT. COSTS FOR THESE ACTIVITIES WERE DEVELOPED BY ANALYSES CONSIDERED APPROPRIATE IN THE CIRCUMSTANCES.

"D. THE CONTRACTOR'S PER MESSAGE COSTS WITH RESPECT TO REVENUE ACCOUNTING AND COMMERCIAL OPERATIONS ARE CONSIDERABLY IN EXCESS OF THOSE INCURRED IN SIMILAR OPERATIONS BY COMPARABLE ALASKA TELEPHONE FACILITIES. AN ANALYSIS OF THE COSTS OF THE COMPONENT FUNCTIONS MAKING UP THE COMPOSITE RATE OF $1.06254 PER MESSAGE SHOWS THAT KPU'S COSTS WITH RESPECT TO MOST COMPONENT FUNCTIONS SUCH AS MAINTENANCE, DEPRECIATION, ETC., ARE REASONABLY IN LINE WITH SIMILAR PER MESSAGE COST EXPERIENCED IN COMPARABLE TELEPHONE OPERATIONS. HOWEVER, IN REGARD TO THE TWO FUNCTIONS IN QUESTION, KPU'S COSTS SUBSTANTIALLY EXCEED INDUSTRY NORMS AS INDICATED IN THE FOLLOWING ABULATION:

"IN VIEW OF THE NON-TYPICAL COSTS BEING INCURRED BY THE CONTRACTOR IN THESE TWO FUNCTIONS (REVENUE ACCOUNTING AND COMMERCIAL OPERATIONS), THE CONTRACTOR'S COST PER CREDITABLE MESSAGE OF $1.06254 MAY NOT NECESSARILY BE AN APPROPRIATE RATE FOR INTERCONNECTION SETTLEMENT BETWEEN THE CONTRACTOR AND THE GOVERNMENT. IT IS SUGGESTED THAT, IN THE NEGOTIATION OF A SUCCESSOR INTERCONNECTION AGREEMENT, THE POSSIBILITY OF GETTING THE CONTRACTOR TO REALIGN OPERATIONS IN THESE TWO AREAS TO REDUCE COSTS TO A MORE REALISTIC LEVEL BE EXPLORED. * * *"

OF THE TOTAL UNIT COST FIGURE REFERRED TO IN THE ABOVE QUOTE, $0.515 REPORTEDLY WAS ALLOCABLE TO TOLL USE OF KPU'S PLANT (EQUIPMENT DEPRECIATION, OPERATION, MAINTENANCE, ETC.), AND THE REMAINDER THEREOF, OR $0.54754, WAS ALLOCABLE TO THE FUNCTIONS OF BILLING, COLLECTING AND ABSORBING UNCOLLECTIBLE ACCOUNTS IN CONNECTION WITH THE LONG DISTANCE CALLS WHICH WERE CHARGED. UNDER THE CONTRACTS WHICH HAD BEEN IN EFFECT THROUGH MAY 31, 1960, KPU WAS REQUIRED TO FURNISH BOTH CATEGORIES OF SERVICE. IT WILL BE NOTED FROM THE AAA REPORT THAT THE AGENCY FOUND THAT PORTION OF THE ESTIMATED TOTAL UNIT COST FIGURE WHICH WAS ALLOCABLE TO TOLL USE OF KPU'S PLANT TO BE "REASONABLY IN LINE WITH SIMILAR PER MESSAGE COST EXPERIENCED IN COMPARABLE TELEPHONE OPERATIONS.'

IT APPEARS THAT, PRIOR TO THE EXPIRATION OF CONTRACT NO. DA-45-041- SC- 1142, COVERING THE PERIOD FEBRUARY 28, 1960 (THE DATE OF ITS EXECUTION), THROUGH MAY 31, 1960, KPU PROPOSED A RATE OF $1.26 FOR THE NEW CONTRACT, WITH AN ACCOMPANYING OFFER TO ENTER INTO A "NEW INTERIM CONTRACT" CALLING FOR PAYMENT AT THE RATE OF $1.085 PER MESSAGE FOR THE SERVICES INVOLVED, TO COVER A PERIOD OF FURTHER NEGOTIATION. CONTRACT DA-45-041-SC-1142 REPORTEDLY WAS ENTERED INTO ON AN INTERIM BASIS. THE PREVIOUS CONTRACT (DA-45-041-SC-977), WHICH COVERED THE PERIOD JANUARY 1, 1958, TO FEBRUARY 28, 1959, HAD STIPULATED A RATE OF $0.801 PER MESSAGE, AND KPU HAD PROPOSED A RATE OF $1.286 FOR THE SUCCEEDING CONTRACT, WHEREAS THE ACS OFFER WAS $0.887. HOWEVER, KPU'S PROPOSAL FOR A "NEW INTERIM CONTRACT" WAS REJECTED BY ACS, AND CONTRACT DA-45-041-SC-1142 WAS ALLOWED TO EXPIRE. AT THE EXPIRATION OF THE CONTRACT, KPU SUSPENDED THE BILLING AND COLLECTION SERVICES WHICH IT HAD BEEN REQUIRED TO FURNISH UNDER THE CONTRACT, AND ACS ASSUMED THIS RESPONSIBILITY. NEVERTHELESS, KPU'S LOCAL TELEPHONE EXCHANGE FACILITIES WERE ALLOWED TO REMAIN CONNECTED WITH THE ACS TOLL FACILITIES UNDER THE FOLLOWING CIRCUMSTANCES.

BY LETTER OF JULY 1, 1960, THE CITY MANAGER OF KETCHIKAN ADVISED THE CONTRACTING OFFICER AS FOLLOWS:

"THE CITY IS DISAPPOINTED AT THE POSITION TAKEN BY YOUR AGENCY IN REGARD TO AN INTERIM AGREEMENT FOR INTERCONNECTION.

"THE CITY PREVIOUSLY ADVISED IT WOULD NOT PERMIT CONTINUED USE OF ITS TELEPHONE PLANT WITHOUT REIMBURSEMENT. WE WERE WILLING TO IGNORE THIS MATTER WHILE NEGOTIATIONS FOR AN INTERIM AGREEMENT WERE IN PROGRESS. NOW THAT IT IS OBVIOUS YOUR AGENCY DOES NOT INTEND TO COMPROMISE THIS MATTER PENDING STUDY AND THE ENTERING OF A REGULAR AGREEMENT THIS OFFICE HAS NO ALTERNATIVE BUT TO PROCEED WITH THE COLLECTION OF A FAIR AMOUNT FOR THE INTERCONNECTION AND USE OF THE TELEPHONE PLANT. ACCORDINGLY, OUR CLAIM AND BILL FOR THE MONTH OF JUNE, 1960 IS ENCLOSED.

"IN CONNECTION WITH THIS BILL, AND FUTURE BILLS WHICH WILL BE RENDERED, THE AUTHORITY AND BASIS FOR INTERCONNECTION WITH THE CITY'S TELEPHONE SYSTEM (CONTRACT DA 45-041-SC-1142) EXPIRED ON MAY 31, 1960. THE ALASKA COMMUNICATION SYSTEM HAS CONTINUED ITS INTERCONNECTION AND USE OF THE CITY'S TELEPHONE PLANT SINCE THAT DATE. AS LONG AS THIS INTERCONNECTION AND USE CONTINUES THE CITY WILL ON A MONTHLY BASIS CLAIM AND BILL FOR A FAIR AMOUNT FOR REIMBURSEMENT.'

ENCLOSED WITH THE LETTER WAS KPU'S INVOICE DATED JUNE 30, 1960, IN THE AMOUNT OF $2,083.48, DIRECTED TO THE ALASKA COMMUNICATION SYSTEM, SEATTLE, WASHINGTON, FOR "INTERCONNECTION AND USE OF THE K.P.U. TELEPHONE PLANT BY THE A.C.S. FOR LONG DISTANCE TOLL PURPOSES DURING THE MONTH OF JUNE 1960. " THE INVOICE SHOWED THAT THE AMOUNT WAS FOR 5,315 CALLS, AT $0.392 PER CALL, GOING THROUGH THE KPU SYSTEM TO THE ACS LONG DISTANCE OPERATOR DURING THE BILLING PERIOD.

