B-141238, FEBRUARY 11, 1960, 39 COMP. GEN. 580

B-141238: Feb 11, 1960

Additional Materials:

Contact:

Ralph O. White
(202) 512-8278
WhiteRO@gao.gov

Kenneth E. Patton
(202) 512-8205
PattonK@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

WAS PROPERLY PERMITTED TO ESTABLISH TO THE SATISFACTION OF THE PROCUREMENT AGENCY THAT FUTURE DELIVERIES WOULD BE MADE IN COMPLIANCE WITH THE CONTRACT. NO ACTION NEED BE TAKEN WITH RESPECT TO PRIOR DELIVERIES WHICH WERE NOT IN COMPLIANCE WITH THE SMALL BUSINESS REQUIREMENTS OF THE CONTRACT. 1960: REFERENCE IS MADE TO YOUR LETTER OF NOVEMBER 11. OUR INVESTIGATION DISCLOSES THAT THE MATTER INVOLVED WAS FIRST BROUGHT TO THE ATTENTION OF THE MILITARY PETROLEUM SUPPLY AGENCY ( MPSA) BY YOUR LETTER OF AUGUST 20. 1959) DURING WHICH PETROLEUM TRADING AND TRANSPORT COMPANY WAS AUTHORIZED TO FURNISH JP-4 JET FUEL TO CERTAIN ACTIVITIES OF THE MILITARY SERVICES UNDER OPEN END CONTRACT ASP-22066. THE CONTRACTOR WAS REQUIRED TO DELIVER FUEL WHICH WAS (I) REFINED IN ITS OWN REFINERY.

B-141238, FEBRUARY 11, 1960, 39 COMP. GEN. 580

CONTRACTS - AWARDS - SMALL BUSINESS CONCERNS - COMPLIANCE - PRIOR DELIVERIES UNDER AN OPEN-END JET FUEL CONTRACT AWARDED PURSUANT TO A SMALL BUSINESS SET-ASIDE, WHICH CONTAINED A DEFAULT CLAUSE GRANTING TO THE CONTRACTOR A PERIOD OF TIME TO CURE PERFORMANCE DEFECTS, A CONTRACTOR WHO, AFTER BEING ADVISED BY THE PROCUREMENT AGENCY THAT THE BLENDING OF COMPONENTS OBTAINED FROM OTHER THAN A SMALL BUSINESS REFINERY DID NOT CONSTITUTE A REFINING OPERATION TO SATISFY THE SMALL BUSINESS REQUIREMENTS OF THE CONTRACT, WAS PROPERLY PERMITTED TO ESTABLISH TO THE SATISFACTION OF THE PROCUREMENT AGENCY THAT FUTURE DELIVERIES WOULD BE MADE IN COMPLIANCE WITH THE CONTRACT; THEREFORE, UNDER THE TERMS OF THE DEFAULT CLAUSE, NO ACTION NEED BE TAKEN WITH RESPECT TO PRIOR DELIVERIES WHICH WERE NOT IN COMPLIANCE WITH THE SMALL BUSINESS REQUIREMENTS OF THE CONTRACT.

TO THE DANAHO REFINING COMPANY, FEBRUARY 11, 1960:

REFERENCE IS MADE TO YOUR LETTER OF NOVEMBER 11, 1959, WITH ENCLOSURES, AND SUPPLEMENTAL LETTER DATED NOVEMBER 27, 1959, WITH ENCLOSURES, RELATIVE TO THE QUESTION OF WHETHER THE PETROLEUM TRADING AND TRANSPORT COMPANY HAS BEEN SUPPLYING JP-4 FUEL TO THE NAVAL AUXILIARY AIR STATION, CHASE FIELD, BEEVILLE, TEXAS, UNDER CONTRACTS ENTERED INTO BY THE MILITARY PETROLEUM SUPPLY AGENCY IN VIOLATION OF THE "SMALL BUSINESS CONDITIONS" OF THE CONTRACTS.

