Free Proposed Findings of Uncontroverted Fact - District Court of Federal Claims - federal

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

No. 03-1216C (Senior Judge Wiese)

PLAINTIFF'S PROPOSED FINDINGS OF UNCONTROVERTED FACT Pursuant to RCFC 56, Plaintiff Placid Holding Company ("Placid") respectfully submits its Proposed Findings of Uncontroverted Fact. A. DESC'S PROCUREMENT OF FUEL 1. The Defense Energy Support Center ("DESC"), part of the Defense Logistics

Agency, is the principal purchaser of military fuels for the Department of Defense. From 1980 to 1999, DESC purchased more than $90 billion of military fuel. 2. In the spring and fall of each year, DESC conducted two major procurements of

military fuel, and, for each procureme nt, the Director of DESC authorized the award of a "class of contracts." Compare App. 151 and App. 162 (fall and spring procurements); App. 189-92 (award of a "class" of contracts). Depending on demand, DESC awarded as many as thirty contracts in each procurement and purchased as much as $4 billion of military fuel annually. App. 196, 198, 204. 3. In purchasing military fuel, DESC utilized a contract type known as a "Fixed

Price Contract with Economic Price Adjustment." FAR subpt. 16.2, App. 87-93; App. 468. 4. Prior to the early 1980's, DESC used a supplier's crude oil costs to establish the

price of military fuel in its contracts. App. 208. Beginning in the early 1980's, DESC observed that crude oil costs did not reflect accurately changes in the market value of refined petroleum products and, thereafter, discontinued the use of crude oil costs to establish prices. App. 208-09.

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5.

DESC thereby specifically sought to avoid any link between a supplier's principal

material cost and the price DESC paid for military fuel. App. 208-09, 458, 461. B. DESC'S FUEL PRICES 6. Instead, DESC began using price indexes to establish fuel prices with the

objective of reducing fuel prices. App. 208. DESC principally used the Petroleum Marketing Monthly Indexes ("PMM Indexes") published by the Department of Energy. 7. The PMM Indexes were not designed for the purpose of measuring market value,

but, rather, for use by Congress in addressing national energy policy goals. Barrett Ref. Corp. v. United States, 42 Fed. Cl. 128, 131, 137 (1998), aff'd in part and rev'd in part, 242 F.3d 1055 (Fed. Cir. 2001). Even though the PMM Indexes were not "adequate . . . for use in determining fair market value," DESC used the Indexes to adjust prices by as much as sixty percent. Id.; Def.'s App. 25. 8. When DESC purchased fuel from Placid in Louisianna, DESC used PMM

Indexes so geographically diverse that they included Maine. Def.'s App. 24 (providing for price adjustments based on PAD I, which includes Maine); App. 115 (showing geographic boundaries of PAD I). 9. DESC stated in the Federal Register that the proffered goal of its pricing clause

was to "ensure that the contract will be awarded and remain at the market price." App. 224. DESC claimed that through its pricing clause, it sought to "ensure[] that the sale will be at the market price, which is a fair and reasonable price." Id. 10. DESC has expressly disavowed any intent for its prices to reflect changes in its

contractor's material costs. 11. Mr. Donald Peschka, until recently DESC's Division Chief of the Bulk Fuels

Division, has stated "D[E]SC's bulk EPA clauses are not cost type provisions. . . . [T]hey do not attempt to measure costs . . . or maintain a relationship between a contract price and a contractor's costs." App. 458. Similarly, DESC's then-director of Market Research, Dr.

