B-147843, JUL. 1, 1968

B-147843, JUL. 1, 1968

TO MR. ROBERT L. MCCARTY:

WE REFER TO YOUR TELEGRAM OF FEBRUARY 9, 1968, AND SUBSEQUENT CORRESPONDENCE IN BEHALF OF THE EVAN JONES COAL COMPANY AND USIBELLI COAL MINE, INCORPORATED, BOTH OF ALASKA, PROTESTING THE CONVERSION OF THE COAL FUELED POWER PLANTS AT TWO ALASKAN MILITARY INSTALLATIONS, ELMENDORF AIR FORCE BASE AND FORT RICHARDSON, TO GAS OPERATION. YOUR CLIENT COAL PRODUCERS WERE NOT IN A POSITION TO BID DIRECTLY UPON EITHER THE GAS SUPPLY CONTRACT OR THE FURNANCE CONVERSION PROJECTS. HOWEVER, BECAUSE THE COAL SUPPLIER'S PRIOR POSITION AS THE PRIMARY SOURCE OF FUEL FOR THESE POWER PLANTS HAS BEEN ADVERSELY AFFECTED BY THE GOVERNMENT'S DECISION TO SWITCH FROM COAL TO GAS OPERATION, WE ARE CONSIDERING YOUR PROTEST.

YOU FIRST CONTEND THAT THE CONTRACTS FOR THE EQUIPMENT AND SERVICES NEEDED TO CONVERT THE POWER PLANT FURNACES FROM COAL TO GAS OPERATION ARE ILLEGAL BECAUSE OF CERTAIN EXPRESS RESTRICTIONS CONTAINED IN THE STATUTE AUTHORIZING THE CONVERSIONS, THE MILITARY CONSTRUCTION AUTHORIZATION ACT OF 1967, P.L. 89-568, 89 CONG. 2ND SESS., 80 STAT. 739, HEREAFTER THE 1967 ACT.

CONTRACTS WERE AWARDED TO LORD BROTHERS CONTRACTORS, INCORPORATED, FOR THE FORT RICHARDSON CONVERSIONS AND TO WYATT AND KIPPER ENGINEERS, INCORPORATED, FOR THE ELMENDORF CONVERSIONS, UNDER ADVERTISED SOLICITATIONS NOS. DACA85-68-B-0026 AND DACA85-68-B-0022, RESPECTIVELY, BOTH ISSUED JANUARY 12, 1968, BY THE DISTRICT ENGINEER, ALASKAN DISTRICT, CORPS OF ENGINEERS. WE ARE ADVISED THAT SUBSTANTIAL WORK HAS BEEN COMPLETED UPON BOTH OF THESE PROJECTS.

THESE CONVERSION PROJECTS WERE INDIVIDUALLY AUTHORIZED IN TITLES I AND III OF THE 1967 ACT. HOWEVER, ALL MILITARY CONSTRUCTION PROJECTS AUTHORIZED UNDER THIS ACT WERE SUBJECT TO THE CONDITION SET OUT IN SECTION 607, WHICH PROVIDES:

"NOTWITHSTANDING ANY OTHER PROVISION OF LAW, NONE OF THE MILITARY PUBLIC WORKS AUTHORIZED BY TITLE I, II, III, OR IV OF THIS ACT MAY BE PLACED UNDER CONTRACT UNTIL SUCH TIME AS THESE MILITARY PUBLIC WORKS PREVIOUSLY AUTHORIZED BY LAW, AND FOR WHICH FUNDS HAVE BEEN APPROPRIATED AND FOR WHICH THE AUTHORIZATION HAS BEEN EXTENDED BY SECTION 606 OF THIS ACT, HAVE BEEN PLACED UNDER CONTRACT. THE FOREGOING PROVISION SHALL NOT APPLY TO MILITARY PUBLIC WORKS PREVIOUSLY AUTHORIZED BY LAW WHICH HAVE HERETOFORE BEEN DEFERRED AND WHICH ARE CERTIFIED BY THE SECRETARY OF DEFENSE TO BE NO LONGER CURRENT AND NECESSARY TO THE MISSION OF THE MILITARY DEPARTMENT OR MILITARY INSTALLATION CONCERNED. CERTIFICATIONS BY THE SECRETARY OF DEFENSE UNDER THIS SECTION SHALL BE MADE IN WRITING TO THE COMMITTEES ON ARMED SERVICES OF THE SENATE AND HOUSE OF REPRESENTATIVES.

"NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS SECTION, ANY MILITARY PUBLIC WORK AUTHORIZED BY TITLE I, II, III, OR IV OF THIS ACT MAY BE PLACED UNDER CONTRACT IF THE SECRETARY OF DEFENSE DETERMINES AND CERTIFIES IN WRITING TO THE COMMITTEES ON ARMED SERVICES OF THE SENATE AND THE HOUSE OF REPRESENTATIVES THAT SUCH PROJECT IS (1) URGENTLY REQUIRED IN THE INTERESTS OF NATIONAL DEFENSE, AND (2) MORE ESSENTIAL TO THE INTERESTS OF NATIONAL DEFENSE THAN THOSE MILITARY PUBLIC WORKS PREVIOUSLY AUTHORIZED BY LAW, DESCRIBED IN THE FIRST SENTENCE OF THIS SECTION.

THE MARCH 29, 1968, REPORT FROM THE OFFICE OF THE CHIEF OF ENGINEERS (CODE ENGGC-M) TO THIS OFFICE DOES NOT QUESTION YOUR CONTENTION THAT CERTAIN MILITARY CONSTRUCTION PROJECTS AUTHORIZED PRIOR TO THE 1967 ACT HAVE NOT BEEN PLACED UNDER CONTRACT. FURTHER, IT DOES NOT APPEAR THAT THE SECRETARY OF DEFENSE HAS CERTIFIED TO THE COMMITTEES ON ARMED SERVICES OF THE SENATE AND HOUSE OF REPRESENTATIVES THAT THESE TWO FURNACE CONVERSION PROJECTS QUALIFY INDIVIDUALLY UNDER THE EXCEPTION TO SECTION 607 OF THE 1967 ACT PERMITTING CONSTRUCTION OF ITEMS DETERMINED TO BE BOTH ESSENTIAL AND URGENT TO THE NATIONAL DEFENSE WITHOUT REGARD TO THE STATUS OF PREVIOUSLY AUTHORIZED MILITARY CONSTRUCTION.

THE ARMY REPORT CONTENDS THAT THIS FAILURE IS NOW IMMATERIAL, FOR THE COMMITTEES HAVE GRANTED BLANKET APPROVAL FOR CONSTRUCTION OF ALL THE PROJECTS AUTHORIZED IN THE 1967 ACT BY MEANS OF AN EXCHANGE OF CORRESPONDENCE BETWEEN THE SECRETARY OF DEFENSE AND THE CHAIRMEN OF THE COMMITTEES ON ARMED SERVICES OF THE SENATE AND THE HOUSE OF REPRESENTATIVES.

THE SECRETARY OF DEFENSE, IN HIS LETTER OF FEBRUARY 11, 1967, INFORMED THE COMMITTEE CHAIRMEN THAT: "IN LIGHT OF OUR RECENT ACTION IN RELEASING PREVIOUSLY AUTHORIZED PROJECTS FROM DEFERRAL, THE CIRCUMSTANCES UNDER WHICH SECTION 607 WAS ENACTED HAVE CHANGED MATERIALLY. ASIDE FROM THOSE PROJECTS DETERMINED TO BE NO LONGER CURRENT, A LIST OF WHICH IS ENCLOSED AND AS TO WHICH I CERTIFY THAT THEY ARE NO LONGER CURRENT AND NECESSARY TO THE MISSION OF THE MILITARY DEPARTMENT OR MILITARY INSTALLATION CONCERNED, THE PREVIOUSLY AUTHORIZED PROJECTS AND THE 1967 PROJECTS WILL PROCEED IN THE ORDINARY MANNER. SINCE, THEREFORE, THERE WILL NO LONGER BE ANY DEFERRAL OF CONSTRUCTION, IT WOULD APPEAR THAT THE PROCEDURE OF CERTIFYING AS TO URGENCY AND RELATIVE ESSENTIALITY IS NO LONGER NECESSARY TO MEET THE OBJECTIVE OF SECTION 607. "IN PLACING THE RELEASED PROJECTS UNDER CONTRACT, IT IS PLANNED TO FOLLOW ORDERLY EXECUTION SCHEDULES SO AS TO OBTAIN THE MOST FAVORABLE BIDDING POSSIBLE. CERTAIN FY 1967 PROJECTS MAY CONSEQUENTLY ACTUALLY REACH THE CONSTRUCTION CONTRACT STAGE AHEAD OF PRIOR YEAR PROJECTS JUST RELEASED BECAUSE OF THE WIDE VARIETY OF LOCAL AND OTHER FACTORS, INCLUDING DESIGN AND WEATHER, WHICH PACE SCHEDULING OF CONSTRUCTION PROJECTS. PLEASE BE ASSURED, HOWEVER, THAT WE FULLY INTEND TO PROCEED EXPEDITIOUSLY WITH ALL OF THE RELEASED ITEMS.'

