put pump stations to various oil company refineries and tank farm terminals. The petroleum products currently being shipped are premium gasoline, regular gasoline, diesel fuel, stove oil, furnace oil, aviation gasoline, and jet fuel. We handled 25 million barrels of products in 1959. At strategic locations, takeoff terminals are located to serve requirements of our commercial oil company customers and, in addition, we have exclusive use of military pipelines serving March Air Force Base, Calif.; Davis-Monthan Air Force Base, Williams Air Force Base, and Luke Air Force Base, Ariz.; Yuma Marine Corps Auxiliary Air Station, Ariz.; McClellan Air Force Base and Mather Air Force Base, Calif.; and Fallon Naval Auxiliary Air Station at Fallon, Nev. Our pipeline service to these fields results in substantial savings to the U.S. Government. Our northern_district pipeline originates at Richmond, Calif., located on San Francisco Bay, with gathering lines connecting the following oil companies to our initial pump station: Richfield Oil Corp. : Terminal. Texaco, Inc.: Terminal. Time Oil Co.: Terminal. Standard Oil Co. of Calif.: Refinery (capacity 180,000 b.p.d.) Twenty-three miles east of our Richmond pump station, at Concord, Calif., we have a second pump station, which is connected to refineries of Shell Oil Co. (daily capacity of 57,800 barrels) and Tidewater Oil Co. (daily capacity of 142,000 barrels), as well as the Ozol Air Force POL Retail Distribution Station, which has approximately 1 million barrels of underground storage, all of which are served by tankers. Our main pipeline between Concord and Roseville pump stations is 10 inches in diameter. Under the provisions of H.R. 10777, an item of $10,818,000 is included for the Naval Air Station at Lemoore, Calif., of which amount $4,759,000 is for the construction of approximately 90 miles of 6 inch pipeline, pumping stations, acquisition of land, 220,000-barrel capacity storage tank farm, and a submarine pipeline for fuel which would be supplied by tanker at Estero Bay and thence via pipeline to Lemoore Naval Air Station. When this project was first indicated, we subsequently discussed the matter with various Navy personnel and, more recently, jointly with both Navy and Air Force personnel. Previously, the Air Force had approached us as to the practicability of a pipeline to serve its Castle Air Force Base, located near Merced, Calif. An economic study was made of this latter request, and it was found not feasible to construct a pipeline to serve Castle Air Force Base only; however, when the combined fuel consumption of both Castle Air Force Base and Lemoore Naval Air Station was studied, it was developed that it was economically feasible to make a proposal to both the Air Force and the Navy to serve both locations by pipeline. The Castle Air Force Base requirements (JP-4) were given to us as 150,000 barrels per month, and the Lemoore Naval Air Station requirements (JP-5) as 167,000 barrels per month. The proposal of Southern Pacific Pipe Lines, Inc., as a substitute for the Navy Estero Bay-Lemoore line, is as follows: Senator STENNIS. That is the one in the bill, the Navy Estero Bay? Mr. McGANNEY. Yes, sir. We propose, first, to construct a 10-inch line from connection of its main line at Stockton to Atwater (68 miles), to handle the combined volumes of the Navy for Lemoore (JP-5) and the Air Force for Castle (JP-4), at a rate of 40 cents per barrel from the Richmond-Concord area to that point. 2. To construct a terminal at Atwater, consisting of three 67,000barrel tanks for Navy JP-5, together with necessary pumps, motors, et cetera. 3. To construct a terminal at Atwater, consisting of three 67,000barrel tanks for Air Force JP-4, together with necessary pumps, motors, et cetera. 4. To construct a 6-inch line from Atwater terminal to Lemoore Naval Air Station (85 miles). 5. To construct a 6-inch line from Atwater terminal to Castle Air Force Base (21⁄2 miles). 6. Items 2 and 4-that is, the tankage and line to Lemoore above, to be covered by a 5-year service contract with the Navy, at a rental of $66,800 per month (or 40 cents per barrel), for the handling of 167,000 barrels per month. Any volume in excess of that figure per month would be handled at rate of 20 cents per barrel from Atwater to Lemoore. 7. Items 3 and 5, above, to be covered by a 5-year service contract with the Air Force, at a rental of $9,000 per month (or 6 cents per barrel) for the handling of 150,000 barrels per month. Any volume in excess of 150,000 barrels per month would also be handled at 6 cents per barrel. 8. The above indicates a through charge of 80 cents per barrel from the Richmond-Concord area to Lemoore on 167,000 barrels per month. Included in this cost on the entire volume of the new line is about $800,000 per year (or 40 cents per barrel on the 167,000 barrels per month to Lemoore) which will be returned to the Government in income taxpayments, making a net cost to the Government at Lemoore of 40 cents per barrel. On any volume in excess of 167,000 barrels per month, crediting income tax payments will result in a net cost to the Government at Lemoore of 30 cents per barrel. 