"Contract performance involving the preparation and furnishing of advice to the Department in a technical area where the contractor is also providing consulting assistance in the same area to any other organization.

Contract performance involving the preparation and furnishing of advice to the Department on a regulatory matter where the contractor is also providing assistance on the same or similar matter to any organization regulated by the Department."

The DOE Procurement Regulations, which were published as a proposed rule on April 14, 1978 (43 FR 15853) and which will be issued as a final rule, will contain the foregoing additional examples as "(6)" and "(7)" under Section 9-1.5404(b) and such other changes as may be deemed necessary to emphasize the especially sensitive nature of the Department's regulatory functions with respect to the avoidance of organizational conflicts of interest.

If you have any questions, please contact Ed Lovett on 376-1758.

Hatth

Berton J. Roth, Director
Office of Policy

Procurement and Contracts

Management Directorate

Mr. FINNEGAN. What does that one clause mean that was added to the contract by the contracting office?

Mr. KILDEE. You are speaking now of standard article No. 4.18? Mr. FINNEGAN. Right.

Mr. KILDEE. That is a clause drafted for support services contracts where there is a long and continuing relationship. It reflected the ERDA experience. And it is not as carefully tailored to this situation as we would like. We are starting to look into whether that clause needs to be revised or whether we need some additional guidance in the area of these regulatory clauses; that is, of the contracts for regulatory activity. We have on an ad hoc basis done some things where there has been continuing support for a permit or licensing operation, Mr. Finnegan, that the contractor was precluded from representing or consulting with anyone who was involved in an application's procedures for the period of the contract and for a period of I think 1 year after.

We need to look at each one of these on an ad hoc basis and develop a general pattern. We are in the process of doing that now. Mr. FINNEGAN. How long do you think it will be before that will be finished?

Mr. KILDEE. I hope we do better than the issuance of the original regulations.

Mr. FINNEGAN. Which took 18 months.

Mr. KILDEE. I know. We are going to provide interim guidance right away. I think we will force a serious look at each one of them immediately. Until the stage when we will get some final guidance, I hate to promise you at this stage.

Mr. FINNEGAN. I hope you keep the subcommittee advised.

Mr. DINGELL. Gentlemen and ladies, the committee thanks you for your assistance to us. It may be that there will be some additional questions from staff regarding this or other matters that will

be submitted for the record. And I know you will give us your usual cooperation in these matters.

The Chair does thank you, Mr. Bardin, and your associates. The committee stands adjourned until Monday at 10 o'clock. [Whereupon, at 12:30 p.m., the subcommittee adjourned, to reconvene at 10 a.m., Monday, February 26, 1979.]

DEPARTMENT OF

OF ENERGY AUTHORIZATIONS

(FISCAL YEARS 1979 AND 1980) AND ENERGY EMERGENCY PREPAREDNESS

MONDAY, FEBRUARY 26, 1979

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON ENERGY AND POWER,

COMMITTEE ON INTERSTATE AND Foreign Commerce,

Washington, D. C.

The subcommittee met at 9:30 a.m., pursuant to notice, in room 2123, Rayburn House Office Building, Hon. Albert Gore, Jr., presid ing, Hon. John D. Dingell, chairman.

Mr. GORE. The hearing will come to order. On behalf of Chairman Dingell, I will read an opening statement.

The subject of this morning's hearing is the 1980 budget for the strategic petroleum reserve program.

The Arab oil embargo during the winter of 1973-74 and the resulting petroleum shortage caused severe impacts on the U.S. economy. It emphasized our vulnerability to interruptions in imports from the major oil exporting nations and to other supply disruptions. To minimize the impact of another such embargo, the Energy Policy and Conservation Act (EPCA), signed into law on December 22, 1975, authorized the creation of a strategic petroleum reserve. Under this program, the Federal Government would buy oil and store it in specially constructed facilities so that on short notice the reserve oil could substitute for any embargoed supplies. This would give the Nation a cushion against future disruptions. Now, the first crisis of the nature which the strategic reserve was designed to avert is at hand. Gas rationing is being actively discussed. Home heating oil may be in short supply. We face critical cutbacks in industrial production, with resulting unemployment. Since the program was established, U.S. taxpayers have spent $3.5 billion and when we asked how much oil we can get from our storage program, we are told we have less than a week's supply and we cannot get it out of the ground anyway.

The recurring problems of the strategic reserve highlight the need for careful congressional oversight of the program. The Department of Energy is now pressing for more money to construct its facilities. It insists it must reprogram $732 million for fiscal years 1979 and 1980 so the program will not fall further behind schedule. This fiscal legerdemain would avoid the Budget Act and the scrutiny of this subcommittee during the budget authorization process. The reprograming, if the Congress permits it to happen, means this subcommittee would only review about $8 million for

fiscal year 1980 instead of the hundreds of millions of dollars which will actually be spent.

