Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 1 of 17
IN THE UNITED STATES COURT OF FEDERAL CLAIMS LA GLORIA OIL AND GAS COMPANY, Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) ) ) ) )
No. 02-465C (Judge Hewitt)
PLAINTIFF'S PROPOSED FINDINGS OF FACT Pursuant to RCFC 56(h)(2), Plaintiff, La Gloria Oil and Gas Company ("La Gloria"), respectfully submits its Proposed Findings of Fact. I. THE PARTIES 1. DESC1 is the principal purchaser of military fuel for the Department of Defense
("DOD"). It is the single largest purchaser of fuel in the world.2 As relevant here, DESC principally purchased unique types of military jet fuel. Amended Complaint ¶ 2; App. 648-87.3 2. La Gloria was a supplier of military fuel to DESC. La Gloria maintained long-
term supply relationships with DESC and committed substantial, long-term capacity to refining military fuel. App. 648-87. DESC purchased military fuel from La Gloria, as it did from essentially all military fuel suppliers, under long-term contracts typically lasting one year. Amended Complaint ¶ 2; App. 648-87. During the period relevant here, La Gloria and DESC DESC previously was known as the Defense Fuel Supply Center ("DFSC"). For simplicity, "DESC" is used throughout.
2 1
Dimensions, Defense Logistics Agency News Magazine (1999 Almanac ed.), available at http//www.dla.mil/dimensions/almanac/desc.htm. Chevron Products Company, Aviation Fuels Technical Review 13 (2000) (military "maintain[s] separate specifications for jet fuel [because of] operational and logistical differences between the military and civilian systems and the additional demands high-performance jet fighter engines place on the fuel").
3
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 2 of 17
entered 6 contracts providing for the purchase of military fuel in Texas. Amended Complaint ¶¶ 31; App. 648-87. II. DESC'S MILITARY FUEL PRICES AND ITS STATED INTENT TO PAY FAIR MARKET VALUE FOR FUEL 3. DESC's military fuel contracts contained adjustable prices that permitted DESC
to set military fuel prices monthly or weekly during the contract term. App. 648-87. 4. As relevant to DESC's motion, DESC set fuel prices under its military fuel
contracts using a compilation of petroleum sales data published by the Department of Energy ("DOE") known as the Petroleum Marketing Monthly ("PMM").4 App. 650-54. The PMM reports a monthly average sales figure for specified fuels, such as jet fuel or diesel fuel, for five regions known as Petroleum Administration for Defense Districts ("PADDs"). Barrett Ref. Corp. v. United States, 42 Fed. Cl. 128, 130 n.6, 131 (1998), aff'd in part and rev'd in part, 242 F.3d 1055 (Fed. Cir. 2001). As the PMM moved upward or downward each month, DESC's fuel prices also moved upward or downward. App. 650-54.5 5. DESC's Deputy Director of Contracting, Edward Biddle, stated in a 1993
memorandum that the purpose of DESC's adjustable prices was to "ensure[] that the sale will be at the market price, which is a fair and reasonable price. Not only is the government protected, but the contractor is protected by knowing that its price will always be related to the price it could obtain in the commercial marketplace." App. 4 (emphasis added). 6. DESC's Director of the Office of Market Research and Analysis, Lawrence Ervin,
testified similarly before this Court in 1998 that DESC used adjustable prices because: "[W]e
4
DESC also used other compilations of sales data to set fuel prices. However, in its motion, DESC offers no evidence concerning these other compilations or their relationship to the market for military fuel. Because DESC fails to meet its burden to offer any evidence concerning these other compilations, or otherwise move with respect to them, La Gloria does not address them specifically in its response and limits its discussion to the PMM. The PMM is designed for Congressional use in developing broad energy policy. Barrett, 42 Fed. Cl. at 131.
