BNUMBER:  B-275193
DATE:  January 29, 1997
TITLE:  Sun Company, Inc.

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Matter of:Sun Company, Inc.

File:     B-275193

Date:January 29, 1997

Ronald H. Uscher, Esq., and Nick R. Hoogstraten, Esq., Bastianelli, 
Brown, Touhey & Kelley, for the protester.
J. Keith Burt, Esq., McKenna & Cuneo, for MAPCO Alaska Petroleum, 
Inc., an intervenor.
Karen E. Schools, Esq., Defense Logistics Agency, for the agency.
Wm. David Hasfurther, Esq., John Van Schaik, Esq., and Michael R. 
Golden, Esq., Office of the General Counsel, GAO, participated in the 
preparation of the decision.

DIGEST

Protest that in procurement for fuel, agency should be required to 
include in bid evaluation all costs associated with government 
controlled facilities which play a role in the transportation of FOB 
origin offers is denied where the costs at issue are uncertain and 
speculative and are largely fixed, in other words, would exist 
regardless of which firms are awarded contracts.

DECISION

Sun Company, Inc. protests the method proposed by the Defense Fuel 
Supply Center (DFSC) to evaluate prices under request for proposals 
(RFP) No. SPO600-97-R-0061, issued for DFSC's annual purchase of bulk 
fuel for the gulf and east coasts.  
We deny the protest.
 
DFSC makes two major bulk petroleum purchases each year to cover fuel 
requirements for approximately 400 locations.  The agency uses a 
computer program in its evaluation under those procurements to 
determine the combination of contract awards that will result in the 
lowest overall cost to the government.  This computer program, or bid 
evaluation model, calculates evaluated prices based on consideration 
of numerous factors including:  (1) locations requiring fuel; (2) the 
volume of fuel to be procured for each location; (3) acceptable 
methods of delivery for each location; (4) identity of each offeror; 
(5) quantities offered, (6) methods of delivery offered; (7) 
contingencies in offers, such as all-or-none offers, or maximum and 
minimum quantities; and (8) transportation costs.

DFSC issued the RFP for the purchase of approximately 1.7 billion 
gallons of jet fuel, marine fuel, and gasoline for numerous government 
facilities in the east and gulf coast regions of the United States.  
Under the RFP, offerors are to propose products for each facility on 
an FOB destination basis, including delivery to the destination called 
for by each line item, or FOB origin basis, not including delivery.  
For FOB origin offers, the RFP indicates that DFSC will calculate the 
cost of transporting the fuel to the line item destination at 
government expense and add that cost to the offeror's price.  The 
agency then compares the FOB origin, plus government expense prices, 
with prices in FOB destination offers (where delivery is at the 
offeror's expense) to determine the lowest "laid-down," or delivered, 
price for each facility.  

In response to a question asked by Sun, DFSC informed the firm that 
the costs of using government controlled terminal facilities called 
Defense Fuel Support Points (DFSP) during transportation of fuel 
offered FOB origin will not be evaluated when determining the lowest 
laid-down price.  These costs are incurred when the in-transit fuel 
passes through the DFSPs, such as, for example, when fuel is 
transferred from a pipeline to a truck or barge.

The protester notes that Federal Acquisition Regulation (FAR)  sec.  47.306 
requires the use of "transportation and transportation-related costs" 
when evaluating offers and that the RFP states that "[t]ransportation 
rates and related costs shall be used in the evaluation of FOB origin 
. . . proposals."  According to Sun, by refusing to evaluate DFSP 
costs, the agency is not considering all relevant 
transportation-related costs in violation of the FAR and the RFP.  The 
protester also maintains that the failure to consider DFSP costs is 
contrary to the Competition in Contracting Act of 1984 (CICA), 10 
U.S.C.  sec.  2304(a)(1) (1994), which requires full and open competition 
and requires that the agency accept the offer that is most 
advantageous to the government.

In addition, the protester argues that the failure to evaluate those 
costs unfairly favors some firms over others.  Sun notes that it 
offers Philadelphia-origin fuel which "in many cases [does] not 
require the use of a DFSP to reach government line item destinations."  
Sun states that its offers are competing against FOB origin offers, 
often from other parts of the country, which the agency will deliver 
to line item destinations via DFSP terminals.  Sun argues that, 
because the agency refuses to include DFSP costs along with other 
transportation-related costs in the evaluation, these FOB origin 
offers receive the benefit of free DFSP transit.  According to the 
protester, in effect, the taxpayers are subsidizing those FOB origin 
offers to the prejudice of offerors such as Sun which have permissible 
geographical advantages that allow them to use no DFSPs or fewer DFSPs 
than gulf coast firms.