I have suggested to the Appropriations Subcommittee, which is considering the reprograming, that any reprogramed funds should be strictly limited. No funds should be made available out of reprogramed funds for commitments in fiscal year 1980. Changes in program direction should be made through supplemental budget action, subject to the authorization process. This morning we are going to ask the Department to separate 1979 from 1980 and to tell us what exactly it needs in each year for the different aspects of the program. Only that information will permit the Congress to determine how well the Government is controlling its costs.

Delays in the program continue. Oil suppliers are claiming they cannot live up to their contracts to deliver oil because of the events in Iran. Suppliers generally are refusing to offer the Government any more oil-except at almost double the normal price. We expect serious problems in getting any future oil supplies for the reserve.

The subcommittee is asking the General Accounting Office this morning to review the oil acquisition program, the measures the Government is taking, or not taking, as the case may be, to enforce its oil supply contracts and what steps can be taken to meet future program needs.

Still unresolved is the question of who is going to manage the future construction of the reserve: Government or private industry. While the reserve program has had very serious problems, the people now working on the project are the only ones who have actually built as big and as complex a storage facility as the reserve calls for. I hope and believe they have learned from past mistakes. Private industry has not had a chance to make those same mistakes, and I am not sure we should give them the chance at taxpayers' expense. For this reason, the subcommittee has expressed concern that before we commit ourselves to go to private industry using the so-called turnkey approach, we have an opportunity to study the alternatives available.

The Department has promised to make no decisions until after advising this subcommittee. But in reviewing the reprograming proposal, we find approximately $226 million designated for turnkey development. We are concerned the Department may be trying to avoid congressional scrutiny by presenting turnkey proposals for consideration at a time when so much money has already been committed that no one can realistically evaluate the proposals objectively and decide whether or not turnkey is the proper approach. This issue will also be discussed today.

In December we found that the costs of the program were out of control-that they had doubled in the space of 1 year. Mr. Ernest Fitzgerald, an expert on government contracts, testified that even the most fundamental documentation of the changing financial status of the program-a cost tracking system-was completely missing. Mr. DeLuca agreed that it was an essential tool of cost control and offered to provide the subcommittee with the Department's plan for implementing such a system. However, the subcommittee has not yet received any evidence that the system has been implemented.

I should point out that the mere existence of a cost control system will not control costs. It takes the determination and the willingness to management to enforce contracts as originally written even though some favored contractors may lose money.

According to the testimony of the Department only one contractor may lose money while the other contracts were merely modified to cover substantial cost overruns. In mid-December 1978, the program reserve office reported that some 60 percent of its 100 largest contracts were already suffering from cost overruns. Some of those contracts exhibited cost growth of over 1,000 percent. We are also asking the General Accounting Office to audit these contracts and report back to the subcommittee.

Our first witness this morning will be Mr. J. Dexter Peach, Director, Energy and Minerals Division, General Accounting Office. Welcome, Mr. Peach. Could you identify yourself to the reporter and those who will be accompanying you in your testimony and have those people please do the same.

STATEMENT OF J. DEXTER PEACH, DIRECTOR, ENERGY AND MINERALS DIVISION, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY TIMOTHY GROGAN, MANAGEMENT ANALYST, INTERNATIONAL DIVISION; FRANK CONAHAN, ASSOCIATE DIRECTOR, INTERNATIONAL DIVISION; AND FLORA MILANS, MANAGER, FOSSIL FUELS, ENERGY AND MINERALS DIVISION Mr. PEACH. Yes, thank you, Mr. Chairman.

I am Director of the General Accounting Office, Energy and Minerals Division. I have with me today starting at the far right hand of the table, Mr. Chairman, Mr. Frank Conahan, who is a Senior Associate Director in our International Division, and Mr. Timothy Grogan, Management Analyst in our International Division. That division was responsible for the work that I will be discussing today dealing with issues regarding the size of the petroleum reserve. I have with me on my left hand side Ms. Flora Milans. She is the Manager in Charge of our fossil fuels work in the Energy and Minerals Division and is responsible for a variety of other activities we have ongoing with respect to the reserve. Let me say, starting with my statement we will, of course, be glad to work with the committee in the areas you mentioned this morning regarding oil acquisition, the oil acquisition program and regarding issues relating to contract escalation and costs and slippage in schedule.

We are glad to be here to discuss the work still in process on the size of the strategic petroleum reserve and three aspects of the Department of Energy's management of the reserve. Although our work in both areas is still underway, we expect to issue reports sometime in March.

SIZE OF THE RESERVE

The 1973-74 Arab oil embargo demonstrated U.S. vulnerability to interruptions in petroleum supplies and increased national concern for reducing the effects of potential future import interruptions. In December 1975, the Energy Policy and Conservation Act was enacted authorizing the creation of a reserve of up to 1 billion barrels of crude oil and petroleum products.