9. During the second 5-year period, if service contract is obtainable or option is desired by the Navy, rental would be $33,400 per month (or 20 cents per barrel) Atwater to Lemoore on throughput of 167,000 barrels per month. This would mean a through rate from the Richmond-Concord area to Lemoore of 60 cents per barrel, or a net cost to the Government of 30 cents per barrel. Crediting of income taxpayments would result in a net cost of 30 cents per barrel, inasmuch as the second 5-year period includes income taxpayments of about $600,000 on the entire volume of the new line. The through rate of 60 cents per barrel, or a net cost to the Government of 30 cents per barrel, would be continued for the third 5-year period. 10. Through charge of 46 cents per barrel from the RichmondConcord area to Castle Air Force Base represents a saving to the Air Force of approximately 9 cents per barrel as against present methods of handling, in addition to giving the Air Force the advantages of pipeline transportation. 11. Both the Navy and Air Force will obtain the benefits of the substantial tankage which will be provided at Atwater terminal, which will serve the purpose of backup storage for Castle and Lemoore. The attached map (exhibit A) illustrates the area under discussion and location of proposed pipelines, also origin connections and possible origin connections to Southern Pacific Pipe Lines, Inc., system. Southern Pacific Pipe Lines, Inc., would advance the capital for the investment involved to construct the pipeline. From Stockton to Atwater the Government would have no obligation. As stated in the above proposal, the Navy and the Air Force would enter into 5-year service contracts covering tankage near Atwater and separate lines to Castle Air Force Base and Lemoore Naval Air Station. Reference is made to conference report of Joint Navy-Air Force representatives and Southern Pacific Pipe Lines, Inc., on jet engine fuel delivery systems, Naval Air Stations, Lemoore, Calif., dated February 12, 1960. Annual costs of current Navy project-Navy pipeline Estero Bay to Lemoore-truck delivery Stockton to Castle Air Force Base-are shown therein. The Navy based its study on annual operating costs to include amortization of its investment at 44 percent for 15 years; which, of course, does not give effect to income tax payments. Southern Pacific Pipe Lines, Inc., has taken into consideration the effect of income tax and, similarly, has extended its study over a 15-year period. Exhibit B is attached for proper comparison. On this basis, Southern Pacific Pipe Lines' current proposal, compared with the Navy's project, would result in a saving to the Government of $724,662 over the 15year period, or an average of 1.27 cents per barrel for the entire volume of both the Navy and the Air Force. To the extent that the San Francisco Bay area can supply JP-5-that is, the Navy fuel-there is a further possible saving compared with the Estero Bay Navy project of 5.78 cents per barrel. It is therefore evident that Southern Pacific Pipe Lines, Inc., a private enterprise, can provide this service. As further defined in Bureau of Budget Directive Bulletin 60-2, September 21, 1959, paragraphs 2 and 3, we should like to stress that Federal income taxes should be credited to private enterprise to place the projects on a comparative basis. Moreover, if private enterprise builds the line, benefits to subdivisions of Government, through State income and local property taxes, will result. Our estimates of operating expense for this line include over $150,000 per year for such taxes. In addition to the oil terminals and refineries presently connected to Southern Pacific Pipe Lines, Inc., in the Bay area, the Navy tankage at the Point Malote naval installation at Richmond, Calif., could very easily be connected to SPPL's system at Richmond. Furthermore, in the event that an emergency should interfere with the source of fuel supply to the pipeline in the San Francisco Bay area, connections could be made within hours to any of the various marine terminals in the Stockton area, thereby furnishing a continuous source of fuel supply to Castle Air Force Base and Lemoore Naval Air Station. In contrast, any emergency rendering the Estero Bay terminal useless would eliminate any source of supply to the Estero Bay-Lemoore line. Summing up, we believe the principal points of our proposal which are advantageous to the Government are: It will save the Government a capital expenditure of nearly $5 million; will give pipeline service to Castle Air Force Base as well as Lemoore, whereas the Navy's proposed line from Estero Bay would serve Lemoore only; and our proposal also results in a net saving to the Government of over 14 cents per barrel for the combined volume to both installations over