Sun also argues that the costs related to DFSPs can be determined, or 
at least estimated, with reasonable accuracy so this is not a case 
where the exclusion of  particular costs from the evaluation is 
justified because those costs are speculative.  Sun notes that 
internal agency records show that some DFSC officials believe that 
DFSC's bid evaluation model is capable of accurately including DFSP 
costs in the evaluation.  

In response to the protest, DFSC explains that DFSPs serve multiple 
purposes, some of which Sun has ignored, and that it is not feasible 
to isolate the costs Sun has in mind.  First, DFSC states, some DFSPs 
hold bulk petroleum reserve stock, or war reserves, positioned to 
reduce reaction time and to ensure adequate support of military forces 
during the early stages of war until stocks can be replenished.  These 
war reserves cannot be used except in an emergency.  Second, according 
to the agency, some DFSP's hold substantial volumes of operating 
stock, or inventory required to sustain peacetime operations.  The 
agency reports that military bases typically do not have sufficient 
storage to satisfy long-term fuel requirements, and need to be 
resupplied on a regular basis and that the government has carefully 
positioned its network of DFSPs to meet this need.  The agency also 
notes that regulations require that fuel stocks be positioned as near 
to the point of intended use as economical and practical to minimize 
transportation requirements and the impact of hostile disruption of 
supply lines.  

Third, the agency explains that the DFSPs also serve as a means of 
rotating war reserves and peacetime operating stocks in order to 
prevent deterioration of the fuel.  Finally, according to the agency, 
it takes advantage of these facilities to store fuel purchased on an 
FOB origin basis in transit between the origin shipment point and the 
ultimate destination.               

The agency reports that there are three types of DFSP facilities: 1) 
government-owned government-operated (GOGO), which are operated and 
paid for by the military services;  2) government-owned 
contractor-operated (GOCO) which are  operated and maintained under 
contracts of 3- to 5-years duration; and
3) contractor-owned contractor-operated (COCO), which operate under 
services contracts of 3- to 5-years duration.  The agency explains 
that decisions concerning where DFSP terminals are placed, the amount 
of storage required, and how those terminals are operated and 
maintained are long-term strategic choices which are entirely separate 
from the annual petroleum procurement process.  The agency reports 
that, among other factors, decisions concerning the location and 
operation of DFSPs are based on war reserve requirements; peacetime 
inventory requirements; inventory holding costs; receipt capabilities 
of both the storage facilities and the customers they support, 
transportation costs, and the effect of the current and alternative 
systems on competition.

Thus, according to the agency, for purposes of the bid evaluation for 
bulk petroleum purchases, DFSP costs are fixed, not variable, because 
the government must operate and maintain the DFSPs regardless of which 
offerors receive supply contracts and regardless of whether the DFSPs 
are used for anything other than holding war reserves and peacetime 
operating stocks.  According to the agency, in contrast to DFSP costs, 
which are fixed and exist regardless of whether the DFSPs play a role 
in the transit of fuel, the costs associated with commercial pipelines 
and commercial terminals are included in the bid evaluation model 
because they are variable transportation costs.  

The agency acknowledges that there are some costs associated with 
using DFSPs for the transit of fuel, but argues that most of the costs 
of DFSPs are attributable to storage of war reserves and peacetime 
operating stocks.  Moreover, according to the agency, the portion of 
DFSP costs that can be attributed to the acceptance of any particular 
offer would be speculative.  The agency explains that in order to 
allocate DFSP costs to particular offers the agency would have to 
consider that each terminal has different storage capacities and 
tanks, different levels of war reserves, peacetime operating stocks, 
and fuel in transit, and for privately-owned and operated facilities, 
that each contract with an owner-operator is priced differently.  As a 
result of these factors, the agency maintains that the amount of DFSP 
costs that could be attributed to transit of fuel is uncertain and 
speculative and, for that reason, the agency should not be required to 
consider those costs in the bid evaluation.

DFSC notes there is debate within the agency concerning these issues 
and acknowledges that, as Sun points out, some agency officials 
believe DFSC could identify the transit costs of DFSPs and include 
those costs in the bid evaluation.  The position of the agency, 
nonetheless, is that the costs could not be adequately identified.  
Moreover, DFSC argues that the more important question is whether such 
costs are fixed or variable, that is, whether they would continue to 
exist regardless of which firms are awarded petroleum supply 
contracts.  

In a related point, DFSC concedes that, to the extent there are 
variable costs associated with DFSPs, these costs should be included 
in the bid evaluation.  As an example, the agency agrees with Sun that 
the New York state spill tax should be included in the bid evaluation, 
where fuel passes through a New York facility from out of state.  The 
agency also allows that, to the extent DFSC expends any funds at GOGO 
facilities for incremental throughput charges, the agency will 
identify and include these costs in the bid evaluation.  While 
conceding that these costs are variable, not fixed, the agency 
nonetheless argues that the majority of costs associated with DFSPs 
are not variable costs, but remain constant across all of DFSC's 
supply options and are no more attributable to other offerors than 
they are to Sun and therefore should not be included in the bid 
evaluation.