THE CHAIRMAN OF THE HOUSE ARMED SERVICES COMMITTEE, IN HIS LETTER OF FEBRUARY 13, 1967, INDICATED HIS AGREEMENT WITH THE SECRETARY OF DEFENSE IN VIEW OF THE RELEASE OF FUNDS FOR ALL DEFERRED PROJECTS. ACCORDINGLY, THE CHAIRMAN COULD "SEE NO REASON FOR THE CERTIFICATION AS REQUIRED BY SECTION 607".

THE CHAIRMAN OF THE SENATE ARMED SERVICES COMMITTEE, IN A LETTER DATED FEBRUARY 17, 1967, STATED THAT IN HIS OPINION THE PLAN OUTLINED IN THE SECRETARY OF DEFENSE'S LETTER "FULLY COMPLIED WITH THE INTENT OF THE COMMITTEE IN PROPOSING SECTION 607".

ON THE BASIS OF THIS EXCHANGE OF CORRESPONDENCE, THE ARMY REPORT CONCLUDES THAT THE REQUIREMENTS OF SECTION 607 HAVE NOT BEEN VIOLATED BY THE AWARDING OF THE FURNACE CONVERSION CONTRACTS, EVEN THOUGH CERTAIN PROJECTS AUTHORIZED IN PRIOR YEARS HAVE NOT AS YET BEEN PLACED UNDER CONTRACT.

YOU NEXT CONTEND THAT WHATEVER THE EFFECT OF THIS EXCHANGE OF LETTERS MIGHT BE, IT HAS BEEN NEGATED BY THE SECRETARY OF DEFENSE'S MEMORANDUM DATED OCTOBER 5, 1967, POINTING OUT THE THEN UNCERTAIN STATE OF FEDERAL FINANCES AND PROHIBITING NEW MILITARY CONSTRUCTION CONTRACTS EXCEPT FOR THOSE ESSENTIAL TO THE EFFORT IN SOUTHEAST ASIA.

THIS PROBLEM APPEARS TO BE SATISFACTORILY ANSWERED BY THE MAY 16, 1968, LETTER FROM CHAPMAN, DISALLE AND FRIEDMAN, COUNSEL FOR THE ALASKA PIPELINE COMPANY, INDICATING THAT THE OCTOBER 5, 1967, TEMPORARY RESTRAINT ON CONSTRUCTION EXPENDITURES WAS LIFTED FEBRUARY 9, 1968, SO THAT MILITARY CONSTRUCTION PROJECTS PRESENTLY AUTHORIZED AND FUNDED BY CONGRESS ARE NO LONGER RESTRICTED. SEE HEARING BEFORE THE SUBCOMMITTEE ON MILITARY CONSTRUCTION OF THE HOUSE COMMITTEE ON ARMED SERVICES ON MILITARY CONSTRUCTION AUTHORIZATION FISCAL YEAR 1969, 90TH CONG., 2ND SESS. 7636- 7637 (1968).

IT IS OUR OPINION THAT THE REMOVAL OF THE EXPENDITURE RESTRICTION RENDERS ANY QUESTION REGARDING ITS EFFECT ON THIS PROCUREMENT ACADEMIC. ACCORDINGLY, THIS ASPECT OF YOUR PROTEST NEED NOT BE CONSIDERED FURTHER.

YOU ALSO QUESTION THE POWER OF THE COMMITTEES ON ARMED SERVICES TO SUBSTITUTE AN EXCHANGE OF LETTERS FOR WHAT YOU VIEW AS A MANDATORY REQUIREMENT OF SECTION 607 DIRECTING THAT THE SECRETARY OF DEFENSE NOTIFY THE COMMITTEE OF EACH AND EVERY DETERMINATION. IT IS ALLEGED THAT THIS CONSTITUTES AN ILLEGAL WAIVER OF A STATUTORY REQUIREMENT UNDER SUCH CASES AS PENNSYLVANIA COMPANY V INTERNATIONAL COAL MINING COMPANY, 230 U.S. 184, 199 (1913) AND DISTRICT OF COLUMBIA V THOMPSON, 346 U.S. 100, 114 (1953).