OUR INVESTIGATION DISCLOSES THAT THE MATTER INVOLVED WAS FIRST BROUGHT TO THE ATTENTION OF THE MILITARY PETROLEUM SUPPLY AGENCY ( MPSA) BY YOUR LETTER OF AUGUST 20, 1959, OR SHORTLY BEFORE THE EXPIRATION OF THE PERIOD ( APRIL 1 THROUGH SEPTEMBER 30, 1959) DURING WHICH PETROLEUM TRADING AND TRANSPORT COMPANY WAS AUTHORIZED TO FURNISH JP-4 JET FUEL TO CERTAIN ACTIVITIES OF THE MILITARY SERVICES UNDER OPEN END CONTRACT ASP-22066, LET PURSUANT TO THE SMALL BUSINESS SET-ASIDE PROVISIONS OF INVITATION FOR BIDS NO. 59-75. UNDER THE TERMS OF THAT CONTRACT, THE CONTRACTOR WAS REQUIRED TO DELIVER FUEL WHICH WAS (I) REFINED IN ITS OWN REFINERY, (II) OBTAINED FROM A REFINERY QUALIFYING AS A SMALL BUSINESS CONCERN RELATIVE TO THE PROCUREMENT OF PETROLEUM PRODUCTS, AS DEFINED IN SECTION 212 (C) OF THE SMALL BUSINESS ACT OF 1953, 15 U.S.C. 641 (C) ET SEQ., OR (III) OBTAINED BY A REFINER BIDDER FROM LARGE BUSINESS BY VIRTUE OF A BONA FIDE EXCHANGE AGREEMENT. ONLY THE SECOND CATEGORY COULD APPLY TO PETROLEUM TRADING AND TRANSPORT COMPANY SINCE THE LATTER IS NOT A REFINING CONCERN. IN THE LETTER OF AUGUST 20, 1959, YOU CONTENDED THAT THE FUEL BEING SUPPLIED TO CHASE FIELD UNDER THE CONTRACT CAME FROM THREE RIVERS REFINERY CORPORATION (ABOUT 86 PERCENT OF THE STOCK OF WHICH IS OWNED BY PETROLEUM TRADING AND TRANSPORT COMPANY, A PARTNERSHIP), AND THAT INFORMATION CONTAINED IN COMBINED FORM EH-3 AND SW-6 REPORTS, FILED BY THREE RIVER REFINERY CORPORATION WITH THE RAILROAD COMMISSION OF TEXAS, OIL AND GAS DIVISION, FOR THE PERIOD APRIL 1, TO JULY 31, 1959, CERTIFIED COPIES OF WHICH YOU SUBMITTED, INDICATED THAT SUCH FUEL WAS NOT BEING REFINED BY THREE RIVERS REFINERY CORPORATION, BUT WAS BEING PROCURED BY THE CORPORATION FROM LARGE BUSINESS.

FOLLOWING THE RECEIPT OF YOUR LETTER, MPSA STARTED AN INVESTIGATION OF THE MATTER, BUT IN THE MEANTIME THE AGENCY WAS EVALUATING BIDS UNDER IFB 59-164 WHICH HAD BEEN ISSUED ON JUNE 18, 1959, FOR BIDS TO BE OPENED JULY 15, 1959, PREPARATORY TO ISSUING CONTRACTS FOR DELIVERY OF JET FUEL DURING THE PERIOD OCTOBER 1, 1959, THROUGH MARCH 31, 1960, AND UNDER DATE OF SEPTEMBER 2, 1959, OPEN-END CONTRACT ASP-21977 WAS AWARDED TO PETROLEUM TRADING AND TRANSPORT COMPANY, AS THE LOW BIDDER, FOR ITEM N-129, CALLING FOR THE DELIVERY OF AN ESTIMATED 17,700,000 GALLONS OF JP-4 JET FUEL TO NAVAL AUXILIARY AIR STATION, CHASE FIELD, BEEVILLE, TEXAS, DURING THE PERIOD OF TIME INVOLVED. AWARD OF ALL BUT 150,000 GALLONS OF THE ITEM WAS MADE AS A SET-ASIDE, AND THE CONTRACT CONTAINED PROVISION RELATIVE TO THE SOURCE OF THE FUEL IDENTICAL WITH THOSE CONTAINED IN THE PRECEDING CONTRACT, REFERRED TO ABOVE. CLAUSE 29, DEFAULT, OF THE GENERAL PROVISIONS FOR PETROLEUM CONTRACTS, INCORPORATED IN THE CONTRACT, PROVIDES THAT THE GOVERNMENT MAY BY WRITTEN NOTICE OF DEFAULT TO THE CONTRACTOR TERMINATE THE WHOLE OR ANY PART OF THE CONTRACT IN ANY ONE OF THE FOLLOWING CIRCUMSTANCES: (I) IF THE CONTRACTOR FAILS TO MAKE DELIVERY OF THE SUPPLIES WITHIN THE TIME SPECIFIED; OR (II) IF THE CONTRACTOR "FAILS TO PERFORM ANY OF THE OTHER PROVISIONS OF THIS CONTRACT, * * * AND * * * DOES NOT CURE SUCH FAILURE WITHIN A PERIOD OF 10 DAYS (OR SUCH LONGER PERIOD AS THE CONTRACTING OFFICER MAY AUTHORIZE IN WRITING) AFTER RECEIPT OF NOTICE FROM THE CONTRACTING OFFICER SPECIFYING SUCH FAILURE.' ITALICS SUPPLIED.)

