OIG Audit Report 97-03

FUEL PURCHASES BY THE BUREAU OF PRISONS,
THE FEDERAL BUREAU OF INVESTIGATION, AND
THE IMMIGRATION AND NATURALIZATION SERVICE

The Office of the Inspector General, Audit Division, has completed an audit of fuel purchases by the Bureau of Prisons (BOP), the Federal Bureau of Investigation (FBI), and the Immigration and Naturalization Service (INS). We focused our audit on bulk fuel purchases by BOP, INS, and the FBI and retail fuel purchases by the FBI for FY 1995 and projected FY 1996.

Together, BOP, INS, and the FBI spent about $6 million in FY 1995 for bulk fuel purchases. The agencies purchase bulk fuels to use for heating and power generation, and fueling motor vehicles and equipment. Fuel is purchased in bulk for convenience, security, and cost efficiency. The FBI's retail purchase of gasoline was primarily to fuel its fleet of 11,500 vehicles. The FBI spends over $7 million annually for retail purchases of gasoline.

We determined that there are varying degrees of cost savings possible in each of the three components audited:

Prior to the issuance of this report, we discussed and reached agreement with FBI, INS, and BOP management on the findings and recommendations. The report discusses conditions found, our recommendations, and actions necessary for final closure. These matters are discussed in the Finding and Recommendations section of the report. Our audit scope and methodology are addressed in Appendix I.

The FBI investigates violations of federal criminal law; protects the United States from foreign intelligence activities; and provides leadership and assistance to federal, state, local, and international agencies. The FBI is comprised of a Headquarters and 56 field offices. The FBI's annual funding for FY 1995 was over $2.1 billion.

The INS enforces laws regulating the admission of foreign-born persons (i.e., aliens) to the United States and administers various immigration benefits, including the naturalization of resident aliens. The INS has 3 regional offices, 4 service centers, 36 district offices, and 21 border patrol sectors. INS' operating budget for FY 1995 was about $2 billion.

The BOP confines offenders in the controlled environments of prison and community-based facilities. In FY 1995, BOP was charged with the care and custody of approximately 89,000 offenders in 85 federal facilities throughout the United States. The BOP operating budget for FY 1995 was over $2.7 billion.

The type and amount of fuel purchased varied due to agency size and mission. According to the agencies, the tables below present forecasted gasoline and diesel usage for FY 1996:

	Bulk (Gallons)	Retail (Gallons)	Total (Gallons)	Bulk Percentage
BOP	1,382,253	212,354	1,594,607	87
FBI	569,148	6,480,000	7,049,148	8
INS	3,246,391	4,077,386	7,323,777	44

	Bulk (Gallons)	Retail (Gallons)	Total (Gallons)	Bulk Percentage
BOP	721,364	104,947	826,311	87
FBI	Negligible	Negligible	Negligible	N/A
INS	567,676	1,583,288	2,150,964	26

The agencies' bulk purchase decisions are made at the local level. Generally, high volume bulk purchases, 10,000 gallons or more annually, should be acquired through a DFSC contract. Low volume bulk purchases, less than 10,000 gallons annually, are purchased locally on a competitive bid basis. For all three agencies, field site personnel are responsible for reviewing the reasonableness and accuracy of bulk purchase invoices.

Based on our survey of current usage, the BOP, INS, and FBI could purchase fuel more economically. Specifically, the installation and use of additional bulk fuel tanks could result in savings to BOP of about $222,000 over 30 years. In addition, different retail and bulk fuel purchasing strategies, such as buying lower octane gasoline, and avoidance of inapplicable federal and state excise taxes, could result in annual savings to the FBI, BOP, and INS of over $694,000.

BOP's diesel fleet consists of buses, heavy equipment (back hoes, forklifts, etc.), grounds and farming equipment, and trucks. Based on discussions with garage foremen and facility managers, the majority of garage diesel fuel is consumed on BOP grounds. The Internal Revenue Code requires that diesel fuel used on public highways be taxed (this tax is known as a federal excise tax (FET)). Federal agencies, which consume diesel fuel entirely within their facilities, are exempt from the payment of the FET because they do not meet the "on public highway" test for FET applicability. For ease of tax status identification, the Internal Revenue Service requires that diesel fuel used for a non-taxable purpose be dyed. Taxed diesel fuel is undyed, typically referred to as clear. The purchaser of diesel fuel can acquire either dyed or clear diesel fuel and is responsible for ensuring the correct use.