THIS OFFICE HAS NO AUTHORITY TO QUESTION THE ACTIONS OF A CONGRESSIONAL COMMITTEE. IT IS OUR INFORMAL OPINION, HOWEVER, THAT YOUR CONTENTIONS IN THIS REGARD ARE WITHOUT FOUNDATION, FOR THE COMMITTEE'S FUNCTION UNDER SECTION 607 WAS SIMPLY TO RECEIVE NOTICE OF DETERMINATIONS OF URGENCY RENDERED BY THE SECRETARY OF DEFENSE.

THE SECRETARY RETAINED THE POWER TO ACT UPON HIS OWN DETERMINATIONS, AND TO APPROVE DEVIATIONS FROM THE CONGRESSIONAL SCHEME TO CONSTRUCT PREVIOUS YEARS' PROJECTS BEFORE THE CURRENT YEARS-. ON THE OTHER HAND, THE COMMITTEE'S DUTIES INVOLVED NO DIRECT REVIEW OR APPROVAL OF THE EXECUTIVE DETERMINATIONS, EXCEPT FOR THE INDEFINITE POSSIBILITY OF FUTURE LEGISLATION.

THEREFORE, WHEN THE SECRETARY NOTIFIED THE COMMITTEE CHAIRMEN THAT ALL PREVIOUSLY AUTHORIZED PROJECTS WOULD BE UNDERTAKEN IN THE ORDINARY MANNER ALONG WITH THE PRESENT YEARS' PROJECTS, THE SECRETARY WAS, IN EFFECT, ADVISING THEM THAT THERE MIGHT BE DEVIATIONS FROM THE SCHEME OF SECTION 607 OF THE 1967 ACT, IN THAT CURRENT PROJECTS MIGHT BE BUILT BEFORE PREVIOUSLY AUTHORIZED PROJECTS. WE BELIEVE THIS ADVICE SUBSTANTIALLY COMPLIED WITH THE NOTICE REQUIREMENT OF SECTION 607, AND ELIMINATED THE NEED FOR FURTHER CASE-BY-CASE NOTIFICATION.

THIS SUBSTITUTION OF ONE SINGLE AGREEMENT WHICH SATISFIED THE PURPOSE OF THE STATUTE IS IN OUR VIEW A PROCEDURAL MATTER WELL WITHIN THE COMMITTEE'S DISCRETION, RATHER THAN A WAIVER OF THE STATUTORY REQUIREMENTS.

ON THE BASIS OF THE ABOVE DISCUSSION WE HAVE NO OBJECTION TO THE CONTRACTS FOR THE FURNANCE CONVERSION AT ELMENDORF AIR FORCE BASE AND FORT RICHARDSON, ALASKA.

YOU FURTHER CONTEND THAT THE PRESENT NATURAL GAS SERVICE CONTRACT AWARDED ALASKA PIPELINE WAS IMPROPER BECAUSE COMPETING FUELS WERE NOT GIVEN AN OPPORTUNITY TO COMPETE. THIS CONTRACT, NO. DAFA-03-67-C-0084, FORMALLY ACCEPTED ON SEPTEMBER 22, 1967, PROVIDES FOR THE FURNISHING OF NATURAL GAS SERVICE TO ELMENDORF AIR FORCE BASE AND FORT RICHARDSON FOR A TEN-YEAR PERIOD COMMENCING WITH THE INITIATION OF SERVICE.

IN ORDER TO CONNECT THE BASES TO BE SERVED WITH ALASKA PIPELINE'S EXISTING FACILITIES, EIGHT MILES OF PIPELINE ARE BEING CONSTRUCTED OUTSIDE OF THE BASE LIMITS, PLUS METERING STATIONS AND ADDITIONAL LENGTHS WITHIN THE BASES. UNDER PARAGRAPH 1 (B) OF THE CONTRACT, THE COST OF THIS CONSTRUCTION IS RECOVERABLE ON A PRO RATA BASIS IN THE EVENT THE GOVERNMENT CANCELS THE GAS SERVICE CONTRACT BEFORE THE EXPIRATION OF TEN YEARS.