IN THE COURSE OF ITS INVESTIGATION, WHICH WAS FACILITATED AS A RESULT OF FACTS WHICH YOU BROUGHT TO THE AGENCY'S ATTENTION, MPSA ASCERTAINED THAT PETROLEUM TRADING AND TRANSPORT COMPANY HAD IN FACT FURNISHED JP-4 JET FUEL TO CHASE FIELD, UNDER CONTRACT ASP-22066, WHICH HAS BEEN OBTAINED FROM THREE RIVERS REFINERY CORPORATION, A QUALIFIED SMALL BUSINESS REFINERY, WHICH IN TURN HAD PURCHASED THE COMPONENTS THEREOF FROM LARGE BUSINESS; THAT THE ONLY PROCESS THREE RIVERS PERFORMED WITH RESPECT TO THE JET FUEL INVOLVED WAS TO BLEND THE PURCHASED COMPONENTS INTO THE FURNISHED PRODUCT WHICH WAS DELIVERED TO CHASE FIELD; AND THAT THE JET FUEL BEING FURNISHED UNDER CONTRACT ASP 21977 WAS ALSO BEING PROCURED FROM THREE RIVERS, WITH THE SAME CIRCUMSTANCES PREVAILING IN RESPECT TO ITS ORIGIN. WHEN APPROACHED ABOUT THE MATTER, PETROLEUM TRADING AND TRANSPORT COMPANY CONTENDED (1) THAT THE "BLENDING OF COMPONENTS" CONSTITUTED A REFINING OPERATION, AND (2) THAT SINCE THE JET FUEL HAD BEEN PURCHASED FROM THREE RIVERS, THE PRODUCT MUST BE HELD TO HAVE BEEN OBTAINED FROM A SMALL BUSINESS REFINERY AND HENCE IN COMPLIANCE WITH THE CONTRACT TERMS WHETHER OR NOT THE PRODUCT OR ITS COMPONENTS WERE ACTUALLY REFINED IN SUCH REFINERY.

MPSA, HOWEVER, CONCLUDED THAT BLENDING IS NOT REFINING, AS CONTENDED BY PETROLEUM TRADING AND TRANSPORT COMPANY, AND BY LETTER OF NOVEMBER 6, 1959, THE CONTRACTING OFFICER GAVE THE COMPANY UNTIL NOVEMBER 18, 1959, TO FURNISH SATISFACTORY EVIDENCE THAT THE PRODUCT "TO BE DELIVERED" UNDER THE SET-ASIDE PORTION OF CONTRACT ASP-21977 WOULD EITHER BE "REFINED BY A SMALL BUSINESS REFINING CONCERN OR BLENDED BY A SMALL BUSINESS CONCERN FROM COMPONENTS ORIGINATING IN A SMALL BUSINESS REFINERY.' THE LETTER STATED THAT IN THE EVENT THE COMPANY WAS UNABLE TO FURNISH SUCH EVIDENCE, ORDERING ACTIVITIES OF THE MILITARY SERVICES WOULD BE INSTRUCTED TO CEASE PLACING FURTHER ORDERS UNDER THE CONTRACT. THE NOVEMBER 18 DEADLINE WAS SUBSEQUENTLY EXTENDED TO DECEMBER 24, 1959, AND IN A LETTER OF JANUARY 7, 1960, TO US, WITH REFERENCE TO THE MATTER, THE ASSISTANT SECRETARY OF THE NAVY ( MATERIAL STATED THAT ON DECEMBER 23, 1959, PETROLEUM TRADING AND TRANSPORT COMPANY HAD INDICATED THAT THEY WOULD START DELIVERIES ESSENTIALLY IN ACCORDANCE WITH MPSA- REQUEST. HE ALSO ADVISED THAT THE DIFFICULTIES BEING EXPERIENCED IN THE SOUTHWEST TEXAS AREA IN PROMULGATION OF AN EFFECTIVE SMALL BUSINESS PROGRAM HAD CAUSED MPSA TO REVISE ITS SOLICITATION AND CONTRACT PROVISIONS IN THE MANNER INDICATED IN THE ATTACHED COPY OF " ADDITIONAL TERMS AND CONDITIONS OF THE INVITATION FOR BIDS," PROMULGATED DECEMBER 15, 1959, WHICH NEW PROVISIONS ARE STATED TO HAVE BEEN "COORDINATED BY MPSA WITH THE SMALL BUSINESS ADMINISTRATION.'