the 15-year period considered. It also gives a greater flexibility for supply of fuel due to accessibility to the refineries of oil terminals on San Francisco Bay, particularly the Government underground storage terminal at Ozol consisting of about 1 million barrels of tankage protected by reinforced concrete; and I might add, incidentally, that installation just went into service in the last few months; and, in addition, the possible connection at Stockton, if needed, as against entire dependency on tankers and a single terminal at Estero Bay to reach Lemoore alone. If tankers should not be available to move jet fuel to the San Francisco Bay or Stockton areas, there would still be the four major bay area refineries as a jet fuel supply source, and which are connected with our pipeline. I might make a little explanation in relation to the map. I think it is self-explanatory. The red line on the map shows our existing pipeline. The green line down as far as Merced, and then the short branch out to Castle, and then the green line to Lemoore, from Estero Bay Senator STENNIS. Is that a present line or a proposed line? The blue line from Estero Bay to Lemoore is the Navy's proposal, and on the map shows the connections at Richmond and Concord, and the possible connections at Stockton, and the capacity of the refineries now connected to the line. Exhibit B: We have tried here to make a full parallel comparison with the Navy study, which we have, the last one that we have. We have made two slight adjustments in order to get a true comparison. First, we have eliminated the tanker cost to Estero Bay on the theory that insofar as the Navy obtained jet fuel from the gulf coast, Gulf of Mexico coast, Texas, Louisiana, and so forth, refineries from Aruba off Venezuela, the tanker costs would be the same to San Francisco as to Estero Bay. In other words, that is a washout. So we eliminated it from both studies. Secondly, in the Navy's study they had an estimate of some $34,000 to cover operations at Lemoore which would also be common with our line or the Navy line as built. We have also, in order to get a comparable setup, extended our study out over 15 years, and gave the annual average cost in the second block of figures to show that we would actually produce for the Government a saving as against what the Navy proposes, and what the manner in which Castle now gets its supply of, as I said, $724,662 over the 15-year period or one hundred and twenty-seven one-hundredths cents per barrel. That, I think, outlines our proposal. We believe very sincerely that it would be advantageous to the Government to work this out along the lines we have suggested, and it seems to us very much in line with the directive of the Bureau of the Budget, to the effect that wherever private industry can supply the necessary services at costs that are comparable or, it states, even at costs that are a little bit more, that private industry should be used, and in that respect I will read, if I may, just two paragraphs from the Budget Bureau directive. Bulletin No. 60-2 of September 21, 1959, the second paragraph says: Policy. It is a general policy of the administration that the Federal Government will not start, or carry on, any commercial-industrial activity to provide a service or product for its own use if such product or service can be procured from private enterprise through ordinary business channels. That is paragraph 2. Then over in paragraph 3, subparagraph (b), they lay down various rules for appraising the relative merits of the two methods of supply, either from the Government's own method or from private enterprise, and they say: Appraisal of elements not usually chargeable to current appropriations, such as depreciation, interest on Government investment, the cost of self-insurance, even though it is unfunded, and exemption from Federal, State, and local taxes, must also be made to the extent necessary to put the costs on a comparable basis. On the other hand, costs attributed to procurement from private sources must be computed on an equally fair and complete basis. Now, that is our theory that the Government means that our return of income tax to the Government should be measured in this project as against the Navy's proposal to serve Lemoore alone. I think that completes what I have to say, and I would be glad to answer any questions that may occur to you, Mr. Chairman, or the committee. (Exhibits A and B, previously referred to, follow :) EXHIBIT B.-Comparison of Navy versus Southern Pacific Pipe Lines, Inc., proposal for combined Lemoore-Castle requirements (projected over 15-year period) $561, 743 990,000 1 1, 551, 743 1,517,695 39.90 Average annual gross cost to 1 Tanker costs to Estero Bay excluded. 2 This amount subtracted as Navy estimates these costs would remain regardless of which proposal accepted. NOTE.-Use of Southern Pacific Pipe Lines, Inc., proposal results in saving of $724,662 for 15-year period, or 1.27 cents per barrel. |