Free Motion for Partial Summary Judgment - District Court of Federal Claims - federal

Case 1:03-cv-01216-JPW

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS PLACID HOLDING COMPANY Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) )

No. 03-1216C (Judge Wiese)

DEFENDANT'S PROPOSED FINDINGS OF UNCONTROVERTED FACT THE PARTIES 1. Plaintiff Placid Holding Company ("Placid") is a Delaware corporation with its headquarters in Dallas, Texas. Compl. ¶ 6. The shares of Placid Holding Company are held equally by three trusts: the William Herbert Hunt Trust Estate, the Nelson Bunker Hunt Trust Estate, and the Lamar Hunt Trust Estate. Placid owns approximately 77% of Placid Refining Company, a Delaware limited liability company, which owns and operates a 50,000 barrel-perday refinery in Port Allen, Louisiana. Placid Refining is an affiliate of the Petro-Hunt Group, one of the largest privately held independent energy groups of companies in the world. http://www.petrohunt.com/About.htm. 2. The Defense Energy Support Center ("DESC") is a field activity of the Defense Logistics Agency ("DLA"), a component of the Department of Defense ("DoD"). 48 C.F.R. ("DFARS") § 202.1. Among other things, DESC (formerly called the Defense Fuel Supply Center, or "DFSC") purchases refined fuels for the military worldwide. Compl. ¶ 9. 3. DESC's contracts that are the subject of this complaint were entered with Placid Refining Company. Placid Refining Company became Placid Holding Company pursuant to a corporate name change that took place in 1998. See Def. App. 103, Certified Claims of Placid

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Holding Company, fn.1. CONTRACT OVERVIEW 4. DESC issues several annual requests for proposals ("RFPs") for hundreds of

millions of gallons of various bulk fuel products. Def. App. 2, ¶ 4. DESC evaluates the proposals and awards contracts to a number of companies each year, based upon the best prices to the Government. Def. App. 3, ¶ 7. The contracts are typically indefinite quantity contracts with a term of approximately one year. Def. App. 2, ¶ 4. 5. Placid and DESC entered into five, year-long contracts between 1990 and 1994,

pursuant to which Placid supplied "JP-5" and "JP-8" jet fuel. Compl. ¶ 10; Def. App. 1. 6. JP-5 is a kerosene-based jet fuel used primarily by the Navy. JP-8 is a kerosene-

based jet fuel used primarily by the Air Force and Army. Def. App. 1, ¶ 3 and 10, ¶ 3. 7. Placid's contracts were competitively awarded through negotiated solicitations,

pursuant to 48 C.F.R. ("FAR") part 15 ("Contracting by Negotiation"). Def. App. 2, ¶ 4. 8. Placid delivered more than 214 million gallons of fuel under the five contracts at

issue here, for total payments in excess of $130 million. Def. App. 2, ¶ 4. 9. The market values of crude oil and refined petroleum products change frequently.

Def. App. 2, ¶ 5. Because a single barrel of crude oil may be refined into many different commercial products, however, changes in the price of crude oil are not necessarily highly correlated with changes in the prices of refined products over the short term. Refining margins also can affect the correlation between prices of crude and refined products. Def. App. 11 ­ 12, ¶ 8. A barrel of crude oil constitutes the raw material for a wide variety of petroleum products sold in a multitude of competitive geographic and spot markets. Id. Prices in those markets are influenced by countless factors that affect supply and demand for the individual refined -2-

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products. Id. Therefore, over any given time period, changes in the market prices of some refined products, made from a portion of a barrel of crude oil, may not correlate, in either direction or magnitude, with changes in the prices of crude, or of other products. Id. 10. Virtually all of DESC's fuel supply contracts are of the "fixed price with economic

adjustment" variety, see FAR subpart 16.203, and, therefore, contain an economic price adjustment ("EPA") clause. Def. App. 2, ¶ 5. Clause B19.33 is DESC's principal EPA clause. Id. DESC's general practice with regard to making the FAR 16.203-3 determination to use an economic price adjustment clause is to include the determination in the acquisition plan for the solicitation. Def. App. 2, ¶ 6. The acquisition plan is maintained in what is known as the preaward or solicitation file, because the plan applies to the solicitation as a whole. Id. Copies of the plan are not kept in individual contract files. Id. Because of the age of most of the contracts, many of the acquisition plans have been destroyed as permitted by FAR record retention procedures. Id. However, the contracting officer found the acquisition plan to solicitation DLA600-93-R-0161, which is applicable to Placid's contract DLA600-94-D-0579. Id. 11. DESC began using EPA clauses in 1973, in response to increases in crude oil costs

experienced by suppliers as a result of the Arab oil embargo. At that time, the Government had imposed controls upon the price of crude oil. After the price restraints were lifted, DESC gave suppliers the option of selecting an EPA clause based either upon actual crude oil costs, or upon market prices for similar products. In 1981, having concluded that allowing that choice presented too many administrative problems, including difficulties in evaluating and comparing bids that used different EPA types, DESC began using market-based prices exclusively. DESC chose a refined product market price publication because it was believed to closely mirror

