oversight

Transportation Charges for Imported Crude Oil: An Assessment of Company Practices and Government Regulation

Published by the Government Accountability Office on 1977-10-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME          /   -
                 ]7
04004 - (B30142891
Transportation Charges for Imported Crude Gil: An Assessment of
Company Practices and Government Regulation. EBD-76-105;
B-178205. October 27, 1977. Released November 4, 1977. 40 pp. +
2 appendices (7 pp.).
Report to Rep. Harley 0. Staggers, Chabraanx House Cosaittee on
Interstate and Foreign Coammerce; by Bobert r. Keller, Acting
Comptroller General.
Issue Area: Energy: Energy Pricing (1604); Energy: Effect of
    Federal Financial Incentives, Tax Policies, and Regulatory
    Policies on Energy Supply (1610).
Contact: Energy and Minerals Div.
Budget Fanction: Natural Resources, Environsent, and Energy.
    Energy (305); Commerce and Transpcrtatic¢.: later
    Transportation (406).
Organization Concerned: Department of the Treasury; Federal
    Energy Administration.
Congressional Relevance: House Committee on Interstate and
    Foreiga Commerce.
Authority: Emergency Petroleum Allocation Act of 1973 (PA.
    93-159). Economic Stabilization act of 1970 (P.L. 91-379).
    Federal Energy Administration Act of 1974 (P.L. 93-275).
    Energy Policy and Conservation Act of 1975 (P.L. 94-163).
          Transportation cost i- a significant elumeat in the
cost of imported crude oil. Together with other costs, it is
used to support price increases for regulated petroleum
products. Findings/Conclusions: Review of the tanker
transportation charges reported by seven large oil ccmpanies
showed that: the Federal Energy Administration's (PEAs})
transportation regulations were inadequate in preventing
companies receiving payments greater than their actual costs;
the overall reliability of the PEA's transportation data was
questionable due to inconsister'iss and incompatibilities in the
reporting systems and inadequate audits; and caspanies reported
about $26 million in transportation charges which seemed
questionable or were considered as overcharges.
Recommendations: The Secret-ry of the Department of Energy
should take the following actions with regard to regulatory
compliance, administration, and systees support: (1) verify that
the oil companies have repooLed cost adjustments for uncovered
overcharges; (2) assure proper implementation of new
tra!sportation regulations; (3) assure that all companies
applyinc, for exceptions to standard transportation accounting
methods demonstrate that the company method results in costs no
qreater than those resulting from the use of the published
Average Freight Rate Assessment as commonly applied; (4) insure
that reviews of imported crude oil transportation charges are of
sufficient scope to assure continued compliance with applicable
regulations; (5) evaluate the Average Freight Rate ALsessment
poseriodically to assure the continued iategzity of the system;
(6) eliina.te. to the greatest extent practical1   problems which
arise from Department of Energy report period time fraaes which
are incompatible with the tiaespan in which the reecrted events
take place; &ad(7) require respondent companies to use unifora
reporting procedures which identify clear end discrete
transportation d'ta. (Author/SC)
          ain'ttler                       A                    (




C w't a        REPORT OF THE///                                             '

 -~            COMPTROLLER
                 C-t        GENERAL
               OF THE UNITED STATES



               Transportation Charges For
               Imported Crude Oil--An
               Assessment Of Company Practices
               And Government Regulation
             Transportation cost is a significant element in
             the cost of imported crude oil. Along with
             other costs, it is used to support price in-
             creases for regulated petroleum products.
             GAO reviewed tanker transportation charges
             reported by seven large oil companies and
              Found that:
                  --The Federal Energy Administration's
                    tr,: sportation regulations were inade-
                    quate in preventing companies receiv-
                    ing payments greater than their actual
                    costs.

                  --Companies reported about $26 million
                    in transportation charges which GAO
                    questioned or considered overcharges.
                  --The overall reliability ot the Federal
                    Energy Administration's transportation
                    cost data is questionable because of
                    inconsistencies and incompatibilities in
                    the reporting systems and inadequate
                    audits.



             EMD-76-105                                  OCTOBER 27, 1977
               COMPTROLLER GENERAL OF THE UN!ITED STATES
                          WASHINGTON, D.C. 2054




3-1782C5




The Honcrable Harley O. Staggers
Chairman, Committee on Intarstate and
  Foreign Commerce
Pouse of Representatives
Dear Mr. Chairman:

     In response to your February 11, 1976, request, we
reviewed the Federal Energy Administration's regulations
and company practices regarding transportation charges for
imported crude oil.

     The Federal Energy Administration reviewed a Craft
of our report. Its comments are included as appendix II.
We also provided the Internal Revenue Service with a draft
of our report and the seven companies included in our
review with pertinent report extracts.

     Our report contains recommendations to the Secretary,
Department of Energy, on page 36. As you know, section 236
of the Legislative Reorganization Act of 1970 requires the
head of a Federal agency to submit a written statement on
actions taken on our recommendations to the House Committee
on Government Operations and the Senate Committee on Govern-
mental Affairs not later than 60 days after the date of the
report and to the House and Senate Committees on Appropria-
tions with the agency's first request for appropriations made
more than 60 days after the date of the report.


                                 Sincerely yours,




                        ACTING Comptroller General
                               of the United States
 COMPTROLLER GENERAL'S                    TRANSPORTATION CHARGES FOR
 REPORT TO THE COMMITTEE ON               IMPORTED CRUDE OIL--AN
 INTERSTATE AND FOREIGN                   ASSESSMENT OF COMPANY PRACTICES
 COMMERCE                                 AND GOVERNMENT REGULATION
 HOUSE OF REPRESENTATIVES


               DIGEST
               Transyortation cost is a significant
                                                      element
                in the cost of imported crude oil.
               the 27-month period of October 1973  During
                                                    through
               December 1975, crude oil transporation
               of nearly $3 billion--a little over      charges
                                                    $1 for
               each barrel imported--were reported
                                                    to the
               Federal Energy Administration. 1/ These
               charges, along with others reported
               companies, are used to support price by oil
                                                     increases
               for certain regulated petroleum products.
              This report, prepared a'; the request
                                                    of the
              Chairman, House Committee on Interstate
                                                       ar-.
              Foreign Commerce, discusses the
              -- effectiveneus of the Federal Energy
                                                     Ad-
                 ministration's transportation regulations,

              -- allowability of transportation charges
                 claimed by seven selected companies
                 porting crude oil,                  im-

              -- quality and reliability of the transpor-
                 tafion charges reported, and
             -- compliance and enforcement efforts
                Federal Energy Administration with of the
                                                   regard
                to transportation charges.
            Using the authority to make energy
            tion audits of the books and recordsverifica-
                                                  of pri-
            vate companies, stated under title
                                               V
            Energy Policy and Conservation Act, of the
                                                 GAO
---
 ___-------__
1/The Federal Energy Administration
                                    is one of the agencies
  consolidated under the Department of
                                       Eneryy ab of Octo-
  ber 1, 1977.




 ~.Warc5,    Upon rIdnvi the report
  cvr       sild    notd heron.       i                 EMD-76-105
examined company information supporting about
$293 million in imported crude oil transpor-
tation charges reported by seven oil companies
for the period October 1973 through December
1975.  (See p. 6.)
STUDY RESULTS

GAO found:
-- Federal Energy Administration regulations
   for computing and reporting crude oil
   transportation charges in effect during
   GAO's period of review were inadequate,
   therefore giving companies the opportunity
   to collect more than actual costs.   (See
   p. 13.)

--In one case GAO found an apparent viola-
  tion of the FEA regulations existing at
  that time.  (See p. 24.) In all instances,
  no evidence of intent to misstate transporta
  tion charges was found.  (See p. 10.)
--Companies were using a variety of computa-
  tional methods and reporting widely varying
  charges for similar shipments. (See p. 13.)
-- Companies used a variety of transportation
   practices that appeared reasonable under the
   circumstances and the related charges were
   supported by company documentation. (See
   p. 27.)
-- Individual company computations of trans-
   portation charges were generally accurate,
   but the overall reliability of the Federal
   Energy Administration's transportation cost
   statistics is questionable, because of incon-
   sistencies among companies computed and
   Leported transportation charges.   (See
   pp. 10 and 11.)
-- The Federal Energy Administration had assigned
   low-priority audit status to imported crude
   oil transportation charges. Because of
   factors, such as a limited number of auditors
   and the complexity and interpretive nature
   of the Federal Energy Administration's
   regulations, much of the data reported was
   not verified. However, the accomplished


                     ii
              audit work varied in quality and detected
              problems were not vigorously pursued.  (See
              p. 14.)
            Effectiveness of transportation
            charge regulations
           Federal Energy Administration regulations for
            imported crude oil transportation were ineffec-
           tive during GAO's period of review because they
           left undefined the accounting method to be used
           to compute transportation charges for transac-
           tions between companies and their affiliates.
           This allowed refiners the opportunity to recover
           more than actual costs.     (See p. 13.) The Federal
           Energy Administration issued new regulations ef-
           fective January 1, 1977, which define the ac-
           counting methods to be used. GAO believes the
           Average Freight Rate Assessment method provided
           for in the regulations
           of transportation costs isfora affiliates'
                                          reasonable measure
                                                      transac-
           tions if consistently applied over the long term.
           (See p. 17.)

           Allowability of reported charges
           GAO identified over $26 million in reported
           transportation charges which were overcharges
           or questioned charges. The overcharges total-
            ing about $1 million resulted from
           tional errors by five of the seven uninten-
                                               companies
           in accounting for and reporting transportation
           charges. (See p. 10.) Of the questioned
           charges, $24 million represented charges by
           three companies which were not supported by
           application of an industrywide measure for
           computing transportation charges, or by actual
           cost data which the companies gave GAO.
           (See p. 20.) An additional $900,000 in ques-
           tioned charges involved an unusually high fee
           by one company for moving crude oil from the
           Carribbean to U.S. ports. The company involved
           did not support to GAO's satisfaction that
           the fees represented actual costs.   (See p. 30.)
           The seven companies engaged in a variety of
           transportation practices that are specific cost
           items included in total transportation charges.
           Where these transportation practices occurred
           and could be identified with shipments in the
           GAO sample, the charges generally were reasonable

IMr!;hft                        iii
 and were supported by documentation provided
 by the companies.

 The overcharges and questioned charges were
 used in oil company computations to support
 price increases for certain regulated petro-
 leum products. GAO c:ould not determine,
 however, the impact, if any, on consumers
 because the complex regulatory formulas and
 pricing practices disguised the impact which
 transportation charges had on price increases
 relative to all other cost factors.  (See
 p. 3.)
 Reliability of transportation
 cost information

 In preparing monthly computations of trans-
 portation charges for reporting to the Fed-
 era' Energy Administration, companies found
 it niecessary to estimate costs for which
 they had not yet been billed. Also, in some
 instances they corrected previously reported
 data which they found to be erroneous or in-
 complete. The manner in which companies ad-
 justed reported information when previously
 reported data was updated varied among the
companies, both in frequency and the Federal
Energy Administration forms on which they
were reported.    (See pp. 8 and 11.) For ex-
ample, adjustments might apply to a prior month
or months and might oe reported a year after
the original reporting to the Federal Energy
Administration. Also, depending on the form
used for making the adjustments, cost data
was aggregated with other reported costs and
at times was not picked up in the transpor-
tation charge data base.    (See p. 11.)  Be-
cause of such factors, GAO believes that the
Federal Energy Administration's transpor-
tation costs statistics for imported crude
oil are of questionable reliability.
Federal Ener.y Administration
co~M1Lance an d eR`   eFFrefforts
Generally, the Federal Energy Administration
hal. assigned a low priority to the audit of
transportation charges.   It has attempted to
verify the accuracy of certain data but be-
cause of limited personnel and the complexity
and interpretive nature of their regulations,


                       iv
             much of the data reported has not been veri-
             fied. Additionally, GAO noticed instances
             where Federal Energy Administration auditors
             were not aware of the issues, believed that
             no problem existed, or did rot vigorously
             pursue problems identified.  (See p. 14.)
             RECOMMENDATIONS

             GAO recimiends that the Secretary, Deparment
             of Energy, take the following actions with
             regard to regulatory compliance, administration,
             and systems support.