SIMILAR INVOICES IN THE AMOUNTS OF $2,151.69, $1,989.79 AND $2,188.93, FOR 5,489, 5,076 AND 5,584 CALLS, RESPECTIVELY, ALLEGED TO HAVE BEEN TRANSMITTED OVER THE KPU SYSTEM TO ACS DURING THE MONTHS OF JULY, AUGUST AND SEPTEMBER, 1960, WERE SUBMITTED BY KPU TO ACS AND ARE SHOWN TO HAVE BEEN RECEIVED BY THE AGENCY ON AUGUST 22, SEPTEMBER 30 AND OCTOBER 10, 1960, RESPECTIVELY. THE CLAIM REPRESENTED BY THESE INVOICES, IN THE AGGREGATE AMOUNT OF $8,413.89, WAS TRANSMITTED TO OUR CLAIMS DIVISION FOR DIRECT SETTLEMENT BY THE OFFICE OF THE CHIEF OF FINANCE AT INDIANAPOLIS, INDIANA, UNDER DATE OF DECEMBER 1, 1960, AND WAS DISALLOWED BY SETTLEMENT DATED FEBRUARY 23, 1961, AS ADMINISTRATIVELY RECOMMENDED, FOR THE STATED REASON, AMONG OTHERS, THAT WE HAD NO BASIS UPON WHICH TO DETERMINE THAT KPU WAS ENTITLED TO BE PAID AT THE RATE OF $0.392 PER CALL FOR THE SERVICES INVOLVED, IN THE ABSENCE OF A FINAL AGREEMENT BETWEEN THE PARTIES CONCERNED AS TO WHAT REPRESENTED A PROPER RATE, OR CHARGE, THAT BEING A MATTER WITHIN THE DISCRETION OF YOUR DEPARTMENT.

IN A LETTER DATED MARCH 17, 1961, THE CITY MANAGER OF KETCHIKAN REQUESTED REVIEW OF THE SETTLEMENT, STATING THAT WHILE THE RATE OF $0.392 REPRESENTED A "UNILATERAL DETERMINATION" ON THE PART OF KPU, THE ARMY AUDIT AGENCY HAD DETERMINED--- AS INDICATED BY THE REPORT OF AUDIT REFERRED TO ABOVE--- THAT THE RATE SHOULD HAVE BEEN $0.515 PER MESSAGE, AND THE CITY DESIRED TO AMEND THE CLAIM ACCORDINGLY. THE CITY MANAGER STATED THAT THE MESSAGE COUNT USED IN COMPUTING THE CLAIM HAD BEEN BASED ON THE TOTAL CALLS TO AGS'S SWITCHBOARD, AND NOT NECESSARILY UPON COMPLETED CALLS, SINCE KPU HAD BEEN UNABLE TO OBTAIN THIS INFORMATION FROM ACS. THE CITY MANAGER ALSO REFERRED TO THE FACT THAT, SINCE THE ISSUANCE OF THE SETTLEMENT, THE PARTIES HAD REACHED AN AGREEMENT FOR A NEW CONTRACT WHICH HAD BEEN EXECUTED BY THE CITY AND FORWARDED TO THE ACS CONTRACTING OFFICER ON MARCH 16, 1961, FOR EXECUTION, AND WHICH PROVIDED FOR PAYMENT TO KPU AT THE RATE OF $0.91 PER MESSAGE FOR THE COMPLETE INTERCONNECTION SERVICES REQUIRED TO BE SUPPLIED UNDER THE PREVIOUS CONTRACTS. THE LETTER STATED THAT THE CITY OF KETCHIKAN WAS WILLING TO SETTLE THE CLAIM ON THE BASIS OF THE NUMBER OF MESSAGES AS RECORDED BY ACS DURING THE PERIOD JUNE 1, 1960, TO MARCH 31, 1961, AT THE RATE OF $0.515.

IN HIS LETTER OF MAY 29, 1961, FURNISHING US A REPORT ON THE SUBJECT MATTER OF THE ABOVE LETTER, THE ASSISTANT SECRETARY (FINANCIAL MANAGEMENT) STATED THAT THE NEW AGREEMENT, REFERRED TO ABOVE, WAS EXECUTED ON MARCH 20, 1961, EFFECTIVE AS OF APRIL 1, 1961, FOR A PERIOD OF ONE YEAR WITH AN OPTION TO THE GOVERNMENT TO EXTEND THE CONTRACT PERIOD ON AN ANNUAL BASIS AND PROVISIONS FOR INITIATION OF NEGOTIATIONS TO MAKE A COMPENSATION ADJUSTMENT FOR EACH EXTENDED PERIOD UPON DEMAND OF THE CITY. THE LETTER RECOMMENDED AGAINST ALLOWANCE OF THE CLAIM, AS AMENDED BY THE CITY'S LETTER OF MARCH 17, 1961. HOWEVER, WE FELT THAT WE NEEDED A MORE COMPLETE REPORT IN THE MATTER THAT THAT CONTAINED IN THE ASSISTANT SECRETARY'S LETTER, AND IN OUR LETTER OF JUNE 14, 1961, TO YOU, REQUESTED THAT WE BE FURNISHED WITH CERTAIN ADDITIONAL INFORMATION. OUR LETTER WAS, IN PERTINENT PART, AS FOLLOWS:

"AS UNDERSTOOD HERE, THE SITUATION EXISTING DURING THE INTERIM PERIOD--- INSOFAR AS THE RENDITION OF SERVICES WAS CONCERNED--- WAS THE SAME AS THAT FOLLOWING APRIL 1, 1961, EXCEPT THAT AFTER THE LATTER DATE THE CITY RESUMED THE RESPONSIBILITY FOR COLLECTIONS FROM ITS SUBSCRIBERS. THERE IS SOME BASIS FOR BELIEVING THAT DURING THE "INTERIM PERIOD" THE PARTIES WERE LOOKING TO THE ESTABLISHMENT OF "APPROPRIATE COMPENSATION ARRANGEMENTS FOR A NEW CONTRACT"--- SEE PAGE TWO OF THE LETTER OF MAY 29, 1961. IF OUR ASSUMPTION IS CORRECT THAT THE SERVICES FURNISHED BY THE CITY OF KETCHIKAN DURING THE "INTERIM PERIOD" WERE THE SAME AS THOSE FURNISHED UNDER THE CONTRACT BEGINNING APRIL 1, 1961, EXCEPT FOR THE INDICATED COLLECTIONS, THEN THE GOVERNMENT APPEARS TO HAVE RECEIVED VALUABLE SERVICES FOR WHICH YOUR DEPARTMENT PROPOSES THAT NO PAYMENT BE MADE, OR THE GOVERNMENT IS PAYING A RATE OF $0.91 PER MESSAGE FOR ONLY THE "COLLECTION SERVICES.' "IT WILL BE APPRECIATED IF YOU WILL FURNISH A COPY OF THE COST AUDIT REPORT PREPARED BY THE ARMY AUDIT AGENCY, AND ADVISE US WHETHER THE REPORTED COST OF $0.515 PER MESSAGE DOES OR DOES NOT INCLUDE TOLL COLLECTION SERVICES BY THE CITY. IT IS ALSO REQUESTED THAT OUR OFFICE BE FURNISHED WITH A STATEMENT AS TO THE TOTAL MESSAGES INVOLVED DURING THE PERIOD FROM JUNE 1, 1960, THROUGH MARCH 31, 1961.'

BY LETTER OF OCTOBER 12, 1961, THE ASSISTANT SECRETARY FURNISHED US WITH A COPY OF THE REFERRED-TO COST AUDIT REPORT PREPARED BY THE ARMY AUDIT AGENCY, TOGETHER WITH A STATEMENT PREPARED BY ACS ENTITLED "EXPLANATION OF TOLL TICKET PRORATION," WHICH SHOWS THAT 15,182 CREDITABLE LONG DISTANCE CALLS WERE COMPLETED BY SUBSCRIBERS OF KPU DURING THE PERIOD IN QUESTION. THE ASSISTANT SECRETARY STATED IN THE LETTER THAT "THE REPORTED COST OF $0.515 PER MESSAGE DOES NOT INCLUDE TOLL COLLECTION SERVICES BY THE CITY.' WITH RESPECT TO THE VIEW EXPRESSED IN THE PARAGRAPH OF OUR LETTER OF JUNE 14, 1961, QUOTED FIRST ABOVE, THE ASSISTANT SECRETARY STATED:

"INTERCONNECTION AGREEMENTS ARE EXECUTED BY THE ACS (AS THE LONG DISTANCE MESSAGE TELEPHONE AGENCY) WITH LOCAL TELEPHONE COMPANIES IN ALASKA FOR THE PURPOSE OF EXTENDING THE CAPABILITY OF THE LOCAL EXCHANGE SYSTEM TO INCLUDE LONG-DISTANCE TELEPHONE SERVICE OFFERINGS TO THE LOCAL COMPANY CUSTOMERS AND TO ESTABLISH THE DIVISION OF REVENUE DUE THE LOCAL COMPANY FOR THEIR PARTICIPATION AND USE OF THE COMPANY PLANT AND FACILITIES. THE SAME TIME, THE ARRANGEMENT IS INTENDED TO PROVIDE A MEANS OF EFFECTING THE COLLECTION OF THE TOLL CHARGES AND TRANSMITTING THEM TO THE GOVERNMENT. IN THE CASE AT HAND, WHEN THE ACS WAS UNABLE TO PROCURE THE EXCHANGE SERVICES AT A REASONABLE PRICE, IT WAS PREPARED TO ABANDON THE INTERCONNECTION BETWEEN THE TWO SYSTEMS, AND TO RENDER LONG-DISTANCE TOLL SERVICES TO THE RESIDENTS OF THE CITY OVER GOVERNMENT-OWNED FACILITIES INSTEAD, WITHOUT DEPENDENCE UPON ANY OF THE SERVICES THE CITY MAY HAVE PREVIOUSLY RENDERED UNDER THE EXPIRED CONTRACT.