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Christopher Lee, has stated: "If D[E]SC had intended that MAPCO's prices reflect MAPCO's costs, D[E]SC would have agreed to a crude cost-based escalator." App. 459. 12. DESC's use of price indexes to establish prices met with immediate objection

from its suppliers, which characterized as "coerced" DESC's use of standards that were not tied to a supplier's own cost or prices and which did not reflect the supplier's market. App. 211. 13. DESC nonetheless used its market power as the sole purchaser of military fuel to

compel use of price indexes, boasting that it had sufficient market power to force even the largest refiners of fuel to accept its prices. App. 213, 215. 14. By 1983, use of price indexes to establish prices was "not negotiable, as a matter

of policy." App. 217. Thereafter, each spring and fall, DESC's procurement authorizations stated under the heading "POTENTIAL PROBLEMS" that "common escalation is nonnegotiable." App. 123, 128, 134, 139, 144, 150, 155, 161, 166, 171, 176, 182. 15. In a telling assessment of the inherent inequity of DESC's policy of using the

same common price escalator in its contracts, Col. Clarence Lee, DESC's then Director of Contracting and Production, wrote: [C]ommonality of EPA [economic price adjustment] must not be viewed only in terms of its ability to provide an equitable method of EPA, not a goal in and of itself. Equity is a legitimate goal that, for reasons enumerated above, may not be achieved with the common escalator. The legal consideration of "equity" involves primarily the mechanical procurement process, but may not sufficiently consider the fairness or reasonableness of procurement issues. App. 220 (emphasis added). 16. In 1989, DESC's disregard of the FAR's requirements for equitable pricing

wreaked havoc upon MAPCO Alaska Petroleum. Under MAPCO's 1989 contract, DESC's use of the PMM Indexes resulted in the price for military fuel falling by thirty- five percent, while MAPCO's crude oil costs rose by ninety- five percent. MAPCO Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 405, 407 (1992).

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17.

When DESC denied MAPCO's request for relief, MAPCO brought suit in this

Court, seeking recovery of a $10 million loss resulting from the inversion of prices and costs. Id. Pursuant to a motion for summary judgment, this Court struck down as violative of the FAR and illegal DESC's use of price indexes to establish prices. Id. at 406. DESC's prices, the Court held, "[did not] divide the risk of economic uncertainty between the parties" in the manner the FAR required. Id. at 413. C. DESC ADMITS THE ILLEGALITY OF ITS PRICES 18. DESC ultimately sought a permanent FAR deviation, through amending the

Defense Logistics Acquisition Regulation ("DLAR"), to permit DESC to continue to use the very prices this Court held to be illegal. 60 Fed. Reg. 10826, 10826-27 (Feb. 28, 1995), App. 238-40. 19. In publishing a notice of its request for a permanent FAR deviation in the Federal

Register, DESC expressly admitted that "[n]one of the three EPA [economic price adjustment] types currently encompassed by the FAR" permitted use of DESC's price adjustment clause. 60 Fed. Reg. at 10827, App. 239. 20. DESC conceded that "FAR 16.203-1(a) and its related coverage and clauses

recognize EPA references based on established market or catalog prices of the individual contractor only." Id. (emphasis added). DESC therefore proposed to "expand this to include industry-wide and geographically specific market price assessments and authorize the development and use of clauses on that basis." Id. 21. Four years later, DESC reiterated its 1995 admissions by publishing a final rule in

the Federal Register that was virtually the same as its 1995 proposal. 64 Fed. Reg. 41,834, 41,834-35 (Aug. 2, 1999), App. 241-42. DESC again acknowledged that the FAR only

encompassed "three EPA types" and that FAR § 16.203 recognized "EPA references based on established market or catalog prices of the individual contractor only." Id. at 41,835, App. 579.

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22.

In its Motion for Summary Judgment in Gold Line Refining, Ltd. v. United States,

54 Fed. Cl. 285 (2002), DESC stated that "market-based EPA provisions are not among the three general types of clauses described in FAR 16.203-1." App. 244-45. In addition, DESC has conceded the illegality of its prices in numerous Contracting Officers' final decisions addressing claims for DESC's illegal prices. App. 255, 262, 269. D. REGULATORY HISTORY OF FAR SUBPART 16.2 23. The principal drafter of FAR § 16.203 was Etha Quinn. App. 276, 280. As part

of the 1978 FAR Project, Ms. Quinn was responsible for drafting FAR § 16.203 based on the then-existing Defense Acquisition Regulation ("DAR") and Federal Procurement Regulation ("FPR"). App. 276. The charter of the FAR Project was to "unify and simplify the federal procurement system," but not to make substantive or policy changes to the existing regulations. MAPCO, 27 Fed. Cl. at 409; App. 276-77. 24. When FAR § 16.203 was first published in the Federal Register for public