5
2
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 3 of 17
wanted our prices to reflect, as closely as possible, market levels for the same or similar commercial fuels in the marketplace. . . . We wanted the price to go up and also down when the market prices of similar fuel went [up or] down." App. 14; see also App. 62 ("the EPA [economic price adjustment] reference selected is [intended to be] reflective of changes in commercial market prices"); App. 69 ("the EPA reference is designed to adjust the award price in concert with changes in going market price levels;" "the D[E]SC Office of Market Research and Analysis endeavors to select the reference that most accurately reflects movements of going market prices"). 7. Consistent with this purpose, DESC's pricing clause is titled "Economic Price
Adjustment Published Market Price." App. 9. Among its various iterations over time, the clause states that "[t]he market price [used to set military fuel prices] is derived from quotes, assessments, or sales prices in the market place" and further provides that military fuel prices are "to reflect market conditions." App. 9 (emphasis added).6 It is therefore unsurprising that in Barrett the United States Court of Appeals for the Federal Circuit expressly found that DESC's adjustable pricing clause embodied a promise to "pay at least fair market value" for fuel. 242 F.3d at 1060. III. DESC'S CONFLICTING INTERNAL ASSESSMENTS AND PUBLIC STATEMENTS ABOUT ITS MILITARY FUEL PRICES 8. Outwardly, DESC maintained that the PMM was the "gold standard" for
measuring fair market value. DESC wrote to its parent organization, the Defense Logistics Agency ("DLA"), that its PMM "references are virtually unimpeachable from an accuracy standpoint, since they don't just `track' the market they are the market." App. 98 (emphasis
See also App. 87 (Mr. Ervin stating that, pursuant to DESC's pricing clause, "replacement of the escalation reference is called for if the reference `consistently fails to reflect market value'"); App. 85 (Mr. Ervin stating that through its pricing clause "DESC assumes the risk of higher product prices").
6
3
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 4 of 17
added).7 In response to a supplier's objection to the PMM, DESC similarly wrote that the PMM "consistently reflects actual market prices," App. 96, and to another objecting supplier DESC wrote that the PMM is "a reliable indicator of price movements in the petroleum products market." App. 91. As late as 1998, DESC's Mr. Ervin testified before this Court that the PMM is "the benchmark against which we . . . compare everything domestically." App. 29. 9. DESC's statements to DLA, its suppliers and this Court stand in stark contrast to
DESC's expert economists' assessment of the PMM. In 1986, DESC's then-Director of the Office of Market Research and Analysis, Mr. Christopher Lee, undertook an assessment of the PMM to compare its performance with commonly used commercial price references for fuel, such as Platts and OPIS (which DLA subsequently directed DESC to use in place of the PMM). Referring to Platts and OPIS as "other references,"8 Mr. Lee, who holds a Doctorate in Economics,9 stated: "Yet our analysis of the movement of the PMM as compared to other references as used for interim price adjustments indicates that the PMM may have moves as much as one or two cents per gallon out of step with such interim references." App. 103 (emphasis added). In contrast, DESC required its suppliers to submit bids to the one tenthousandth of a cent ($0.000001). See, e.g., App. 672 (reflecting a bid price of $0.576300). 10. In 1987, DESC's Office of Market Research and Analysis undertook another
study "comparing PMM versus Platts and OPIS." App. 134. That study supported using the commercial price references Platts and OPIS to make price adjustments not the PMM.
7
DESC's public espousal of the PMM is unsurprising, given DESC's acknowledgment that "DOE normally will work with us to see that our needs are satisfied as we are one of the primary users of PMM." App. 100.
In the 1986 assessment, Mr. Lee uses the phrase "other references as used for interim price adjustments." App. 103. DESC used its interim price adjustments to set prices on an interim basis at the time fuel was delivered. App. 120. DESC set final prices when the PMM was published three months after the fact i.e., three months after the fuel was delivered. App. 121. DESC's interim references, as identified in its adjustable pricing clause, were Platts and OPIS. App. 120.
9
8
App. 111.