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changes in refiners' costs, over time, although a given price publication might not track costs over shorter periods. See Def. App. 14. 12. DESC's principal EPA clause (B19.33) listed prices, for various refined products

and regions, taken from a commercially available market publication. See Def. App. 22 (Part A) and 24 (Part D). In part D, the EPA clause provided a unique "reference price" (sometimes called a "base reference price") for each refined petroleum product sought in the RFP. Def. App. 24. An offeror would propose a "base price" for each product offered. That price was subject to adjustment, based upon changes in the reference price. The base price was primarily for proposal evaluation purposes. It was not expected to be the price the contractor received for fuel. Def. App. 2, ¶ 5. 13. EPA clause B19.33 provided that "[t]he prices payable under this contract for

listed items shall be the base [bid] price for the listed item increased or decreased by the same number of cents, or fraction thereof, that the reference price increases or decreases per like unit of measure from the base reference price." Def. App. 24 (part D(c)) (emphasis added). Thus, it may be said that each offeror's base price was "tied" to the reference price identified by DESC for that product. See id. 14. The EPA clauses in Placid's contracts adjusted the contracts prices based upon

changes in the Petroleum Marketing Monthly ("PMM"). Def. App. 3, ¶ 9. The PMM, published by the Department of Energy ("DOE"), Energy Information Administration, is a compilation of transaction prices in domestic petroleum markets. Def. App. 3, ¶ 9, and 11, ¶ 5. All refiners are required by law to submit sales data to DOE monthly. Id.; 15 U.S.C. § 772. DOE compiles the data and reports monthly average sales prices for various petroleum products, by region and by state, in the PMM. Def. App. 3, ¶ 9, and 11, ¶ 5. The PMM is considered a reliable indicator of -4-

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average price movements. Id. 15. There is a three-month lag time for DOE to obtain the sales data and publish them

in the PMM. Thus, for example, sales data for January are published in April, and data for February are published in May. Def. App. 3, ¶ 9. Prices were adjusted monthly under the PMM-based EPA clause. Id. Because of the publication lag, interim adjustments were made monthly, subject to reconciliation when PMM data for that month were published. Id. 16. During performance of the contracts at issue here, Placid never raised any question

regarding the legality of the EPA clauses, and never complained that it was not being paid fairly. Def. App. 4, ¶ 11. Nor did it ever object to any of the many price adjustments made under the contracts' EPA clauses. Id. In its proposals for each contract for which DESC's contract file still exists, Placid expressly stated that it agreed to all terms and conditions. Id. Placid submitted offers continually during the period 1989 - 1993, and in later years. Id. FAR DEVIATIONS 17. In December 1992, this Court ruled, in MAPCO Alaska Petroleum, Inc. v. United

States, 27 Fed. Cl. 405 (1992), superseded in part on reconsid'n, 30 Fed. Cl. 153 (1993), that DESC's EPA clause B19.33 was inconsistent with the FAR and, therefore, unauthorized. In January 1993, DESC sought an individual FAR deviation to permit it to continue using its PMMbased EPA clause. Def. App. 30 - 61. DESC said it was "in the middle of several major Bulk Fuels Division acquisitions" and needed deviations to continue them. Def. App. 30. 18. On January 14, 1993, Gary S. Thurber, DLA's Acting Executive Director

(Contracting), granted an individual deviation for the use of the PMM-based EPA clause in contracts awarded pursuant to solicitation DLA600-93-R-0061. Def. App. 62. Placid's Contract DLA600-93-D-0517 was awarded pursuant to this solicitation. Def. App. 4, ¶ 14. On February -5-

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3, 1993, DLA granted an individual deviation for use of the clause in contracts awarded pursuant to solicitation DLA600-93-R-0062. Def. App. 63. In March 1993, DoD advised DLA that, because the Director of Defense Procurement ("DDP") had previously approved DESC's clauses, a class deviation was not needed. Def. App. 64 - 65. A March 1993 letter from the DDP confirmed that the EPA clauses had "grandfathered" approval by the DDP. Def. App. 66 - 72. In 1992, the DDP had approved all DESC-drafted clauses then in use. Id. DESC later reconsidered and sought a class deviation despite the DoD advice (see below). 19. On September 6, 1994, DESC requested another individual deviation for a market-

based EPA clause. Def. App. 73 - 76. On November 15, 1994, Marilyn S. Barnett, DLA's Executive Director (Procurement), granted that deviation for contracts awarded under solicitation DLA600-95-R-0061. Def. App. 77. 20. In January 1995, DESC requested a "class deviation" authorizing the use of

market-based EPA clauses, as well as a permanent revision to the DLA Acquisition Regulation ("DLAR") to expressly permit the use of such EPA provisions, notwithstanding any other FAR or DLAR provisions. Def. App. 78 - 82. The request was directed to the Director of the Defense Acquisition Regulation Council, through DESC's Director of Procurement. Id. This request resembled DESC's prior request for an individual deviation. DESC stated that, because the DLAR revision would "have a significant effect beyond the internal operating procedures of DLA and may have a modest impact on contractors and offerors," the proposal would be published for public comment in accordance with FAR 1.301(b), FAR subpart 5, and Section 22 of the Office of Federal Procurement Policy Act. Def. App. 80. 21. On February 28, 1995, DLA published the proposed revision to the DLA

procurement directive in the Federal Register, providing a 60-day comment period. Def. App. -6-