comment, Caterpillar, Inc., specifically proposed changing what is now FAR § 16.203-1 to include price indexes. App. 279, 291-92. As reflected in the contemporaneous FAR Project documents known as "Phase II Spreadsheets," Caterpillar proposed: We believe the title of this subparagraph should read "Adjustments based on price indexes." Similar language in the subparagraph should be changed. If there are cost indexes and (a)(3) [16.203-1(c)] is properly stated, then a 16.203-1(a) [16.203-1(d)] is needed stating "Adjustments based on price indexes." These price adjustments are based on increases in prices stated in indexes specifically identified in the contract. Id. at 569 (emphases in original). 25. As Ms. Quinn explains, the drafters of FAR § 16.203 rejected Caterpillar's

proposal because "to add a new provision providing for price indexes in addition to cost indexes would have been a substantive policy change from the DAR and FPR which was not permitted by the Office of Federal Procurement Policy (OFPP) guidelines." App. 279. As Ms. Quinn 5

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further states, quoting the contemporaneous Phase II Spreadsheets, "[t]he drafters of this portion of the FAR opted to use the DAR terminology `cost indexes' since, to our knowledge, it had never created a problem." Id. 26. Accordingly, Ms. Quinn concludes: "Based on my participation in the FAR

[P]roject as the principal drafter of FAR Subpart 16.2, it is my opinion that an EPA clause that is based on a price index of contract end items is not permitted by the FAR as it was originally promulgated." App. 280. 27. Ms. Quinn's statements that the drafters of FAR § 16.203 expressly considered

and rejected the use of price adjustment clauses based on price indexes are confirmed by Mr. Lawrence Rizzi, a member of the executive review committee that gave final approval to the FAR before it was officially promulgated. App. 332. 28. Mr. Rizzi confirms that: (1) Ms. Quinn was the principal drafter of FAR

§ 16.203; (2) the Phase II Spreadsheets from which Ms. Quinn quotes formed the basis for the final review and publication of the FAR; and (3) the Phase II Spreadsheets and the disposition of comments reflected therein accurately represent the intent of the drafters of FAR § 16.203. App. 332-35. 29. Accordingly, Mr. Rizzi expressly confirms that the drafters of the FAR

specifically considered and rejected authorizing price adjustment clauses based on price indexes. App. 342-43, 351-55. 30. The testimony of Ms. Quinn and Mr. Rizzi is further confirmed by the testimony

of Mr. Hugh Witt, the first Administrator of the Office of Federal Procurement Policy under whose authority the relevant portions of the Armed Services Procurement Regulation ("ASPR"), which gave rise to FAR subpt. 16.2, were promulgated. App. 400-34. See MAPCO, 27 Fed. Cl. at 409 ("FAR Subpart 16.2 and its forerunners in the DAR and ASPR reveal that Subpart 16.2 is largely a reproduction of DAR § 3.404."). 31. Ms. Quinn also addressed the meaning of "established prices," as used in FAR

§ 16.203-1(a), entitled "Adjustments based on established prices," making plain that it refers to 6

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the contractor's own prices.

She said that "the concept that an established price was the

`contractor's' own price was inherent in the definition of an Economic Price Adjustment (EPA) clause based on established prices which had been adopted from the DAR. Indeed, as the comment itself noted, reference to the `contractor's' established price was already contained in FAR 16.203-3." App. 278. 32. Mr. Rizzi corroborated Ms. Quinn's testimony. He confirmed that all references

to "established prices" in FAR subpt. 16.2 were intended as references to the "contractor's" established prices. App. 351-53. 33. Mr. Rizzi also discussed the definition of the term "established market price" as

used in FAR § 15.804-3. In his deposition concerning the FAR Project's contemporaneous Phase II Spreadsheets, Mr. Rizzi noted that only "the offeror could provide data needed to justify the exemption." App. 358. Thus, he explained that the provision referred to the contractors' own sales to the general public: Question: The exemption[s] from submitting certified cost and pricing data were the exemptions based on established catalog or market price. And there is as a comment in column 3 that says, "Who but an offeror could provide data needed to justify an exception?" I would ask you: Is the import of that comment that the exemption requires the individual contractor to supply data regarding his own sales to the general public? ... Answer: Based on my understanding of the regulations, I would say the answer is yes.