"THE CITY, SEEKING TO RETAIN THE FORMER MEANS OF LONG DISTANCE SERVICES AS A CONVENIENT METHOD OF DISCHARGING ITS OWN OBLIGATIONS TO SUBSCRIBERS OF ITS TELEPHONE FACILITIES, BUT UNWILLING AT THAT TIME TO AGREE UPON A REASONABLE RATE THEREFOR, REQUESTED ACS TO MAINTAIN THE MUNICIPALITY'S CONNECTION WITH ACS FACILITY. ACS THEREUPON AGREE, FOR THE SOLE BENEFIT OF THE CITY, TO ACCEPT AND DELIVERY TOLL CALLS THROUGH ACS FACILITIES. THE CITY CONTINUED TO RECEIVE THE BENEFIT OF SUCH SERVICES IN THE ONLY MANNER TECHNICALLY POSSIBLE UNDER THE CIRCUMSTANCES, I.E., THROUGH ITS OWN INTERCONNECTION EXCHANGE WITH GOVERNMENT FACILITIES. UNDER THE TERMS OF THIS PARTICULAR ARRANGEMENT, THE GOVERNMENT NEITHER BARGAINED FOR, NOR DID IT RECEIVE A BENEFIT. AT THE MOST, THE FUNCTIONS OF THE CITY, ACTING AS A CONNECTING LINK SO THAT IT MIGHT ASSURE CONTINUED LONG DISTANCE SERVICES TO ITS OWN CUSTOMERS, SHOULD BE CONSIDERED AS INCIDENTAL IN NATURE, ARISING SOLELY FROM THE TECHNICAL ARRANGEMENTS NECESSARY TO ASSURE CONTINUED SERVICE TO THE MUNICIPALITY. IN FACT, THE ABSENCE OF ANY ACTION ON THE PART OF THE CITY TO RESUME PERFORMANCE OF ANOTHER IMPORTANT ELEMENT OF A FORMAL INTERCONNECTION AGREEMENT, I.E., THE COLLECTION WORK, THEREBY LEAVING THE GOVERNMENT TO DEAL WITH THE CITY'S TOLL USERS DIRECTLY, INDICATES THE LIMITED ASPECTS OF THE INFORMAL ARRANGEMENTS.

"FOR THE REASONS DETAILED ABOVE, IT IS CONSIDERED THAT YOUR COMMENTS CONCERNING THE CURRENT CONTRACT AND THE COMPENSATION ARRANGEMENTS CONTAINED THEREIN, WHICH COVER ALL ASPECTS OF THE CONSIDERATION BARGAINED FOR, DO NOT APPLY, AND SHOULD NOT BE USED AS A BASIS FOR A DETERMINATION THAT THE GOVERNMENT RECEIVED ANY COMPENSABLE SERVICE.'

IN OUR DECISION OF NOVEMBER 6, 1961, TO THE CITY MANAGER OF KETCHIKAN, WE SUSTAINED THE PREVIOUS DISALLOWANCE, STATING THAT IN VIEW OF THE CIRCUMSTANCES IN THE CASE AS REPORTED BY YOUR DEPARTMENT, THERE APPEARED TO BE SUBSTANTIAL DOUBT AS TO WHETHER THE GOVERNMENT WAS LIABLE TO THE MUNICIPALITY FOR ANY PART OF THE CLAIM ASSERTED, AND, HENCE, OUR CONCLUSION WAS THAT WE WOULD NOT BE JUSTIFIED IN AUTHORIZING PAYMENT IN THE ABSENCE OF A JUDICIAL DETERMINATION AND JUDGMENT BY A COURT OF COMPETENT JURISDICTION. HOWEVER, BY LETTER OF DECEMBER 21, 1961, SENATOR E. L. BARTLETT REQUESTED RECONSIDERATION OF THE DECISION ON BEHALF OF THE CITY, AND, AFTER A CONSIDERED REVIEW OF ALL ASPECTS OF THE CASE, INSTRUCTIONS WERE ISSUED TO OUR CLAIMS DIVISION UNDER DATE OF FEBRUARY 1, 1962, AUTHORIZING ALLOWANCE OF THE CLAIM IN THE TOTAL AMOUNT OF $7,818.73, REPRESENTING PAYMENT TO KPU, AT THE RATE OF $0.515 PER MESSAGE, FOR THE 15,182 CREDITABLE LONG DISTANCE CALLS WHICH WERE REPORTEDLY COMPLETED BY SUBSCRIBERS OF THE UTILITY DURING THE PERIOD INVOLVED. THE BASIS FOR OUR ACTION IN THE MATTER, AS SET FORTH IN OUR MEMORANDUM OF INSTRUCTIONS TO THE DIVISION, WAS AS FOLLOWS:

"ALTHOUGH BOTH PARTIES IN THIS MATTER CLAIM THE CONNECTION AGREEMENT IS FOR THE BENEFIT OF THE OTHER, WE BELIEVE THE ARMY'S CONTENTION IS NEGATED BY THE FACT THAT THE ARMY PAID FOR SERVICES WHICH IT CONSIDERED TO BE OF VALUE PRIOR TO JUNE 1, 1960, AND SUBSEQUENT TO MARCH 31, 1961, AND IN THE INTERIM, WHILE NEGOTIATING TO DETERMINE THE REASONABLE VALUE OF THOSE SERVICES, THE ARMY ACCEPTED THE SERVICES, EXCEPT FOR TOLL COLLECTION, WITH FULL KNOWLEDGE THAT THE CITY EXPECTED PAYMENT FOR THEM. THE ARMY AUDIT AGENCY DETERMINED THE VALUE OF THE SERVICES RENDERED DURING THE PERIOD IN QUESTION TO BE$0.515 PER MESSAGE, BUT THE DEPARTMENT OF THE ARMY HAD DECLINED TO RECOMMEND PAYMENT ON THAT BASIS. ON THE PRESENT RECORD, WE CANNOT CONCLUDE THAT THE ARMY WAS IN ERROR IN MAKING PAYMENTS TO KETCHIKAN UNDER THE TRAFFIC CONNECTION AGREEMENTS, SO THEREFORE WE MUST ALSO CONCLUDE THAT THE ARMY RECEIVED SERVICES OF VALUE TO IT DURING THE INTERIM WHEN NO EXPRESS AGREEMENT WAS IN EFFECT.

"A CONTRACT IMPLIED IN FACT MAY BE INFERRED FROM THE CIRCUMSTANCES OR ACTS OF THE PARTIES. SEE KLEBE V. UNITED STATES, 276 U.S. 188; HUGHES TRANSP. V. UNITED STATES, 121 F.SUPP. 212. IN THE PRESENT CASE, THE CONTRACTING OFFICER HAD FULL AUTHORITY TO NEGOTIATE AND ENTER INTO A CONTRACT WITH THE CITY OF KETCHIKAN.