THIS CONTRACT REPRESENTS NEARLY A DECADE OF EFFORT ON THE PART OF THE DEPARTMENT OF DEFENSE TO TAKE ADVANTAGE OF THE FUEL SAVINGS AND OPERATIONAL EFFICIENCIES POSSIBLE WITH THE DEVELOPMENT OF NATURAL GAS RESERVES IN THE ANCHORAGE AREA. WE UNDERSTAND THAT THESE TWO MILITARY INSTALLATIONS ARE THE LAST REMAINING COAL CONSUMERS OF ANY SIGNIFICANCE IN THE AREA, AND THAT THE PRIMARY PROTESTANT, THE EVAN JONES COAL COMPANY, WILL CEASE OPERATIONS IF IT CANNOT OBTAIN FURTHER CONTRACTS FOR THIS SERVICE.

THE RECORD FURTHER SHOWS THAT THE DEPARTMENT OF DEFENSE HAS STUDIED THE SUBJECT FUEL CONVERSION ON MANY OCCASIONS OVER A PERIOD OF YEARS AND THAT THE CONVERSION WAS THE SUBJECT OF THOROUGH CONGRESSIONAL SCRUTINY BY BOTH THE PERTINENT AUTHORIZING AND APPROPRIATING COMMITTEES. THESE HEARINGS LED TO APPROVAL OF THE FURNACE CONVERSIONS ON A LINE ITEM BASIS. FURTHERMORE, SOME ASPECTS OF THIS CONVERSION WERE THE SUBJECTS OF OUR EARLIER DECISIONS, B-147843 OF JUNE 12, 1962, AND B-155725 OF AUGUST 5, 1965. IT IS THEREFORE APPARENT THE ARMY'S DECISION TO CONVERT ELMENDORF AIR FORCE BASE AND FORT RICHARDSON FROM COAL TO GAS OPERATION IS THE RESULT OF CAREFUL, UNHURRIED PLANNING. IN ADDITION, THE PRESENT GAS SERVICE CONTRACT WAS PRECEDED BY AN ATTEMPTED FUEL PROCUREMENT INVOLVING COMPETITION BETWEEN THE THREE FUELS MARKETED IN THE AREA, COAL, OIL AND NATURAL GAS. THIS COMPETITION RESULTED IN AN AWARD ON DECEMBER 18, 1964, OF A FIVE-YEAR CONTRACT TO ALASKA PIPELINE FOR THE FURNISHING OF GAS SERVICE TO THE TWO INSTALLATIONS. HOWEVER, BECAUSE THIS CONTRACT WAS CONTINGENT UPON OBTAINING BOTH AN AUTHORIZATION AND AN APPROPRIATION FOR THE CONVERSION WORK NEEDED, THE CONTRACT EXPIRED BY ITS OWN TERMS WHEN CONGRESS HAD FAILED TO ACT BY THE CONTRACT'S AMENDED CUT-OFF DATE, JANUARY 1, 1967.

YOU CONTEND THAT BECAUSE THE PRESENT CONTRACT WAS NOT THE RESULT OF COMPETITION BETWEEN ALL FUELS, AS WAS THE EARLIER CONTRACT, THE AWARD WAS IMPROPER FOR FAILURE TO OBTAIN ADEQUATE COMPETITION.