Currently, BOP institutions normally have only one diesel tank for the garage. The tank is usually filled with clear diesel fuel because clear fuel can be used either on or off prison grounds, while dyed fuel must be consumed entirely within grounds. We determined that the BOP could lower its FET payments and save about $222,000 over 30 years3 by installing additional bulk fuel tanks at four field locations. The additional bulk tanks would allow BOP to store both clear and dyed fuel instead of purchasing only taxable clear diesel fuel. The four locations, their annual diesel fuel usage, and their FET avoidance appear in Appendix II of the report.

The size of the additional tank should vary depending on the specific location's clear and dyed diesel usage. We based our projected cost savings on the most likely scenario. Typically, the current BOP diesel tank has a 2,000 gallon capacity. The BOP estimated that purchase and installation costs are about $17,500 for a 2,000 gallon tank. Based on information provided by field personnel, we estimate that the annual maintenance cost per tank is about $400 per year.

To arrive at our net savings, we evaluated the cost and benefit of BOP installing 2,000 gallon tanks at the four field sites using the net present value method for allocating capital between investment projects. We calculated the present value of the annual FET savings, less maintenance costs, over the 30 year useful life of the tanks ($291,612),4 and subtracted the purchase and installation costs ($70,000)5 to arrive at a net present value ($221,612) of purchasing and installing the tanks at the four field sites. Given that the present value of the future cash flow is greater than the purchase and installation costs of the fuel tanks, this project is worth undertaking. We also calculated the internal rate of return6 for the investment. The internal rate of return for installing the four bulk fuel tanks is 34 percent.7

If BOP adopts this approach and installs additional storage tanks, it would need to segregate its garage diesel fleet into clear and dyed groups. Any BOP vehicle which travels to any extent on public roads must always be filled with clear diesel. We suggest that a warning label be affixed to all on-road vehicles mandating the exclusive use of clear diesel.

Prior to issuance of this report, we discussed the finding with BOP management and obtained concurrence on the recommendation. The actions necessary for final closure are discussed following the recommendation.

Resolved. This recommendation can be closed when we receive documentation that the additional bulk storage tanks have been installed at the four sites.

In addition to FET, states also tax motor vehicle fuels; however, states should exempt federal agencies from taxation on bulk gasoline and diesel fuel purchases. Therefore, bulk purchasing by federal agencies should eliminate state excise taxes, which range from $.075 to $.29 per gallon, with a national average of $.18 per gallon.

We determined that the BOP paid $18,569 in unnecessary FET and state excise taxes (SET). As shown in the following table, 6 of the 68 BOP sites paid FET on dyed diesel fuel, which is not subject to FET, or purchased clear diesel fuel, which is subject to FET, for non-taxable use. Additionally, 4 of the 68 BOP sites paid SET when they were exempt from the tax by law.

Location	FET	SET	Total
Texarkana, TX	$3,904		$3,904
El Paso, TX	$1,363		$1,363
Boron, CA	$ 730		$ 730
Montgomery, PA	$2,928		$2,928
Pekin, IL		$5,053	$5,053
Cumberland, MD		$1,604	$1,604
Oakdale, LA	$ 224	$2,100	$2,324
Brooklyn, NY	$ 286	$ 377	$ 663
Total	$9,435	$9,134	$18,569

These payments were apparently made because BOP staff were unfamiliar with the applicability of federal and state taxes and the use distinctions between clear and dyed diesel fuel.

Resolved. This recommendation can be closed when we receive documentation that the BOP has reemphasized, by memorandum to its field sites, the guidance on FET and SET tax applicability.

The BOP, INS, and FBI purchase gasoline in bulk for use in their vehicles. Under the provisions of 41 CFR Subpart 101-38.401-1, Gasoline for use in Motor Vehicles, manufacturers' recommendations for octane requirements should be followed. Further, agencies are prohibited from purchasing premium gasoline, except for those vehicles that require premium gasoline.