"UPON RECONSIDERATION OF THE MATTER, IT IS OUR OPINION THAT THE ACTIONS OF THE CONTRACTING OFFICER IN ACCEPTING THE SERVICES DURING THE TIME NEGOTIATIONS AND AN AUDIT WERE IN PROGRESS TO DETERMINE THE VALUE OF THOSE SERVICES, PARTICULARLY IN VIEW OF HIS KNOWLEDGE THAT THE CITY EXPECTED PAYMENT, CONSTITUTED CIRCUMSTANCES FROM WHICH A CONTRACT MUST BE IMPLIED IN FACT. THE ARMY HAS REPORTED A TOTAL OF 15,182 CREDITABLE MESSAGES DURING THE PERIOD IN QUESTION, AND THE CLAIMANT HAS AGREED TO ACCEPT THE ARMY'S RECORDS IN THIS REGARD. BOTH PARTIES AGREE THAT THE VALUE OF THE SERVICES FURNISHED BY THE KETCHIKAN EXCHANGE IS $0.515 PER MESSAGE. VIEW OF THESE AGREEMENTS AND SINCE IT IS OUR OPINION THAT AN IMPLIED CONTRACT EXISTED BETWEEN THE PARTIES, THERE APPEARS TO BE NO NECESSITY FOR A JUDICIAL DETERMINATION OF THE AMOUNT OF LIABILITY.'

UNDER DATE OF FEBRUARY 8, 1962, OUR CLAIMS DIVISION ISSUED A SETTLEMENT IN THE AMOUNT OF $7,818.73, AND THE VOUCHER AUTHORIZING PAYMENT OF THE CLAIM, STATED IN FAVOR OF KETCHIKAN PUBLIC UTILITIES, WAS SENT TO THE OFFICE OF THE CHIEF OF FINANCE, UNITED STATES ARMY, FIELD DIVISION, INDIANAPOLIS, INDIANA, BY TRANSMITTAL NO. 81010, DATED FEBRUARY 8, 1962. ON FEBRUARY 13, 1962, THE OFFICE OF THE CHIEF OF FINANCE FORWARDED THE VOUCHER FOR PAYMENT TO THE FINANCE AND ACCOUNTING OFFICE, ALASKA COMMUNICATION SYSTEM, SEATTLE, WASHINGTON. HOWEVER, BY LETTER OF APRIL 24, 1962, THE U.S. ARMY FINANCE CENTER, INDIANAPOLIS, RETURNED THE VOUCHER TO OUR CLAIMS DIVISION, UNPAID, FOR WHATEVER ACTION WAS DEEMED DESIRABLE BY OUR OFFICE IN VIEW OF THE "INFORMATION" REFERRED TO IN A LETTER DATED APRIL 20, 1962 (SIGAK-CC-5), FROM THE FINANCE AND ACCOUNTING OFFICER, U.S. ARMY ALASKA COMMUNICATION SYSTEM, SEATTLE, TO THE COMMANDING GENERAL, U.S. ARMY FINANCE CENTER, INDIANAPOLIS, WHICH WAS ENCLOSED. THE LETTER OF APRIL 20, 1962, STATES:

"1. THE ATTACHED VOUCHER FOR $7,818.73 IN FAVOR OF THE KETCHIKAN PUBLIC UTILITIES, CERTIFIED BY THE COMPTROLLER GENERAL FOR PAYMENT, (INCL 1), WAS RECEIVED PER YOUR LETTER, FILE FINCY, SUBJECT: VOUCHER APPROVED FOR PAYMENT, 13 FEBRUARY 1962.

"2. REVIEW OF THE FACTS AND CIRCUMSTANCES SURROUNDING THE PERIOD AND CONDITIONS COVERED BY THE VOUCHER INDICATES A POSSIBILITY THAT "MATERIAL EVIDENCE OR DETAILED FACTS" MAY HAVE BEEN ABSENT OR INSUFFICIENTLY CLEAR AT THE TIME OF REVIEW. * * *

"3. IT IS RECOMMENDED THAT THE CASE BE REVIEWED AND RECONSIDERED IN LIGHT OF THE REMARKS MADE BY THE COMPTROLLER, ALASKA COMMUNICATION SYSTEM (INCL 2).'

THE "REMARKS" MADE BY THE COMPTROLLER, ALASKA COMMUNICATION SYSTEM, REFERRED TO IN THE ABOVE LETTER, ARE CONTAINED IN A MEMORANDUM FROM THAT OFFICIAL TO THE "F AND A OFFICER," DATED APRIL 6, 1962, WHEREIN IT IS STATED:

"5. * * *

"B. NO BENEFIT TO THE GOVERNMENT. * * * AS REPEATEDLY EMPHASIZED BY THE COMMANDING OFFICER, ACS DOES NOT ENCOURAGE INCREASED USE OF THE TELEPHONE FOR LONG DISTANCE PURPOSES: MORE ,COMMERCIAL BUSINESS . . . OVER THESE MILITARY LINES" SIMPLY MEANS MORE WORK-LOAD FOR THE ARMY--- WORK-LOAD NOT RELATED TO THE ARMY MISSION OF DEFENSE, AND CARRIED ON AT A LOSS TO THE TREASURY OF SEVERAL MILLION DOLLARS ANNUALLY.

"C. RATES. * * * COMMERCIAL LONG LINES COMPANIES' RATES MAY COVER ALL COSTS FROM ORIGINATING TELEPHONE TO TERMINATING TELEPHONE, BUTACS RATES DO NOT EVEN COVER THE COST OF THE LONG LINES SERVICE PROVIDED BY ACS ITSELF. SPECIFICALLY, ACS RATES DO NOT TAKE INTO ACCOUNT OR INCLUDE ANY AMOUNTS FOR ALLOCATION TO LOCAL COMPANIES' EQUIPMENT COSTS.

"6. OBJECTIONS. THERE ARE SEVERAL OBJECTIONS TO DISALLOWANCE OF THE CLAIM. THESE ARE EASILY ANSWERED:

"A. OBJECTION A: "ACS SHOULD HAVE BROKEN THE INTERCONNECTION WHEN THE CONTRACT EXPIRED.' ANSWER: THE MAYOR OF THE CITY OF KETCHIKAN, MR. R. E. HARDCASTLE, SPECIFICALLY REQUESTED THE COMMANDING OFFICER, ACS, COL. GEO. F. ROGERS, TO CONTINUE THE CONNECTION SO THAT THE PEOPLE OF THE CITY WOULD HAVE A MORE ACCESSIBLE AND CONVENIENT MEANS OF "CONTACT WITH THE OUTSIDE WORLD.'

"7. THIS CLAIM HAS BEEN DISCUSSED WITH THE COMMANDING OFFICER AND THE EXECUTIVE OFFICER, ACS. THEY AGREE THAT IT SHOULD BE RETURNED TO THE COMPTROLLER GENERAL WITH A REQUEST FOR RECONSIDERATION. * * * IT IS REQUESTED THAT YOU TAKE ACTION TO REQUEST RECONSIDERATION BY THE COMPTROLLER GENERAL.'

IN VIEW OF THE MATTERS AND CONTENTIONS SET FORTH IN THE ABOVE-QUOTED MEMORANDUM MR. THOMAS A. RIVIERE, PROGRAM DIRECTOR, ACS, WAS INFORMALLY REQUESTED BY THE MEMBERS OF OUR GENERAL COUNSEL'S STAFF DIRECTLY CONCERNED IN A FURTHER REVIEW OF THIS CASE TO CONFER WITH THEM IN ORDER THAT THEY MIGHT HAVE AN OPPORTUNITY TO BECOME BETTER INFORMED ON THE ACTUAL OPERATION OF THE SYSTEM. MR. RIVIERE WAS MOST HELPFUL IN EXPLAINING THE SYSTEM AND ANSWERING QUESTIONS BEARING UPON THIS MATTER AT A CONFERENCE HELD HERE ON MAY 9. HE STATED, AMONG OTHER THINGS, THAT HE WAS IN KETCHIKAN WHEN A CONFERENCE WAS HELD BY COLONEL GEORGE F. ROGERS, REFERRED TO ABOVE AS THE COMMANDING OFFICER OF ACS, AND POSSIBLY OTHERS, WITH MR. R. E. HARDCASTLE, MAYOR OF KETCHIKAN, REGARDING THE MATTER, AND THAT WHILE HE, MR. RIVIERE, WAS NOT PRESENT, HE WAS INFORMED THAT, AT THE CONFERENCE, COLONEL ROGERS INFORMED THE MAYOR, IN RESPONSE TO THE LATTER'S REQUEST THAT KPU'S TELEPHONE EXCHANGE FACILITIES BE ALLOWED TO REMAIN CONNECTED WITH THE ACS TOLL FACILITIES FOR THE BENEFIT OF THE CITY OF KETCHIKAN THAT ACS WOULD NOT BREAK THE CONNECTION (APPARENTLY THIS COULD BE DONE BY SIMPLY REMOVING A PLUG), BUT THAT, IF THE CITY DID NOT TAKE ACTION TO DO SO, IT WAS TO BE UNDERSTOOD THAT THE CITY WOULD NOT BE PAID ANY AMOUNT BY ACS FOR THE SO-CALLED USE OF THE KPU PLANT DURING THE PERIOD THAT NO CONTRACT WAS IN FORCE. IN THE REPORT DATED AUGUST 11, 1960, SUBMITTED BY THE CONTRACTING OFFICER (WALTER W. SAUNDERSON) IN CONNECTION WITH THE ORIGINAL CLAIM, IT HAD BEEN STATED SIMPLY THAT ANY SERVICE "WHICH RESULTED FROM THE DECISION OF KPU, AS INSTRUCTED BY THE MAYOR OF KETCHIKAN, TO CONTINUE CONNECTION OF LOCAL TELEPHONE EXCHANGE FACILITIES TO ACS TOLL FACILITIES WITHOUT A CONTRACT," ETC.