WE DO NOT AGREE THAT COMPETITION BETWEEN ALL FUELS WAS NECESSARY FOR IT HAD BEEN PREVIOUSLY DETERMINED THAT THE GOVERNMENT'S REQUIREMENT WAS FOR A SUPPLY OF NATURAL GAS. THIS DECISION WAS PROMISED UPON SUCH DOCUMENTS AS THE MARCH 24, 1962, AND THE OCTOBER 24, 1964, MEMORANDA OF THE DEPUTY ASSISTANT SECRETARY OF THE ARMY (I-AND-L) (INSTALLATION) INCLUDED IN THE MARCH 29, 1968, REPORT TO THIS OFFICE, AND THE FUEL SELECTION ANALYSIS OF JUNE 23, 1967, FOUND ON PAGE 369 OF THE HEARINGS BEFORE A SUBCOMMITTEE OF THE HOUSE COMMITTEE ON APPROPRIATIONS ON MILITARY CONSTRUCTION APPROPRIATIONS FOR 1968, 90TH CONG., 1ST SESS., PT. 4 (1967). IN ADDITION THE SAVING POSSIBLE UNDER THE TERMS OF THE PREVIOUS CONTRACT FOR GAS SERVICE DEMONSTRATED ON A PRACTICAL BASIS THE CONCLUSIONS OF THE VARIOUS STUDIES REGARDING THE GOVERNMENT'S FUEL REQUIREMENTS. IN THE ABSENCE OF FAVORITISM, PERSONAL PREJUDICE OR ABUSE OF DISCRETION THIS OFFICE WILL NOT QUESTION AN ADMINISTRATIVE AGENCY'S DETERMINATION OF ITS NEEDS, FOR THE PREPARATION OF SPECIFICATIONS FOR THE PROCUREMENT OF SUPPLIES AND SERVICES IS THE PRIMARY RESPONSIBILITY OF THE PROCURING AGENCY, B-146046, AUGUST 9, 1961. IN THIS CONNECTION, THERE IS NECESSARILY CONSIDERABLE SCOPE FOR THE EXERCISE OF ADMINISTRATIVE DISCRETION AND, IN THE ABSENCE OF A CLEAR INDICATION OF THE ABUSE OF THAT DISCRETION, WE WILL NOT INTERFERE WITH THE ADMINISTRATIVE JUDGMENT. 17 COMP. GEN. 554; 40 COMP. GEN. 294; B-153901, JUNE 16, 1964.

THERE IS NOTHING IN THE RECORD TO INDICATE THAT THE DEPARTMENT OF THE ARMY WAS MOTIVATED BY ANY DESIRE OTHER THAN TO OBTAIN FOR THE GOVERNMENT THE MOST EFFICIENT AND ECONOMIC FUEL AVAILABLE IN THE ANCHORAGE AREA. ADDITION, THE DECISIONS OF THIS OFFICE, WITHOUT EXCEPTION, ARE TO THE EFFECT THAT THE UNITED STATES IS NOT TO BE PLACED IN A POSITION OF HAVING A PROSPECTIVE BIDDER DICTATE ITS REQUIREMENTS. B-148922, SEPTEMBER 4, 1962.

IT IS OUR OPINION THAT THE GOVERNMENT ENGINEERS AND FIELD OFFICERS FAMILIAR WITH THE GOVERNMENT'S REQUIREMENTS ARE, OR SHOULD BE, BETTER QUALIFIED TO JUDGE THE GOVERNMENT'S NEEDS THAN ANY REPRESENTATIVE OF A PARTICULAR INDUSTRY WHOSE MAIN INTEREST IS TO SELL HIS PRODUCT. 16 COMP. GEN. 38, 41.

WE BELIEVE THAT THE RECORD ESTABLISHES THE REASONABLENESS OF THE ARMY'S DETERMINATION THAT THE FURNACES AT ELMENDORF AND FORT RICHARDSON REQUIRE A SUPPLY OF NATURAL GAS IN ORDER TO ACHIEVE THE MOST ECONOMICAL OPERATION. ACCORDINGLY, THE GOVERNMENT WAS NOT REQUIRED TO SOLICIT OTHER FUELS.

YOU FURTHER QUESTION THE REASONABLENESS OF THE PRICE OF THE GAS UNDER THE CONTRACT WITH ALASKA PIPELINE. YOU COMPARE THE PRESENT CONTRACT PRICE OF 34 CENTS PER UNIT TO THE 29 CENT PRICE UNDER THE PRIOR CONTRACT, AND ALLEGE THAT UNDER THE PRESENT PRICE ALASKA PIPELINE RECEIVES A SPREAD OF 14 CENTS BETWEEN ITS COST OF GAS AT THE WELLHEAD AND ITS SALE PRICE, WHILE UNDER THE PREVIOUS CONTRACT A 4 CENT SPREAD WAS RECEIVED. FROM THIS IT IS CONCLUDED THAT IN THE ABSENCE OF EFFECTIVE COMPETITION FROM COMPETING FUELS ALASKA PIPELINE HAS RAISED ITS PRICES UNNECESSARILY HIGH.

THE ADMINISTRATIVE REPORT OF MARCH 29, 1968, TO THIS OFFICE CONTRADICTS THESE FIGURES AND SHOWS, INSTEAD, THAT UNDER THE PRIOR CONTRACT ALASKA PIPELINE HAD A COST OF 20 CENTS PER UNIT AND SALE PRICE OF 29 CENTS, RESULTING IN A 9 CENTS PER UNIT SPREAD, WHICH COMPARES FAVORABLY WITH THE PRESENT COST OF 24 CENTS PER UNIT AND A SALE PRICE OF 34 CENTS, FOR A SPREAD OF 10 CENTS PER UNIT.

