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ment and management of utility and communications services. This allows DOD to procure services for its own needs except when GSA areawide contracts will satisfy DOD requirements.36 These agreements assign to GSA the overall responsibility for coordinating the Government's representations before regulatory bodies but with the understanding that DOD will represent the military services where they are the major Government party concerned.37

GSA enters into areawide contracts with various utilities for furnishing services to Federal agencies. GSA areawide contracts provide that the utility, upon execution of an authorized Government order, will furnish the services involved in accordance with the supplier's rate schedules specified in the areawide contract.

Unless it is determined that more advantageous services are available, each agency in the area covered by a GSA areawide contract must procure utility services according to the contract. However, when it is in the best interests of the Government, an agency may negotiate special rates under an area wide contract or under a separate contract.3

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In addition, GSA has special statutory authority to enter into long-term contracts for utility services for periods not exceeding ten years.39 On its own initiative or upon request by an agency, GSA will negotiate or assist in the negotiation of a long-term contract if one is justified.40

When advantageous to the Government (in terms of economy, efficiency, or service), consolidated purchase, joint use, or cross-service by one agency for another is used to procure utility services. In the absence of a GSA areawide or a long-term contract, agencies may procure utility services and facilities independently. This is handled in three ways:

• When the utility rates are fixed or adjusted by a Federal, State, or other public regulatory body, such procurements may be effected by formal contracts or by simple procurement

36 FPR 1-4.407.

37 "Statement of Areas of Understanding Between the Department of Defense and the General Services Administration in the Matter of Procurement of Utility Services (Power, Gas, Water)," Federal Register, Dec. 1, 1950, p. 8227, and Federal Register, Feb. 7, 1957, p. 871.

38 FPR 1-4.407.

39 40 U.S.C. 481 (1970) and FPR 1-4.408.

40 Ibid.

documents, such as Government purchase orders or other written requests for service."1 • When the utility rates are not fixed or adjusted by a Federal, State, or other public regulatory body, a formal contract must be used.42

In any event, if the cost of annual service exceeds $50,000, or the connection charge, termination liability, or facilities charge exceeds $5,000, it must be cleared with GSA. This does not apply if the agency has established a clearance with GSA based on having a technically qualified in-house staff capable of handling the matter. The services of GSA are available to agencies to effect contracts or agreements as necessary.43

For telecommunication services, GSA will enter into areawide, general-purpose, and special-purpose contracts for Federal agencies. If GSA has an areawide contract, it must be used by all agencies in the area unless a generalor special-purpose contract is deemed by GSA, in consultation with the agency concerned, to be in the best interests of the Government." Certain operational telecommunication systems (for example, air traffic, biomedical, satellite tracking) have been exempted from this provision."5

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the Army, is the DOD single manager for military traffic, land transportation, and common-user ocean terminals. It is one of three single-manager organizations established to provide transportation service for DOD. The Military Airlift Command (MAC) provides military and contract air movement services, including operation of air terminals. The Military Sealift Command (MSC) provides ocean shipping services using fleet and commercial shipping.

Personal property shipments handled by MTMTS worldwide represent the largest segment of DOD's peacetime transportation budget. More than 1.1 million shipments having a total weight of close to 1.2 million tons were made during fiscal 1971.49

Passenger traffic in the continental United States (CONUS) reached a peak of 7.2 million passengers in 1967 but declined to about 5.6 million in 1971.50 Air and bus travel have almost completely replaced rail travel. At present, MTMTS manages movements of ten or more people, but this is being changed to apply to movements involving six or more people.

Inland cargo traffic in CONUS, with the exception of movements of less than 10,000 pounds, is given conventional traffic management support (for example, rates, routing) by MTMTS. Fiscal 1971 volume was about 23 million tons. Cargo transhipped through CONUS ports totaled more than 13 million tons, of which 11 million tons were export cargo.51

The Commission did not review procurement of ocean shipping services since a joint study was being conducted by the Department of Commerce, the Department of Defense, and the Federal Maritime Commission.52

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that are appropriate and reasonable for the services required, but there is no provision for acceptance of commercial forms.

The broad range and nature of Government requirements and the variations in rate-setting methods preclude the Government from relinquishing its prerogative of rate negotiation. For transportation services and possibly other utilities, opportunities often exist for consideration of alternative or competitive means of fulfilling requirements. The Government should avail itself of every opportunity to compete its requirements when savings based on total costs can be achieved.