UNDER DATE OF MAY 15, 1962, WE REFERRED THIS MATTER TO OUR SEATTLE REGIONAL OFFICE FOR AN INVESTIGATION AND REPORT, WITH PARTICULAR REFERENCE TO THE INFORMATION WHICH WE HAD RECEIVED FROM MR. RIVIERE. IN REPORTING THE RESULTS OF ITS INVESTIGATION, OUR REGIONAL OFFICE STATED THAT THE CONFERENCE REFERRED TO BY MR. RIVIERE WAS HELD IN KETCHIKAN ON JUNE 2, 1960, WHEN THE FOLLOWING PEOPLE (ACCORDING TO THE CONTRACTING OFFICER) WERE PRESENT: R. E. HARDCASTLE, MAYOR OF ETCHIKAN; R. E. SHARP, CITY MANAGER OFKETCHIKAN; COLONEL GEORGE F. ROGERS, COMMANDING OFFICER, ACS; COLONEL WILLIAM FIENDELL, OFFICE OF CHIEF SIGNAL OFFICE; AND MAJOR LEE WOMSTED, ACS SECTOR COMMANDER, JUNEAU. ALTHOUGH NO FORMAL MINUTES OF THE CONFERENCE WERE PREPARED BY ACS, THE ACS CONTRACTING OFFICER (W. W. SAUNDERSON) PREPARED A MEMORANDUM FOR THE RECORD ON JUNE 3, 1960, ON THE MATTERS DISCUSSED AND AGREEMENTS REACHED DURING THE CONFERENCE AS RELATED TO HIM BY THE ACS COMMANDING OFFICER BY TELEPHONE ON JUNE 2, 1960. THIS MEMORANDUM STATES: "B. THE MAYOR AND CITY MANAGER WERE AGREEABLE TO PERMITTING USE OF THE CITY'S EXCHANGE TELEPHONE PLANT WITHOUT COMPENSATION DURING FURTHER NEGOTIATIONS WITH THE ACS BILLING THE CITY TELEPHONE SUBSCRIBERS ON A DIRECT BASIS.'

THE MEMORANDUM ALSO STATES THAT THE CONTRACTING OFFICER CONTACTED THE CITY MANAGER OF KETCHIKAN BY TELEPHONE ON JUNE 3, 1960, AND CONFIRMED THE GENERAL DISCUSSIONS HELD DURING THE CONFERENCE. HOWEVER,THE CONTRACTING OFFICER INFORMED OUR REPRESENTATIVES THAT, DURING THIS TELEPHONE CONVERSATION, THE CITY MANAGER DENIED ANY SPECIFIC AGREEMENT REGARDING COMPENSATION FOR THE USE OF THE CITY'S PLANT "DURING FURTHER NEGOTIATIONS," ALTHOUGH THIS FACT WAS NOT RECORDED IN THE CONTRACTING OFFICER'S MEMORANDUM.

IN A LETTER DATED JUNE 22, 1960, FROM THE CITY MANAGER TO THE CONTRACTING OFFICER--- WHICH REFERS TO THE TELEPHONE CONVERSATION HELD WITH THE CONTRACTING OFFICER ON JUNE 3, AND TO THE FACT THAT A LETTER FROM THE CONTRACTING OFFICER DATED JUNE 18 HAD FAILED TO MENTION WHETHER THE OFFER MADE BY THE CITY OF KETCHIKEN DURING THE CONFERENCE OF JUNE 2, TO SPLIT THE DIFFERENCE BETWEEN THE "LAST OFFERS OF THE CITY AND ALASKA COMMUNICATION SYSTEM FOR THE PURPOSE OF AN INTERIM AGREEMENT PENDING COMPLETION OF THE AUDIT AND ENTERING INTO A PERMANENT OR REGULAR AGREEMENT"--- THE CITY MANAGER STATED:

"* * * THE CITY FEELS THAT IN THE ABSENCE OF AN INTERIM AGREEMENT THE CONTINUED USE OF ITS TELEPHONE SYSTEM FOR ORIGINATING AND TERMINATING LONG DISTANCE CALLS SHOULD BE ON A REIMBURSABLE BASIS FOR THE SEVERAL MONTHS WHICH WILL BE INVOLVED IN THE COMPLETION OF THE AUDIT AND NEGOTIATING AN AGREEMENT.

"PLEASE ADVISE IF THE OFFER FOR THE INTERIM AGREEMENT IS ACCEPTABLE. YOU FIND THIS OFFER UNACCEPTABLE PLEASE ADVISE IF YOUR AGENCY DESIRES TO CONTINUE USE OF THE CITY'S TELEPHONE FACILITIES DURING THE INTERIM PERIOD. IF SO, THE CITY WILL COMMENCE BILLING FOR THAT PORTION OF THE COST FOR ITS SYSTEM EXCLUDING THE ACTIVITIES RESUMED BY ALASKA COMMUNICATION SYSTEM.'

IN REPLYING TO THE ABOVE LETTER BY LETTER OF JUNE 28, 1960, THE CONTRACTING OFFICER ADVISED THE CITY MANAGER THAT ARMY AUDIT AGENCY REPRESENTATIVES AND HE WOULD MEET WITH CITY OFFICIALS IN KETCHIKAN AT 1:30 P.M. ON JULY 14, 1960. IN HIS LETTER OF JUNE 22, THE CITY MANAGER HAD STATED THE CITY PREFERRED THAT A MEETING FOR THE PURPOSE OF ESTABLISHING CONDITIONS FOR APPORTIONING TOLL COSTS BE HELD ON THAT DATE. WITH RESPECT TO THE ADVICE REQUESTED IN THE CITY MANAGER'S LETTER, AS SET FORTH ABOVE, THE CONTRACTING OFFICER STATED:

"THE ACS IS AGREEABLE TO AN INTERIM SETTLEMENT AGREEMENT DURING THE PERIOD OF THE AUDIT STUDY AND AGAIN REPEATS ITS OFFER OF SETTLEMENT AT $0.887 PER MESSAGE WITH THE CITY OF KETCHIKAN RESUMING ITS NORMAL "A" FUNCTION RESPONSIBILITIES. ANY SUCH AGREEMENT ENTERED INTO COULD ONLY BE EFFECTIVE AS OF THE DATE OF EXECUTION OF THE AGREEMENT BY THE PARTIES.'

THE CONTRACTING OFFICER THUS REFUSED TO ACCEPT THE CITY MANAGER'S OFFER TO ENTER INTO AN INTERIM CONTRACT PROVIDING FOR A RATE TO BE DERIVED BY SPLITTING THE DIFFERENCE BETWEEN THE RESPECTIVE RATES WHICH HAD BEEN PROPOSED BY THE PARTIES, AND THE LETTER WAS SILENT WITH RESPECT TO THE CITY MANAGER'S QUESTION WHETHER ACS DESIRED TO CONTINUE USE OF THE CITY'S TELEPHONE FACILITIES DURING THE INTERIM PERIOD. THE CITY MANAGER'S LETTER OF JULY 1, 1960, SUPRA, OBVIOUSLY WAS IN RESPONSE TO THIS LETTER.