             Compliance
             -- Verify that the companies have reported
                cost adjustments for the overcharges dis-
                cussed in this report.
             -- Determine if the charges GAO questioned
                represent recoveries greater than cost
                and, if so, require companies to make
                appropriate adjiatments.
             -- Assure proper implementation of new trans-
                portation regulations.
             -- Assure that all companies applying for
                exceptions to standard transportation ac-
                counting methods demonstrate that the
                company method results in costs no greater
                than those resulting from the use of the
                published Average Freight Rate Assessment
                as commonly applied. It is important that
                data offered by companies in support of ex-
                ceptions receive indepth audit.
             Administration
             -- Insure that reviews of imported crude oil
                transportation charges are of sufficient
                scope to assure continued compliance with
                applicable regulations.
             -- Evaluate the Average Freight Rate Assess-
                ment periodically to assure the continued
                integrity of the system. This will be espe-
                cially important if either the status of the




Toar Sbhae                         v
  tanker market changes significantly or if
  the Average Freight Rate Assessment's spe-
  cifications should change.

Systems support

-- Eliminate, to the greatest extent practical,
   problems which arise from Department of
   Energy report period timeframes which are
   incompatible with the tiriespan in which the
   reported events take place.
-- Require respondent companies to use uniform
   reporting procedures which identify clear
   and discrete transportation data.
AGENCY AND COMPANY COMMENTS
AND UNRESOLVED ISSUES

Federal Energy Administration's comments on
the report are contained in a June 30, 197-7,
letter. (See app. I.) The Federal Energy
Administration considered the report-'s con-
clusions and recommendations to be reason-
able and stated that in each case action
had been initiated or would be taken to im-
plement them.
Four of the companies--Gulf, Shell, SOCAL,
and Texaco--which submitted comments on the
draft report did not have any substantive
comments regarding the report material.
EXXON, Getty, and Mobil took issue with
certain report statements and made substan-
tial comments. The full text of company
comments are available from GAO upon re-
quest. Where warranted, GAO made appropriate
changes to report data and statements, but
there remain residual differences of opinion
concerning the interpretation of certain charges
and computation methods. Transportation charges
which were overcharges or charges questioned by
GAO remain at about $26 million.




                    vi
                      C o n t e n t s


DIGEST
CHAPTER
   1       IMPORTED CRUDE OIL TRANSPORTATICN             1
               FEA regulation                            2
               Accounting and shipping practices         4
               Scope                                     6

   2       TRANSPORTATION REGULATIONo COMPLIANCE
             AND DATA RELIABILITY                        8
               Company compliance with FEA regulations
                 and the quality of data :ep :ted        8
               Adequacy of FEA's regulations and
                 compliance and enforcement effcots      13

   3       ACCEUTANCE AND APPLICATION OF A.RA FOR
             REUtLATORY PURPOSES                         17
               Acceptance of AFRA                        17
               AFRA modifications raise questions        20

   4       REASONABL6NESS OF TRANSPORTATION PRACTICES    27
               Transportation practices                  27
               Appropriateness of company trans-
                 shiping charge questioned               30
               Backhrtuling and slow steaming did
                 not materially aff ct transportation
                 charges                                 31

   5       CONCLUSIONS AND RECOMMENDATIONS               34
               GAO recommendations                       36

   6       AGENCY AND COMPANY COMMENTS AND OUR
             EVALUATION                                  37
               Agency comments                           37
               Company comments                          37

APPENDIX

   I       Letter dated February 11, 1976, from
             the Chairman, House Committee on
             Interstate and Foreign Commerce             41

  II       Letter dated June 0,   1977, from the
             Administrator, FER                          44
                    ABBREVIATIONS
AFRA   Average Freight Rate Assessment
DOE    Department of Energy
DWT    deadweight ton(s)
EPAA   Emergency Petroleum Allocation Act
FEA    Federal Energy Administration
GAO    General Accounting Office
IRS    Internal Revenue Service
VLCC   very large crude carrier
                            GLOSSARY OF TERMF,
AFRA (average freight              The weighted average cost of
  rate assessment)                 chartered tonnage as em-
                                   ployed in the international
                                   transport of oil (see London
                                   Tanker Broker's Panel).
arms-length transaction            The consummation of a busi-
                                   ness transaction between un-
                                   related parties in a free
                                   marketplace.
backhaul                           The practice of an oil tanker
                                   loading another cargo, such
                                   as grain, coal; oil, or ore,
                                   for transport to some over-
                                   seas location after discharg-
                                   ing crude oil at a U.S. port.
bank                               The accumulation of allowable
                                   product cost increases which
                                   were not passed through to the
                                   purchaser in the form of
                                   higher prices.
barrel                             The standard unit of volume
                                   for oil measurement, equiva-
                                   lent to 42 gallons (U.S.)
                                   at 60 F.
bunker fuel                        A grade of residual fuel oil
                                   used to power ships.
charter

       bareboat or demise
         charter                   An agreement under which a
                                   vessel is operated by the
                                   charterer who bears all
                                   costs other than capital
                                   costs typically for 10 to 20
                                   years or for the vessel's
                                   useful life.
    contract of
      affreightment               An agreement under which the
                                  ship owner delivers a specific
                                  quantity of oil during a spe-
                                  cific period but does not
                        state the frequency of ship-
                        ments, the amount in each
                        shipment, or the vessels that
                        are to be used. The owner is
                        responsible for all costs.
    single voyage or
      spot charter      Hire of a vessel for one voy-
                        age between any two ports.
                        All expenses are for the ac-
                        count of the owner.
    time charter        Hire of a vessel for any
                        agreed period for voyages be-
                        tween any ports selected by
                        the charterer. All capital
                        and fixed operating costs are
                        borne by the owner, but vari-
                        able costs, such as fuel,
                        canal tolls, and port charges,
                        are borne by the charterer.
cost passthrough        The increase in the allowable
                        selling price of a petroleum
                        product as a result of an
                        increase in costs of produc-
                        tion. The increased costs
                        of production must be those
                        permitted to be passed on to
                        the buyer by PEA regulations.
deadfreight or light
  loading               A charge by the vessel owner
                        or operator to the importer
                        for cargo carrying capacity
                        not used.
DWT (deadweight tons)   Total carrying capacity of a
                        ship expressed in long tons
                        of 2,240 lbs.
demurrage               The charge paid to a vessel
                        owner or operator by the
                        vessel charterer for detention
                        of a vessel at the port(s)
                        beyond the time allowed, usu-
                        ally 72 hours, for loading
                        and unloading.
lightering              The practice of unloading
                        part of the crude from a
                        tanker onto a smaller vessel,
                        usually a barge, in order
                        that the partially loaded
                        tanker may enter a port.
                        Lightering costs, called
                        lighterage, are the fees
                        paid for the use of the
                        small vessel.

landing                 The unloading of a petroleum
                        cargo at its final port of
                        destination.

London Tanker
  Brokers' Panel        A London-bLased panel which
                        publishes AFP' rates on a
                        monthly basis. The panel
                        is made up of representa-
                        tives from six leading
                        London tanker brokerage
                        firms.

slow steaming           Reducing vessel cruising
                        speed to extend voyage
                        time and/or absorb excess
                        tanker capacity.
transshipment           A method of ocean transpor-
                        tation whereby ships dock
                        at a deepwater terminal and
                        offload the oil cargo to
                        temporary storage tanks or
                        to one or more smaller tank-
                        ers, which then transport
                        the oil to a market destina-
                        tion that has only shallow
                        water port facilities.
vertically integrated
  oil company           A company engaged in all
                        phases of the oil business;
                        i.e., production, transpor-
                        tation, refining, and mar-
                        keting; a company which
                        handles its own oil from
                        wellhcad to gasoline pump.
voyage       Usually the movement of a
             vessel from loading port
             to discharge port and re-
             turn. A portion of a voyager
             s.g., from loading port to
             discharge port, is called a
             leg of a voyage.
Worldscale   A worldwide schedule of
             rominal freight rates
             stated in dollars per long
             ton for crude oil carried
             between numerous ports.
             It is intended solely
             as a standard of reference
             for comparing rates for
             all voyages and market
             levels.
                           CHAPTER 1

               IMPORTED CRUDE OIL TRANSPORTATION
     In 1976 crude oil imports averaged 6 million barrels
per day and supplied 44 percent of the United States energy
demand. Recent industry estimates indicate that by 1980,
crude oil imports could increase to over 12 million barrels
per day. Transportation cost to the United States is a
significant element in the cost of imported crude oil.
     During the period October 1973 through 1975, reported
transportation charges totaled over $2.8 billion for over
2.7 billion barrels of imported crude oil. Under Federal
Energy Administration (FEA) 1/ regulations, increased trans-
portation costs related to imports may be ultimately passed
on to consumers as price increases. The Chairman, House
Committee on Interstate and Foreign Commerce, requested
that, using the authorities quoted under title V of the
Energy Policy and Conservation Act, we make an assessment
of the administration and enforcement of FEA regulations
'ertaining to the accounting for transportation costs.
     The level of assurance that imported crude oil trans-
portation charges reported to FEA are a reasonable approxima-
tion of actual costs, and thereby adeauate for Federal
price control, is dependent on the following factors:

     --The degree to which Federal regulation provides
       an enforceable standard for the evaluation of
       cost identification and reporting procedures.
     -- The effectiveness of Federal agency efforts to
        verify that reported transportation charges are,
        in fact, a valid representation of actual costs.

     -- The integrity and manageability of the Federal
        information systems used to formulate and com-
        municate the reported transportation charge data.
     In the course of our work we focused on four principal
issues:

    -- The effectiveness of FEA's transportation regulations
       and compliance and enforcement efforts in supporting
       the Emergency Petroleum Allocation Act (EPAA) of 1973
       (Public Law 93-159) which calls for a dollar-for-
       dollar passthrough of crude cost increases.


1/FEA is one of the agencies consolidated under the Depart-
  ment of Energy (DOE) as of October 1, 1977.


                              1
     -- The reasonableness of published rate scales and
        shipping rate averages used for calculating im-
        ported crude oil transportation charges reported
        to FEA.
     --The ac-uracy and reliability of transportation costs
       claimed by companies importing crude oil under FEA
       regulations.
     -- The frequency, nature, and impact on transportation
        cost of shipping practices ancillary to crude oil
        importation.
FEA REGULATION

Origin   of price controls
     While there has been Federal regulation of the petro-
leum industry since the 1930s, price control of the
petroleum industry was initiated in August 1971 with a 90-
day price freeze imposed by the President under the author-
ity of the Economic Stabilization Act of 1970 (Public Law
91-379).  Subsequently, oil companies were placed under a
control system in which ceiling prices established during
the freeze period became base prices that could not be ex-
ceeded unless (1) the increases were cost justified and
(2) yearly profit margins did not exceed the base period
profit margin.
     The regulation on petroleum prices continued in effect
until they were re-issued relatively intact by the Federal
Energy Office under EPAA, passed as a result of the Arab
oil embargo. EPAA stated that in specifying prices the
President shall promulgate regulations providing for a
dollar-for-dollar passthrough of net increases in the cost
of crude oil, residual fuel oil, and refined petroleum pro-
ducts to all marketers or distributors at the retail level.

     To bring about the legislated energy goals, the Presi-
dent created the Federal Energy Office on December 4, 1973.
Then on May 7, 1974, the Federal Energy Administration Act
of 1974 (Public Law 93-275) was enacted which provided for a
reorganization of governmental functions to deal with energy
shortages. EPAA was amended by the Energy Policy and Con-
servation Act of i975 (Public Law 94-163), extending con-
trols over crude oil prices into 1979, with standby author-
ity until 1981.




                             2
Consumer impacts of controls are-uncertain

     The price consumers pay for petroleum products are
determined by the application of complex regulatory formulas
to cost factors and by cost increases which refiners feel
can be recovered in the marketplace. Because of supply and
demand market forces, prices charged are frequently less
than the ceiling amount allowable under the regulatory for-
mulas. FEA has allowed refiners to carry forward as unre-
covered costs those increases which were not immediately
added to selling prices. This carry forward has been des-
cribed as nbanks," and has at times represented over 50 per-
cent of the additional costs that refiners claim to have
incurred since May 1973. In December 1975 the combined
banks of the 30 largest refiners were about $1.5 billion.
FEA has also allowed refiners to offset against the banks
the value of most overcharges resulting from violations of
the regulations. Frequently it can't be determined whether
given charges or cost adjustments actually result in product
price increases, This is due in part to the fact that not
all cost increases are passed through, and in part to the
cost and adjustment absorbing nature of the banks.
Revision of-landed-cost-regulations

     During the period covered by our review, October 1973
through December 19;'5, FEA regulation allowed refiners to
recoup through increased product prices the crude oil cost
increases incurred since May 1973. For imported crude FEA
defined landed costs as the purchase price plus transporta-
tion to the United States and import fees and duties in-
curred. Much of the foreign crude imported by major inte-
grated U.S. oil companies is transported on vessels owned
or controlled by the oil companies' foreign affiliates.

