Defense Logistics
Better Fuel Pricing Practices Will Improve Budget Accuracy Gao ID: GAO-02-582 June 21, 2002The Department of Defense (DOD) Defense Working Capital Fund was used to buy $70 billion in commodities in fiscal year 2001. This amount is estimated to grow to $75 billion for fiscal year 2003. The department's financial management regulation states that fund activities will operate in a business-like fashion and incorporate full costs in determining the pricing of their products. The National Defense Authorization Act for Fiscal year 2001 requires that GAO review the working capital fund activities to identify any potential changes in current management processes or policies that would result in a more efficient and economical operation. The act also requires that GAO review the Defense Logistics Agency's (DLA) efficiency, effectiveness, and flexibility of operational practices and identify ways to improve services. One such DLA activity, the Defense Energy Support Center, sold $4.7 billion of various petroleum-related products to the military services in fiscal year 2001. DOD's fuel prices have not reflected the full cost of fuel as envisioned in the working capital fund concept because cash movements to the fund balance and surcharge inaccuracies have affected the stabilized annual fuel prices. Over $4 billion was moved into and out of the working capital fund from fiscal year 1993 to 2002. These adjustments affected the extent to which subsequent years' prices reflected the full cost of fuel. In addition, the surcharges did not accurately account for fuel-related costs as required by DOD's Financial Management Regulation.
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United States General Accounting Office:
GAO:
Report to Congressional Committees:
June 2002:
Defense Logistics:
Better Fuel Pricing Practices Will Improve Budget Accuracy:
GAO-02-582:
Contents:
Letter:
Results in Brief:
Background:
Fuel Prices Used in Budget Requests Do Not Reflect Full Cost:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Defense:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Cash Movements Out of the Working Capital Fund:
Table 2: Effect That Cash Movements Could Have Had on the Stabilized
Annual Fuel Price:
Table 3: Difference Per Barrel between Estimated and Actual Surcharge
Obligations for Fiscal Year 1993 through Fiscal Year 2001:
Figures:
Figure 1: Components of Fiscal Year 2003 Stabilized Annual Fuel Price
of $35.28 per barrel:
Figure 2: Budget Process for DOD Fuel:
Figure 3: Stabilized Annual Fuel Prices and Crude Oil Cost Estimates
for Fiscal Year 1993 through Fiscal Year 2003:
Figure 4: Fuel-Related Cash Movements for Fiscal Years 1993 through
2002:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
June 21, 2002:
Congressional Committees:
The Defense Working Capital Fund is the financial vehicle the Department
of Defense (DOD) used to buy about $70 billion in commodities in fiscal
year 2001 for peacetime, contingency, and wartime missions. This amount
is estimated to grow to about $75 billion for fiscal year 2003. By
statute (10 U.S.C. 2208), working capital funds are devices to
effectively control and account for costs of goods and services
provided. The department‘s financial management regulation states that
fund activities will operate in a business-like fashion and incorporate
full costs in determining the pricing of their products. The regulation
also states that the activities‘ cost of operations should break-even
over time and that losses can be occasionally funded through
appropriations or by transfers from another DOD account. Annual DOD
appropriations acts have also contained provisions transferring money
from the fund under some circumstances.
The National Defense Authorization Act for Fiscal Year 2001 (P.L. 106-
398) requires that we review the working capital fund activities to
identify any potential changes in current management processes or
policies that, if made, would result in a more efficient and economical
operation. The act also requires that we review the Defense Logistics
Agency‘s (DLA) efficiency, effectiveness, and flexibility of
operational practices and identify ways to improve services. One such
DLA activity, the Defense Energy Support Center, sold about $4.7
billion of various petroleum-related products to the military services
in fiscal year 2001. The services primarily use their operation and
maintenance appropriations to pay for these products. The basis for the
military services‘ annual budget request to Congress related to fuel
needs is what DOD refers to as the stabilized annual fuel price. The
stabilized annual fuel price, along with the services‘ estimated fuel
requirements, is used to compute budget estimates. Therefore, it is
important that the fuel price accurately reflect the full cost as
envisioned in the concept. If the price is too high, the fund will
receive more funds than required, funds that otherwise could be used to
meet other priorities. If the price is too low, the fund will not have
sufficient funds to cover the cost of fuel, prompting DOD to either
increase prices in future years, request a supplemental appropriation,
or transfer funds from another DOD account.
In response to the mandate, we have undertaken a body of work that will
result in a series of reports on working capital fund activities. This
report addresses (1) whether DOD‘s stabilized annual fuel prices have
reflected the full cost of fuel and (2) our views on the process to
establish the stabilized annual fuel price.
To make the pricing assessment, we reviewed the pricing components”-
crude oil cost estimates, cost to refine, adjustments, and surcharges”
[Footnote 1] used in determining budget year fuel prices for fiscal
years 1993-2003. Figure 1 identifies these components as a percentage
of the total price for the fiscal year 2003 stabilized price, which is
the amount per barrel that DLA charges its military customers.
Figure 1: Components of Fiscal Year 2003 Stabilized Annual Fuel Price of
$35.28 Per Barrel:
[Refer to PDF for image]
Components of Fiscal Year 2003 Stabilized Annual Fuel Price of $35.28
Per Barrel:
Crude oil cost estimates: 53% ($18.63);
Cost to refine: 23% ($7.99);
Surcharge: 23% ($8.20);
Net Adjustments: 1% ($0.46).