IN DISPUTES OF THIS TYPE, IT IS THE LONG STANDING POLICY OF THIS OFFICE TO RELY UPON THE ADMINISTRATIVE VERSION OF THE FACTS IN THE ABSENCE OF CONVINCING PROOF TO THE CONTRARY.

YOU OFFER TWO LETTERS DATED APRIL 5, 1965, AND APRIL 8, 1965, PURPORTING TO BE AN EXCHANGE BETWEEN THE ALASKA PIPELINE COMPANY AND MARATHON OIL COMPANY CONFIRMING A PRICE OF 20 CENTS PER UNIT FOR A FIVE-YEAR PERIOD. SINCE FIVE YEARS HAVE NOT ELAPSED, YOU CONTEND THAT THE PRESENT PRICE IS 20 CENTS PER UNIT. HOWEVER, BECAUSE THIS EXCHANGE OF LETTERS SETTING A FIVE-YEAR WELLHEAD PRICE OCCURRED SHORTLY AFTER THE DECEMBER 18, 1964, AWARD OF THE PRIOR FIVE-YEAR CONTRACT TO ALASKA PIPELINE, IT IS NOT UNREASONABLE TO ASSUME THE TWO EVENTS WERE RELATED, AND THAT WHEN THE CONTRACT BETWEEN ALASKA PIPELINE AND THE GOVERNMENT EXPIRED WITHOUT TAKING EFFECT, THE AGREEMENT SHOWN IN THE LETTERS LOST ITS REASON FOR BEING.

IN REGARD TO THE REASONABLENESS OF THE PRESENT PRICE OF 34 CENTS PER UNIT, WE CALL YOUR ATTENTION TO PAGE 30 OF YOUR LETTER OF DECEMBER 11, 1964, TO THIS OFFICE CONCERNING THE PRIOR GAS SERVICE CONTRACT BETWEEN ALASKA PIPELINE AND THE GOVERNMENT, IN WHICH, YOU STATED:

"* * * BASED UPON A RETURN OF 6.5 PERCENT THE COST OF SERVICE TO THE PIPELINE COMPANY, COMPUTED MOST CONSERVATIVELY, IS 38 CENTS PER MM BTU.'

AS THIS PRICE OF 38 CENTS PER UNIT WAS PREMISED UPON AN ASSUMED WELLHEAD COST OF 25 CENTS PER UNIT, YOU THEN CONTENDED THAT A SPREAD OF 13 CENTS PER UNIT REPRESENTED THE MINIMUM COST OF SERVICE FOR ALASKA PIPELINE TO SUPPLY FORT RICHARDSON AND ELMENDORF AIR FORCE BASE.

YOUR LATER LETTER OF APRIL 7, 1965, ON PAGE 26, REVISED WHAT WAS PRESENTED AS THE MINIMUM REASONABLE PRICE UPWARD TO 39.1 CENTS PER UNIT, FOR A SPREAD OF 14.1 CENTS BETWEEN COST AND SALE PRICE. AS YOU WILL RECALL, THESE CONTENTIONS WERE PREMISED UPON THE REPORT OF A CONSULTANT IN THE FIELD OF UTILITY RATES YOU RETAINED TO COMPUTE WHAT YOU DESCRIBED AS "A JUST AND REASONABLE PRICE" FOR ALASKA PIPELINE SERVICES.

THEREFORE, WE FIND NO BASIS IN THE RECORD BEFORE US TO QUESTION THE REASONABLENESS OF THE PRESENT GAS SERVICE CONTRACT RATES.