     FEA regulations required that where transportation was
obtained through an arms-length transaction, the importing
oil company must report the actual transportation cost as
the transportation charge. This is a cost in the strict
sense and meets the dollar-for-dollar criterion. However,
in a transaction between affiliates, the transportation
charge was to be computed using whatever generally accept-
able accounting procedures the importing refiner had his-
torically used. These regulations, applicable to the
period of our review, were issued January 15, 1974, and
remained relatively unchanged until a new regulation was
issued effective January 1, 1977.

     Because the accounting methods used to compute imported
crude transportation costs were undefined by the regulation,
varying charges resulted for similar shipments. As a result,


                              3
in March, and again in September 1976, FEA issued two
different proposals to revise the regulation. It held hear-
ings and invited public comments and issued a revised regula-
tion effective January 1, 1977, on the basis of industry
comments to the proposals and its own considerations.

     Within 30 days of the regulation's effective date,
companies may request approval to use their customary ac-
counting procedures if they can demonstrate that resultant
transportation charges are not materially greater than those
charges which would result from prescribed procedures.
ACCOUNTING AND SHIPPING PRACTICES
Worldscale

      Charter rates reflect the mutual views of owners and
charterers on present and future tanker purchase and op-
erating costs and present and anticipated tanker demand
and supply balances. Frequently, charter rates are listed
in Worldscale--a worldwide schedule of nominal freight rates
stated in dollars per long ton for crude oil carried between
numerous ports, prepared jointly by the International Tanker
Freight Scale Association of London and the Association of
Ship Brokers and Agents of New York. The schedule was
originally issued, effective September 15, 1969, to provide
a standard of reference that could be used for all voyages
and market levels. It replaced separate freight schedules
previously published by the associations. Worldscale rates
are revised annually and published near the end of each
year.

Average Freight Rate Assessment

     An integrated company faces the problem of apportioning
shipping costs plus a reasonable profit for the shipping af-
filiate among the various refining and marketing affiliates.
Because companies generally do not dedicate specific ships
to specific routes, shipping costs, such as depreciation,
crew expenses, and repairs, are difficult to allocate to
individual voyages. The use of Average Freight Rate Assess-
ments (AFRA) applied to Worldscale is a common industry
practice which is one alternative to accounting for costs
on a voyage-by-voyage basis.

     AFRA was first calculated on April 1, 1954, and has
been published regularly since that date. Each month the
London Tanker Brokers' Panel publishes, in terms of




                             4
Worldscale, the weighted average charter rate for five size
categories of tankers operating commercially during the pre-
vious month. For example, the AFRA rate for a 25,000-44,999
deadweight ton (DWT) class of ship, for a given month, may
be expressed as W165.5. This tells the AFRA user that the
transportation charge per ton of petroleum carried on any
tanker in that size range over a certain route may be com-
puted by multiplying the appropriate Worldscale rate for
that route by 165.5 percent. The assessment period runs
from the 16th day of a month to the 15th day of the follow-
ing month, and during this period the London Tanker Brokers'
panel analyzes and evaluates all the information supplied by
the oil companies direct, the individual Panel members, and
other sources. Most major integrated oil companies cooper-
ate with the Panel in furnishing information regarding their
executed contracts. The six Panel members have each ac-
cepted responsibility for maintaining day-to-day records for
a section of the world tanker fleet. The Panel believes it
secures data relating to at least 90 percent of the tankers
included in AFRA.

Federal interest in accounting and
shipping practices

     Transportation charges computed using AFRA were not re-
quired by FEA to be supported by actual cost uata. Also, the
various methods individual refiners use when applying AFRA
rates may produce differing transportation charges given
essentially the same facts. It was the variety of methods
for using AFRA which led FEA in April 1976 to question the
use of AFRA and Worldscale and to propose revisions to the
transportation regulations. FEA held hearings, revie.ed in-
dustry and public comments, and made further revisions to
the proposed regulation later that year.

     FEA concluded that AFRA and Worldscale as published are
an industrywide measure and should lead to close agreement
over the long term between allowed and actual crude oil
transportation costs. With certain limitations, other costs
not included in published AFRA or Worldscale rates are also
allowed.

     An alternative to AFRA is the net-cost method, a tech-
nique for calculating the approximate actual transportation
costs for each voyage. The regulation allows a firm using
an actual cost method to request permissios.to make a one-
time-only change to the AFRA method.

     In addition to AFRA there are certain practices which
are intrinsic to tanker transportation of crude oil. Most
U.S. ports are not capable of handling vessels over 80,000

                             5
DWTs without light-loading or lightering (see glossary). As
a result, imported crude oil transportation costs include
costs ancillary to the basic shipping charge. These costs
include lighterage, deadfreight, demurrage, and transship-
ping fees.  In addition, backhauling and slow steaming are
practices which may affect transportation charges. While
these are normal and acceptable industry practices, the
methods used to calculate the costs of several of these prac-
tices could result in increased transportation charges.

SCOPE

     From October 1973 through December 1975, the seven major
U.S. oil companies included in our review accounted for 45
percent of all foreign crude oil imports, about 1,222 million
barrels, at a reported total cost of about $14.8 billion.
Of this amount, about $1.4 billion or 9.7 percent was trans-
portation costs. Our review of the seven companies covered
693 randomly selected shipments which accounted for 241 mil-
lion barrels or about 20 percent of their imports of foreign
crude oil during the 27-month period. Reported costs of
sampled transportation charges were about $293 million.
Due to inconsistent reporting practices, the total popula-
lation of landings and associated transportation charges
from which our sample was taken could not be determined
from the data within the scope of our review.

     The seven companies were:
     -- Exxon Corporation, U.S.A. (EXXON)
     -- Getty Oil Company           (Getty)
     -- Gulf Oil Corporation        (Gulf)
     -- Mobil Oil Corporation       (Mobil)
     -- Standard Oil Company/of
          California                (SOCAL)
     -- Shell Oil Company           (Shell)
     -- Texaco Incorporated         (Texaco)
We revi?wed laws and FEA regulations affecting transporta-
tion charges. We evaluated the oil companies' use of di-
verse accounting and shipping practices relative to reported
transportation charges and discussed them with oil company
officials.



                                6
     To preclude unnecessary duplication of efforts or more
than a minimum imposition of burden on the companies, we
sought to acquire as much pertinent information as possible
already in the possession of Federal agencies. We had meet-
ings and discussions with technical staff at the U.S. Mari-
time Administration, the Military Sealift Command, the In-
ternal Revenue Service, and the Congressional Research
Service.  In addition, we had discussions with officials
at FEA headquarters and field locations to determine the
scope of auditing devoted to imported crude oil transporta-
tion charges reported by the seven companies.




                             7
                          CHAPT"R 2

            TRANSPORTATION REGULATIONS COMPLIANCE
                     AND DATA RELIABILITY

     For the period October 1973 through 1975, the seven
companies we reviewed generally compli'    .th applicable FEA
transportation regulations and related     )rting require-
ments. Also, companies were reasonably accurate in deter-
mining the transportation charges they reported to FEA.
However, overall, the transportation information reported by
the companies and associated FEA reporting systems cannot be
considered reliable for ?rice control because neither was
accomplished in a consistent nor determinant manner. In ad-
dition, FEA's landed cost regulations were ineffective in
supporting the objectives of EPAA because they allowed re-
finers the opportunity to recover more than their actual
costs.

      One standard method for computing transportation
charges specified under the revised transportation regula-
tions issued by FEA in December 1976 and effective January 1,
1977, is the use of AFRA. Because AFRA _. not controlled
by the agency specifying its use, it is important that the
Federal Government be assured that AFRA is an appropriate
measure of transportation costs. (See .h. 3 for our assess-
r ant of the appropriateness of AFRA.)

     Additionally, some shipping practices, which are
ancillary to the transportation of crude oil, are quite
costly. Such practices are important in assessing trans-
portation charges reported to the Federal Government; they
are examined and evaluated in chapter 4.

COMPANY COMPLIANCE WITH FEA REGULATIONS
AND THE QUALITY OF DATA REPORTED

FEA reporting systems
     Basically, FEA's petroleum price control system permits
refiner cost increases for crude oil, purchased refined
products, and certain nonproduct costs experienced in
a month to be applied to the price of products sold in the
following month. For the period covered in our review, re-
finers accomplished this through the preparation of the
Monthly Cost Allocation Report, Form FEO-96 (form-96). In-
creased costs would be passed through during the month in
which the report was submitted; e.g., May 1975 costs would
be reported by June 10, 1975, ..ch any increased costs to
be added to product prices in June 1975.
      The regulations applicable to the refiner segment of
the industry recognized transportation to the United States
as a cost element in the total crude cost or the "landed
cost" (crude oil purchase price plus transportation plus
import fees and duties). In determining landed cost, FEA re-
quired that transportation cost be determined in one of two
ways:
     -- If the transportation was obtained pursuant to an
        arms-length transaction, the actual transportation
        cost was to be used.

     -- If the transportation was obtained pursuant to a
        transaction between affiliated entities, the cost
        was to be computed by using generally accepted
        accounting procedures consistently and historically
        applied by the firm concerned.

Before February 1975 transportation charges were not re-
ported separately; they were incorporated in the total im-
ported crude oil cost reported on form-96.
     In February 1975 FEA required refiners which imported
at least 500,000 barrels of crude per month and refiners which
imported crude from affiliates to submit a Transfer Pricin
Report, Form FEA-F701-M-O (form-701). Among other data, t
refiner was required to report by month, retroactive to
October 1973, and also for the month of May 1973, the trans-
portation cost per barrel for each crude oil landing.
     As a price monitoring form, the principal use of form-
701 by FEA is to determine, using nonaffiliated crude oil
import transaction data, an average price f¢: certain types
of crude oil. This average or "representative price." ex-
clusive of transportation costs, is applied as a ceiling
against a company's reported average price per barrel of
similar crude oil purchased from affiliates. The second
purpose is to provide the cata necessary for FEA to moni-
tor changes in price and cost for crude oil in both the
U.S. and worldwide markets.

     Form-96 was superseded in January 1976 by the "Re-
finers' Monthly Cost Allocation Report," Form FEA-P-110.
The new form reflects the regulatory changes made to
pricing computations and requires onlj sumroary data be
reported to FEA in lieu of the actual computation. De-
tailed supporting data must be maintained by the com-
panies for FEA audit purposes. Form-701 continues to be
used essentially unchanged fi )m the period of our review.



                              9
Reported data was generally accurate
     Because form-96 lacked discrete transportation cost
data, we chose form-701 as the basis of our review. Our
sample consisted of 693 reported shipments from schedule B
of form-701.

     Although the companies' computations of transportation
charges were generally accurate, we found specific over-
charqes related to imported crude transportation costs at
five of the seven companies. The overcharges resulted from
a variety of activities, but mostly from errors made in ac-
counting for and reporting of transportation costs on forms
701 and/or -96.
     We carefully examined the nature of each of these
errors and found neither a pattern nor evidence of the in-
tent to misstate the subject transportation costs. Examples
of the errors that caused overcharges included the applica-
tion of the wrong AFRA category; application of AFRA perti-
nent to the wrong month; use of the wrong Worldscale rate?
accounting errors, such as duplicate charges; and errors in
the exchange rate used to convert foreign currency to U.S.
currency.

     We believe thee! errors and resulting overcharges were
unintentional and the companies involved were trying to com-
ply with the regulations.    In each case the companies agreed
to correct the overcharges   by adjusting their monthly re-
ported cost.   As noted below,  errors were found which also
resulted in  undercharges or  cost understatements.

     Erroneous transportation charges from the sample trans-
actions verified at each company are shown below.
                                                  Net reported
                                                   undercharge
Company         Undercharges        Overcharges   or overcharge

Gulf             $      -       $     551,917       $551,917
EXXON                 10,512           25,744         15,232
Getty                   -                -              -
SOCAL                   -                -              -
Mobil                 67,616          111,414         43,798
Shell                 52,781           94,714         41,933
Texaco               215,924          541,580        325,656

    Total        $346,833       $1,325,369          $978,536




                               10
     Reliability of data is questionable because
     of inconsistency in reporting

     In preparing the monthly computations, the manner in
which data was extracted and compiled from their financial
accounting systems varied among refiners, according to the
individual practice of each company. We found instances
where data reported to FEA by the several oil companies
were erroneous or incomplete but later adjusted. The
major causes for these prublems are
     -- the incompatibility of FEA reporting requirements
        with the company's corporate procedures and

     -- the FEA requirements to retroactively report data
        nearly 2 years old.