App. 54. E. DESC'S PURPORTED DEVIATIONS 34. DESC sought to preserve its price advantage by requesting an exception, or

"deviation," from the FAR to permit its continued use of the very price indexes that this Court had held illegal. From 1993 through 1999, DESC intermittently sought a series of purported deviations.

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35.

DESC initially sought one individual deviation for "all domestic bulk fuel

solicitations" for an indefinite period. App. 204, 221. The Defense Logistics Agency required DESC to seek one individual deviation for each fall and spring procurement. App. 463. 36. In an attempt to make its deviations more palatable, DESC altered one of the

more egregious a spects of its pricing -- its use of the PMM Indexes, which did not reflect market value and were nowhere used in commercial transactions. In proposing its deviations, DESC changed its preferred price index from the PMM Indexes to a commercial price index, Platts. App. 224. 37. While Platts had the virtue of being a commercial publication intended to reflect

market value of commercial (but not military) fuels, it suffered from the deficiency of reflecting only one-day spot sales of fuel, which represented most commercial sales by the mid-1990's. App. 225-34, 235-37. By virtue of reporting only spot prices, Platts did not reflect either longterm sales, which DESC's contracts required, or price changes associated with changes in longterm supply risks. 38. Thus, while DESC squarely imposed long-term supply risks upon its suppliers by

requiring long-term contacts, DESC tied its market power as the sole purchaser of military fuel with the use of Platts to avoid paying prices that properly reflected the risks it imposed on its contractors. 39. DESC admits that its FAR deviations constitute "a regulation or procedure"

within the meaning of Section 22 of the Office of Federal Procurement Policy Act. 41 U.S.C. § 418b (2002). App. 498. 40. In addition, in seeking the deviations, DESC admitted that "the coverage will

have a significant effect beyond the internal operating procedures of DLA." App. 498. DESC's deviations had a significant cost or administrative impact upon contractors or offerors. Id. 41. DESC did not publish its individual or class deviations in the Federal Register or Accordingly, no public comments on DESC's

solicit public comment on the deviations.

deviations were received or resolved, the DAR Council did not review the resolution of any 8

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comments, and the Director of Defense Procurement did not review or approve any such actions taken by the DAR Council. 42. DESC elsewhere has admitted that it was required to publish its deviations in the

Federal Register. In a brief filed before the United States Court of Appeals for the Federal Circuit in Barrett, DESC stated: "It was not until 1996, that D[E]SC learned that approval by the Director of Defense [Procurement] was not sufficient for obtaining a deviation from FAR § 16.203 and that publication of the deviation in the Federal Register was also required." App. 517-18 (emphasis added.). 43. The Defense Department had little difficulty properly publishing other proposed

deviations during this time period when the stakes were much lower. For example, in March 1995, the Department of Defense proposed a "deviation from the [FAR] record keeping and physical inventory requirements for Special Tooling, Special Test Equipment and Plant Equipment with an acquisition cost of $1,500 or less." 60 Fed. Reg. 15,740 (Mar. 27, 1995), App. 530. 44. Likewise, in September 1995, DOD proposed a deviation "from the [FAR] that

simplifies the method of determining the rental charges for governmental property." 60 Fed. Reg. 46,259 (Sept. 6, 1995), App. 533. In both of these instances, DOD published the temporary deviations even though it also was proposing permanent deviations. App. 530, 533. See also 59 Fed. Reg. 22,521 (May 2, 1994) (NASA publication of proposed class deviation), App. 535-36. 45. FAR § 52.103(a) provides: Whenever any FAR provision or clause is used without deviation in a solicitation or contract, whether it is incorporated by reference or in full text, it shall be identified by number, title and date. This identification shall also be used if the FAR provision or clause is used with an authorized deviation, except that the contracting officer shall then insert "(DEVIATION)" after the date. Solicited firms and contractors shall be advised of the meaning of this insertion through the use of the (1) provision at 52.252-5, Authorized Deviations in Provisions, or (2) clause at 52.252-6, Authorized Deviations in Clauses. The above mentioned provision and clause are prescribed in 52.107(e) and (f). 9