In order to determine an acceptable octane level for high performance vehicles (police cruisers, reactive vehicles, and surveillance vehicles), we solicited opinions from automobile manufacturers, Ford and Chevrolet, to obtain recommendations on police cruiser vehicles. The vehicle manufacturers stated that for police cruiser vehicles, the recommended octane level is 87 octane, which is regular gasoline.

Currently, the BOP, INS, and FBI, to varying extents, purchase non-regular (mid-grade and premium (88-93 octane)) gasoline for their bulk fuel tanks. The percentage of non-regular bulk purchases is 28 percent for the BOP, 100 percent for the FBI, and 13 percent for the INS. We estimate that the BOP, INS and FBI could achieve annual savings of over $58,000 by buying regular gasoline rather than mid-grade and premium gasoline for its bulk tanks. These estimates are based on the price differences between the grades of gasoline as reported to us by the field sites we surveyed.

Based upon the responses to our fuel surveys, we calculated average cost per gallon for each type of gasoline. Our calculations include FET; however, we excluded SET because the rate and applicability of excise and motor fuels taxes varies by state and would cause distortions in our computations. The base averages for FY 1995 were as follows:

Regular	(87 Octane)	$.86
Mid-grade	(88-89 Octane)	$.88
Premium	(91-93 Octane)	$.92

The price spread between regular gasoline and premium gasoline is significantly greater at retail than when purchased in bulk. The estimated price difference between regular gasoline and premium gasoline is only about $.06 per gallon at bulk, however, at retail, the difference is about $.18 per gallon.8

	Recommended Change	Annual Usage (Gallons)		Excess Cost		Cost Savings
FBI	Premium to Regular	477,5469	X	$.06	=	$28,653
BOP	Mid-grade to Regular	177,086	X	$.02	=	$ 3,542
	Premium to Regular	208,511	X	$.06	=	12,511
	Subtotal					$16,053
INS	Mid-grade to Regular	298,400	X	$.02	=	$ 5,968
	Premium to Regular	122,535	X	$.06	=	7,352
	Subtotal					$13,320
	TOTAL					$58,026

Prior to issuance of this report, we discussed the finding with FBI, INS, and BOP management and obtained concurrence on the recommendation. The actions necessary for final closure are discussed following the recommendation.

Resolved. This recommendation can be closed when we receive documentation that field sites purchasing fuels in bulk have been instructed to purchase only regular gasoline.

The DFSC is responsible for purchasing bulk fuel for all federal agencies. According to 41 CFR Subpart 101-26.602-3 Procurement of gasoline, fuel oil (diesel and burner), kerosene, and solvents, agencies forecasting usage greater than or equal to 10,000 gallons of fuel per year shall submit estimates of annual usage to the DFSC. The DFSC uses this information to solicit bids from fuel suppliers and award contracts.

We estimate the BOP could save about $16,000 annually if bulk fuel contracts were obtained through the DFSC at nine sites. At these sites, fuel usage exceeded the 10,000 gallon annual requirement for the establishment of DFSC fuel contracts, but usage was not reported to the DFSC. The non-reporting field sites are contained in the table on the following page.

Staff at the sites were either unaware of the DFSC's reporting requirements or misunderstood reporting thresholds. We limited our calculation of cost savings to gasoline because it was the prevalent unreported fuel type. According to our survey, seven sites estimated gasoline usage of 130,540 gallons for FY 1996. For comparable sites, DFSC supplied regular gasoline was $.12 per gallon cheaper than non-DFSC supplied regular gasoline. We estimate a cost savings of $15,665.

LOCATION	FUEL TYPE(S)
Pekin, IL	Gas
Englewood, CO	Gas
Safford, AZ	Gas
Greenville, IL	Diesel
Butner, NC	Gas
Loretto, PA	Gas
Tallahassee, FL	Gas
Oklahoma City, OK	Diesel
Sandstone, MN	Gasoline & Burner

4. Ensure that forecasted fuel usage is provided to the DFSC and use the DFSC where cost effective.

Resolved. This recommendation can be closed when we receive documentation that field sites have been instructed to report forecasted fuel usage to the DFSC.

Retail purchases account for over 90 percent of the FBI's fuel purchases. The FBI purchases gasoline for its 11,500 standard and high performance (police cruisers, reactive vehicles, and surveillance) vehicles. According to the FBI, about 40% of its fleet consists of high performance vehicles. As previously discussed, 41 CFR requires that manufacturers' recommendations for octane requirements be followed. Further, agencies are prohibited from purchasing premium gasoline except for vehicles that require it.