     Because the time period from loading to unloading cargo
is often longer than the reporting period (monthly), many
costs had to be estimated. In many cases transportation
charges included cost estimates of demurrage and lightering,
which were then billed to the refiner in months subsequent
to the reporting period. These problems were handled dif-
ferently by individual refiners with solutions ranging from
lump-sum reporting to nonreporting. We found in some com-
panies that invoices for various transportation charges
were filed in the chronological order in which they were
processed--an order which met the internal needs of the
company but which made it difficult to locate all costs
associated with particular shipments for purposes of re-
porting to FEA. Invoice revisions, adjustments, and re-
versals were sometimes captured at different physical loca-
tions. Under these circumstances the retrieval of support
data can be very difficult, time consuming, and uncertain
as to completeness.

     When actual or corrected ccst data became available,
the refiner would make an adjustment for transportation
charges on subsequent reports, usually as prior period un-
recovered costs. These adjustments might refer to the
previous month or a series of previous months and might
be submitted a year or more after the original shipment
report. Frequently, the adjustments were an aggregation
of lesser individual adjustments. As a result, the
ability to identify transportation data relating to a
given month, let alone a specific shipment, was lost.
     Compounding this, the manner varied in which com-
panies made adjustments to form-701 data:

     -- All adjustments were rnu*Snely made via form-96.
     -- Form-701 data adjustments were made via that form
        only if the item was "material"--at least $50,000.
     -- Form-701 data was always adjusted to that form.
     Because of the masking effect of adjustments, espe-
cially for form-96, and because the reporting cycles for
forms-96 and -701 are different and not compatible, we found
that reported costs could not be reconciled between them.
As a result, effects on costs' passthrough adjustments for
any given month are indeterminant.
Conclusions

     Seven major U.S. oil companies importing crude oil for
the period October 1973 through 1975 reported to FEA trans-
portation charges which were generally accurate. Although
we found overcharges, we encountered no evidence indicating
an intent to overcharge.

     We could not determine the impact of the overcharge
on petroleum product prices due to

     -- the complex regulators formulas,

     -- prior prices which did not reflect total cost
        increases,
     -- the banking of these costs for future recovery,
        and

     -- the inability of the reporting mechanisms to trace
        data relating to specific accounting and shipping
        activity.
     The conflicting timings of reports and events should
have no material effect on reported charges over long pe-
riods, if existing reporting practices for transportation
cost are historically and consistently applied. However,
when the data resulting from such practices are used for
short-term decisionmaking, the significance of existing
timin conflicts and reporting practices is more pronounced.
As long as the exigencies of Federal reporting systems re-
main incompatible with the physical occurrence of reported
activities and with industry accounting practices; and
until there are reasonably uniform reporting practices;
the timeliness, accuracy, and utility of the reported
data will probably be unreliable and of uncertain accuracy.




                             12
ADEQUACY OF FEA'S REGULATIONS AND COMPLIANCE
AND ENFORCEMENT EFFORTS
Transportation regulations were permissive

     FEA regulations applicable to the refiner segment of
the industry recognized transportation to the United States
as a cost element in the total crude cost, but left unde-
fined the accounting method:; to be used to compute imported
crude transportation charges. While the regulations stipu-
lated the use of actual cost data for third-party transac-
tions, they restricted affiliated transactions only to
"generally accepted accounting practices consistently and
historically applied." No further direction or constraints
were provided by the regulations.

     This lack of regulatory specificity raised questions
about the data being reported to FEA as transportation costs
and the possible effects it could have:

     -- In reference to transactions between affiliates,
        where the profits from transportation charges fall
        to the foreign shipping affiliate, the question
        arises of whether oil companies using affiliate
        company's ships have recovered more than trans-
        portation costs.
     -- The Federal Government's lack of regulatory stand-
        ards for the costing of imported crude oil trans-
        portation resulted in inconsistent reporting and
        the inability to evaluate both the data and ac-
        counting methods.  (See ch. 3 for its effects.)
We found that among the seven companies were four distinct
methods of accounting for transportation costs. Also, three
of the companies modified an industry "standard" accounting
practice. Charges for similar shipping practices varied
and many transportation charges were not demonstrated to
reasonably approximate actual costs.

     The interim regulation issued in December 1976 and ef-
fective January 1, 1977, addresses the problems of lack of
criteria to judge appropriateness of accounting practices
and cost representiveness of reported transportation
charges.   the substance of this new regulation deals with
the specification and application of AFRA and an optional
"net cost" method.   (See ch. 3.)




                             13
 FEA review of transportation charges

      Generally, FEA has assigned a low-priority audit status
 to imported crude oil transportation charges. Regardless of
 priority, FEA did not vigorously pursue detected problems,
 and audit work was varied in quality.

     FEA did attempt to verify the accuracy of the costs re-
ported on the form-96. Because of the limited number of
auditors, the complexity of FEA's regulations, and the de-
gree to which the regulations were subject to interpretation,
much of the data reported had not been verified. Our findings
are consistent with our earlier observations on FEA's com-
pliance and enforcement.   (See our report "Problems in the
Federal Energy Administration's Compliance and Enforcement
Effort," December 6, 1974.) While the situation has been
partially mitigated by the new regulations, the basic problems
identified in that report still remain.

     In recent testimony before the Subcommittee on Energy
and Power, House Committee on Interstate and Foreign Com-
merce, on FEA Compliance Activities, we summarized FEA's
difficulties with regulatory compliance and enforcement
activities.

     "Some of the problems are caused by the unresolved
     regulatory issues and inappropriate regulatory re-
     porting requirements discussed earlier. Other fac-
     tors, which our previous work has shown, and which
     may have contributed to the existing situation,
     are the number of special programs such as the pro-
     pane and fuel oil supplier audits which took au-
     ditors away from other review programs, inter-
     regional disputes over jurisdiction and support
     roles, attrition of personnel, and uncertainties
     over the future of the regulatory program."

     Practices went undetected

     We noticed certain instances at the companies where
auditors were either not aware of the issues involved or FEA
                                                         they
believed no violation of FEA regulations had resulted. FEA
auditors assumed that if a company used AFRA for calculating
transportation charges, and if the application was consis-
tent and historical, generally, the company was in compli-
ance with FEA regulations, regardless of how the company
chose to apply AFRA.

     In the case of one company, FEA auditors had done no
work in the area of imported crude oil transportation



                             14
charges. The auditors appeared unaware of the company's
modification of the AFRA system as well as the effect'of the
modification on transportation charges. (See p. 21.)

      In another case, FEA auditors had been aware that the
AFRA categories were revised, but they believed that the com-
pany had consistently and historically revised the categories
and, therefore, no violation of the regulations had occurred.
However, after inquiries in early 1976 by staff of the House
Subcommittee on Energy and Power, FEA audited certain trans-
portation charges reported by that company. FEA auditors
found that the company had changed accounting methods and
was not consistent in its use of modified AFRA. The auditors
recommended to FEA regional and headquarters officials that
the company be required to follow AFRA without any deviations
as this would more truly reflect a proper measurement of
costs. (See p. 23.)

     In a third case, FEA auditors did some work in the area
of transportation charges, including those reported in Jan-
uary and February of 1974. They did not discover the use of
a questionable bunker surcharge which occurred during that
time. FEA's explanation for this was that the time limita-
tions did not allow for an indepth investigation.  (See
p. 24.)
     FEA officials told us that they have recently begun to
closely review the facts in the second case we cited.

Conclusions

     For the period of our review, October 1973 through
1975, FEA regulations governing the calculation of imported
crude oil transportation charges were not effective because
they allowed refiners the opportunity to recover more than
cost. Importing refiners were using a variety of computa-
tional methods and, as a result, reported widely varying
charges for similar shipments. Thus, Federal regulations
did not provide an enforceable standard for the identifi-
cation and reporting of dollar-for-dollar costs passthrough
as required under EPAA. FEA issued new regulations effec-
tive January 1, 1977, which, if properly implemented, will
eliminate future problems of the nature described in this
report.

     Transportation costs are less significant than are
crude oil costs, and the scope of the review did not permit
us to assess the propriety of FEA's assignment of a lower
priority to the audit of transportation costs. However,



                            15
FEA has not adequately fulfilled its responsibilities of
assuring compliance with transportation cost regulations.
In addition, because FEA's reporting requirements included
estimates and combined adjustments, we could not be assured
of complete and accurate transportation cost data. In our
opinion, the information reported to FEA was not reliable  for
assuring price control. Similarly, the effectiveness of the
new transportation regulations may be neutralized without
more effective data reporting requirements.

     The change in accounting methods cited in the second
example of FEA audit oversights appears to violate the FEA
regulation requiring the use of customary accounting proce-
dures consistently and historically applied.




                            16
                            CHAPTER 3
             ACCEPTANCE AND APPLICATION OF AFRA

                     FOR REGULATORY PURPOSES
     To determine how charges derived from applying AFRA
and Worldscale compare to actual transportation costs, we
examined two accounting systems which were structured to
provide actual cost data on a voyage-by-voyage basis, re-
ferred to as voyage cost accounting.  In addition, we ob-
tained profit and loss data and other financial information
relevant to tanker transportation from several companies
that did not practice voyage cost accounting.

     Our examination of AFRA, supported by work accomplished
during our review, has shown that published AFRA/Worldscale
can be an appropriate measure of transportation costs. Gen-
erally, for the period of our review, we found that transpor-
tation charges computed using AFRA were lower than actual
transportation costs for long-term chartered vessels and
greater than short-term charter costs. Although, for any
given period of time, a company's actual fleet costs could
be above or below those computed using AFRA, the relation
of AFRA to costs reflected the status of the tanker market
during most of the period of our review.

     Fluctuations in costs are a function of (1) industry
response to anticipated shipping and cargo market changes,
(2) the resultant mix of long- and short-term contract ar-
rangements, and (3) the actual behavior of the particular
markets themselves. In times of surplus tanker capacity
and declining charter rates, AFRA is usually above short-
term charter rates. On the other hand, in times of high
market rates, AFRA will be below short-term charter rates.
ACCEPTANCE OF AFRA

     EPAA provided for a dollar-for-dollar passthrough of
net increases in the cost of crude oil. Transportation
charges based on actual cost meet the EPA requirement. How--
ever, because companies sometimes use AFRA to compute trans-
portation charges reported under FEA regulations, we found
it necessary to determine whether AFRA, both as it is pub-
lished and used, satisfies the requirements of relevent
legislation and regulation.

    We addressed two principal questions:

    -- Can AFRA be applied in a manner which provides an
       acceptable level of assurance that AFRA-based


                              17
        transportation charges are a reasonable approximation
        of actual costs?

     -- Which applications of AFRA, if any, raise questions
        about the cost representativeness of their resultant
        transportation charges?
Acceptance of AFRA by industry
and U.S. Government

      For many years integrated oil companies have used AFRA
to price crude oil transportation between affiliates. Today
 industry continues to strongly affirm its use as an arms-
length rate, essentially reflecting the open chartering mar-
ket. This is because AFRA represents the average cost of
all competitively chartered tankers in world trade. Tankers
owned and operated by the oil companies to transport company
crude oil are not effectively included in AFRA. The cost of
each charter currently in effr:t is weighted into the AFRA
calculation, which results in the average cost of the world's
tanker fleet, and expressed in terms of Worldscale. At any
point in time the cost of an individual vessel may be above
or below AFRA. Because long-term, short-term, and spot
charters are weighted, AFRA reflects the steadying effects
of the longer term period charters which dampen the typi-
cally violent fluctuations of the very short-term spot
charter market, and, in this sense, AFRA represents more
stable costs.
      However, the use of AFRA has raised some concerns. The
published AFRA rate schedule is divided into five distinct
categories on the basis of vessel size. Due to economies of
scale, the AFRA rate decreases as vessel size increases.
There is concern that, by revising the categories so that
larger vessels are included in a smaller vessel category,
or by disregarding the actual size of vessel used in trans-
porting the crude oil, the effective AFRA rate could be
higher.