4
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 5 of 17
App. 134. When DLA ultimately learned of DESC's 1987 study albeit seven years later DLA directed DESC to stop using the PMM to set prices and to use Platts and OPIS instead. 11. Mr. Ervin explains how DESC's 1987 study led to DLA's directive to stop using
the PMM in 1994: I was sitting in a room when the decision happened and it was made in response to some pressure from headquarters to do things differently. So the analysis is based on, basically is the analysis in the '87 study. Some people who have read the '87 studies [stated] that they would draw different conclusions than what was presented at the end of the study, certainly a close call. Analysis would have supported that as well so it's really the '87 study which is the basis for that move [in 1994 from PMM to Platts and OPIS]. App. 134.10 12. The 1987 study was written by the Office of Market Research and Analysis with
the objective of justifying continued use of its "gold standard," the PMM. App. 595-602.11 While the all-important statistical analysis behind the study has not yet been produced, the admissions against interest in the narrative of the study are compelling. DESC's expert economists admit that using Platts and OPIS to set prices instead of the PMM "would cost DESC money" and concede that "[t]here is market risk associated with the move away from escalation on actual sales [PMM] particularly with respect to jet kerosene [military jet fuel]." App. 599; App. 602.12 DESC's economists additionally recount in the 1987 study how its suppliers had
10
DESC proffered Mr. Ervin as a witness in response to a Notice of Deposition served under Rule 30(b)(6) in this case. App. 141. The notice directed DESC to designate a witness to address the existence of documents requested in the plaintiff's requests for production of documents. App. 141. Because, pursuant to the terms of the notice, the deposition was limited to the existence of responsive documents, the plaintiff's ability to inquire into the substance of the conclusions of the documents was limited. App. 141. That inquiry must await further discovery. While this document is attached to DESC's motion, DESC does not specifically identify the document as the 1987 study referred to by Mr. Ervin in his deposition. Final confirmation of this fact awaits further discovery. DESC elsewhere has asserted that its statements about the PMM's relationship to the marketplace are, in reality, criticism of DESC's then-interim price references Platts and OPIS and not criticisms of the PMM at all. DESC's assertion is nothing short of startling, given that DESC currently uses Platts and OPIS to set fuel prices.
11
12
5
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 6 of 17
complained that, as a result of DESC's use of the PMM to set prices after fuel is delivered, "`we never know if we have made or lost money when you (D[E]SC) lift a cargo.'" App. 597 (emphasis added); see also App. 595 (cover memorandum to the 1987 study stating with respect to the proposed change in using the PMM, "The issue has been raised several times in recent years, formally and informally, by contractors"). 13. Once DLA directed DESC to stop using the PMM in 1994 and to set prices using
Platts and OPIS instead, DESC made the extraordinary admission that prices it previously had set using the PMM so departed from market value that they could not be compared to prices set based on Platts and OPIS. DESC stated: "Direct contract price comparisons are not possible due to the switch from the monthly interim-final (PMM) escalation method to a weekly market price escalation basis [using Platts and OPIS]." App. 144 (emphasis added).13 DESC's admission is unsurprising, given that DESC had concluded elsewhere that changing from the PMM to commercial references, such as Platts and OPIS, "could significantly influence contract prices," App. 98, and further found, in response to a proposal from one of its largest suppliers to stop using the PMM, that its "PMM JP-5" jet fuel prices were ten cents a gallon higher, then ten cents lower, and yet again ten cents higher than Platts all within the same year. App. 182.14
13
For each procurement, DESC prepares a "Price Analysis Memorandum" to determine its price objectives during contract negotiations. See, e.g., App. 144, 150, 154, 157, 163. In determining its price objectives for the procurement, DESC typically considers, under the heading "Price History," the price it is paying under its current, existing contracts. See, e.g., App. 144, 151, 155, 157, 163, 167-68. However, as noted above, when DESC stopped using the PMM and switched to using Platts and OPIS instead, it stated that its usual practice of making price comparisons with its existing contracts was "not possible." App. 144. The assessments of the PMM by DESC's expert economists, discussed above, together with DLA's direction to stop using the PMM based on DESC's 1987 study, draw into serious question the credibility of Mr. Ervin's subsequent cross-examination testimony in this Court in 1998 that he never identified any "problem with using the PMM" to set military fuel prices other than "billing" issues. App. 36-37.
14
6
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 7 of 17
IV.