Source: GAO analysis of DOD data.
[End of figure]
Although the net adjustment shown above was only $0.46 per barrel, it
represents positive and negative cash adjustments totaling $16.08 per
barrel (or $1.8 billion). Positive adjustments totaling $8.27 per
barrel (or $910 million) included a $4.67 per barrel increase to
compensate for not receiving an anticipated $514 million appropriation
for fiscal year 2002. Negative adjustments totaling $7.81 per barrel
(or $860.9 million) included decreasing the price by $6.13 per barrel
as a result of an estimated decrease in refined oil prices for fiscal
years 2002 and 2003.
Results in Brief:
DOD‘s fuel prices have not reflected the full cost of fuel as
envisioned in the working capital fund concept. This is because cash
movements (adjustments) to the fund balance and surcharge inaccuracies
have affected the stabilized annual fuel prices. First, fund balances
have been used by Congress, and to a lesser extent DOD, to meet other
priorities. The cash became available when crude oil costs were less
than expected. Conversely, on one occasion, Congress appropriated money
to the fund when higher-than-expected crude oil costs created a large
loss. Both types of actions, while recognized by DOD‘s Financial
Management Regulation and disclosed in budget documents, affected the
development of future years‘ stabilized annual fuel prices. Second, we
identified inaccuracies in DOD‘s surcharge estimates that also affected
the development of prices based on full cost. More specifically our
work shows
* Over $4 billion was moved into and out of the working capital fund
from fiscal year 1993 to 2002. These adjustments, which were made
through the appropriations process and disclosed in DOD‘s budget
process, affected the extent to which subsequent years‘ prices
reflected the full cost of fuel. The services‘ budget requests since
fiscal year 1996 were about $2.5 billion higher over 5 years than full
fuel costs and about $1.5 billion lower than the full fuel cost in
another year. Congress, as part of the appropriation process,
identified reasons for moving about $2 billion to meet other defense
budget needs. Alternatively, in another instance the fund balance was
increased when Congress provided about $1.6 billion in an emergency
supplemental appropriation to offset fund losses in fiscal year 2000.
This appropriation was necessary because of a worldwide increase in the
price of crude oil. With congressional notification, $0.5 billion from
the fund was used to pay for specific nonfuel-related expenses such as
the Counter Drug Effort. However, DOD‘s budget documents did not
include a rationale for moving the funds. We noted in one instance that
the Senate Appropriations Committee essentially reversed a DOD decision
to use fund revenues for a nonfuel-related purpose during the
appropriations process. Moving money into and out of the fund, which
could be used to affect future fuel prices, causes future service
appropriations to be higher or lower than they otherwise would be.
* In addition, the surcharges did not accurately account for fuel-
related costs as required by DOD‘s Financial Management Regulation,
which further affected the development of full-cost-based fuel prices.
This occurred for two reasons. First, the surcharges were not adjusted
to reflect prior year results and did not include all costs. Even
though the surcharge was overstated on average $99 million annually, no
adjustments were made prior to fiscal year 2002. The surcharge also did
not include inventory losses, which ranged from about $12.0 million to
$27.5 million a year. Second, some costs were not adequately supported.
For example, DLA could not provide the basis for its over $40-million
annual overhead charge.
To improve DOD‘s fuel pricing process, we are making two
recommendations to the Secretary of Defense. These recommendations
are to provide rationale to support future cash movements from the fund
and to require methodologies that fully account for and document the
surcharge costs. DOD generally concurred with the recommendations, but
provided explanatory comments. In general, DOD was concerned as to
whether it was necessary to have additional documentation to explain the
actions being taken. We continue to believe a formal record of the
rationale would be useful to improve full disclosure and accountability
for funds.
Background:
DOD has been trying to successfully implement the working capital fund
concept for over 50 years. However, Congress has repeatedly noted
weaknesses in DOD‘s ability to use this mechanism to effectively control
costs and operate in a business-like fashion.
The Secretary of Defense is authorized by 10 U.S.C. 2208 to establish
working capital funds. The funds are to recover the full costs of goods
and services provided, including applicable administrative expenses.
The funds generally rely on sales revenue rather than direct
appropriations or other funding sources to finance their operations.
This revenue is then used to procure new inventory or provide services
to customers. Therefore, in order to continue operations, the fund
should (1) generate sufficient revenue to cover the full costs of its
operations and (2) operate on a break-even basis over time–that is, not
have a gain or incur a loss. In fiscal year 2001, the Defense Working
Capital Fund”which consisted of the Army, Navy, Air Force, Defense-
wide, and Defense Commissary Agency working capital funds”was the
financial vehicle used to buy about $70 billion in defense commodities
including fuel.
The Defense Energy Support Center, as a subordinate command of DLA,
buys fuel from oil companies for its customers. Military customers
primarily use operation and maintenance appropriations to finance these
purchases. In fiscal year 2001, reported fuel sales totaled about
$4.7 billion, with the Air Force being the largest customer, purchasing
about $2.7 billion.
