B-135496, JUN. 2, 1958

B-135496, JUN. 2, 1958

TO HONORABLE FRANKLIN FLOETE, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

REFERENCE IS MADE TO YOUR LETTER OF APRIL 2, 1958, AND ENCLOSURES, RESPONDING TO OUR REQUEST DATED MARCH 19, 1958, FOR A REPORT ON THE FACTS AND CIRCUMSTANCES INVOLVED IN THE PROTEST OF INTERNATIONAL MINERALS AND METALS CORPORATION, AS SET FORTH IN ITS LETTER OF MARCH 11, 1958, WHEREIN OBJECTION IS RAISED TO THE METHOD ADOPTED BY YOUR AGENCY FOR PRICING COPPER FURNISHED UNDER CONTRACT NO. DMP-19, DATED AUGUST 29, 1952, BETWEEN THE DEFENSE MATERIALS PROCUREMENT AGENCY AND SAN MANUEL COPPER CORPORATION. BY AN INSTRUMENT EXECUTED ON JUNE 30, 1953, IDENTIFIED AS A SALES AND SERVICES AGREEMENT, THE PROTESTANT WAS AUTHORIZED TO ACT AS AGENT FOR THE CONTRACTOR IN CONNECTION WITH THE COPPER TO BE PRODUCED FROM ITS SAN MANUEL MINING PROPERTIES LOCATED IN PINAL COUNTY, ARIZONA.

THE BASIC CONTRACT, NO. DMP-19, PROVIDED FOR THE DEVELOPMENT OF THE MINE AND THE INSTALLATION OF NECESSARY EQUIPMENT AND FACILITIES AT THE MINE SITE. IT REQUIRED THE CONTRACTOR TO OBTAIN NECESSARY ARRANGEMENTS WITH AN ACCEPTABLE REFINER OF METALS TO PRODUCE ELECTROLYTIC COPPER FROM BLISTER OR SMELTER COPPER DELIVERED FROM THE ORES TAKEN FROM THE ABOVE MINE. CONTRACT ALSO DATED JUNE 30, 1953, THE PHELPS DODGE REFINING CORPORATION AGREED TO REFINE THE COPPER FOR THE CONTRACTOR WHICH AGREEMENT APPEARS TO HAVE BEEN SUBMITTED TO, AND ACCEPTED WITHOUT QUESTION BY, THE GOVERNMENT. THE PROVISIONS PERTINENT TO THE INSTANT MATTER STIPULATE THAT THE BLISTER COPPER WILL BE DELIVERED BY THE CONTRACTOR F.O.B. CARS REFINER'S PLANT AT LAUREL HILL, LONG ISLAND; THAT THE REFINER RESERVES THE RIGHT TO DIVERT ALL OR ANY PART OF THE MATERIAL TO ANY OF ITS OTHER REFINERIES; AND, THAT ANY INCREASE OR DECREASE IN TRANSPORTATION OR OTHER CHARGES ON THE DIVERTED TONNAGE SHALL BE FOR THE REFINER'S ACCOUNT, SUBJECT TO FURTHER STIPULATIONS ENTITLING THE CONTRACTOR TO HAVE THE ELECTROLYTIC COPPER DELIVERED AT MIDWESTERN POINTS AT A COST SUBSTANTIALLY LOWER THAN THE ACTUAL FREIGHT CHARGES WHICH WOULD NORMALLY BE INCURRED.

THE REFINER DIRECTED THAT SEVERAL RECENT SHIPMENTS BE DIVERTED TO ITS REFINERY AT EL PASO, TEXAS, AND IT IS UNDERSTOOD THAT CERTAIN CURRENT DELIVERIES ARE BEING ORDERED TO THAT FACILITY. UNDER THE TERMS OF THE AGREEMENT BETWEEN THE CONTRACTOR AND THE REFINER REIMBURSEMENT FOR THE ELECTROLYTIC COPPER IS MADE ON A PER TON BASIS F.O.B. LAUREL HILL, NEW YORK, NOTWITHSTANDING THE BLISTER COPPER WITH WHICH WE ARE CONCERNED WAS DELIVERED FROM SAN MANUEL, ARIZONA, THE MINE SITE, TO EL PASO, TEXAS.

CONTRACT NO. DMP-19 PROVIDES FOR THE PAYMENT OF THE REFINED COPPER AT $0.24 PER POUND (SUBJECT TO ESCALATION) F.O.B. ATLANTIC SEABOARD REFINERIES, AND THAT---

"THE PRICE OF COPPER DELIVERED TO THE GOVERNMENT FROM ANY REFINERY OTHER THAN ON AN ATLANTIC SEABOARD REFINERY SHALL BE ADJUSTED BY DEDUCTING THEREFROM ANY FREIGHT SAVINGS TO CONTRACTOR RESULTING FROM DELIVERY AT SUCH REFINERY POINT INSTEAD OF AT AN ATLANTIC SEABOARD REFINERY.' IN VIEW THEREOF PAYMENTS FOR THE COPPER COVERED BY THE 15 INVOICES REFERRED TO IN LETTER OF FEBRUARY 27, 1958, TO THE AGENT FROM YOUR DIRECTOR OF ACCOUNTS, HAVE BEEN ADJUSTED TO REFLECT THE THEORETICAL FREIGHT SAVINGS ON SHIPMENTS OF COPPER TO EL PASO RATHER THAN TO LAUREL HILL, STATED TO BE $22.5364 PER TON, LESS THE REPORTED FREIGHT RATE OF $21.4755 FROM EL PASO TO NEW HAVEN, INDIANA, AND MARION, OHIO. THAT DIFFERENCE, EQUAL TO $1.0609 PER TON, HAS BEEN WITHHELD FROM THE REFERRED-TO PAYMENTS TOGETHER WITH THE CLAIMED AMOUNT OF $7.75 PER TON ($7.26 PER TON ON INVOICE NO. CS-3293), REPRESENTING THE PREDETERMINED CHARGE TO BE PAID THE REFINER BY THE CONTRACTOR FOR ALL COPPER MOVED FROM EL PASO TO THE ABOVE STORAGE POINTS.