THE NON-NEGOTIABILITY OF DESC'S MILITARY FUEL PRICES 14. Despite DESC's admission that "comparisons are not possible" between the
prices it set using the PMM and those set using commercial market references such as Platts and OPIS, DESC had mandated that "[a]ll offerors are required to accept a method of price adjustment based on . . . the Petroleum Marketing Monthly (PMM)." App. 195; see also App. 199 (stating that DESC "would not consider" an offer unless objection to the PMM was withdrawn). As Mr. Ervin testified before this Court, DESC used its "leverage as a buyer" as the sole purchaser of military fuel to "improve the competition" for DESC's business by requiring use of the PMM. App. 17. 15. Accordingly, even though suppliers objected to DESC's use of the PMM as
"coerced," App. 201; App. 204, the use of the PMM to set prices was "not negotiable as a matter of policy." App. 205. DESC's procurement authorizations expressly stated under the heading "POTENTIAL PROBLEMS" that "common escalation [using the PMM] is non-negotiable." App. 206-278; Navajo Ref. Co., L.P. v. United States, 58 Fed. Cl. 200, 214 (2003) ("DESC explicitly stated in its pre-negotiation briefing memoranda that it deemed its price adjustment clause to be non-negotiable"); see also Barrett Ref. Corp. v. United States, 45 Fed. Cl. 166, 171 (1999) (supplier "had no control over use of PMM EPA clause, and indeed attempted, unsuccessfully, to persuade the agency not to use it"), aff'd in part and rev'd in part, 242 F.3d 1055 (Fed. Cir. 2001). Evidencing the futility of objecting to DESC's pricing clause, even after a supplier filed a claim in 1988 challenging DESC's use of the PMM, DESC continued to use the PMM for six more years, until it was directed to use Platts and OPIS instead. MAPCO Alaska Petroleum, Inc. v. United States, 27 Fed. Cl. 205, 407 (1992). V. THE FAILURE OF DESC'S MILITARY FUEL PRICES TO REFLECT FAIR MARKET VALUE 16. While La Gloria knew that DESC's use of its adjustable pricing clause and the
PMM were non-negotiable, what La Gloria did not know was that DOE had not designed the PMM to be used to set fuel prices or to reflect market value. As Dr. John Cook, Director of the 7
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 8 of 17
Petroleum Marketing Division of the Department of Energy's Energy Information Administration (which publishes the PMM), has since testified and as this Court found: "[T]he PMM is not intended to be an index that is used for setting prices." Barrett, 42 Fed. Cl. at 131. Thus, while La Gloria "entered the fuel contracts with the intent that the prices DESC set would reflect fair market value[,]" it could not have been more wrong. App. 639. 17. An assessment of the PMM as an established market price is set forth in the
Expert Report of Joseph Kalt15 and Peter Killen.16 In their report, Kalt and Killen conclude that DESC's "PMM-based adjustment clauses failed to provide an effective measure of established market prices or the fair market value of military fuels." App. 611.
Joseph Kalt is the Ford Foundation Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University. App. 609-10.
16
15
Peter Killen is a Senior Advisor in the Houston offices of the firm of Muse Stancil & Company, a global consulting firm specializing in the energy industry. He holds a B.S. in Chemical Engineering and is a Registered Professional Engineer. App. 610.
8
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 9 of 17
18.
The following chart, drawn from Kalt and Killen's report, dramatically illustrates
the PMM's departure from the marketplace:
Figure 3 PMM ADJUSTMENT FAILS TO TRACK THE MARKET: DIFFERENCES BETWEEN MONTHLY CHANGES IN MARKET-BASED ESCALATOR AND PMM-BASED ESCALATOR ARE UNSTABLE IN MAGNITUDE AND DIRECTION January 1992 March 1995
19.
The chart illustrates how many cents per gallon the marketplace changed more or
less than the PMM during the years surrounding DESC's use of the PMM to set La Gloria's JP-8 jet fuel prices. App. 634; App. 623-24.17 If the change in the PMM was equal to the change in the marketplace, the bars in the chart would be zero or nonexistent. Thus, as the chart shows, in January of 1994 the marketplace increased by almost 6 cents a gallon more than the PMM. Indeed, not only did the change in the PMM depart substantially from the change in marketplace, but also the PMM's relationship to the marketplace was fundamentally unstable, inasmuch as the
17
As Kalt and Killen explain, it is the change in price levels of the PMM and the marketplace, rather than the absolute prices levels themselves, that are relevant here, because "the PMM is used by the DESC to index changes in price levels, rather than the price levels themselves." App. 623 (emphasis original).