Each year the Office of the Under Secretary of Defense (Comptroller)
faces the challenge of estimating and establishing a per barrel price
for its fuel and other fuel-related commodities that will closely
approximate the actual per barrel price during budget execution, almost
a year later. The Office of the Under Secretary of Defense
(Comptroller) establishes the stabilized annual price based largely
upon the market price of crude oil as estimated by the Office of
Management and Budget, plus a calculated estimate of the cost to
refine. To this price is added other adjustments directed by Congress
or DOD and a surcharge for DLA overhead and the operational costs of
the Defense Energy Support Center. The services annually use these
stabilized prices and their estimated fuel requirements based on
activity levels (such as flying hours, steaming days, tank miles, and
base operations) in developing their fuel budget requests.[Footnote 2]
Figure 2 generally illustrates the process and the main organizations
involved in budgeting for fuels.
Figure 2: Budget Process for DOD Fuel:
[Refer to PDF for image]
This figure is an illustration of the budget process for DOD fuel, as
follows:
Stabilized price:
OMB: Provides crude oil cost estimates;
DESC: Computes cost to refine;
DESC/DLA/OSD: Computes surcharge.
Information is provided to:
Office of the Secretary of Defense: Makes adjustments;
Stabilized price is established.
Estimated requirements:
Begins with stabilized price;
Total Army including tank-mile and flying-hour requirements;
Total Navy including flying-hour and steaming requirements;
Total Air Force including flying-hour requirements;
Together these service requirements:
Requirements X prices = services' operation and maintenance request;
DOD's budget request;
Congress approves with or without adjustments.
Legend:
DESC: Defense Energy Support Center;
OMB: Office of Management and Budget;
OSD: Office of the Secretary of Defense.
Source: Developed by GAO.
[End of figure]
The stabilized annual fuel prices computed by DOD have varied over the
years, largely due to volatility in the price of crude oil. For
example, the stabilized annual fuel price and the Office of Management
and Budget‘s estimated crude oil price, on which the stabilized price
was based for fiscal years 1993 through fiscal year 2003, are shown in
figure 3.
Figure 3: Stabilized Annual Fuel Prices and Crude Oil Cost Estimates
for Fiscal Year 1993 through Fiscal Year 2003:
[Refer to PDF for image]
This figure is a multiple line graph depicting the following data:
Stabilized Annual Fuel Prices and Crude Oil Cost Estimates (estimates
in price per barrel):
Fiscal year: 1993;
Stabilized annual fuel price: $28.92;
Crude oil cost estimates: $19.30.
Fiscal year: 1994;
Stabilized annual fuel price: $34.02;
Crude oil cost estimates: $21.28;
Fiscal year: 1995;
Stabilized annual fuel price: $29.82;
Crude oil cost estimates: $16.21.
Fiscal year: 1996;
Stabilized annual fuel price: $31.50;
Crude oil cost estimates: $17.19.
Fiscal year: 1997;
Stabilized annual fuel price: $31.92;
Crude oil cost estimates: $18.36.
Fiscal year: 1998;
Stabilized annual fuel price: $38.22;
Crude oil cost estimates: $20.29.
Fiscal year: 1999;
Stabilized annual fuel price: $34.86;
Crude oil cost estimates: $19.29.
Fiscal year: 2000;
Stabilized annual fuel price: $26.04;
Crude oil cost estimates: $14.12.
Fiscal year: 2001;
Stabilized annual fuel price: $42.42;
Crude oil cost estimates: $18.62.
Fiscal year: 2002;
Stabilized annual fuel price: $42.00;
Crude oil cost estimates: $23.42.
Fiscal year: 2003;
Stabilized annual fuel price: $35.28;
Crude oil cost estimates: $18.63.
Source: GAO analysis of Office of Management and Budget and DOD data.
[End of figure]
The stabilized fuel price for each budget year remains unchanged until
the next budget year, to provide price stability during budget
execution. According to DOD‘s Financial Management Regulation,
differences between the budget year price and actual prices occurring
during the execution year should increase or decrease the next budget
year‘s price. However, according to DOD‘s Financial Management
Regulation, fund losses can occasionally be covered by obtaining an
appropriation from Congress or by transferring funds from another DOD
account. DOD is also authorized to move money out of the fund by annual
appropriation acts.[Footnote 3] These acts limit the amount of funds
that can be moved and the purposes for which the funds can be used.
Specifically, money can only be removed from the fund for higher
priority items, based on unforeseen military requirements, than those
for which originally appropriated and cannot be used for items
previously denied by Congress. These acts also require the Secretary of
Defense to notify Congress of transfers made under this authority.
Fuel Prices Used in Budget Requests Do Not Reflect Full Cost:
The stabilized annual fuel prices used in the services‘ budget requests
to Congress do not reflect the full cost of fuel because of cash
movements (adjustments) and inaccurate surcharges. Therefore, the
services‘ budgets for fuel may be greater or less than needed and funds
for other readiness needs may be adversely affected. Based on our
review of Office of Management and Budget and Defense Energy Support
Center methodologies, the crude and refined oil price components
appeared reasonable (see app. I for details). However, in fiscal years
1993-2002, cash movements into and out of the fund (adjustments)
amounting to over $4 billion, while disclosed to Congress in DOD budget
documents, were used for other purposes rather than to lower or raise
prices. Some of the cash was moved at the direction of Congress and
some at the direction of DOD. Congress makes such decisions as part of
its budget deliberations. While authorized to move funds, DOD did not
provide Congress with any rationale for the movements based on the
limitations in the applicable appropriations acts. Identifying the
rationale for moving these funds would be helpful to DOD and
congressional decisionmakers as part of the budget review process.