IT MAY BE PRESUMED, ALTHOUGH NO RATES HAVE BEEN FURNISHED US, THAT SHIPMENTS OF RAW COPPER FROM THE ARIZONA MINE SITE TO EL PASO WOULD COST LESS THAN SHIPMENTS TO LAUREL HILL. THE LANGUAGE OF THE CONTRACT SEEMS TO EVIDENCE AN INTENT THAT THE ADJUSTMENT REQUIRED WAS TO HAVE BEEN BASED UPON THAT DIFFERENCE, SINCE DELIVERY TO THE GOVERNMENT WAS TO BE F.O.B. REFINERY AND THE CONTRACTOR THEREFORE HAD NO CONCERN WITH FREIGHT CHARGES ON SHIPMENTS OF ELECTROLYTIC COPPER THEREFROM.

THE ADJUSTMENT MADE BY GSA, AS SET FORTH IN ITS LETTER OF FEBRUARY 27, 1958, APPARENTLY WAS BASED ON THE THEORY THAT THE CONTRACTOR SAVED THE COST OF FREIGHT SHIPMENT OF COPPER FROM EL PASO TO LAUREL HILL, BUT THAT THE FREIGHT CHARGE ON SHIPMENT FROM EL PASO TO NEW HAVEN, INDIANA, OR MARION, OHIO, WAS CHARGEABLE TO THE GOVERNMENT.

HOWEVER, THE ADJUSTMENT CLAUSE PERMITS THE BASE PRICE TO BE PAID BY THE GOVERNMENT TO BE REDUCED ONLY BY THE AMOUNT OF "FREIGHT SAVINGS TO CONTRACTOR RESULTING FROM DELIVERY" AT A REFINERY OTHER THAN AN ATLANTIC SEABOARD REFINERY. UNDER THE CONTRACTOR'S CONTRACT WITH ITS REFINER, THE CONTRACTOR WAS REQUIRED TO DELIVER ITS SMELTER ON BLISTER COPPER F.O.B. REFINER'S PLANT AT LAUREL HILL, NEW YORK, WITH THE RIGHT IN THE REFINER TO DIVERT ANY SHIPMENTS TO OTHER REFINERIES "AND ANY INCREASES OR DECREASES IN TRANSPORTATION OR OTHER CHARGES ON SUCH DIVERTED TONNAGE SHALL BE FOR REFINER'S ACCOUNT.' IT IS THEREFORE CLEAR THAT THE CONTRACTOR HAD NO IMMEDIATE FREIGHT SAVINGS AS A RESULT OF DELIVERY OF ITS SMELTER COPPER AT EL PASO INSTEAD OF AT LAUREL HILL. AS A CONSIDERATION FOR THIS SAVING EFFECTED TO THE REFINER, HOWEVER, THE CONTRACTOR HAD UNDER ITS REFINING CONTRACT A RIGHT TO HAVE ELECTROLYTIC COPPER DELIVERED FOR ITS ACCOUNT AT VARIOUS MIDWESTERN POINTS AT A PRICE SUBSTANTIALLY LESS THAN IF IT HAD PAID OR BEEN CHARGED THE FULL FREIGHT COSTS THERETO. THE COPPER DELIVERED TO THE GOVERNMENT STORAGE POINTS FROM EL PASO WAS OBTAINED UNDER THIS PROVISION, AND THE FULL SAVINGS TO THE CONTRACTOR RESULTING THEREFROM- - WHICH ARE THE ONLY SAVINGS REALIZED BY IT--- HAVE BEEN PASSED ON TO THE GOVERNMENT IN THE SUBJECT INVOICES.

SINCE THE FACTS OF RECORD SUBSTANTIATE THE CONTRACTOR'S CONTENTION THAT THE CHARGES BILLED THE GOVERNMENT REFLECT ALL FREIGHT SAVINGS TO THE CONTRACTOR RESULTING FROM THE REFINING OF THE COPPER AT EL PASO RATHER THAN AT LAUREL HILL, THERE DOES NOT APPEAR TO BE ANY CONTRACTUAL BASIS FOR ADJUSTING THE AMOUNTS OF THE INVOICES SUBMITTED, BY REASON OF FREIGHT COSTS. THEREFORE, THE AMOUNTS WITHHELD FROM SUCH PAYMENTS MAY BE REFUNDED, IF OTHERWISE CORRECT.

THE INVOICES AND RELATED PAPERS INFORMALLY OBTAINED FROM THE OFFICE, DIRECTOR OF ACCOUNTS, GENERAL SERVICES ADMINISTRATION, ARE BEING RETURNED UNDER SEPARATE COVER.