9
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 10 of 17
change in the PMM substantially understated the change in the market one month and then substantially overstated the change in the market in the next. As Kalt and Killen explain: "The fact that we see significant bars indicates that the relationship between the movements of the two series [the PMM and marketplace] is notably unstable." App. 624. Thus, as Kalt and Killen demonstrate, the chart shows the PMM's relationship with the marketplace to be highly volatile with the change in the PMM varying from the change in the market place from approximately -6 cents to approximately +6 cents during the relevant period. App. 623-25; App. 634.18 20. Equally compelling, Kalt and Killen explain that the PMM and the marketplace
"frequently actually move in different directions [e.g., the market goes up and the PMM goes down] in a starkly erratic fashion." App. 625-26.
18
As Kalt and Killen further explain, the fact the PMM overstated the change in market does not mean that La Gloria was overpaid. Given the PMM's random relationship with the market, "the winning bidder could readily [and erroneously] forecast that the Defendant's PMM index in any particular contract period would turn out to yield payments in the next contract period in excess of fair market value pushing the optimistic bidder's base price bid downward." App. 613; see also App. 628-31.
10
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 11 of 17
21.
The next chart, again drawn from Kalt and Killen's report, illustrates on an annual
basis how much the change in the PMM departed from the change in the marketplace for JP-4 jet fuel:
22.
The height of the bars shows for each year how many cents per gallon, on
average, the change in the PMM departed from the change in the marketplace. App. 636; App. 626-27. Once again, not only is the amount of the error significant (in 1986 the PMM understated the marketplace on average 4 cents a gallon), but both the amount and the direction of the error are erratic (in 1987 the PMM overstated the market by 3 cents a gallon).
11
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 12 of 17
23.
This volatile nature of the PMM is significant, because it made it essentially
impossible for a bidder to predict correctly how the PMM would relate to the marketplace and, therefore, to bid in a way that would provide some meaningful protection from the PMM. As Kalt and Killen explain: "The deviations between changes in the Market-based JP-4 escalator and the PMM-based JP-4 escalator are quite volatile . . . This volatility confounds rational prediction by which a rational bidder might reliably adjust bid prices so as to ensure receipt of no less than market value under a given period's fuel contract." App. 627. 24. Kalt and Killen state that there are a number of reasons why the PMM does not
reflect the marketplace. Among them, Kalt and Killen explain, "the PMM data were not designed or intended to be used as an index." App. 611. They also show that the PMM suffers from a statistical flaw known as an "index number problem." App. 616-19. This statistical flaw, Kalt and Killen state, results in the PMM erroneously reporting changing in the volume of fuel sold as changes in the price of fuel. Because of the PMM's index number problem, Kalt and Killen conclude: PMM data do not contain accurate information needed to understand how the prices of specific products, such as a particular grade of military jet fuel, may have changed over time. An index that relies on these data, such as the DESC's PMM-based escalator, is readily susceptible to situations in which the index reports a price increase (or decrease) even though the actual market value of the fuel has declined (or risen) in the marketplace. App. 617-18.19 25. Significantly, Kalt and Killen point out that, unlike DOE here, other federal
agencies that publish indexes intended to be used as price indexes go to great lengths to ensure that the indexes do not suffer an index number problem. Kalt and Killen state:
19
DESC elsewhere takes issue with Kalt and Killen's analysis of the PMM's index number problem, claiming that Kalt and Killen wrongly assert that the PMM mixes different fuel products. However, the PMM index for kerosene-type jet fuel does encompass several different fuel products, including Jet-A, JP-5 and JP-8, a fact DESC does not and cannot dispute. App. 616.