Removing money from the fund, which could be used to reduce future fuel
prices, causes future service appropriations to be higher than they
otherwise would be. In addition, the estimated surcharge component of
the price used in budgeting was consistently higher than actual; it did
not contain all costs; and in some cases, the costs were not adequately
supported.
Cash Movements Masked the Full Cost of Fuel and Affected the Budget:
Substantial cash movements (adjustments) into and out of the fund, while
disclosed to Congress in budget documents, have kept prices from
reflecting the full cost of fuel and affected the development of future
years‘ stabilized annual fuel prices. As a result, the fuel-related
portion of the services‘ operation and maintenance budgets totaled
about $2.5 billion too high in 5 fiscal years and about $1.5 billion
too low in another. The cash taken out of the fund went for the
services‘ operation and maintenance and other nonfuel-related expenses.
Further, Congress provided a $1.56 billion emergency supplemental
appropriation in fiscal year 2000 to help offset a loss due to a
worldwide increase in crude oil prices. This was necessary because DOD
had established a stabilized price of $26.04 per barrel but the actual
cost that year was $48.58 per barrel. This appropriation allowed DOD to
avoid recovering the loss through a price increase. Figure 4 shows the
various fuel-related cash movements during fiscal years 1993 through
2002.
Figure 4: Fuel-Related Cash Movements for Fiscal Years 1993 through
2002:
[Refer to PDF for image]
This figure is a vertical bar graph depicting the following data:
Fiscal year: 2993;
Movement out: -$588 million;
Movement in: None.
Fiscal year: 1994;
Movement out: -$141;
Movement in: None.
Fiscal year: 1995;
Movement out: None;
Movement in: None.
Fiscal year: 1996;
Movement out: None;
Movement in: None.
Fiscal year: 1997;
Movement out: -$192;
Movement in: None.
Fiscal year: 1998;
Movement out: -$695;
Movement in: None.
Fiscal year: 1999;
Movement out: -$125;
Movement in: $1,556;
Fiscal year: 2000;
Movement out: -$800;
Movement in: None.
Fiscal year: 2001;
Movement out: None;
Movement in: None.
Fiscal year: 2002;
Movement out: None;
Movement in: None.
Source: GAO analysis of DOD data.
[End of figure]
Table 1 shows the various cash movements out of the working capital fund
from fiscal years 1993 through 2002. In total, about $2.5 billion of
fuel-generated funds was removed from the fund. Of this amount,
$0.5 billion was used to pay for specific nonfuel-related expenses such
as the Counter Drug Effort. The remaining $2.0 billion was used to meet
the services‘ other operation and maintenance needs.
Table 1: Cash Movements Out of the Working Capital Fund (Dollars in
millions):
Action: Service Operation and Maintenance Account;
Amount: $2,037.5.
Action: Subtotal;
Amount: $2,037.5;
Total: $2,037.5.
Action: Air Force Working Capital Fund;
Amount: $125.0.
Action: U.S. Transportation Command;
Amount: $107.0.
Action: Defense Commissary Agency;
Amount: $85.0.
Action: Army Transportation in Bosnia;
Amount: $81.0.
Action: Army National Guard;
Amount: $60.0.
Action: Counter Drug Effort;
Amount: $45.0.
Action: Subtotal;
Amount: $503.0
Total: $503.0
Action: Total;
Total: $2,540.5.
Source: GAO analysis of DOD data.
[End of table]
In reviewing these cash movements, we noted that DOD had notified
Congress. However, when doing so, DOD did not provide rationale for the
cash movements based on the law, which stipulates that the authority for
such movements may not be used, unless for higher priority items, based
on unforeseen military requirements, and where the item for which the
funds are requested has not been previously denied by Congress. As a
good management practice, such rationale, along with other information,
such as the impact on future prices, would serve to provide more
visibility to cash movements. In fact, in one instance, the Senate
Appropriations Committee disallowed the $125-million request created
when DOD moved these funds from the Defense-wide Working Capital Fund
to cover Air Force Working Capital Fund losses. The Senate
Appropriations Committee Report on the Department of Defense
Appropriation Bill, 2002 and Supplemental Appropriations, 2002, stated
that it could not support such a cash movement because it was
inconsistent with DOD‘s existing policies for recovering working
capital fund losses. As a result, the committee reduced the
appropriation to DOD‘s working capital fund by that amount.
Table 2 shows the effect of these cash movements on the stabilized
annual fuel price if they had been used to lower or raise future year
prices.
Table 2: Effect That Cash Movements Could Have Had on the Stabilized
Annual Fuel Price (Dollars per barrel):
Fiscal year affected: 1996;
Stabilized price: $31.50;
Cash out of fund: ($4.91);
Cash into fund: 0;
Adjusted price including movements: $26.59;
Percent change: ($15.6).
Fiscal year affected: 1997;
Stabilized price: $31.92;
Cash out of fund: ($1.18);
Cash into fund: 0;
Adjusted price including movements: $30.74;
Percent change: ($3.7).