Industry concern over the Government's reluctance to accept the forms and provisions used by industry appears to have merit. In most cases, Federal Procurement Regulations authorize use of simple procurement documents if the annual cost of the service is under $10,000, but the regulations do not indicate that use of standard industry forms is acceptable. Many service transactions would be simplified if commonly used industrial forms were accepted by the Government. Such a policy might encourage public utilities to modify their forms to conform with legal requirements necessary to make them acceptable to Government activities.

Conclusions

The special characteristics of regulated industries appear to justify the statutory and regulatory exceptions to processes normally used in the procurement of commercial products.

The Government's requirements for services of regulated industries appear to need special consideration in regulatory plans. A statutory requirement for the Government to comply with State and local regulatory requirements is not feasible.

Transportation costs can be reduced through greater consideration of competitive sources. and modes.

Administrative costs in the procurement of regulated services can be reduced for both Government and industry by judicious Government acceptance of the forms and provisions used in ordinary commerce.

CHAPTER 6

Total Economic Cost

In the procurement of commercial products, Government officials at every level tend to focus on the "price paid to the supplier" rather than on the total long-run cost of satisfying a Government requirement. As a result the Government has failed to develop the data and techniques needed to measure the "total economic cost" of fulfilling a Government need.

This chapter addresses three types of costs related to the acquisition and use of commercial products:

• Support Cost. The cost of the support systems the Government uses to acquire and provide commercial products to the ultimate

user.

• Landed Cost. The total cost to provide an item to its user. This includes the price paid for the item and its allocated share of the cost of the support system, or systems, used to acquire and deliver it.

• Total Economic Cost. The landed cost of an item plus costs incident to its use, and disposal or consumption.

The chapter summarizes the results of study group analyses of support and landed costs and discusses the compelling need for total system management. Recommendation 6, Chapter 4, encompasses consideration of types of costs, discussed in this chapter, as basic to analyses of effective procurement and distribution systems. The elements of landed costs analyzed in this study are shown in figure 1.

METHODOLOGY

The cost data received from agencies did not

segregate costs of procurement and distribution systems, thus necessitating the prorating of these costs. Where necessary, we developed our own estimates from the data furnished and made adjustments for missing data. In some cases, we did not include elements of cost if the information was not critical to the development of support costs. For example, we did not include costs of disbursement of funds at station level for payment of commercial accounts. Our approach was consistent with the cost-effectiveness and analysis guidance used by the Department of Defense (DOD).1

The resources used in procurement and distribution were identified, measured, and priced. For interagency programs, available accounting data were used to develop costs related to capital resources. Return on invested capital was costed at ten percent per year. For base activities, we took the average costs of transactions and the cost of personnel as furnished to us. Costs fell into three general categories:

2

• Appropriated fund costs that primarily included personnel and operating expenses of the support provided

• Stock or revolving fund costs that primarily included transportation and inventory loss costs (except in the case of the Veterans Administration where operating expenses are funded by its revolving fund)

• Unfunded costs that were primarily investment costs reflecting depreciation and return on invested capital. Annual appropriated funds that might have reflected capital re

1U.S. Department of Defense, DOD Instruction 7041.3, Economic Analysis of Proposed Department of Defense Investments, Feb. 26, 1969.

2 U.S. Office of Management and Budget, Circular A-94, Discount Rates to be Used in Evaluation of Deferred Costs and Benefits, Nov. 15, 1971.

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pairs or minor construction were not adjusted for this factor.

Costing was based on data for fiscal 1971. Activity in that year was declining from the peak of the Vietnamese conflict. This had some impact on operations, mostly in property disposal and the reduction of inventories, as exhibited by low procurements in relation to sales.

The purpose of our cost analyses is not to show relative efficiency. Rather, it is to highlight the magnitude of costs of available alternatives and whether alternative choices would offer the Government opportunities for savings in the procurement and distribution of commercial products. In establishing a support system, various alternatives sometimes compete with and at other times complement one another. Thus the decisions must reflect both the best choice among alternatives and the best combination of approaches to support the specific needs of a given using activity.

As discussed in Chapter 4, the policies gov

erning the acquisition of commercial products are not consistent among the Federal agencies, and agencies generally do not give adequate consideration to total economic cost. In establishing and operating procurement and distribution systems, they often fail to consider adequately the costs of alternatives. This results in higher costs and raises questions about operating costs between Congress and the executive branch, among agencies, and between industry and Government.

INTERAGENCY SUPPORT COSTS

We estimated the costs of the interagency support provided by the Federal Supply Service (FSS) of the General Services Administration (GSA), the Veterans the Veterans Administration (VA), and the six inventory control points (ICP) or supply centers of the Defense Sup

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