SINCE NONE OF THE ACS OFFICIALS MENTIONED ABOVE AS HAVING ATTENDED THE CONFERENCE OF JUNE 2, 1960, PRESENTLY ARE STATIONED AT THE AGENCY'S HEADQUARTERS IN SEATTLE, REPRESENTATIVES OF OUR SEATTLE REGIONAL OFFICE WERE UNABLE TO QUESTION THEM AS TO THEIR RECOLLECTION OF WHAT WAS SAID BY THE MAYOR AND CITY MANAGER OF KETCHIKAN AT THE CONFERENCE REGARDING THE MATTER OF COMPENSATION PAYABLE TO THE CITY FOR THE USE OF ITS PLANT DURING THE PERIOD WHEN A NEW CONTRACT FOR THE INTERCONNECTION SERVICES PREVIOUSLY FURNISHED WAS BEING NEGOTIATED. HOWEVER, UPON BEING INFORMED BY THE COMPTROLLER OF ACS THAT OFFICIALS OF KETCHIKAN HAD CALLED ON LIEUTENANT COLONEL C. V. TELQUIST, EXECUTIVE OFFICER, ACS, IN SEATTLE AND REQUESTED THAT THE ACS-KPU CIRCUITS REMAIN CONNECTED, OUR REPRESENTATIVES INTERVIEWED COLONEL TELQUIST IN CONNECTION WITH THE MATTER. COLONEL TELQUIST CONFIRMED THAT THE MAYOR AND CITY MANAGER OF KETCHIKAN HAD CALLED ON HIM IN SEATTLE PRIOR TO EXPIRATION OF CONTRACT DA-45-041-SC-1142 AND REQUESTED THAT THE RESPECTIVE CIRCUITS BE ALLOWED TO REMAIN CONNECTED DURING THE PERIOD THAT NO CONTRACT WAS IN EFFECT. HE STATED THAT, WHILE THE QUESTION OF REIMBURSEMENT TO THE CITY FOR COSTS INCIDENT TO THE USE OF ITS PLANT DURING THE PERIOD INVOLVED WAS NOT MENTIONED AT THE TIME, HE ASSUMED THERE WOULD BE NO REIMBURSEMENT INASMUCH AS IT WAS CLEARLY UNDERSTOOD BY ALL PARTIES THAT THE ACTION WAS BEING REQUESTED FOR THE BENEFIT OF KPU PATRONS.

A LIMITED INVESTIGATION ON OUR PART HAS THUS FAILED TO ESTABLISH THAT THE MAYOR AND CITY MANAGER AGREED AT THE CONFERENCE OF JUNE 2, 1960, THAT THE CITY OF KETCHIKAN WAS TO RECEIVE NO COMPENSATION FOR THE USE OF THE KPU PLANT IN THE EVENT IT REMAINED CONNECTED WITH THE ACS TOLL FACILITIES. EVEN IF FURTHER INVESTIGATION WERE TO REVEAL THAT THEY SO AGREED, SUCH FACT WOULD NOT APPEAR TO FURNISH A SUFFICIENT LEGAL BASIS FOR DISALLOWANCE OF THE CLAIM IN VIEW OF THE REPUDIATION OF ANY SUCH AGREEMENT BY THE CITY MANAGER WHEN CALLED ON THE TELEPHONE BY THE CONTRACTING OFFICER FOR CONFIRMATION THE NEXT DAY. IN VIEW OF SUCH REPUDIATION, THE CITY MANAGER'S LETTERS OF JUNE 22 AND JULY 1, 1960, SUPRA, AND THE SUBSEQUENT BILLINGS, ACS MAY BE SAID TO HAVE BEEN FULLY AND TIMELY ADVISED BY THE CITY THAT COMPENSATION WAS EXPECTED FOR THE USE OF THE KPU PLANT IN THE EVENT IT REMAINED CONNECTED WITH THE ACS TOLL FACILITIES.

UPON UNDERTAKING OUR PRESENT REVIEW OF THIS MATTER, WE WERE PARTICULARLY CONCERNED WITH THE ACS COMPTROLLER'S STATEMENT (APPEARING IN THE ABOVE- QUOTED MEMORANDUM OF APRIL 6, 1962) THAT COMMERCIAL BUSINESS WAS CARRIED ON OVER THE LONG DISTANCE TELEPHONE LINES OF ACS "AT A LOSS TO THE TREASURY OF SEVERAL MILLION DOLLARS ANNUALLY.'

THE STATUTORY AUTHORITY FOR PROCURING INTERCONNECTION SERVICES SUCH AS ARE HERE INVOLVED IN CONNECTION WITH THE OPERATION OF THE ALASKA COMMUNICATION SYSTEM IS DERIVED FROM THE ACT OF MAY 26, 1900, 31 STAT. 206, AS AMENDED, WHICH, AS CODIFIED IN SECTION 310, TITLE 48, UNITED STATES CODE, PROVIDES THAT "COMMERCIAL BUSINESS MAY BE DONE OVER MILITARY TELEGRAPH AND CABLE LINES CONNECTING ST. MICHAEL, ALASKA, WITH OTHER MILITARY STATIONS IN ALASKA, UNDER SUCH CONDITIONS AS MAY BE DEEMED, BY THE SECRETARY OF THE ARMY, EQUITABLE AND IN THE PUBLIC INTERESTS, ALL RECEIPTS FROM SUCH COMMERCIAL BUSINESS TO BE ACCOUNTED FOR AND PAID INTO THE TREASURY OF THE UNITED STATES; " AND THE PROVISO IN PUBLIC LAW 71, APPROVED MAY 23, 1941, 55 STAT. 191 (48 U.S.C. 311), THAT ,HEREAFTER CHARGES FOR INTERCONNECTION BETWEEN THE RADIO TELEPHONE FACILITIES OF THE ALASKA COMMUNICATION SYSTEM AND COMMERCIAL TELEPHONE FACILITIES MAY BE PAID FROM THE RECEIPTS OF THE ALASKA COMMUNICATION SYSTEM.'

AT THE HEARINGS HELD BY THE SUBCOMMITTEE OF THE HOUSE COMMITTEE ON APPROPRIATIONS, 85TH CONGRESS, 1ST SESS., ON DEPARTMENT OF THE ARMY APPROPRIATIONS FOR THE FISCAL YEAR 1958, MAJOR GENERAL W. PRESTON CORDERMAN, DEPUTY CHIEF SIGNAL OFFICER, PRESENTED THE FOLLOWING GENERAL STATEMENT (PAGE 1214 OF THE HEARINGS) IN SUPPORT OF THE APPROPRIATION PROPOSED BY THE DEPARTMENT FOR OPERATION AND MAINTENANCE OF THE ALASKA COMMUNICATION SYSTEM:

"* * * THE ALASKA COMMUNICATION SYSTEM, ESTABLISHED ON MAY 26, 1900, IS OPERATED BY THE ARMY SIGNAL CORPS TO PROVIDE TELEPHONE AND TELEGRAPH SERVICES THROUGHOUT THE TERRITORY OF ALASKA AND TO CONNECT ALASKA WITH THE UNITED STATES AND OTHER COUNTRIES. THE SYSTEM PERFORMS A DUAL MISSION BY PROVIDING THE MAIN MILITARY LONG LINES CHANNELS AND FURNISHING COMMERCIAL COMMUNICATIONS FOR THE TERRITORY. THIS DUAL MISSION REQUIRES THAT THE ALASKA COMMUNICATION SYSTEM BE SO INTEGRATED WITH THE MILITARY AND COMMERCIAL CONNECTING COMMUNICATION FACILITIES THAT IT MAY SERVE EFFECTIVELY BOTH THE MILITARY AND CIVILIAN REQUIREMENTS.

"IN THE ANALYSIS OF THESE ESTIMATES AN IMPORTANT POINT TO CONSIDER IS THAT RECEIPTS FROM COMMERCIAL OPERATIONS ARE DEPOSITED IN THE TREASURY OF THE UNITED STATES AS A GENERAL FUND RECEIPT. COMMERCIAL RECEIPTS ARE PROJECTED AS FOLLOWS:

CHART FISCAL YEAR 1956 (ACTUAL - - - - - - - - - - - - - $3,296,000 FISCAL YEAR 1957 (ESTIMATED) - - - - - - - - - - - - - 3,460,000 FISCAL YEAR 1958 (ESTIMATED) - - - - - - - - - - - - 3,685,000

"YOU WILL RECALL THAT DURING LAST YEAR'S HEARINGS, THE COMMITTEE EXPRESSED CONCERN ABOUT THE RATES CHARGED CIVILIAN USERS IN ALASKA FOR SERVICES RENDERED. IN VIEW OF THIS, THE CHIEF SIGNAL OFFICER UNDERTOOK AN EXHAUSTIVE STUDY TO DETERMINE WHETHER OR NOT THESE RATES SHOULD BE INCREASED. THE FOLLOWING DETERMINATIONS WERE MADE AS A RESULT OF THAT STUDY:

"/A) TELEGRAPH RATES SHOULD BE INCREASED BY APPROXIMATELY 30 PERCENT.

THE CHIEF SIGNAL OFFICER HAS PROPOSED THAT SUCH AN INCREASE BE PUT INTO EFFECT AS OF JULY 1, 1957.