Fiscal year affected: 1998;
Stabilized price: $38.22;
Cash out of fund: 0;
Cash into fund: 0;
Adjusted price including movements: $38.22;
Percent change: 0.
Fiscal year affected: 1999;
Stabilized price: $34.86;
Cash out of fund: 0;
Cash into fund: 0;
Adjusted price including movements: $34.86;
Percent change: 0.
Fiscal year affected: 2000;
Stabilized price: $26.04;
Cash out of fund: ($1.76);
Cash into fund: 0;
Adjusted price including movements: $24.28;
Percent change: ($6.8).
Fiscal year affected: 2001;
Stabilized price: $42.42;
Cash out of fund: ($6.45);
Cash into fund: 0;
Adjusted price including movements: $35.97;
Percent change: ($15.2).
Fiscal year affected: 2002;
Stabilized price: $42.00;
Cash out of fund: ($1.13);
Cash into fund: $14.12;
Adjusted price including movements: $54.99;
Percent change: $30.9.
Fiscal year affected: 2003;
Stabilized price: $35.28;
Cash out of fund: ($7.27);
Cash into fund: 0;
Adjusted price including movements: $28.01;
Percent change: ($20.6).
Note: Numbers in parentheses are negative.
Source: GAO analysis of DOD data.
[End of table]
Cash removed in 5 years caused the services‘ fuel budgets to be about
$2.5 billion higher than necessary because the prices could have been
lowered. For example, $800 million removed in fiscal year 2001 caused
the stabilized price in fiscal year 2003[Footnote 4] to be $7.27 per
barrel higher than necessary. As a result, the services‘ fiscal year
2003 fuel budgets were overstated by $800 million. However, in fiscal
year 2000, a $1.43 billion net cash movement into the fund caused the
fiscal year 2002 stabilized price to be $12.99 per barrel lower than
necessary to recover the full cost. As a result, the services‘ fiscal
year 2002 budgets were understated by $1.43 billion.
While military service comptroller officials responsible for managing
fuel costs for each service stated that they were aware that DOD sets
the stabilized annual fuel price that they must use in the budget
process, they believed any gains in 1 year were being used to lower
future fuel prices. These officials were not aware that funds generated
from fuel sales in 1 year were being used to pay for nonfuel-related
DOD needs. In their view, lower prices would have allowed them to use
more of their operation and maintenance funds for other priorities.
Surcharge Inaccuracies also Affect Budget Information:
The estimated surcharge portion of the price supporting budget requests
has not accurately accounted for fuel-related costs consistent with
DOD‘s Financial Management Regulation. The surcharges were consistently
higher than actual but did not include all costs. Furthermore, some
costs were not adequately supported. These problems were due to
deficient methodologies and record-keeping. As a result the stabilized
annual prices and resulting services‘ budgets were inaccurate.
Surcharge Overstatements:
Consistent surcharge overstatements caused the stabilized annual price
of fuel to be higher than necessary and cost customers on average about
$99 million annually from fiscal years 1993 through 2001. Our analysis
of the surcharge costs shows that the estimated obligations exceeded
actual obligations for every year from fiscal years 1993 through 2001
except for fiscal year 1999 as shown in table 3 below.
Table 3: Difference Per Barrel between Estimated and Actual Surcharge
Obligations for Fiscal Year 1993 through Fiscal Year 2001 (Dollars in
millions):
Fiscal year: 1993;
Estimated: $5.35;
Actual: $5.27;
Difference: $0.08;
Number of barrels sold (in millions): 140.8;
Difference: $11.3.
Fiscal year: 1994;
Estimated: $5.70;
Actual: $5.54;
Difference: $0.16;
Number of barrels sold (in millions): 127.9;
Difference: $20.5.
Fiscal year: 1995;
Estimated: $6.08;
Actual: $5.53;
Difference: $0.55;
Number of barrels sold (in millions): 110.0;
Difference: $60.5.
Fiscal year: 1996;
Estimated: $6.75;
Actual: $4.24;
Difference: $2.51;
Number of barrels sold (in millions): 120.1;
Difference: $301.5.
Fiscal year: 1997;
Estimated: $6.69;
Actual: $4.22;
Difference: $2.47;
Number of barrels sold (in millions): 111.7;
Difference: $275.9.
Fiscal year: 1998;
Estimated: $6.65;
Actual: $5.41;
Difference: $1.24;
Number of barrels sold (in millions): 111.3;
Difference: $138.0.
Fiscal year: 1999;
Estimated: $7.32;
Actual: $7.30;
Difference: 0;
Number of barrels sold (in millions): 112.5;
Difference: 0.
Fiscal year: 2000;
Estimated: $7.16;
Actual: $6.69;
Difference: $0.47;
Number of barrels sold (in millions): 107.7;
Difference: $50.6.
Fiscal year: 2001;
Estimated: $7.34;
Actual: $7.02;
Difference: $0.32;
Number of barrels sold (in millions): 110.3;
Difference: $35.3.
Fiscal year: Total;
Estimated: $59.04;
Actual: $51.24;
Difference: $7.80;
Number of barrels sold (in millions): 1052.3;
Difference: $893.6.
Fiscal year: Average;
Estimated: $6.56;
Actual: $5.69;
Difference: $0.87;
Number of barrels sold (in millions): 116.9;
Difference: $99.3.