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(Emphasis added), App. 94. The standard clause set f rth in FAR § 52.252-5 provides, in o pertinent part: AUTHORIZED DEVIATIONS IN PROVISIONS (APR 1984) (a) The use in this solicitation of any Federal Acquisition Regulation (48 CFR Chapter 1) provision with an authorized deviation is indicated by the addition of (DEVIATION) after the date of the provision. App. 102. 46. DESC included FAR § 52.252-5 in at least some of the contracts for which it See, e.g., App. 692 (solicitation no. DLA600-92-R-0061,

alleges that it obtained deviations.

incorporated by reference on the first page of contract no. DLA600-92-D-0503 at Def.'s App. 20). In addition, DESC identified some of the clauses in these contracts that departed from the FAR by inserting "(DEVIATION)" after the date of the clause. App. 856, 858, 859. 47. DESC has not shown that it designated its pricing clause, B19.33, as a

"(DEVIATION)" clause in the one Placid contract for which DESC alleges it obtained a deviation for its prices. 48. DESC has admitted that the Regulatory Flexibility Act ("RFA") applied to its

deviation here. App. 497. 49. In seeking approval of its deviations, DESC certified that an initial RFA analysis

was not required, stating that "coverage is not expected to have a significant impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq.[,] since the elimination of interim billing will greatly simplify administrative procedures required of contractors. A regulatory flexibility analysis, therefore, is not required." App. 499. 50. When DESC later published the request for a permanent revision to the DLAR, it

refused to conduct an analysis because: "The primary user of the new DLAR coverage will be the Defense [Energy] Supply Center, which has been utilizing these types of EPA references

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since the early 1980s. The proposed rule will therefore not represent a change for small entities doing business with D[E]SC." App. 239, 241. 51. 52. DESC deviations directly and substantially impacted small businesses. As much as forty percent of DESC's purchases of fuel were set aside for small

businesses. App. 851-55. Moreover, four of the early challenges to DESC's illegal prices were brought by small businesses -- Barrett Refining, Pride Companies, Gold Line Refining, and Phoenix Petroleum. Barrett, 42 Fed. Cl. at 129. App. 545, 553, 564. 53. Moreover, DESC's pricing decisions concerning small businesses directly affect

other bidders, as DESC permits small businesses to match the prices offered by other bidders, a pricing technique that affects the pricing decisions of all participants in the procurement. App. 543-44. 54. When DESC sought a deviation to the FAR it specifically tried to amend the

"Limitations" provisions of FAR § 16.203-3 to permit the contracting officer to make a determination that price adjustments were necessary to reflect changes in price indexes. Pursuant to DESC's proposed change, FAR § 16.203-3, as applicable to DESC, would permit the use of price adjustments based on the following determination: "A fixed price contract with economic price adjustment may also be used to provide for price adjustments [based on price indexes] authorized in this section." App. 467. 55. When DESC has sought an exemption from the statutory requirement for public

advertising for its fall and spring fuel procurements, the Commander of DESC has made the requisite "findings" to support the exemption not for an "individual contract action" but on a "class" basis, stating that he was providing "authority to enter into a class of contracts by negotiation." App. 189-92. While this finding is from a procurement in 1984, the fundamental structure of DESC's fall and spring procurements has remained the same. Compare App. 116 with App. 183.

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F.