"/B) TELEPHONE MESSAGE RATES ARE NOT QUITE HIGH ENOUGH AT THE PRESENT LEVEL OF OPERATIONS TO RECOVER ALL COSTS OF PROVIDING THE SERVICE. THE CHIEF SIGNAL OFFICER FEELS, HOWEVER, THAT THE ANTICIPATED INCREASE IN VOLUME OF BUSINESS WILL YIELD A SUBSTANTIAL INCREASE IN REVENUE WITH RELATIVELY SMALL INCREASED COSTS. THEREFORE, NO INCREASE IN TELEPHONE RATES IS PROPOSED.'

IN THE REPORT SUBMITTED BY THE HOUSE COMMITTEE ON APPROPRIATIONS ON H.R. 7665, WHICH BECAME THE DEPARTMENT OF DEFENSE APPROPRIATION ACT OF 1958, 71 STAT. 312, THE COMMITTEE STATED ON PAGE 39 OF ITS REPORT:

"THE ALASKA COMMUNICATION SYSTEM PROVIDES TELEPHONE AND TELEGRAPH SERVICE THROUGHOUT THE TERRITORY OF ALASKA AND CONNECTS ALASKA WITH THE UNITED STATES AND OTHER COUNTRIES FOR BOTH MILITARY AND COMMERCIAL USERS. THE COMMITTEE HAS REDUCED THE BUDGET ESTIMATE OF $5,7000,000 TO $5,000,000, THE AMOUNT APPROPRIATED IN 1957. THE COMMITTEE RECOGNIZES THAT TELEPHONE RATES ARE HIGHER IN ALASKA THAN RATES WITHIN THE CONTINENTAL UNITED STATES AND THAT TELEGRAPH RATES HAVE RECENTLY BEEN INCREASED. HOWEVER, IN VIEW OF THE ENLARGED FACILITIES RESULTING FROM COMPLETION OF THE COAXIAL SUBMARINE CABLE AND IN VIEW OF HIGH OPERATING COSTS GENERALLY WITHIN THE ALASKAN AREA IT IS FELT THAT THERE MAY BE JUSTIFICATION FOR INCREASES IN RATES FOR CIVILIAN USERS THAT WILL HELP TO OFFSET THE COSTS TO THE GOVERNMENT IN OPERATING THE SYSTEM.'

AT THE HEARINGS HELD BY THE SUBCOMMITTEE OF THE HOUSE COMMITTEE ON APPROPRIATIONS, 87TH CONGRESS, 1ST SESS., ON DEPARTMENT OF DEFENSE APPROPRIATIONS FOR THE FISCAL YEAR 1962, MAJOR GENERAL E. F. COOK, DEPUTY CHIEF SIGNAL OFFICER, STATED (PAGES 321 AND 322 OF THE HEARINGS) IN CONNECTION WITH THE APPROPRIATION PROPOSED BY THE DEPARTMENT FOR OPERATION AND MAINTENANCE OF THE ALASKA COMMUNICATION SYSTEM:

"COMMUNICATION SERVICES PROVIDED TO THE MILITARY AND OTHER AGENCIES OF THE FEDERAL GOVERNMENT HAVE IN THE PAST BEEN FREE OF CHARGE. EFFECTIVE WITH THE FISCAL YEAR 1962, PURSUANT TO AN AGREEMENT BETWEEN THE DEPARTMENT OF THE ARMY AND LOCAL TELEPHONE COMPANIES, LONG DISTANCE TELEPHONE TRAFFIC ORIGINATING THROUGH THE FACILITIES OF A LOCAL PRIVATELY OR MUNICIPALLY OWNED TELEPHONE EXCHANGE WILL BE CHARGED THE CIVILIAN RATE. ALL SERVICES PROVIDED CIVILIAN USERS ARE AT RATES AND CHARGES ESTABLISHED BY THE DEPARTMENT OF THE ARMY. MONEYS COLLECTED FROM USERS OF THE FACILITIES ARE DEPOSITED TO THE U.S. TREASURY AS MISCELLANEOUS RECEIPTS. IN FISCAL YEAR 1960 THIS AMOUNT TO $4.6 MILLION. THE FORECAST FOR FISCAL YEAR 1961 IS $4.8 MILLION AND FOR FISCAL YEAR 1962 IS $5 MILLION.'

AT THE CONCLUSION OF GENERAL COOK'S STATEMENT, REPRESENTATIVES GEORGE H. MAHON AND GEORGE W. ANDREWS, CHAIRMAN AND MEMBER OF THE SUBCOMMITTEE, RESPECTIVELY, RAISED CERTAIN QUESTIONS PERTAINING TO ACS'S OPERATIONS, WHICH WERE ANSWERED BY M. C. WEST, ACTING COMPTROLLER, SIGNAL CORPS, AND GENERAL COOK, AS SET FORTH IN THE FOLLOWING EXCERPTS FROM PAGES 324 AND 325 OF THE PRINT OF THE HEARINGS:

"MR. MAHON. WHAT WAS THE BASIS FOR THE AGREEMENT (THE AGREEMENT BETWEEN THE DEPARTMENT OF THE ARMY AND THE LOCAL TELEPHONE COMPANIES REFERRED TO IN THE ABOVE STATEMENT) YOU REFER TO ON PAGE 1? WHO AUTHORIZED IT AND TO WHAT EXTEND DID OTHER FEDERAL USERS OF THE SYSTEM PARTICIPATE IN AND AGREE TO THE DECISION TO CHARGE FEDERAL USERS?

"MR. MAHON. MR. WEST, WILL YOU COMMENT ON THAT MATTER?

MR. WEST. THIS CHANGE ONLY AFFECTS THE OFFICIAL USE, THAT IS, THE GOVERNMENT TELEPHONE CALLS THAT ARE MADE THROUGH PRIVATE EXCHANGES. THE PAST WE HAVE GIVEN THIS FREE.

"STARTING JULY 1, WE PROPOSE TO CHARGE THOSE GOVERNMENTAL AGENCIES WHO PLACE LONG-DISTANCE CALLS THROUGH LOCAL COMMERCIAL FACILITIES AT THE STANDARD COMMERCIAL RATE FOR SIMPLIFICATION OF BOOKKEEPING AND ACCOUNTING.

"MR. MAHON. WHAT IS THE BASIS FOR ESTIMATING THAT THE TELEPHONE TRAFFIC WILL INCREASE OVER 1960 BY 30 PERCENT? GENERAL COOK. OUR RECORDS SHOW THIS TREND.

MR. MAHON. WHAT IS YOUR COMMENT ON IT?

MR. WEST. FOR 1958, FOR EXAMPLE, SIR, THE INCREASE WAS 10.9 PERCENT.

FOR 1959, IT WAS 26.4 PERCENT.

FOR 1960, IT WAS 23.3.

FOR 1961, WE ESTIMATE ABOUT 17 PERCENT.

SINCE WE HAVE NEW FACILITIES IN BEING IN 1962, THE FACILITIES THAT GENERAL COOK JUST SPOKE OF, WE FEEL REASONABLE IN ASSUMING THAT THE INCREASED TRAFFIC WILL GO WAY UP, HIGHER THAN IN THE PAST. "MR. MAHON. IS THAT GOVERNMENT TRAFFIC?

MR. WEST. BOTH SIR.

MR. MAHON. OR NONGOVERNMENT?

MR. WEST. BOTH, SIR, ARE INCREASING

MR. ANDREWS. GENERAL, WHAT WILL THE TOTAL RECEIPTS FOR THE OPERATION OF THE SYSTEM BE IN 1962? WHAT DO YOU ESTIMATE?

GENERAL COOK. WE ARE ESTIMATING $5 MILLION.

MR. ANDREWS. AND YOU ARE REQUESTING $6.3 MILLION FOR OPERATION?

GENERAL COOK. YES SIR.

MR. ANDREWS. SO YOU OPERATE AT ABOUT A $1.3 MILLION LOSS?

GENERAL COOK. THE LOSS, SIR, IS NOT $1.3 MILLION.

MR. ANDREWS. WHAT DID YOU SAY THE RECEIPTS WOULD BE?

GENERAL COOK. $5 MILLION.

MR. ANDREWS. AND THE COST OF OPERATION, $6.3 MILLION?

GENERAL COOK. YES SIR. IN ADDITION TO THAT---

MR. ANDREWS. THAT MAKES A $1.3 MILLION LOSS, ACCORDING TO MY ARITHMETIC.