Source: GAO analysis of DOD data.
[End of table]
We recognize that variances will occur between estimated and actual
surcharge obligations. Differences, however, should be assessed annually
and appropriate adjustments made to the next year‘s surcharge. We found
that no adjustments for these overcharges, as required by DOD‘s
Financial Management Regulation, were made in fiscal years 1994 through
2001. After we brought this to DOD‘s attention, adjustments were made
when computing the fuel price for fiscal years 2002 and 2003.
All Surcharge Costs Not Included:
The surcharges, however, did not include all required costs. Inventory
losses were not included in the surcharge as required by DOD‘s Financial
Management Regulation.[Footnote 5] For fiscal years 1993 through 2000,
these losses ranged from $12.0 million to $27.5 million a year. Adding
these losses would have increased surcharges by about 9 to 23 cents per
barrel. While officials stated that inventory losses were a factor in
determining the number of barrels to be purchased, this practice does
not comply with DOD‘s regulation, which stipulates that inventory
losses should be included in the surcharge.
Inadequate Support:
Our analysis of the estimated surcharge components disclosed that
support for some costs was inadequate. We found that DLA had
inadequate support for its $40-million annual headquarters overhead
charge that is passed on to the Defense Energy Support Center. This
amount equated to over 5 percent of the fiscal year 2002 and 7 percent
of the fiscal year 2003 surcharges. While DLA has a methodology for
allocating its overhead costs to the affected business activities, we
could not verify/validate the portion that was assessed to the center.
As a result, we could not determine whether the Defense Energy Support
Center was charged the appropriate amount. This is of particular
concern because in the most recent budget submission for fiscal year
2003, DLA requested a $16.9 million increase in its overhead charges to
the center. The Office of the Under Secretary of Defense (Comptroller)
refused to grant the increase because it did not believe the increase
was merited.
Furthermore, the Defense Energy Support Center could not provide
support for the $342 million terminal operations component cost for
fiscal years 1997 and 1998. There was also about a $2 million
difference between supporting documentation and the budgeted amount for
depreciation in fiscal year 2001. The Defense Energy Support Center
could not support any of the component costs prior to fiscal year 1997.
According to officials, this documentation was not maintained during
the move to their current location.
Conclusions:
Fuel prices have not reflected full costs. Fund cash balances have been
used by Congress, and to a lesser extent DOD, to meet other budget
priorities. Given the volatility in crude oil prices, these cash
balances are DOD‘s primary means of annually dealing with drastic
increases and decreases in fuel costs. Furthermore, DOD has removed
cash from the fund without providing Congress with a rationale based on
appropriation act language. In one recent instance, Congress reversed
one of DOD‘s cash movement decisions. DOD also has not calculated
surcharges consistent with the governing financial management
regulation.
Recommendations for Executive Action:
To improve the overall accuracy of DOD‘s fuel pricing practices, we
recommend that the Secretary of Defense direct DOD‘s comptroller to:
* Provide a rationale to Congress, consistent with language in the
applicable appropriations act, to support the movement of funds from
the working capital fund and to identify the effect on future prices.
* Require DLA and the Defense Energy Support Center to develop and
maintain sound methodologies that fully account for the surcharge costs
consistent with DOD‘s Financial Management Regulation and maintain
adequate records to support the basis for all surcharge costs included
in the stabilized annual fuel price.
Agency Comments and Our Evaluation:
DOD generally concurred with the recommendations, but provided
explanatory comments on each one. With regard to our recommendation
that it provide Congress the rationale for cash movements, DOD stated
that information is already being provided through formal and informal
means that it believes are sufficient to report why cash was moved. We
recognize this may be occurring; however, we believe that to improve
visibility of fund operations, it is reasonable to provide a formal
record of the rationale to fully disclose and account for each cash
movement. Such a formal record does not exist; therefore, we continue
to believe our recommendation is appropriate.
In concurring with the recommendation to maintain adequate records,
DOD expressed concern about how long to retain them and proposed
5 years. We believe DOD‘s proposal represents a reasonable timeframe
consistent with our recommendation.
In its cover letter conveying the recommendations, DOD stated our report
overlooks the fact that while covering gains or losses to the fund by
either decreasing or increasing fuel prices the next year is a basic
principle, it is not often practical to rely exclusively on this
principle when establishing such prices because of transfers into and
out of the fund. We disagree. While our report points out that under
the working capital fund concept fuel prices should cover gains and
loses, it also acknowledges that there have been numerous transfers.
Our point is that to ensure fund accountability when such transfers
occur, DOD‘s fuel pricing practices should include providing Congress a
full disclosure of the rationale for the transfer and its impact on the
price. Otherwise, the ability of the working fund to effectively
control and account for costs of goods and services is compromised.
DOD‘s comments are printed in appendix II. DOD also provided technical
comments, which we have incorporated as appropriate.
We performed our review in accordance with generally accepted
government auditing standards. Further details on our scope and
methodology can be found in appendix I.
We are sending copies of this report to the Senate Committee on
Governmental Affairs; House Committee on Government Reform; Senate
and House Committees on the Budget; and other interested congressional
committees; the Secretary of Defense; and the Director, Defense
Logistics Agency. Copies will also be made available to others upon
request. In addition, the report will be available at no cost on the
GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff have questions concerning this report, please
contact us on (202) 512-8412. Staff acknowledgements are listed in
appendix III.