12
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 13 of 17
It is important to note here that statisticians at government agencies and in other organizations often go to great lengths to address the "index number" problem when constructing indices such as the PPI and the CPI, which are used to reflect the underlying changes in price levels for specific products used by producers and consumers. Each of these indices is constructed using fixed weights from period to period such that short-term variation in the mix of products sold is not mistaken for actual changes in the levels of prices. App. 618 (footnote omitted). 26. Beyond the PMM's index number problem, Kalt and Killen further conclude that
DESC's PMM-based pricing clause failed to reflect the marketplace because "the formula used by the government to create the index did not track changes in the value of the military jet fuel." App. 611. As they explain, DESC simply used the wrong fuels, and thus the wrong PMM data, in its pricing clause. App. 619-21. 27. Thus, for the military jet fuel known as JP-8, DESC based price adjustments on
the PMM data for kerosene-type jet fuel. App. 619-20. However, kerosene-type jet fuel does not reflect the physical characteristics or market value of JP-8. Kalt and Killen state: "The DESC's simplistic use of kerosene-type jet fuel prices to proxy for JP-8 market prices is inappropriate for economic price adjustment purposes given the technical and economic considerations of how JP-8 is actually produced." App. 619-20. 28. Kalt and Killen explain that a proper measure of the physical characteristics and
market value of JP-8 should be based on a combination of naphtha, kerosene-type jet fuel, and diesel fuel. App. 620-21. Notably, both this Court and the Federal Circuit in Barrett also concluded, over DESC's objection, that, with respect to JP-4 jet fuel, DESC used the wrong PMM data in its pricing clause. Barrett, 242 F.3d at 1061 ("However, the government does not dispute the Court of Federal Claims' finding that the naphtha-based index `provides data that more closely reflect the product [JP-4] Barrett was actually selling.'").20
20
DESC elsewhere claims that Kalt and Killen's analysis assumes that an index used to adjust prices must be an index for the identical product the government purchases. This is a misstatement of Kalt and Killen's analysis. As set forth above, Kalt and Killen's analysis of JP-8 reflects naphtha, kerosene-type jet fuel, and diesel fuel. App. 620-21.
13
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 14 of 17
29.
For these and other reasons, Kalt and Killen observe that commercial buyers and
sellers do not use the PMM as a price index. They conclude that the PMM's failure to pass "[t]his `market test' reinforces the conclusion that a PMM-based escalator of the type used by the DESC is simply not suited to represent actual movements of established market prices for any fuel, much less military jet fuel." App. 619.21 VI. DESC'S MINORITY PRICE PREFERENCES AND FUEL CONTRACT AUCTIONS 30. Beyond DESC's use of the PMM to set military fuel prices, DESC distorted the
market price for fuel in two other ways. First, DESC provided a ten-percent price preference to minority-owned suppliers. Under this price preference, DESC awarded fuel contracts to minority-owned suppliers if their bids were within ten percent of that of the otherwise successful bidder. Def. Supp. App. 6-7; Amended Complaint ¶ 28. In some years, more than twenty percent of the fuel offered (as a percent of that purchased) was subject to DESC's minority price preference. App. 279 (showing volumes offered by minority firms with the designation "SD" and total volume awarded in the procurement); App. 283 (same); Amended Complaint ¶ 28. 31. Second, DESC conducted an auction for fuel contracts, whereby DESC offered
fuel contracts to suppliers that agreed to match the price, or adjusted price, of other bidders. Under this auction, DESC awarded contracts to small businesses willing to match the price, or adjusted price, offered by the otherwise successful bidder. Def. Supp. App. 10-13; Amended Complaint ¶ 27. More than fifty percent of the fuel DESC procured commonly was set aside for award to small businesses. App. 286; Amended Complaint ¶ 27. Both DESC's minority price preference and its auction, by their very nature, placed downward pressure on bid prices, as non-
21
DESC elsewhere takes issue with Kalt and Killen's conclusions because they compare the PMM to Platts spot prices. DESC's assertion is nothing short of extraordinary in view of the fact that DESC currently uses Platts spot prices to set military fuel prices in its military fuel contracts.