GENERAL COOK. WE DO PROVIDE FREE SERVICE TO ALL GOVERNMENT AGENCIES IN ALASKA.

MR. ANDREWS. WHAT DO YOU ESTIMATE THAT TO BE WORTH? DO YOU GET REIMBURSED FOR ANY OF IT?

GENERAL COOK. NO, SIR.

MR. ANDREWS. SO FAR AS YOU ARE CONCERNED, YOU HAVE A $1.3 MILLION LOSS?

GENERAL COOK. THAT IS CORRECT.

MR. ANDREWS. BUT YOU DO FURNISH SERVICE TO OTHER GOVERNMENT AGENCIES?

GENERAL COOK. ALL GOVERNMENT AGENCIES; YES, SIR.

MR. ANDREWS. COULD YOU SUPPLY FOR THE RECORD WHAT THE COST WOULD BE TO THOSE AGENCIES IF NOT FURNISHED FREE BY YOUR AGENCY?

GENERAL COOK. THAT WILL BE SUPPLIED FOR THE RECORD.'

THE INFORMATION WHICH WAS TO BE SUPPLIED FOR THE RECORD BY GENERAL COOK, REFERRED TO JUST ABOVE, IS SET FORTH AT PAGE 326 OF THE PRINT OF THE HEARINGS AS FOLLOWS:

CHART

"VALUE OF COMMUNICATIONS SERVICES FURNISHED FREE TO GOVERNMENT AGENCIES FOR FISCAL YEAR 1960 TELEPHONE - - - - - - - - - - - - - - - - - $1,858,063 TELEGRAPH - - - - - - - - - - - - - - - - - 264,483 LEASES - - - - - - - - - - - - - - - - - 857,434 TIMED WIRE PRESS - - - - - - - - - - - - - - 511 BROADCAST - - - - - - - - - - - - - - - - 54,159 RURAL TELEPHONE SERVICES - - - - - - - - - 6,904

TOTAL - - - - - - - - - - - - - - - - - (1) 3,041,554

(1) OF THE TOTAL AMOUNT OF FREE SERVICES FURNISHED TO OVER 50 DIFFERENT GOVERNMENT AGENCIES IN FISCAL YEAR 1960, SOME $2,356,294 WAS FOR THE DEPARTMENT OF DEFENSE. THE REMAINING $685,260 COVERED THE CIVILIAN AGENCIES OF THE GOVERNMENT, INCLUDING THE CONGRESS.'

FROM THE FOREGOING, IT APPEARS THAT THE ALASKA COMMUNICATION SYSTEM MAY NOT BE SAID TO HAVE BEEN OPERATED AT A LOSS TO THE GOVERNMENT IF THE SERVICES WHICH HAVE BEEN FURNISHED TO THE GOVERNMENT AGENCIES FREE OF CHARGE ARE TAKEN INTO CONSIDERATION, WHICH HAS LONG BEEN RECOGNIZED AS PROPER. THUS, AT THE HEARINGS HELD BY THE SUBCOMMITTEE OF THE HOUSE COMMITTEE ON APPROPRIATIONS ON H.R. 4183, 77TH CONGRESS, WHICH BECAME THE PUBLIC LAW SET FORTH IN 48 U.S.C. 311, SUPRA, "MAKING APPROPRIATIONS FOR THE FISCAL YEAR ENDING JUNE 30, 1942,FOR CIVIL FUNCTIONS ADMINISTERED BY THE WAR DEPARTMENT, AND FOR OTHER PURPOSES," LIEUTENANT COLONEL JAMES T. WATSON, JR., SIGNAL CORPS, STATED (PAGE 20 OF THE HEARINGS):

"WE HAVE AN INCREASE OF 28 PERCENT IN COMMERCIAL TRAFFIC FOR THE PERIOD OCTOBER TO DECEMBER, INCLUSIVE, 1940, OVER THE SAME PERIOD OF A YEAR AGO.

"IN THE LAST FISCAL YEAR $379,404 WAS TURNED INTO THE TREASURY UNDER "MISCELLANEOUS RECEIPTS.' THIS AMOUNT WAS COLLECTED AS TOLLS FOR COMMERCIAL TRAFFIC.

"I WOULD LIKE TO POINT OUT THAT ALTHOUGH THE SYSTEM OPERATES AT AN APPARENT LOSS, WERE EVEN A NOMINAL CHARGE MADE FOR THE TRAFFIC HANDLED FOR GOVERNMENT AGENCIES, THE SYSTEM WOULD OPERATE AT A PROFIT. IF THE CHARGE FOR GOVERNMENT TRAFFIC WERE SET AT ONE-HALFTHE COMMERCIAL RATE, THE SYSTEM WOULD HAVE HAD A PROFIT OF APPROXIMATELY $287,000 IN THE FISCAL YEAR 1940.'

ALSO, IN RESPONSE TO SUBCOMMITTEE MEMBER D. LANE POWERS' QUESTION WHETHER A LOSS OF APPROXIMATELY $186,000 STATED BY COLONEL WATSON TO HAVE BEEN INCURRED IN THE OPERATION OF ACS DURING THE PRECEDING YEAR WAS DUE ENTIRELY TO THE VOLUME OF GOVERNMENT MESSAGES, STATED:

"YES, SIR; AND TO THE FACT THAT OVER 66 PERCENT OF THE TRAFFIC WAS FOR GOVERNMENT BUSINESS WHICH WAS HANDLED WITHOUT CHARGE.'

IN THE REPORT SUBMITTED BY THE HOUSE COMMITTEE ON APPROPRIATIONS ON THE REFERRED-TO H.R. 4183, THE COMMITTEE, IN REFERRING TO THE ALASKA COMMUNICATION SYSTEM AT PAGE 3 OF THE REPORT, STATED:

"THIS IS A SELF-SUPPORTING SERVICE, AS EVIDENCED BY THE FINANCIAL STATEMENT ON PAGE 22 OF THE HEARINGS, WHEREIN, AND RIGHTFULLY SO, CREDIT IS TAKEN FOR GOVERNMENT TRAFFIC WHICH IS HANDLED WITHOUT CHARGE. RECEIPTS TURNED INTO THE TREASURY DURING THE FISCAL YEAR 1940 AMOUNTED TO $379,404.'

IN VIEW OF THE FOREGOING, THE ACS COMPTROLLER'S STATEMENT THAT COMMERCIAL BUSINESS HAS BEEN CARRIED ON OVER THE LONG DISTANCE TELEPHONE LINES OF ACS AT A LOSS TO THE TREASURY APPEARS TO BE WITHOUT FOUNDATION IN FACT, EVEN IF IT COULD BE CONSIDERED AS A BASIS FOR DENIAL OF THE SUBJECT CLAIM.

IN SUMMARY, WE CONCLUDE THAT THE ATTEMPT OF THE ACS TO AVOID LIABILITY FOR COMPENSATING KPU FOR TOLL CALLS HANDLED THROUGH ITS SWITCHBOARD, MERELY BY GIVING NOTICE OF AN INTENTION NOT TO PAY, WHILE AT THE SAME TIME PERMITTING THE INTERCONNECTION TO BE MAINTAINED AND USED IN INITIATING AND COMPLETING CALLS, AND COLLECTING FULL CHARGES THEREFOR AT ESTABLISHED RATES, MAY NOT BE GIVEN EFFECT TO RELIEVE THE GOVERNMENT FROM ALL LIABILITY. WHETHER OR NOT ANY TANGIBLE BENEFIT WAS DERIVED BY THE GOVERNMENT FROM THE INTERCONNECTION, THE USE OF THE KPU FACILITIES (WHICH COULD HAVE BEEN TERMINATED BY THE GOVERNMENT AT WILL BY MERELY THROWING A SWITCH) WAS TECHNICALLY A BURDEN UPON THEM WHICH THE GOVERNMENT HAD NO RIGHT TO IMPOSE WITHOUT COMPENSATION. THEY WERE IN FACT USED IN THE HANDLING OF COMMUNICATIONS FOR WHICH THE GOVERNMENT COLLECTED TOLLS. THE FACT THAT THE KPU WAS ALSO RELUCTANT TO TERMINATE THE USE OF ITS FACILITIES BY THROWING THE SWITCH AS ITS END MAY NOT, IN THE CIRCUMSTANCES, BE CONSTRUED AS CONSENT TO THEIR USE WITHOUT COMPENSATION.

THE VOUCHER INVOLVED IS RETURNED HEREWITH WITH THE REQUEST THAT APPROPRIATE STEPS BE TAKEN BY YOUR DEPARTMENT TO EFFECT PAYMENT THEREON.