     Tankers may, on occasion, load another cargo for trans-
port to some overseas location after discharging crude oil
at a U.S. port. This practice is known as backhauling.
Potential backhauls include such products as grain, coal,
and ore. AFRA values are based on a roundtrip voyage--a
loaded leg and a ballast (empty) leg. This raises the ques-
tion of whether a refiner should receive a credit against
the crude oil transportation charge for any revenue received
by virtue of the backhaul.

     As indicated in the preceding chapter, in the September
1976 proposed regulations, FEA concluded that


                            18
     "* * * the specification of AFRA and Worldscale,
     based on the class of vessels and transportation
     routes actually used, should lead to close agree-
     ment over the long term between allowed and actual
     crude oil transportation costs."
In December 1976 FEA published its revised regulations
which incorporated AFRA/Worldscale as the acceptable nominal
freight rate to be used between affiliates.

     Also, the Internal Revenue Service (IRS) has accepted
AFRA as a measure of arms-length shipping charges for tax
audits through the 1972 tax year. Until recently, however,
IRS had not made firsthand verification of the actual econo-
mic validity or systemic integrity of AFRA.  It did study
AFRA in 1970 and concluded that it could accept AFRA/
Worldscale as a measure of intercompany charges for trans-
portation of crude oil and oil products.

     Although IRS noted some defects, it believed that they
were not serious enough to bar the acceptance of AFRA. In
1976 IRS, in conjunction with the United Kingdom Inland
Revenue, undertook a detailed analysis of the AFRA system
operated by the London Tanker Brokers' Panel. The general
conclusion was that the methodology and procedures as
practiced by the Panel are the same as the published methods
and procedures, and that AFRA provides an accurate statis-
tical index of the average cost of chartered tanker tonnage
on a month-by-month basis.

     We discussed objectives and scope of work of the
analysis with IRS and Inland Revenue personnel who ac-
complished it. We also reviewed the analysis work plan and
findings, and we are satisfied that the scope of the review
was sufficient to assess the accuracy and integrity of the
AFRA system.
Our assessment of AFRA

     For the two companies wit.i voyage cost accounting sys-
tems, comparative analysis il'ustrates the relationship of
AFRA to actual costs for company-owned and long-term char-
tered vessels and to voyage costs for spot (short-term)
chartered vessels. 1/


1/"Long term" refers to leased, bare boat chartered, and time
  chartered vessels. "Short term" refers to voyage chartered
  and contract of affreightment vessels.



                             19
      When comparing the companies' actual costs to AFRA, we
 found that

     -- if the companies were constrained by ownership or
        long-term shipping agreements, each experienced a
        loss of about $1 million and
     -- if the companies were able to take advantage of the
        fluctuations of the short-term market, each ex-
        perienced a gain of nearly three-quarters of a mil-
        lion dollars.
The overall net loss during 2 years for each of the companies
was over a quarter of a million dollars. However, as stated
earlier, a company's actual costs could be higher or lower
than AFRA's for a period of time.

     Whether a shipping affiliate paid at AFRA rates will
remain profitable under similar circumstances depends on a
number of factors. Making the right decisions, such as when
to build, lease, charter, and scrap vessels, at the right
time is important. For example, a shipper who could have
foreseen the current tanker surplus and correspondingly low
rate spot charter market and sold or scrapped uneconomical
vessels would thus be in a position to charter-in vessels
at low spot charter rates to meet current transportation
requirements.

Conclusion

     The use of actual transportation costs meets the re-
quirements of EPAA, but published AFRA/Worldscale consis-
tently applied over the long term is also an appropriate
measure of transportation costs. The use of AFRA meets the
need for determining reasonable charges between affiliates
for the transportation of crude oil.
AFRA MODIFICATIONS RAISE QUESTIONS

     Three of the seven companies we reviewed consistently
applied the AFRA/Worldscale method as published, to compute
allowable transportation charges. One company used actual
transportation costs; the remaining companies modified
published industry procedures for applying AFRA.

     Transportation charges of the last three companies were
about $24 million more than those of AFRA. We question the
appropriateness of these charges because the companies did
not submit evidence or demonstrate to our satisfaction that




                             20
 the charges were more representative of actual costs than
 if the published APRA/Worldscale method had been applied.

      In the following two tables, total charges questioned
 are broken down by the type of practice in question, and
 by the total questioned charges for each company, regardless
 of practice.

                  Questioned charges which are AFRA
                         …relaltea b__ractice
                  Practice                      Amount
            Trade-rate AFRA               $ 7,214 300
            AFRA revised categories         6,562,200
            Bunker surcharge                9,812,400
            Demurrage                         426,000
            Deadfreight                       195,000
               Total                      $24,209,000

NOTE:   The questioned charges by practice identified in the
        table above do not necessarily correlate with the
        questioned charges by company identified in the table
        below.
                  Questioned charges which are AFRA
                          related_bycompEany
                  Company                       Amount
                  Gulf                    $       -
                  EXXON                       7,626,000
                  Getty                       9,812,000
                  SOCIAL
                  Mobil                       6,771,000
                  Shell
                  Texaco

                     Total               $24,209,000

The facts and circumstances surrounding the questioned
charges for each company are discussed in the following
sections of the chapter.
Trade-rate AFRA

     Since 1972 EXXON has used what it calls trade-rate
AFRA for pricing crude oil transportation between affiliates.


                               21
The U.S. importing affiliate paid the foreign transportation
affiliate on the basis of an AFRA vessel category rate as-
signed to each load/discharged port combination or trade,
used in importing crude oil into the United States.  The
AFRA category assigned by EXXON to each trade was established
by (1) determining the maximum size vessel that can regularly
and routinely serve the company's facilities at the load and
discharge ports and (2) then determining the largest AMRA
category for which the industry's average size vessel in
that category can be regularly and routinely used.  In effect,
the application of trade-rate AFRA means that if the maximum
size vessel which the company's trade regularly accommodates
is below indus ry's average size vessel in an AFRA category,
the trade is aL ,gned the lower and more expensive AFRA cate-
gory as the trade rate.

     We compared transportation charges resulting from
application of trade-rate AFRA to the transportation charges
which wouli- have resulted had EXXON applied published AFRA/
Worldscale for 98 crude oil shipments.   The shipments in-
volved about 36 million barrels of crude oil with freight
charges over $49 million and total transportation charges
of about $52 million. Trade-rate AFRA transportation
charges were higher by about $7 million.   These charges
are questioned because they are neither supported by actual
cost data nor are they computed by using AFRA/Worldscale as
published.

     EXXON officials have stated that their system of apply-
ing AFRA has advantages for the refiner, the shipper, and
the consumer. According to EXXON, the refiner can plan more
effectively as his ccst is less subject to fluctuations in
transportation charges; and because the trade rate is pre-
determined, the shippr may optimize his worldwide opera-
tions without involving the domestic refiner. Our review
was intended to focus on transportation charges, and we did
not examine into the commercial benefits and costs accruing
to involved corporate entities.

     Another benefit of the system, according to EXXON, is
that the trade-rate system protects the consumer from hav-
ing to absorb higher costs when the shipping affiliate pro-
vides a vessel larger than the vessel implied by the as-
signed trade-rate AFRA category.  In this case, we were
told, the shipping affiliate must absorb any lightering or
deadfreight charges rather than pass them along to the
refiner and ultimately the consumer.

     However, even after allowing for lightering and dead-
freight costs of $141,000, which would only be passed
through under published AFRA, the net difference between


                             22
that and trade-rate is over $7 million. For the period
of our review, the sampled shipments did not result in a
net benefit for the consumer.
     Moreover, our review showed that 24 vessels in our
sample shipments were larger than implied by the trade-
rate AFRA, and lightering and/or deadfreight charges were
not absorbed by the shipping affiliate. As a result of
these findings, EXXON reviewed all lightening and deadfreight
transactions occurring from August 1973 through December 1975
1975 and stated that $1.9 million had incorrectly been paid
by the U.S. refiner. The company made the cost passthrough
adjustments required and stated that revised control proce-
dures were instituted to avoid a recurrence of such billing
errors.
     EXXON provided documentation that its shipping affiliate
did absorb lightering and deadfreight costs which decrease
the difference between trade-rate AFRA and published AFRA
by about $570,000 for 51 sample voyages. It also stated that
had a vessel AFRA system been employed, EXXON would have
incurred an additional $830,000 in demurrage costs, incurred
on t ansshipped crude, further reducing the difference be-
twe   its trade-rate and published AFRA/Worldscale. However,
because the affiliate absorbed these demurrage costs in a
lump sum, EXXON stated that these costs cannot be specifi-
cally identified or supported by invoices. For this reason,
we cxuld not verify the exact amounts of lighterinq, dead-
freight, and demurrage costs estimated by EXXON to have
been absorbed by the shipper. Therefore, we did not consider
any nf theso costs as a reduction of the net difference be-
tween trade-rate and published AFRA.

Revised AFRA categories

     Mobil used two different methods for applying AFRA to
compute transportation charges during the 27-month review
period.  In 1973 it applied AFRA in a method simi_ r to
that used by EXXON. Each load-port/discharge-port combina-
tion was assigned an AFRA rate category and that rate ca4.e-
gory was used to compute transportation charges regardless
of the size of the vessels actually used in deliverina crude
between the two ports.

     Beginning in 1974 Mobil changed its method for applyinn
AFRA and revised the vessel size ranges within each AFRA
category. The result of the revision was to shift the AFRA
vessel categories downward as much as 33 percent. Thus a
crude oil shipment which wr.ld be charged at the lower
Medium-Range rate under AFRA, as published, instead might be
charged at the more costly General-Purpose rate under Mobil's


                             23
 revised AFRA categories. Mobil stated that the change
 method resulted in lower transportation charges.      in

      although our analysis of several crude shipments
 that the change did result in a reduction of charges, confirmed
 application of AFRA, both before and after the change, Mobil's
                                                         resulted
 in higher transportation charges when compared to charges
                                                            com-
 puted using published AFRA. We found the reported transporta-
 tion charges of about $66 million exceeded published AFRA
 charges by over $6.6 million.
      Mobil's rationale for revising AFRA categories was that
published AFRA represents the average cost of all vessels
any particular category. Its port restrictions often         in
clude the use of vessels larger than the average size  pre-
 in any particular AFRA category. Smaller than average vessel
vessels within each AFRA category are more expensive tosize
operate than larger vessels; therefore, Mobil is denied
economies of scale if it uses AFRA as published. However, the
Mobil did not have a voyage fist accounting system and
not present other data to demonstrate that the revised did
                                                        AFRA
categories more precisely reflected actual cost.
      While we leave the final decision to FEA, Mobil's change
from the port-rating method to the revised-vessel-category
method appears to violate the FEA regulation requiring
                                                        the
use of customary accounting procedures consistently and
historically applied. Although the change did result
                                                       in
reduced transportation charges, the regulatory restriction
on accounting procedure change does not except changes
result in reduced charges.                              which

AFRA and the "bunker index"

      Since October 1973 the cost of bunkers--the fuel
to operate tankers--has quadrupled. World3cale could used
                                                        not
publish rate schedules with sufficiently up-to-date bunker
prices due to the rapid changes in them. As a result,
January 1974 Worldscale publishers began a system wherebyin
changes in bunker prices could be reflected with minimum
delay through a provision known as a monthly bunker index.
The index was calculated for posted bunker prices in
                                                       force
over the previous 1-month period ending on the 15th day
the month. For example, the January 1, 1974, index re- of
flected posted bunker prices in force from November 16
through December 15, 1973.