Singed by:
David R. Warren:
Director, Defense Capabilities and Management:
Signed by:
Gregory D. Kutz:
Director, Financial Management and Assurance:
[End of section]
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John W. Warner:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Ted Stevens:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Bob Stump:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Jerry Lewis:
Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
In assessing the accuracy of DOD‘s stabilized annual fuel prices from
fiscal years 1993-2003, we reviewed each of the four components”crude
oil cost estimates, cost to refine, adjustments, and surcharges”and
identified the major offices, DOD organizations, and other components
involved in pricing. For the crude oil cost estimate component, we
reviewed the Office of Management and Budget‘s methodology for
estimating crude oil prices. We discussed the Office of Management and
Budget‘s methodology with the analyst that prepares the forecasted
crude oil prices. We also reviewed the Office of Management and
Budget‘s use of West Texas Intermediate crude oil futures prices and
the historical relationships between those prices and domestic,
imported, and composite crude oil prices in making crude oil price
forecasts. We concluded that this approach was reasonable. For the cost
to refine component, we reviewed the Defense Energy Support Center‘s
methodology for calculating refined costs. In assessing the Defense
Energy Support Center‘s methodology, we relied on our previous analysis
of its regression equation and a suggested change that was adopted.
This same methodology was being used as of May 2002 and remains
reasonable.
For the third component of fuel pricing”adjustments”we discussed and
examined Office of the Under Secretary of Defense (Comptroller)
documents related to stabilized annual fuel prices and applicable
Program Budget Decisions to determine what costs were included in the
component. To determine criteria, we reviewed the applicable portions of
DOD‘s Financial Management Regulation and the legislative history
pertaining to the creation of revolving funds since 1949. To identify
any fuel-related cash movements into or out of the working capital fund
that occurred and might have affected adjustments, we interviewed
various DOD officials and obtained and reviewed the applicable
appropriations acts and the committee and conference reports on those
acts. We analyzed the results, developed a methodology for determining
the effect, and discussed our conclusions with various DOD program and
budget officials.
Finally, for the fourth component of fuel pricing”surcharges”we
obtained, reviewed and discussed DLA and Defense Energy Support Center
methodologies and documentation used in computing the estimated and
actual surcharge costs. To identify criteria for what surcharge costs
should include, we obtained and reviewed DOD‘s Financial Management
Regulation and any other policies and procedures governing or affecting
fuel pricing. To determine whether the support for the surcharge costs
was adequate, we requested, reviewed, and analyzed pertinent
documentation and records supporting budgeted and actual obligations
for each surcharge element for fiscal years 1993-2003.
However, officials were unable to provide support for estimated
surcharge costs from fiscal years 1993-1996 and were unable to provide
support for several actual costs for fiscal years 1993 and 1994.
We met with and/or contacted various program and budget officials within
the Office of the Secretary of Defense; Office of Management and Budget;
DLA Headquarters; Defense Energy Support Center; and the various
military services.
We performed our work from June 2001 to April 2002 in accordance with
generally accepted government auditing standards. As part of our review,
we examined DOD‘s Financial Management Regulation to ensure that it
incorporated the Statement of Federal Financial Accounting Standards
(SFFAS) No. 4 ’Managerial Cost Accounting Standards“ (Feb. 28, 1997).
We did not independently verify DOD‘s financial information used in this
report. Prior GAO and Department of Defense Inspector General audit
reports and Federal Manager‘s Financial Integrity Act reports have
identified inadequacies in the fund‘s accounting and reporting. As
discussed in our report on the results of our review of the fiscal year
2001 Financial Report of the U.S. Government,[Footnote 6] DOD‘s
financial management deficiencies, taken together, continue to
represent the single largest obstacle to achieving an unqualified
opinion on the U.S. government‘s consolidated financial statements.
Appendix II: Comments from the Department of Defense:
Under Secretary Of Defense:
Comptroller:
1100 Defense Pentagon:
Washington, DC 20301-1100:
June 14, 2002:
Mr. David R. Warren:
Director, Defense Capabilities and Management:
U.S. General Accounting Office:
Washington, D.C. 20548:
Dear Mr. Warren:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO-02-582, "Defense Logistics: Better Fuel Pricing Practices
Will Improve Budget Accuracy," dated May 10, 2002 (GAO Code 350045).
The DoD partially concurs with one recommendation and concurs with
comment on the other recommendation included in the draft report.
The report focuses on the general principle that gains or losses to the
Working Capital Fund because of actual fluctuations of fuel prices are
to be covered by either decreases or increases in the stabilized fuel
prices in the following budget year. The report overlooks the fact
that, while this method may be a basic principle in establishing such
prices, it is not often practical or reasonable to rely exclusively on
this principle in considering fuel prices. Both the law and regulations
permit transfers in and out of the Working Capital Fund to address
exigencies arising during the course of the fiscal year. While
transfers into and from the Working Capital Fund with respect to any
fiscal year can have an impact on the establishment of the stabilized
fuel price for the following budget year, the Department does not
believe that this is any indication of any basic flaw in the process,
but rather a recognition of the realities of budgetary formulation, the
appropriations process, and budgetary execution.