As a general rule, agencies are required to include cost or price as a 
significant factor in the evaluation of proposals, 10 U.S.C.  sec.  
2305(a)(3)(A)(ii); FAR 
 sec.  15.605(b).  While agencies have considerable discretion in 
determining the particular method to be used in evaluating cost or 
price, that method should, to the extent possible, accurately measure 
the cost to be incurred under competing proposals.  BellSouth 
Telecommunications, Inc., B-258321, Jan. 6, 1995, 95-1 CPD 
 para.  10.

The record shows that DFSC identifies and evaluates transportation 
costs, except most DFSP-related costs, for FOB origin offers and 
includes those costs in the evaluation.  For example, the government 
includes in the bid evaluation the cost of transporting fuel by 
pipeline from the origin to a DFSP and of shipping the fuel from the 
DFSP to the ultimate destination, by truck or barge, for example.  
Thus, the only costs in question here are those that pertain to the 
DFSPs themselves.  Therefore, this is not a case where the agency is 
failing to evaluate any transportation costs at all; rather, Sun's 
position is that CICA and the FAR require the agency to more precisely 
include in the evaluation all transportation-related costs.

We conclude that the method used by DFSC to evaluate and compare the 
prices of various offers, which does not include all DFSP facility 
costs, is a reasonably accurate measure of the actual costs to be 
incurred by the competing proposals.  First, DFSP costs are largely 
only indirectly related to the transit of fuel.  In this respect, 
DFSPs have functions, and costs, that relate to holding petroleum as 
war reserves and peacetime operating stocks.  The agency represents 
that these uses of the DFSP facilities, which involve substantial 
amounts of fuel, would exist regardless of the need to process fuel in 
transit through those facilities.  In this respect, the agency notes 
that, although the DFSP facilities are involved in processing fuel, 
some of those facilities are operated under long-term, fixed-price 
contracts that must remain in place regardless of which offerors 
receive annual supply contracts.  

As explained above, the agency argues that transit costs related to 
DFSP facilities should not be considered in the evaluation because 
they are uncertain and speculative.[1]  Among other factors, the 
agency explains that the difficulty of allocating DFSP costs to 
particular offers is related to the fact that the quantity of fuel 
that will be shipped to a storage facility in any given time period 
cannot be accurately predicted and there is no basis for estimating 
the volume of fuel that will be shipped to a particular DFSP until 
after the evaluation has occurred.  In addition, the agency asserts 
that the evaluation factors that would have to be considered would 
vary widely for each storage facility; each terminal has a different 
storage capacity and number and size of tanks, different levels of war 
reserves, peacetime operating stocks, and fuel in transit, and in the 
case of privately-owned and operated facilities, each contract with an 
owner-operator is priced differently.  The agency also asserts that 
almost all offers, including FOB origin offers submitted by Sun, 
include the use of DFSP facilities to transport fuel to the end user.

Thus, in addition to the factors listed by the agency, it is clear 
that evaluating DFSP facility costs would not be simply a matter of 
assigning such costs to some offers and no costs to other offers.  
Rather, in many cases, the bid evaluation, in order to be accurate, 
would have to assign varying amounts of DFSP facility costs to most 
offers depending on the number of DFSP facilities involved in that 
offer.

Based on the development of the record in this protest, it is clear 
that the determination of the appropriate amount of DFSP related costs 
to assign to any particular offer would not be a simple matter.  We 
also conclude that the record demonstrates that the costs that can be 
assigned to any particular offer are a matter of debate, even with the 
agency.  While the particular method to be used by an agency to 
evaluate prices should, to the extent possible, accurately measure the 
costs to be incurred under competing proposals, BellSouth 
Telecommunications, Inc., supra., the evaluation of the most 
advantageous offer in any procurement 
should be confined to matters that are reasonably quantifiable.  
Comdisco, Inc., 
64 Comp. Gen. 11 (1984) 84-2 CPD  para.  416.  Given the numerous factors 
involved in determining the costs for transit through DFSP facilities, 
and the variability of many of those factors, we have no basis to 
challenge the agency's view that most DFSP transit costs currently are 
not reasonably quantifiable.

The protest is denied.

Comptroller General
of the United States

1. On the other hand, as noted above, the agency concedes that DFSP 
costs should be considered in the bid evaluation when they can be 
determined accurately--for example, in the case of the New York state 
spill tax and GOGO costs for incremental throughput charges.