     In announcing the index, Worldscale publishers stated
that use of the inuex could impair the comparability of
rates to some degree, and that its use must be a specific
agreement between the contract parties. Further, the

                              24
announcement made it clear that the index was in no way to
be construed as an amendment to the basic Worldscale rate
schedule.
     Getty, however, used the index as just such an amend-
ment. In 1974 it applied thce monthly bunker index to the
Worldscale rate before applying AFRA when computing charges
for transportation provided by affiliate-owned vessels. As
a result, transportation charges on some imports in 1974
were increased by as much as 52 percent.
     Getty was the only company among the seven included in
cur review that used the bunker index. Its reason was that
neither Worldscale nor AFRA published rates reflected the
higher bunker prices. However, the bunker index was de-
signed as a guideline in negotiating tanker contracts, and
AFRA reflects the weighted average costs of these contracts.
Further, monthly AFRA computations include provisions for
reflecting current vessel operating costs, including the
cost of bunker fuel. Thus, in applying the bunker index
in conjunction with AFRA, compensation for bunker costs
may have been higher than warranted by the increase in such
costs. We question $9.8 million in transportation charges
derived from applying the bunker index.
AFRA and deadfreightand demurrae
                          e      _charges

     If AFRA and Worldscale values are used to calculate
transportation charges, then the same should also be used
to calculate deadfreight charges. The AFRA rate should
also be applied to the daily demurrage rate to derive the
demurrage charge. The following table summarizes the sub-
sequent explanations of deadfreight and demurrage charges
which are questioned because of modifications made to AFRA.
  Charge                   Shipments       Charges       Amount
questioned      Company    involved        involved    questioned
Deadfreight:    EXXON         21       $     482,000    $133,000
                Mobil         11             234,392      62,510
    Total                     32             716,392     195,510

Demurrage:      EXXON         34           1,200,000     279,000
                Mobil         38           3,400,000     147,121

    Total                     72           4,600,000     426,121

        Total                (a)       $5,316,392       $621,631

a/Due to overlap in shipments, total shipments are not
  meaningful.

                             25
We questioned EXXON's reported charges for both deadfreight
and demurrage which were calculated using trade-rate AFRA.
Deadfreight charges of $482,000 were reported for 21 ship-
ments in our sample. Of this amount, $133,000 are ques-
tioned as a result of the application of trade-rate AFRA.
In addition, $279,000 of the $1.2 million in demurrage
charges reported on 34 sample shipments are questioned as
a result of the application of trade-rate AFRA.

     By revising the published AFRA vessel size categories,
Mobil also reported higher charges for deadfreight and demur-
rage. Deadfreight charges totaled $234,392 on 11 sample
shipments, $62,510 of which are questioned because revised
AFRA rates were used. For 38 demurrage charges totaling
about $3.4 million, questioned charges totaling $147,121
resulted from the use of revised AFRA rates.

Conclusions

     As a result of the variety of methods used for cal-
culating transportaton charges, importing refiners reported
widely varying charges for similar shipments. Some of these
we questioned because they were supported neither by actual
cost data nor by AFRA. These questioned transportation
charges totaling over $24 million were found at three
companies.

     The change in accounting practices by one company does
appear to be a violation of regulations even though it did
not result in additional charges.




                             26
                           CHAPTER 4
         REASONABLENESS OF TRANSPORTATION PRACTICES

     Our review of the reasonableness of the practices and
their costs, ancillary to the transportation of imported
crude oil, showed that generally they were reasonable and
were supported by company documentation. We did question
the appropriateness of about $940,000 in transportation
charges claimed by one company because the charges for one
transportation practice exceeded the average costs of such
practices and its cost representativeness was not demon-
strated by any facts we reviewed.
TRANSPORTATION PRACTICES

     In addition to the basic shipping charge, numerous
charges and fees are associated with the transportation
of imported crude oil. Some of these charges and fees
contribute more significantly to transportation costs
than do others. We concentrated our review efforts on
those practices which were apt to have the greater impact.
Such practices, including transshipment, demurrage,
lighterage, deadfreight, backhauling, and slow steaming
are discussed in later sections of this chapter.
     We also reviewed documentation supporting other charges
and fees of lesser importance, such as port charges, termi-
nalling fees, diversion, inspection fees, and war risk in-
surance. Generally, all of the charges and fees for the
shipments reviewed appeared reasonable and were supported by
company documentation.

     The following table   indicates the frequency of occur-
rence for transportation   practices associated with the ship-
ments reviewed and which   occurrence could be readily identi-
fied from the companies'   records.




                              27
                                   Occurrences
                                                          Trans-
                Shipments   Light-      Dead-    Demur-    ship
Company         reviewed    erage      freight    rage     ment
Gulf              100         30          6        38        0
EXXON              98         33         21        34       43
Getty             100         47          0         0        0
SOCAL
  (note a)
Mobil            100         (b)         11        38       20
Shell             98          19          0        21      26
Texaco           100           2          5       57       65
    Total        596        131         43       188      154
Average           99         26           7       31       26
a/ The review at SOCAL concentrated on the company's voyage
   cost accounting system. Charges for such transportation
   elements as lightering, deadfreight, demurrage, andc trans-
   shipping fees were not reviewed.

b/ Lighterage could not be readily identified, because Mobil
   included lightering costs as part of miscellaneous ad-
   justments to the total landed cost.

     A brief description of each of these practices shown in
the above table follows.

Transshipping

     Transshipping involves the transfer of crude oL1 from
one tanker to another for further transportation. Transship-
ping allows the use of much larger and lower cost tankers on
the long transportation leg from very large crude carrier
(VLCC)-rated Persian Gulf loading ports to transshipping
points such as Curacao in the Caribbean. From there, the
crude is transshipped on smaller vessels which can enter U.S.
ports too shallow to accomodate VLCCs.




                              28
        Transshipping car be accomplished in several different
ways:
    -- Direct vessel-to-vessel-transfer without using
       the docking facilities at the transshipping
       terminal.
    -- Direct vessel-to-vessel transfers using a trans-
       shipment terminal's docking facilities.

    -- Actual unloading and storage of crude oil in
       terminal facilities where it is later reloaded
       onto smaller vessels.
In each case a handling fee for each barrel of crude trans-
shipped is usually added to the transportation charge.

Demurrage

     Demurrage is a charge for vessel delay beyond the loading
and unloading time allowed by the charter party agreement.
The time allowed, referred to as laytime, is normally 72 hours.
Delays may occur because of

     -- vessel scheduling at the loading port and

     -- lightering operations at the discharge port
        due to the extended crude discharge time.

     Because the vessel owner or operator wishes to maximize
use of his vessel, any extra port time limits the potential
revenue producing voyages. Thus, the owner or operator pro-
tects himself from potential revenue losses by requiring
reimbursement for undue delays. Demurrage rates per day by
size of vessel are published by Worldscale. In 1975 these
rates varied from $875 per day for 8,500 DWT vessels to
$75,000 per day for 399,000 DWT vessels. For companies using
AFRA, the rates per day are applied to the appropriate AFRA
assessments to determine the daily demurrage charges.

Lighterage

     Lightering is the practice of unloading part of the
crude from a tanker onto a smaller vessel, usually a barge,
to allow the partially loaded tanker to enter a port.
Lightering is generally practiced as an alternative to
light-loading (deadfreight). Lightering costs, called
lighterage, are the fees paid for the use of the small
vessel. The fees vary from location to location and
can be based on a per barrel basis, an hourly basis, or
a time-charter. Lighterage is usually offset through


                               29
the economies of scale by using a large tanker to transport
a large quantity of crude oil (as opposed to transporting
a less amount of crude on a small tanker which can enter
the discharge port without lightering).
Deadfreight

     Deadfreight refers to unused vessel cargo carrying
capacity. Deadfreight may occur either because the fully
loaded vessel could not enter a shallow port or because
the refiner's crude storage facilities are inadequate to
accomodate the full cargo. Deadfreight is paid to the
vessel owner or operator under most commercial voyage
charter contracts. As in lightering, deadfreight normally
occurs when the cost is offset by the freight savings
which result from use of a larger, more efficient vessel.
When using AFRA, deadfreight charges are calculated in the
same manner as the basic freight charge.

APPROPRIATENESS OF COMPANY TRANSSHIPPING
CHARGE QUESTIONED
     Five of the seven companies we reviewed practice trans-
shipping involving offloading the crude oil into storage
facilities. The transshipping fees reported by four of
the five companies ranged from 15 to 25 cents per barrel.
EXXON, however, reported a 38 cents per barrel transshipping
fee. Although the fee was paid to an affiliate that operated
a transshipping terminal in the Caribbean, EXXON has stated
that transshipping fees should include all costs that a
company would incur if it purchased the crude delivered in
the United States from a third party which used transshipping
facilities. The company noted that commonly publicized
transshipping fees often exclude many operational charges
which were included in its transshipping fee. The company
provided a list of the categories included in the transship-
ping fee:
     -- Tankage/handling.

     -- Cargo loss.
     --Demurrage.

     -- Cargo insurance.
     -- Inventory carrying charges.

    -- Charges for nonperformance in transshipping facility.
     -- Diversion costs/vessel slowdown.


                              30
     -- Administrative costs/salaries.

     -- Commercial fee.
     We did not find these items identified as transshipping
costs at other companies. Such charges may be a valid cost
of imported crude, but we question whether they should be in-
cluded as transshipping costs, and we think that FEA ought to
resolve this question.

     Petroleum Economics Ltd. of London, England, a fimwn
recognized as an expert in the field of international tanker
operations, stated that, within its experience, a reasonable
transshipping fee should not exceed 27 cents per barrel. In
addition, a recent study made by a consultant for FEA re-
ported that the transshipping cost involving Caribbean
terminals was about 27 cents per barrel.
     On the basis of the charges reported by the other com-
panies and expert opinion provided us, we believe that the
38 cents per barrel transshipping charge by EXXON should be
questioned by FEA. We estimated the transportation charges
resulting from the 38 cents per barrel fee when compared
to a 27 cents per barrel fee at over $940,000 for 20
transshipments.

BACKHAULING AND SLOW STEAMING DID NOT
MATERIALLY AFFECT TRANSPORTATION CHARGES

     As part of our review, we attempted to determine what
impact the practices of backhauling and slow steaming might
have on transportation charges because they are not reported
as cost related items. We found that for the sample ship-
ments the practices were infrequent and did not materially
increase transportation charges.
Backhauling

     After discharging crude oil at a U.S. port, a tanker
may load a cargo for transport to another port thereby
taking advantage of what is normally the ballast (empty)
leg. This practice is known as backhauling. Backhauling
cargoes can include products such as grain, coal, or ore.
Some tankers referred to as OBOs (oil-bulk-ore) have been
built or modified to haul oil, bulk, or ore cargoes.
     Worldscale and AFRA values are based cn a round-trip
voyage--a loaded leg and a ballast leg. The question
arises whether a credit should be applied against transpor-
tation charges for any revenues received by the shipper by
virtue of backhauling another cargo on the return trip.
                             31
       Backhauling can involve the direct return
                                                  from the port
  of discharge to the port of loading,
                                       or travel to a third
 port where the cargo is loaded and delivered
 port.                                          to yet another
         For example, one vessel included in our
 charged crude oil obtained from the Persian      review dis-
 east coast port and proceeded in b'allast    Gulf  at a U.S.
                                           to a South American
 port.   At that port the vessel loaded crude
 another South American port.                  and hauled it to
                                From there the vessel hauled
 crude up and down the coast for 3 months
                                           landing at
 American ports.   The vessel finally left the coast of16 South
                                                         South
 America and traveled empty to the Persian
                                            Gulf.
       Three of the seven companies we reviewed
                                                 practiced back-
 hauling. Only two of the companies had
                                          frequent backhauls
 and one of these companies stopped the
                                         practice in early 1976
 because, according to the company, it
                                        was not profitable.
      Some tankers involved in backhauls were
                                                more costly to
 build and operate. Also, additional
                                       costs,
 charges, demurrage charges, and in some      such  as port
                                          cases, vessel cleaning
 charges, are incurred as a result of
                                       the backhaul.
 additional costs might be used to offset              These
                                           at least a portion
 of the backhaul revenue.

      Because only some of a return leg may
                                             involve backhauled
cargo and because some costs are spread
of voyages, we found that determining    over  an entire schedule
                                       which costs and revenues
and how much of each, if any, should
calculation was extremely             be included in the credit
                           complex and could not readily  be
determined.   Because of this factor and the fact that
hauling was infrequent for the sampled                  back-
                                        shipments, we did not
pursue the matter further as part of
                                      our review.
Slow
   _--_---steaming
-----

      Slow steaming involves reducing vessel
                                                speed to extend
 voyage time.  Slow steaming is customary when the tanker
 industry is in a position of excess capacity.
 keeps a vessel, for any given voyage,              The practice
 and thereby causes more tankers to be  in  service   longer
                                       kept in operation
 if the same tonnage is to be moved in
as if there were no slow steaming.     the same time period
                                     In this way, slow steam-
 ing helps to absorb the excess capacity.
                                             Slow steaming,
however, does have its drawbacks.   An oil company would
need to strike a balance between (1)
suming less fuel and by carrying more the costs saved by con-
                                       cargo in place of
fuel and (2) the lost opportunity cost
                                         on
the inventory cost incurred by increasing the vessel plus
                                             the voyage time.
Our concern with slow steaming in this
creased transportation charges may resultreview   was whether in-
                                             from the practice.