PLACID'S CONTRACTS 56. Between at least 1990 and 1994, DESC awarded Placid five contracts for military

fuel. In each contract, DESC established the price of fuel based on indexes of the prices of refined petroleum products. 57. DESC awarded the following contracts to Placid: DLA600-90-D-0496, DLA600-

91-D-0525, DLA600-92-D-0503, DLA600-93-D-0517, and DLA600-94-D-0579. 58. DESC alleges that it obtained an individual deviation applicable to one of Placid's

five contracts. DESC asserts that it obtained an individual deviation for contract DLA600-93-D0517. G. PRIDE COMPANIES v. UNITED STATES 59, The Pride Companies, a largely captive DESC supplier, also sought relief from

DESC's illegal prices. Pride Cos., L.P. v. United States, No. 95-597C, 2000 U.S. Claims LEXIS 213 (Fed. Cl. May 10, 2000). In response to Pride's suit, DESC stipulated to the illegality of its prices and to Pride's right to recover under quantum valebant, leaving the Court to "determine what defendant would have paid for the fuel irrespective of Pride's [illegal] contract." Id. at *3. 60. The principal issue for trial was the fair market value of the fuel DESC received,

and the parties were in fundamental agreement concerning how to calculate it. Id at *3-4. The parties agreed that the illegal contract price for fuel was not a valid measure of fair market value, and that, as a starting point, it was necessary to draw on prices for commercial fuels that were comparable to the military fuels. Id. at *4-5. 61. The parties agreed to begin with spot fuel prices as published by Platts, the

acknowledged industry standard, and to add a premium for the long-term military aspects of DESC's contracts. Geographic market differentials were then captured using relevant

transportation costs. The parties thus agreed on the following formula to calculate fair market value: (Platts spot price) + (a long-term DESC contract premium) + (transportation). Id. at *4.

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62.

What the parties did not agree upon were the values to be used in the formula for As the Court

the long-term DESC contract premium and applicable transportation rates.

explained in its opinion, "[t]he parties agree on the [] formula[] for determining fair market value of fuel," id., but "do not agree on the amount of the long-term contract premium in the formula," id., and "do not agree on the transportation costs." Id. at *8. 63. DESC claimed that the long-term contract premium was one- fourth of a cent per

gallon, while Pride ultimately presented evidence that the premium was as high as five cents per gallon (although, based on the evidence available at the time its expert report was first submitted, Pride claimed only three cents per gallon). The evidence Pride presented showed that the longterm DESC contract premium reflected the value of long-term assured supply as well as the unique costs of supply to DESC. These unique costs included, inter alia, the added costs of handling and refining military as opposed to commercial fuel, and the cost imposed by DESC's more burdensome terms and conditions. App. 580-613. 64. DESC asserted that transportation costs should be measured based on hypothetical Pride asserted that

transportation rates DESC developed solely for use in the litigation.

transportation should be based on DESC's actual historical transportation rates. Pride, 2000 U.S. Claims LEXIS 213, at *8-11. 65. After trial on the amount of the long-term premium and transportation costs, the

Court entered a final judgment in the amount of $45 million based on the agreed formula, finding that DESC's use of price indexes to establish prices resulted in DESC paying on average eight percent less than the fair market value of the fuel it purchased. Id. at *12. 66. DESC has extensive experience in purchasing numerous types of military fuel in

various geographic markets, and thus was uniquely qualified during the Pride litigation to opine on the proper methodology for calculating the fair market value of jet fuel. DESC was neither naï ve nor lacking critical information when it agreed to the fair market value formula that the Court in Pride ultimately adopted.

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67.

Indeed, in its post-trial brief in Pride, DESC assured the Court that its expert's

"analysis is fully corroborated by competent and reliable evidence," and DESC continues to advance the opinions of this same expert in the continuing litigation over DESC's illegal prices. App. 677. Specifically, DESC proffered the testimony of Dr. George Schink in Pride, and has proffered his declaration in this case. Def.'s App. at 10. Respectfully submitted,

s/ J. Keith Burt J. Keith Burt Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, D.C. 20006 (202) 263-3208 (Phone) (202) 263-5208 (Fax) Counsel for Plaintiff Placid Holding Company Of Counsel: Michael J. Farley Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, DC 20006 September 25, 2003

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