BY LETTER OF JANUARY 18, 1960, THE ASSISTANT SECRETARY OF THE NAVY ( MATERIAL) FURNISHED US WITH A COPY OF THE FOLLOWING TELEGRAM WHICH HAD BEEN RECEIVED BY THE CONTRACTING OFFICER FROM PETROLEUM TRADING AND TRANSPORT COMPANY ON DECEMBER 23, 1959:

CONFIRMING OUR CONVERSATION THIS MORNING WE WILL FURNISH MAXIMUM 800,000 GALLONS PER MONTH JP-4 OVER FIRST QUARTER 1960 IN COMPLIANCE WITH SMALL BUSINESS CERTIFICATE UNDER OUR CONTRACT ASP 21977. THIS QUANTITY WILL BE FURNISHED US BY THREE RIVERS REFINERY AND THEY HAVE ASSURED US THAT IT WILL BE REFINED BY THEM OR BLENDED FROM COMPONENTS OBTAINED BY THEM FROM SMALL BUSINESS

THE ASSISTANT SECRETARY STATED THAT IN VIEW OF THE ADVICE CONTAINED IN THE TELEGRAM, PETROLEUM TRADING AND TRANSPORT COMPANY WOULD BE PERMITTED TO DELIVER ONLY 800,000 GALLONS OF JP-4 JET FUEL PER MONTH AGAINST THE SET -ASIDE PORTION OF THE CONTRACT DURING THE REMAINDER OF THE CONTRACT PERIOD. ALSO, THE ASSISTANT SECRETARY STATED:

THE QUANTITY REQUIREMENTS OF NAAS CHASE FIELD HAVE BEEN RECHECKED AND REDUCED TO 12,307,468 GALLONS FOR THE SIX MONTHS PERIOD. AFTER CONSIDERING THE QUANTITY DELIVERED BY PETROLEUM TRADING AND TRANSPORT COMPANY AND AVAILABLE FROM THEM UNDER THE SET-ASIDE THERE REMAINED AN UNFILLED REQUIREMENT OF 5,100,000 GALLONS. THIS QUANTITY WAS OFFERED AS A SMALL BUSINESS SET-ASIDE AT THE CUT-OFF PRICE OF $0.09525 PER GALLON DELIVERED TO DESTINATION FIRST TO CACTUS PETROLEUM COMPANY, WHO DECLINED, AND THEN TO DANAHO REFINING COMPANY, WHO ACCEPTED THIS OFFER. BOTH CACTUS AND DANAHO WERE SMALL BUSINESS BIDDERS UNDER IFB 59-164 ON THE ITEM INVOLVED AND QUALIFIED FOR A SET-ASIDE AWARD.

REGARDLESS OF WHETHER PETROLEUM TRADING AND TRANSPORT COMPANY MAY BE SAID TO HAVE FAILED HERETOFORE TO DELIVER JP-4 JET FUEL COMPLYING WITH THE SMALL BUSINESS CONDITIONS OF THE CONTRACT IN THE MANNER INDICATED, SINCE IT NOW APPEARS THAT THE COMPANY HAS ESTABLISHED TO THE SATISFACTION OF THE CONTRACTING OFFICER THAT THE TERMS OF THE CONTRACT WILL THENCEFORTH BE COMPLIED WITH IN THIS RESPECT, AS AUTHORIZED UNDER THE PROVISIONS OF CLAUSE 29 OF THE GENERAL PROVISIONS, SUPRA, WE ARE CLOSING OUR FILE IN THE MATTER.

A COPY OF THIS LETTER IS BEING FURNISHED TO THE SENATE SELECT COMMITTEE ON SMALL BUSINESS, WHICH CONTACTED US INFORMALLY RELATIVE TO THE SUBJECT MATTER OF YOUR LETTERS.