                              32
     Although several of the companies in the review had
practiced slow steaming, we found no adverse effects on
transportation charges. Six of the seven companies used
AFRA and Worldscale values for computing transportation
costs. Because both Worldscale and AFRA are based on a
standard voyage, including the number of steaming days,
slow steaming would not result in additional transportation
charges. In the case of the one company that d'd not use
AFRA, its actual cost system did not reflect inflated
transportation costs as a result of slow steaming.
CONCLUSIONS

     Lightering, transshiping, deadfreight, and demurrage are
integral parts of the cost of transporting imported crude oil
and should be allowed as part of total transportation costs.
Also, backhauling and slow steaming practices were infrequent
and did not appear to materially increase transportation
charges to justify adjustments in the basic shipping charge.
Except for a transshipping charge claimed by one company,
all of the charges and fees reviewed for our sample ship-
ments appeared reasonable and were supported by company
documentation.




                            33
                           CHAPTER 5
               CONCLUSIONS AND RECOMMENDATIONS

     Company computations of transportation charges reported
to FEA were generally accurate. However, we did find speci-
fic overcharges of about $975,000, net, at five of the
seven companies.   The overcharges resulted mostly frc;i,
accounting and reporting errors, but we found no evidence
of intent to misstate transportation costs. Due to regula-
tory complexities and market forces we could not determine
whether the overcharges resulted in price increases. None-
theless, the overcharges should be adjusted against the
five companies' costs passthrough.

     Generally, the companies were inconsistent in the manner
in which they reported transportation cost data to FEA. A
major cause for some of this problem is the incompatibility
of FEA reporting requirements with the corporate accounting
and industry shipping practices on which the companies must
rely to meet those requirements. This incompatibility re-
sulted in extensive estimation of charges which, in turn,
resulted in numerous adjustments once actual or up-to-date
data became available. In the end the various impacts of
specific transportation charges are indeterminant and trans-
,urtation cost data is uncertain in its timeliness, accuracy,
and utility. In our opinion the information reported to
FEA was not effective for assuring price control. Consistent
reporting practices by the companies would help to mitigate
some of the problem, but the basic reporting incompatibili-
ties must be identified and sonde reporting requirements
modified if the problems are to be resolved. Residual
incompatibilities must be managed closely.

     For the period Octob'er 1973 through December 1975, we
found the FEA regulations to be ineffective in establishing
enforceable criteria for assessing the cost representative-
ness of transportation charges for imported crude oil. As a
result, the application of the dollar-for-dollar cost pass-
through provision of the 1973 EPAA was not assured. FEA
has issued new regulations effective January 1, 1977, which,
if properly implemented, will eliminate future problems
of the nature described in this report.

     We found that FEA has not adequately fulfilled its
responsibilities of assuring compliance with transportation
cost regulations. FEA assigned a low priority status to
the audit of transportation charges. Regardless of priority
FEA's pursuit of problems and quality of audit work were not
sufficient to assure reliable data. Regardless of resources

                              34
 audits of transportation charges for imported
                                               crude oil must
 be made with expertise and in a depth sufficient
 data reliability and regulatory compliance.      to assure

       IRS and the United Kingdom Inland Revenue performed
 an indepth audit of the AFRA system and concluded
 the methodology and procedures are what they        that
                                               purport to
 be and that AFRA provides an accurate statistical
 of chartered tanker costs. At the same time,        index
                                                FEA concluded
 that published AFRA/Worldscale should lead to
 between allowed and actual transportation      close agreement
                                            costs.  In conjunc-
 tion with these conclusions and based on our
 company data, we believe that AFRA use meets review of
                                               the
 determining reasonable charges between affiliates need of
                                                    for
 portation of crude oil and fulfills EPAA requirements. trans-

     To have continued assurance of AFRA's regulatory
appropriateness, periodic assessments need to
                                              be made to
determine the systems integrity and to make sure
                                                 that its
terms of reference remain intact.
     Three of the seven companies used modified components
or applications of AFRA which, when compared
                                              to the published
AFRA/Worldscale method, resulted in about $24
                                               million more
in transportation charges. We question the appropriateness
of these charges because the companies neither
evidence inor demonstrated to our satisfaction submitted
                                               that the
charges were more representative of actual costs
the published AFRA/Worldscale method had been     than if
                                               applied.
      Under the new regulations companies are required
                                                          to
 clearly demonstrate that, if they wish to retain
methods not prescribed in the regulations, such accounting
                                                   methods will
not result in costs greater than the approved
believe that this requirement is necessary if   method.    We
tions are to prove effective. Also we believe   the  new  regula-
same criteria can be applied to the charges      that these
                                              questioned in
this report to determine if any adjustments need
                                                    to be made.
      We found that ancillary shipping practices
costs were generally reasonable and supported      and their
data. We did question the appropriateness of    by  company
                                                nearly
lion in transshipping fees claimed by one company       $1 mil-
the costs exceeded industry averages and were        because
                                                not demon-
strated as reasonable by the company data supplied
Backhauling and slow steaming do not appear           to us.
material effect on                           to  have
                    transportation charges at the timea and
need not require an adjustment in the basic shipping
                                                        charge.




                              35
GAO RECOMMENDATIONS
     The Secretary, DOE, should take the following actions
with regard to regulatory compliance, administration, and
systems support.

Compliance

      --Verify that the companies have reported cost adjust-
        ments for the overcharges discussed in this report.
      -- Determine whether the charges we questioned represent
         recoveries greater than cost and, if so, require com-
         panies to make appropriate adjustments.

     -- Assure proper implementation of new transportation
        regulations.
     -- Assure that all companies applying for exceptions to
        standard transportation accounting methods, demonstrate
        that the company method results in costs no greater
        than those resulting from the use of published AFRA/
        worldscale.  It is important that data offered by com-
        panies in support of exceptions receive indepth audit.
Administration

     -- Insure that reviews of imported crude oil transporta-
        tion charges, when made, are of sufficent scope to
        assure continued compliance with applicable regula-
        tions.
     -- Evaluate AFRA periodically to assure the continued
        integrity of the AFRA system. This will be espe-
        cially important if either the status of the tanker
        market changes significantly or if AFRA's terms of
        reference should change.
Systems   support

     ---Eliminate to the greatest extent practical problems
        arising from DOE reporting time frames that are
        incompatible with the time span in which the reported
        events take place.

     -- Require respondent companies to use uniform reporting
        procedures that identify clear and discrete transpor-
        tation data.



                              36
                          CHAPTER 6
       AGENCY AND COMPANY COMMENTS AND OUR EVALUATION
     We furnished a draft of this report tc FEA and IRS and
draft report extracts to the seven companies named in the
report for review and comment.
AGENCY COMMrNTS
     FEA's comments are included as appendix I. FEA con-
sidered the report's conclusions and recommendations to be
reasonable and stated that in each case action had been
initiated or would be taken to implement them. IRS comments
were not received in time for i icusion in this report.

COMPANY COMMENTS

     Four of the :impanies--Gulf, Sh i     .% iL, and Texaco--
that submitted coranments on the draf -ei,  t did not have any
substantive comments regarding the 4eport mauerial. EXXON,
Getty, and Mobil took issue with report statements conceLn-
ing their companies and made substantial comments to that
effect. The full text of the company comments are available
from us upon request.

 We considered all comments and where warranted made
appropriate changes to report dc ta and statements. There
is, however, a residual difference of opinion concerning
the interpretation of certain facts and practices. These
matters are discussed in the following pages.

     EXXON
     EXXON argues tihat our questioning of its trade-rate is
invalid because trade-rate is based on is AFRA and therefore
represents essentially the same values derived under published
AFRA/Worldscale-  We disagree.
     Published APRA/Worldsca.e is a component in EXXON trade-
rate calculations. In our opinion the resultant trade-rate,
applied on a port/trade basis, is not the equivalent. f un-
modified AFRA/WoLldsrale applied on a vessel-by-ve '.l basil.
Furthermore, EXXON argues exttnsively in the balanuc of its
comments that there are significent quantitative and qualita-
tive differences between trade-rate and AFRP. and that the two
will have disparate results. This appears to refute EXXOP's
contention that the two rates represent equivalent values.

     EXXON argues that trade-rate offers an advantage to the
consumer because there are costs which, under trade-rate,
are incurred by the shipping affiliate and not reported to
                             37
FEA as transportation charges to be passed through. On the
other hand, were EXXON to use a published AFRA/Worldscale
system, these costs would be borne by the U.S. importer, re-
ported to FEA, and ultimately passed on to the consumer.
EXXON has identified charges which it did not incur under
trade-rate, but would have incurred had it used AFRA. In
its comments EXXON argues that these charges would reduce
the transportation charge differential between trade-rate
and AFRA and that we ought to apply them to the questioned
charges noted in the report. Since, as the importer, EXXON
could not incur these charges, it did not provide us with
invoiced cost data to support them. In this category are
included charges of $570,000 for deadfreight and $830,000
for demurrage which have been enumerated in the report
because we were able to relate them, as lump sums, to a group
of voyages.   In each of these cases, however, invoice docu-
mentation was not available which would allow us to apply
them as reduction to the difference between trade-rate and
AFRA.

     EXXON also maintains that costs passed through during
the period of our review were unrepresentatively high and
that the data indicates that the difference between trade-
rate and AFRA is much less in subsequent periods. The data
covered in our review does in fact show a significantly
smaller difference between trade-rate and AFRA for the
period subsequent to June 1975 than it shows for earlier
periods. EXXON maintains that this lesser disparity is in-
dicative of the true relation of trade-rate to AFRA and that
our sample is not representative.

     This contention could be valid but it was neither demon-
strated by the data nor the argument presented to us by EXXON
at the time of the review, in subsequent discussions, nor in
the current comments. The fact remains, not disputed by
EXXON, that for the 98 shipments during the 27-month period
we examined, trade-rate results in higher charges than does
AFRA. Secondly, AFRA, as an average. will over time range
higher and lower in its relation to trade-rate. We found
no evidence to suggest that the diminished difference between
trade-rate and AFRA, found in the later period, was more
representative of the long-term relationship than the larger
difference found in earlier periods. We feel that EXXON
should demonstrate the validity of its claim to DOE.
     Lastly, EXXON states that vessel use will be tailored
to the specifics of AFRA. That is, vessels used under
trade-rate would become uneconomic under AFRA and therefore,
due to the use of AFRA, smaller, more costly tankers will be
routed to U.S. ports. To illustrate the undesirable impacts
of changing from trade-rate to AFRA, EXXON suggests that if


                             38
 "* * * all vessels above the trade rate size were replaced
with vessels equal to the trade rate classification" trans-
portation costs would be increased significantly.
     We accept that there is some incentive to make vessel
substitutions, on the basis of category, when opportunities
permit. We think, however, that there are practical limits
on the availability of ships of such specific size so as to
preclude such complete selectivity and sweeping replacement.
Although it may warrant attention, EXXON's assumption does
not appear useful for prc'ecting significant changes in
transportation charges due !o the use of AFRA.
     Getty Oil Company
     Of the five firms included in our review which used
AFRA, only Getty appliec any identifiable mechanism or
index by which a surcharge was applied against AFRA for
increased bunker fuel costs. We do not know what other
firms, which were not included in the scope of our review,
did regarding the use of the bunker index; therefore, we
cannot comment on whether Getty's practice was common.
Getty also contends that if, as questioned by us, the $9.8
million was an unwarranted recovery of increased costs,
then company owned and controlled tankers would have shown
a $1 million loss in 1974.

      First of all it appears that AFRA would in time reflect
such costs and Getty would recover them in the normal course
of events. Getty has not demonstrated that such is not the
case. Secondly, due to the nature of the tanker market dur-
ing this period, many tank ship companies incurred losses.
As our report shows, two companies show losses when AFRA
revenue is compared to actual cost for sample voyages. In
addition, the three shipping affiliates of another company
included in our review suffered huge losses during this
period. It is the nature of AFRA, as an average, to period-
ically offer advantage or disadvantage when compared to
actual costs.

     We continue to believe that DOE should resolve our
question of the impact of Getty's use of the bunker index.

     Mobil Oil Corporation

     Mobil contends that its change from accounting for
imported crude oil freight charges by using a port-trade
related method, similar to EXXON's trade-rate, to a method
of revised AFRa categories was not a change in accounting
procedures. We disagree.