Comments on the draft report recommendations, along with additional
comments concerning specific parts of the report that need
clarification or correction are included in the enclosures.
The Department appreciates the opportunity to comment on the draft
report.
Sincerely,
Signed by:
Dov S. Zakheim:
Enclosures: As stated:
GAO Draft Report Dated May 10, 2002:
(GAO Code 350045)/OSD Case:
"Defense Logistics: Better Fuel Pricing Practices Will Improve Budget
Accuracy"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommended that the Secretary of Defense
direct the Comptroller to provide a rationale to Congress, consistent
with language in the applicable appropriations act, to support the
movement of funds from the working capital fund and to identify the
affect [sic] on future prices.
DOD Response: Partially concur. This recommendation overlooks two
important factors concerning transfers that have been made with respect
to fuel prices.
The first is that the vast majority of transfers that have been made in
the past are specific statutory transfers reflecting congressional
action in connection with annual appropriations acts. Congress either
acted on its own initiative or in response to information provided to
the appropriations committees by the Department concerning fuel pricing
issues. By both formal and informal means, the Department provides
information to congressional committees concerning fuel price issues,
including transfers. Therefore, we believe that Congress is clearly
aware of the impacts of all issues, including issues presented by
transfers, that might have an impact on both current and future fuel
prices.
The second is that, in the case of a general statutory transfer under
either the Department's general transfer authority provision (e.g.,
section 8005 of the FY 2002 Appropriations Act) or the general
provision specifically providing transfer authority for working capital
funds (e.g., section 8006 of the FY 2002 Appropriations Act) transfers
are only made to meet the needs and exigencies of the fiscal year in
which they are made. If such transfers involve fuel pricing issues, the
congressional committees would be aware of any impact of such transfers
on fuel costs and charges.
Finally, the comments in the draft report concerning such general
transfers indicate that they deal with matters that would be applicable
to the Department's general transfer authority (FY 2002 section 8005),
rather than the specific working capital fund transfer authority
provision (FY 2002 section 8006). In fact, in the last 9 years only one
of the Working Capital Fund transfers has involved the use of the
general transfer authority general provision. In either case, however,
the Department believes that the notification procedures that have
case, however, the Department believes that the notification procedures
that have been developed over the years are sufficient to provide the
congressional committees with the information that they need with
respect to transfers under either of the provisions. We also believe
that the committees share this view.
Recommendation 2: The GAO recommended that the Secretary of Defense
direct the Comptroller to require the Defense Logistics Agency and the
Defense Energy Support Center to develop and maintain sound
methodologies that fully account for the surcharge costs consistent
with DoD's Financial Management Regulation (FMR) and maintain adequate
records to support the basis for all surcharge costs included in the
stabilized annual fuel price.
DOD Response: Concur, with comment. To the extent that the
recommendation concerns maintenance of records beyond the period
generally established under the Federal Records Retention Schedules, it
is overly broad.
With respect to the foregoing, General Records Schedule 5 "Budget
Preparation, Preservation, and Apportionment Records" appears to be the
applicable schedule with respect to the type of records involved. Under
this schedule, information concerning the surcharge costs for any
particular fiscal year (developed in connection with the Department's
budget request) would appear to fall within either the category of
"Budget Correspondence Files," (destruction authorized when 2 years
old) or "Budget Background Records" (destruction authorized when 1 year
old). While records relating to the basis on which the surcharge is
calculated are only relevant to one fiscal year, the Department
recognizes that there might be some need for some historical
information beyond the period authorized for the destruction of such
records. Accordingly, we plan to maintain such historical records in
detail for 5 years after they were created.
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Richard G. Payne (757) 552-8119:
Dudley C. Roache, Jr. (757) 552-8117:
Acknowledgments:
In addition to those named above, Bob Coleman, Jane Hunt, Patricia
Lentini, Charles Perdue, Greg Pugnetti, Chris Rice, Gina Ruidera,
Malvern Saavedra, and John Van Schaik made key contributions to this
report.
[End of section]
Footnotes:
[1] Crude oil cost estimates are forecasted crude oil prices provided
by the Office of Management and Budget. Cost to refine is the Defense
Energy Support Center‘s calculated estimate of the cost to refine crude
oil. Adjustments are increases and decreases to the price to account
for a variety of factors such as prior year fund losses, legal
judgments, and rounding. Surcharges are comprised of DLA overhead costs
and Defense Energy Support Center operational costs such as
transportation, labor, and maintenance.
[2] Because of wide variations, volatility of fuel prices, and their
corresponding impact on the budget, GAO provides periodic updated
information to appropriation and authorization committees that shows
the impact of more recent fuel price estimates on the services‘ budget
requests.
[3] Section 8005, P.L. 107-117, is the most current iteration of this
authority. Appropriations acts for recent fiscal years include similar
provisions.
[4] Budgets are developed using stabilized prices established about a
year in advance for any given fiscal year.
[5] Volume 2B, chapter 9, paragraph 090203 C.
[6] U.S. General Accounting Office, U.S. Government Financial
Statements - FY 2001 Results Highlight the Continuing Need to
Accelerate Federal Financial Management Reform [hyperlink,
http://www.gao.gov/products/GAO-02-599T], Apr. 9, 2002.
[End of section]
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