YOUR LETTER OF APRIL 19, 1968, ON PAGE SEVEN ALSO RAISES THE FOLLOWING QUESTION REGARDING THE MATERIAL CONTAINED IN THE MARCH 29, 1968, AGENCY REPORT: "* * * THE ARMY CONCEDES, HOWEVER, THAT THE SHELL OIL COMPANY PROPOSAL OF 15.2 CENTS OFFERED SAVINGS OVER THAT SUBMITTED BY THE ALASKA PIPELINE COMPANY. (SEE INCLOSURE 13, PARAGRAPH 2D). THE REASON GIVEN FOR REJECTING THIS PROPOSAL IS THAT THE SAVINGS INVOLVED OVER THE OFFER OF ALASKA PIPELINE COMPANY WOULD NOT AMORTIZE THE ESTIMATED COST OF $7,650,000 FOR THE INSTALLATION OF A GAS TRANSMISSION FACILITY WITHIN A FIVE YEAR PERIOD. IN THE SAME INCLOSURE 13, THE ARMY THEN JUSTIFIES CONVERSION UNDER THE ALASKA PIPELINE COMPANY PROPOSAL BY ARRIVING AT - ANNUAL SAVINGS' OF $2,158,327 OVER THE CURRENT COST OF COAL AND CONCLUDES THAT THIS WOULD AMORTIZE CONVERSION COSTS OF $2,048,000 WITHIN ONE YEAR. UTILIZING THE ARMY'S OWN -ANNUAL SAVINGS' FIGURE (WITHOUT ATTEMPTING TO INCREASE THIS AS THE ARMY CLEARLY CONCEDES IT WOULD BE IF THEY PROCEEDED WITH THE SHELL PROPOSAL), THE -SAVINGS' OVER THE FIVE YEAR AMORTIZATION PERIOD WOULD AMOUNT TO $10,791,635. EVEN THIS -SAVING- WOULD OBVIOUSLY AMORTIZE THE CONVERSION COSTS OF $2,048,000 AND THE TRANSMISSION PIPELINE COST OF $7,650,000 (TOTAL $9,698,000) IN THE REQUIRED FIVE YEAR PERIOD. IT WAS CLEARLY DISCRIMINATORY TO USE THE SAVINGS OVER COAL IN ANALYSING THE ALASKA PIPELINE COMPANY PROPOSAL BUT REJECTING THIS BASIS AND UTILIZING THE SAVINGS OVER THE ALASKA PIPELINE COMPANY PROPOSAL, IN EVALUATING THE SHELL BID. FOR THIS REASON ALONE, THE ALASKA PIPELINE COMPANY CONTRACT SHOULD BE CANCELLED.'

THE ABOVE ADMITS THAT WHEN THE SHELL OFFER IS COMPARED DIRECTLY TO THE OFFER OF ALASKA PIPELINE, SHELL'S LOWER WELLHEAD PRICE WILL NOT SAVE THE GOVERNMENT ENOUGH MONEY OVER THE STIPULATED FIVE-YEAR PERIOD TO COVER THE GOVERNMENT'S COST OF CONSTRUCTING A PIPELINE. SINCE ALASKA PIPELINE'S OFFER DOES INCLUDE ALL NECESSARY PIPELINES, ITS OFFER IS LESS EXPENSIVE OVER A FIVE-YEAR PERIOD THAN SHELL'S OFFER.

IF ALASKA PIPELINE'S OFFER IS LESS EXPENSIVE THAN SHELL'S WHEN THE TWO ARE COMPARED DIRECTLY TO EACH OTHER, THEN WHEN THE TWO OFFERS ARE COMPARED TO ANY THIRD PRICE, SUCH AS THE ESTIMATED FIVE-YEAR COST OF COAL, THE ALASKA PIPELINE OFFER WILL REMAIN THE LESS EXPENSIVE OFFER. TO CONTEND OTHERWISE WOULD BE A LOGICAL ABSURDITY.

IT THEREFORE CLEARLY MADE NO DIFFERENCE WHATEVER WHETHER SHELL'S OFFER WAS EVALUATED BY COMPARING IT TO THE OFFER OF ALASKA PIPELINE OR BY COMPARING IT TO THE ESTIMATED COST OF COAL.

YOUR LETTERS OF FEBRUARY 14 AND APRIL 19, 1968, CONTAIN A NUMBER OF OTHER ARGUMENTS OF THE TYPE DISCUSSED IMMEDIATELY ABOVE, AND ALTHOUGH THEY HAVE ALL BEEN CONSIDERED, WE DO NOT BELIEVE ANY USEFUL PURPOSE WOULD BE SERVED BY OUR FURTHER DISCUSSION OF SUCH MATERIAL.

ON THE BASIS OF THE RECORD BEFORE US, WE HAVE NO LEGAL OBJECTION TO THE CONTRACT AWARDS IN QUESTION. ACCORDINGLY, YOUR PROTEST IS DENIED.