                             39
     The trade-port or trafe-rate method is a system based
on the average trade experienced over a given route. The
revised-category method is a system based on the actual
vessel used on a shipment-by-shipment basis. Both use
some form of published AFRA/Worldscale as computational
input--but they are distinctly different systems. We
continue to believe that the change of systems appears to
be contrary to the regulation which requires the use of
customary accounting procedures consistently and histori-
cally applied. Mobil further claims that, even assuming
the change was a potential violation, such potential is
neutralized by the fact that transportation charges passed
through were reduced. While it is true that reported trans-
portation charges were reduced, we note that the regulatory
restriction against accounting procedure change does not
make exception for changes which result in reduced changes.




                             40
    APPENDIX I                                                                                                   APPENDIX I


               NINfI'I'Y'URITH CON¢GAW

           NHAI.E 0. SAE        W. VVA. CMAN
                                W.        A
'O       NMANTAD.        MA,    SAMiL L. DaVINE. O1NO
 JSW IL MOSS.CALUF.
PL DIOSIN.       ""
 U.NE. VAN DIIRUN. CAUF.
                                JAMES . wooN-LL.,
                                    ""'N.
                                                   .
                                             ncKY.Congrc
                                JOE ICSIi. KAN                <   ,E
                                                                                dt t(
                                                                                   t
                                                                                         uWnittb
                                                                                         _,  Ae
                                                                                                              tateJ
 FrM u.1OMV, PA.                JAMES P. HAIN"SL   N.Y.                 i       e at    tSttatibe.
 AM M. MEOW. NMy.               JAM"S M. aOLiNS. TI.              ce U 2.   SM, e
                                                                                                  A    P   CmmrcB
 2AVID L.SAWIMII     III. VA.   16J1 PrWY.iJn.. FIA.              4mm     s er te             b
 * ADm.
WmIL          WAI.              J     v . MC       E. HOOS,       AM 212,. xun gcuL                   tt as 1bag
                    JR.. .
w. S. (BI.)SITUaIEKY,             M       F. IEST. N.Y.
S    iAsmmwN.
mNoION PevIIe', NA.
                                 .ja
                                NT.       "NUIII, PA.
                                zDAIIDM IR. NADHAM.ILL.
                                                                            4abfntn. ti.S.            20515
JAMES W. SYMINI4YM. Mm.         GI      , u EA. Al
        J. CAmOM.ONO            MAlTMW J. Ni.       NJ.
nAMI HN.      1YALEL.
SNmOISi. UM4, MD.
JAMES 1N.      . N.Y.
IINl f L OI'INNE . N.Y.
HAY      WAMA. CAbIF.
   -        I mUSEw. YE
                      TSY.
TI~ MOY.     006*.
        wIRTh.
           IND.
      SHAMIR'                                                                February 11, 1976
WLUJAMN. I          A MICH.   .
W. N. (ui)      "M N.CNa
JAMES  J. PLO"    NJ.
AMnrNTNY  T       omy .
                 ~1,
JIM        OaN/
             mEm.
              o       m.
       IMANU N.J.
ANOINIIEW
                                 CLAW
                   W. t. WLLHAMASM




                 The Honorable Elmer B. Staats
                 Comptroller General of the United States
                 General Accounting Office
                 441 G Street, N. W.
                 Washington, D. C. 20548
                  Dear Mr. Staats:
                       The costs of imported crude oil and product are important ingredi-
                  ents of the prics American consumers pay for petroleum prioducts. The
                  recent increase in thoseosts adds to those prices directly, and domes-
                  tic crude oil and product prices have riesen to reflect the costs of
                  imports. A significant part of import costs is attributable to charges
                  for transportation from overseas locations to the United States by
                  tanker.
                       Government policy has allowed importers to recoup only their actual
                  costs of imported crude, plus a fixed increment of profit. I am con-
                  cerned that the portion of those costs attributable to transportation
                  by tankers which is in fact passed through in consumer prices may well
                  exceed the actual costs experienced by importers who control or are af-
                  filiated with transportation subsidiaries within integrated, itegrated
                                                                                  ,
                                                                                 nterna-
                  tional petroleum companies. This would be true if,as appears to be
                  the case, company claims for transportation costs are required to be
                  supported not by actual cost data, but only by reference to a standard
                  which does not realistically reflect actual costs. It would also be
                  true, even using actual cost data, if costs were purposely inflated.
                        Current Federal Energy Administration regulations allow importers
                   to pass on to consumers the cost of transporting crude oil and products
                   from overseas locations to the United States as part of "landed cost".



                                                                       41
APPENDIX I                                                    APPENDIX I



 The Honorable Elmer B. Staats
 -2-
 February 11, 1976

 When the transportation is carried out by an entity affiliated with the
 importing refiner or marketer, the transportation cost allowed is that
 "computed by the use of the customary accounting procedures generally
 accepted and consistently and historically applied by the firm con-
 cerned."
      On the basis of an initial analysis by this Committee's Subcommit-
 tee on Energy and Power there appears to be a possibility that some of
 the integrated, international oil companies are charging transportation
 fees in excess of those which are allowable and proper. If this should
 prove to be the case, this would have large implications for consumers
 and certain sectors of the oil industry. Specifically, consumer prices
 would appear to be higher than Justified. Moreover, in addition to the
 unjust enrichment which results from passing such inflated costs down-
 to the consumer, offending entities may have acquired unfair market ad-
 vantages under the crude oil entitlements program in effect under cur-
 rent regulation.
       This is obviously a matter of considerable significance. I believe
  it evidences a need for a most careful assessment of the administration
  and enforcement of Federal Energy Administration regulations which per-
  tain to transfer pricing of crude oil and petroleum prices -- with
  particular emphasis with respect to the accounting for transportation -
  costs. Accordingly, on behalf of the Committee I wish to request that
  your office use the full measure of your authorities (including those
  most recently granted to you in the Energy Policy and Conservation Act)
  to inquire into this matter. In this endeavor you are specifically re-
  quested to conduct such verification examinations, as may be necessary,
  of the books, records, papers or Jther documents of any vertically in-
  tegrated petroleum company with respect to the financial information of
  these companies as may relate to the matters described above and to
  conduct such other verification examinations as may be necessary, to
  verify filings as may relate to compliance with applicable law and regu-
  lation.
       I appreciate the complexity of the issue I am requesting you to
  investigate and recognize that the scope of this effort will have to
  be scaled with this in mind and within your staffing limits. In this
  regard, primary effort -- if it will accelerate the reporting of
  results -- should be placed on crude oil imports as opposed to product.
  While the end result of this first effort may not fully exhaust the
  subject, I believe it could prove invaluable in shedding enough light
  on this subject to effect immediate corrective action and/or signal the
  need for further work in this or related areas.




                                   42
APPENDIX I                                                    APPENDIX I



 The Honorable Elmer B. Staats
 -3-
 February 11, 1976

      I would ask that, as this study progresses, you contact Mr. Charles
 B. Curtis, at 225-3147, and Mr. Frank M. Potter, Jr., at 225-1030, mem-
 bers of the Full Committee and Subcommittee staffs, and that you keep
 them posted on your progress.
      Based on the results of your examinations, you are requested to
 submit any recommendations for action that you deem appropriate to,
 correct past abuses and prevent their continuance in the future.
                                  Sincerely,


                                  HARLEY     TAGGERS, M.C
                                           CHAIRMAN
 HOS:bf




                                   43
APPENDIX II                                              APPENDIX II




               FEDERAL ENERGY ADMINISTRATION
                       WASHINGTON, D.C.   20461


                        June 30, 1977             OFMnC OFr M ADMNISmATOa




  Mr. Monte Canfield, Jr.
  Director
  Energy and Minerals Division
  U.S. General Accounting Office
  Washington, D.C.  20548

  Dear Mr. Canfield:

  FEA has reviewed the draft report entitled "Transportation
  Charges for Imported Crude Oil" which was prepared for Congress
  by the General Accounting Office (GAO).

  A decision was made in the early part of calendar year 1976 to
  defer the Compliance review of transportation until reviews of
  certain other regulatory areas were completed and sufficient
  Compliance resources became available. Two of these other
  regulatory areas were the establishment of "classes of purchaser"
  and the verification of the May 15, 1973 selling prices, which
  are the foundation of FEA's pricing regulations.  In the interim,
  however, certain administrative actions have been taken for
  developing more explicit transportation regulations.   Two pro-
  posed rulemakings were issued (March 29, 1976, and August 27,
  1976) prior to the promulgation of the transportation regulation
  (10 CFR 212.85) which became effective January 1, 19i..   With
  the publication of this regulation and the availability of
  Compliance manpower, steps were taken in January and February
  of 1977 to establish transportation as part of the priority
  Compliance workload.

  The FEA considers the GAO's conclusions and recommendations to
  be reasonable. Action has been, or will be taken, to implement
  them.  Your recommendations (presented on page vi of your report)
  and FEA's comments are as follows:




                                   44
APPENDIX II                                           APPENDIX II




                               2-



 COMPLIANCE


 GAO Recommendation:  "verify that the companies have reported
 cost adjustments for the overcharges discussed in the [GAO]
 report."

 FEA Response: This will be done.   It is requested that the FEA
 be given copies of, or access to, the GAO workpapers pertaining
 to this area so that audit work will not be duplicated and the
 firms involved will not be inconvenienced unnecessarily.


 GAO Recommendation:  "determine if the charges GAO questioned
 represent recoveries greater than cost and, if so, require
 companies to make appropriate adjustment."

 FEA Response: This will also be done. Again, to facilitate
 implementation of this recommendation, FEA requests copies of,
 or access to, the workpapers of the GAO.


 GAO Recommendation:  "assure proper implementation of new
 transportation regulations."

 FEA Response: Action on this matter is underway. Key
 Compliance personnel have received intensive training in marine
 transportation and we are developing guidelines for auditing
 transportation.  In addition, a course for training Compliance
 personnel in the use of the guidelines is being prepared. These
 preliminary steps, and FEA's commitment to a vigorous Compliance
 program relating to imported crude oil transportation charges,
 will assure proper implementation of the new transportation
 regulations.


 GAO Recommendation:  "assure that all companies applying for
 exceptions to standard transportation accounting methods
 demonstrate that the company method result in costs no greater
 than those resulting from the use of the published AFRA/
 Worldscale.  It is important that data offered by companies in
 support of exceptions receive indepth audit."




                               45
APPENDIX II                                           APPENDIX II




                             - 3 -


  FEA Response: This is being done. To date, seven firms have
  applied for exceptions to standard transportation accounting
  methods. These requests are being given careful consideration
  and review. In-depth audits will be done before any exceptions
  are granted.


  ADMINISTRATION


  GAO Recommendation:  "insure that reviews of imported crude
  oil transportation charges, when made, are of sufficient scope
  to assure continued compliance with applicable regulations."

  FEA Response:  This will be done through the training of the
  Compliance staff, the provision of detailed guidance, the
  supervisory and management review of audit results, the strict
  enforcement of the regulations, and the follow-up reviews and
  audits.


 GAO Recommendation:  "evaluate AFRA, periodically, to assure
 the& ontinued integrity of the AFRA Eystem."

 FEA Response: This is being done. The FEA is closely monlitor-
 ing and reviewing, on a continuing basis, the official publica-
 tions and other output regarding imported crude oil transporta-
 tion charges made by the London Tanker Brokers Panel, the
 Internal Revenue Service, and Worldscale.  It is anticipated
 that through these sources the FEA will be able to adequately
 assess and evaluate AFRA.


 SYSTEMS SUPPORT


 GAO Recommendation:  "eliminate to the greatest extent practical
 problems which arise from FEA report period time frames which
 are incompatible with the time span in which the reported events
 take place."

 FEA Response:  Action is being taken. At the present time, a
 uniform technique for adjusting the differences between the
 various FEA forms (e.g. P-110 and F701-M-0) is being studied
 with a view toward eventual regulatory implementation.




                               46
APPENDIX II                                            APPENDIX II




                            - 4-

 GAO Recommendations: 'require respondent companies to use
 uniform reporting procedures which identify clear and discrete
 transportation data."
 FRA Response:   This will be done to the maximum extent
 1v. 3sible.

 I trust these comments provide an added perspective to the
 audit conclusions and recomnendations. If we can be of any
 further assistance in this matter, please do not hesitate to
 contact us.
                                   Sincer   ,




                                       /nistrator




(00135)


                               47