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83 - 86. The Federal Register notice explained the proposed revision and set forth the proposed new language. DLA proposed to revise the regulation to expressly permit the contracting officer to use alternative EPA clauses, including clauses based upon commercial sales prices and established prices, without requiring that the prices be those of a specific contractor. Id. 22. DESC received only one comment concerning the proposed FAR revision. See

Def. App. 87 - 89. The comment was submitted by the National Security Industrial Association. Def. App. 90 - 91. The trade association did not object to the concept of market-based clauses, as such. Rather, it expressed concern that "the proposed regulation could, in certain circumstances, permit a contracting officer to select (or retain) an EPA reference that does not follow market prices." Def. App. 90 (emphasis in original). DESC discussed the comment in a May 12, 1995, updated class deviation request. Def. App. 95. 23. Also in February 1995, while its request for a class deviation was pending, DESC

requested an individual deviation to allow it to use its Platts-based EPA clause in solicitation SPO600-95-R-0161. Def. App. 97. On March 2, 1995, Col. Barry S. Wilson, DLA's Acting Executive Director (Procurement), granted that individual deviation. Def. App. 98. 24. On October 5, 1995, Eleanor Spector, the Director of Defense Procurement

("DDP") granted DESC's request for a class deviation for the use of EPA clauses based upon "industry-wide and geographically based market price references . . . ." Def. App. 99 - 100. She specifically authorized DESC to "deviate from the requirements of Federal Acquisition Regulation (FAR) 16.203-1 and 16.203-4 when using economic price adjustments on fixed-price contracts." Id. The DDP also approved a regulatory revision in the nature of a change to the DLA supplement to describe such market-based EPA clauses. Id. 25. On August 2, 1999, the final rule revising DLAR subpart 5416.203 ("Fixed Price -7-

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Contracts with Economic Price Adjustment") in accordance with DESC's 1995 request was published in the Federal Register. Def. App. 87 - 89. There has been no Administrative Procedure Act challenge to the final rule. PLACID'S CLAIMS 26. Placid submitted a certified Contract Disputes Act claim regarding its five subject

contracts on January 4, 2001. Compl. ¶ 24; Def. App. 4, ¶ 12. Placid requested total additional compensation of approximately $12 million. Def. App. 4, ¶ 12. Its principal contention was that the EPA clauses in their contracts were illegal, citing the MAPCO decision. Id. Def. App. 101 ­ 163 (claim). 27. To price its claims, Placid calculated the alleged "fair market value" of its product

by starting with the Platts U.S. Gulf Coast Pipeline Spot Price Average for Kerojet. It then added a "long-term contract premium," and transportation costs to complete the formula for the valuation of fuel. Def. App. 123. 28. The contracting officer denied Placid's claims in a final decision dated May 20,

2002. Def. App. 164 - 170. The contracting officer concluded, among other things, that the EPA clauses are authorized and enforceable, and that the constructed prices in Placid's claims do not reflect fair market value. Id. 29. In the alternative, the contracting officer asserted the following Government claim: [I]f Placid's contracts are re-priced [as the result of litigation], the Government asserts a claim against Placid in the amount of $6,819,264 for the recovery of net unauthorized payments under the contracts that did not contain a standard FAR EPA clause, and for which no deviation had been obtained. Def. App. 169.

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Respectfully submitted, PETER D. KEISLER Assistant Attorney General

DAVID M. COHEN Director OF COUNSEL: BERNARD A. DUVAL Chief Counsel HOWARD M. KAUFER Assistant Counsel Office of Counsel Defense Energy Support Center Ft. Belvoir, VA s/ Steven J. Gillingham STEVEN J. GILLINGHAM Senior Trial Counsel KYLE CHADWICK Trial Attorney Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 1100 L Street, 8th Floor Washington, D.C. 20530 Tele: (202) 616-2311 Fax: (202) 353-7988 Attorneys for Defendant August 15, 2003

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CERTIFICATE OF FILING I hereby certify that on August 15, 2003, a copy of foregoing "DEFENDANT'S PROPOSED FINDINGS OF UNCONTROVERTED FACT" was filed electronically. I understand that notice of this filing will be sent to all parties by operation of the Court's electronic filing system. Parties may access this filing through the Court's system.

s/ Steven J. Gillingham