14
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 15 of 17
minority and non-small businesses were forced to compete on an uneven playing field. Amended Complaint ¶ 29. VII. DESC'S WAIVER DEFENSE 32. As Mr. Marple makes clear in his Declaration, La Gloria entered into the
contracts with DESC containing DESC's pricing clause, because the pricing clause was nonnegotiable and because La Gloria had no other choice if it wanted to remain a military fuel supplier. App. 639-40. As Mr. Marple confirms: DESC maintained that the way it set fuel prices was non-negotiable and that its fuel prices reflected fair market value throughout its contracts. In entering the fuel contracts, La Gloria understood that it could not be a fuel supplier to DESC unless it accepted the way DESC set prices. La Gloria continued to enter fuel contracts with DESC because La Gloria sought to continue to be a supplier to DESC. By continuing to enter fuel contracts with DESC, La Gloria did not . . . intend that it would be paid less than the fair market value of fuel or intend to relinquish the right to payment of fair market value. App. 639-40 (internal paragraph numbers omitted). 33. Moreover, DESC wrongly asserts that La Gloria should have been aware of any
defects in the PMM when it bid. As Kalt and Killen point out in their expert report, "[s]uch assertions ignore that a company such as La Gloria, based on the information available at the time that it bid, could not have known that it would receive less than fair market value." App. 628 As Kalt and Killen demonstrate, the PMM's departure from the marketplace was "quite random" and "neither stable nor predictable." App. 628-29. 34. As Kalt and Killen explain:
The typical response of a bidder to the uncertainty around the bias introduced by the DESC's use of a PMM-based escalator would be to try to forecast this bias by reference to some set of historical prices. Assuming that the deviation of PMMbased escalators from actual market price escalators was a random walk, bidders might, for example, assume that the bias observed in past periods would be present in future periods. In the absence of any better information, this may be a reasonable assumption; however, this forecasting approach does not necessarily lead to consistent after-the-fact results due to the unstable nature of the bias introduced by the DESC's use of a PMM-based escalator. Using the past relationship between the PMM-based escalator and a market-based escalator to forecast the future relationship will, alternatively, over- or under-predict the bias. For example, when the bias is high in one year, the forecast bias for the next year 15
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 16 of 17
is likely to be too high given the limited availability of data as to the "true" relationship. App. 630. 35. Furthermore, given the PMM's random variation with respect to the marketplace,
a supplier might well be expected to "alternatively, over- or under-predict the bias," thereby further complicating a supplier's assessment of the PMM's true bias. App. 630. As Kalt and Killen explain: The typical response of a bidder to the uncertainty around the bias introduced by the DESC's use of a PMM-based escalator would be to try to forecast this bias by reference to some set of historical prices. Assuming that the deviation of PMMbased escalators from actual market price escalators was a random walk, bidders might, for example, assume that the bias observed in past periods would be present in future periods. In the absence of any better information, this may be a reasonable assumption; however, this forecasting approach does not necessarily lead to consistent after-the-fact results due to the unstable nature of the bias introduced by the DESC's use of a PMM-based escalator. Using the past relationship between the PMM-based escalator and a market-based escalator to forecast the future relationship will, alternatively, over- or under-predict the bias. For example, when the bias is high in one year, the forecast bias for the next year is likely to be too high given the limited availability of data as to the "true" relationship. App. 630. 36. Accordingly, Kalt and Killen reject DESC's assertion that, through entering a
series of contracts with DESC, La Gloria must be deemed to have intended to relinquish payment of fair market value. They state: "Such assertions ignore that a company such as La Gloria, based on the information available at the time that it bid, could not have known that its would receive less than fair market value." App. 628. 37. La Gloria filed its Complaint soon after the Federal Circuit in Barrett put a final
end to DESC's public assertions that there were no remedies for its military fuel prices. As explained in the Declaration of Mr. Marple, La Gloria submitted claims under the fuel contracts when it first learned that remedies were available for DESC's pricing. App. 640; Barrett, 242 F.3d 1055.
16
Case 1:02-cv-00465-ECH
Document 71
Filed 05/01/2006
Page 17 of 17
38.
DESC threatened essentially the entire U.S. refining industry in writing with
claims of fraud should refiners pursue the same claims the Federal Circuit upheld in Barrett. App. 563-94. Respectfully submitted,
s/J. Keith Burt J. Keith Burt Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, DC 20006 (202) 263-3208 (phone) (202) 263-5208 (fax) Counsel for Plaintiff, La Gloria Oil and Gas Company Of Counsel: Gary A. Winters Mayer, Brown, Rowe & Maw LLP 1909 K Street, N.W. Washington, DC 20006 May 1, 2006
17