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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 414 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 144 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?
Mr. McGANNEY. No; all of that is proposed, sir.

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 :)

[graphic]

EXHIBIT B.—Comparison of Navy versus Southern Pacific Pipe Lines, Inc., pro

posal for combined Lemoore-Castle requirements (projected over 15-year period)

Current Navy project: Navy

pipeline Estero Bay to Le-
moore, truck deliveries,
Stockton to Castle

Annual
cost

Cents

per barrel

Southern Pacific pipelines

proposal

Annual
cost

Cents

per barrel

66. 66

Operating costs for 167,000 barrels per month Navy requirement from Estero Bay to Lemoore Naval Air Sta

tion Truck costs, Stockton to

Castle for 150,000 barrels per month for Castle Air Force Base.

$561, 743

34. 66

990,000

32.00

11, 551, 743
2-34, 048

Average annual gross cost to

Navy for 167,000 barrels per
month from the Richmond-

Concord area to Lemoore. $1,336,000
Average annual return to the

Government in income tax.. 694, 616
Average annual net cost to the

Navy for 167,000 barrels per
month from the Richmond-

Concord area to Lemoore. 641,384
Average annual net cost to the

Air Force for 150,000 barrels
per month from the Rich-
mond-Concord area to
Castle Air Force Base

828,000
Average annual net costo

to Navy and Air Force
for 317.000 barrels per
month from the Rich-
mond-Concord area to
Castle and Lemoore -- 1, 469, 384

46.00

Total annual cost to

Navy and Air Force
for 317,000 barrels per
month..

1, 517, 695

39.90

38. 63

i 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.

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