The FBI has no written policy on recommended octane levels for gasoline purchases. Within the FBI, purchase decisions for retail gasoline are at the discretion of the individual field sites. Since the FBI does not track the octane level it uses, we requested FBI Headquarters to solicit its field sites and determine the octane level used by the field sites. Most sites responded they used mid-grade gasoline. However, a few sites stated they used regular gasoline while others stated they used premium gasoline. FBI Headquarters staff commented that overall, mid-grade gasoline is used for all its vehicles.

We estimate the FBI could save about $602,640 per year by requiring the purchase of regular gasoline for its vehicles in lieu of mid-grade and premium gasoline. We derived our savings by multiplying the 6,480,000 retail gallons purchased by the excess cost difference in retail prices between mid-grade and regular gasoline ($.093).

FBI management provided examples of instances when the use of regular grade gasoline is not appropriate, such as when vehicles are subject to irregular driving conditions (e.g., extended idling during surveillance). We agree that these conditions may warrant an exception to the use of regular gasoline. However, in our judgment, the manufacturer's recommended use of regular fuel for even high performance law enforcement vehicles will serve the vast majority of the FBI's needs, and do so economically.

Prior to issuance of this report, we discussed the finding with FBI management and obtained concurrence on the recommendation. The actions necessary for final closure are discussed following the recommendation.

5. Limit retail fuel purchases to the octane rating recommended by the vehicle manufacturer, except when mission needs dictate otherwise.

Resolved. FBI management provided a draft copy of "Guidelines for Purchases of Gasoline for Bureau Vehicles". This recommendation can be closed when we receive documentation that the draft guidance has been finalized and distributed to FBI field offices.

FUNDS TO BETTER USE are defined as future funds that could be used more efficiently if management took actions to implement and complete audit recommendations.

In planning and performing our audit of fuel purchases, we considered the BOP's, FBI's, and INS' management control structure for the purpose of determining our auditing procedures. This evaluation was not made for the purpose of providing assurance on each agencies' management control structure as a whole. We did not encounter any condition which we consider to be a reportable condition under Government Auditing Standards.

Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the management control structure that, in our judgment, could adversely affect each agencies ability to effectively manage its fuel purchases.

Because we are not expressing an opinion on each agencies management control structure as a whole, this statement is intended solely for the information and use of each agency in managing its fuel purchases. This restriction is not intended to limit the distribution of this report, which is a matter of public record.

We have audited bulk fuel purchases by the BOP, FBI, and INS. Additionally, we audited retail gasoline purchases by the FBI. The period covered by the audit included FY 1995 fuel purchases and FY 1996 projected. The audit was conducted in accordance with Government Auditing Standards.

In connection with this audit, and as required by the standards, we tested transactions and records to obtain reasonable assurance about each agencies compliance with laws and regulations that, if not complied with, we believe could have a material effect on program expenditures. Compliance with laws and regulations is the responsibility of each agencies management.

Our audit included examining, on a test basis, evidence concerning laws and regulations. The specific laws and regulations for which we conducted tests are contained in 41 Code of Federal Regulations, "Public Contracts and Property Management."

The results of our tests indicated that, for the transactions and records tested, we identified noncompliance by the BOP, FBI, and the INS on the purchase of high octane/premium gasoline in accordance with:

· 41 Code of Federal Regulations 101-38.401-1 Gasoline for use in motor vehicles.

The results of our tests also indicated that, for the transactions and records tested, we identified noncompliance by the BOP on reporting its bulk fuel requirements to the DFSC in accordance with:

· 41 Code of Federal Regulations 101-26.602-3 Procurement of gasoline, fuel oil (diesel and burner), kerosene, and solvents.

These instances of noncompliance are discussed in the finding section of this report.

With respect to those transactions not tested, nothing came to our attention that caused us to believe that BOP, FBI, and INS management were not in compliance with the laws and regulations cited above, other than the violations noted in our testing.

Our audit objective was to identify if cost savings were attainable by purchasing fuel more economically. We concentrated our audit on bulk fuel purchases (gasoline, diesel, and burner) by the FBI, BOP, and INS and retail fuel purchases by the FBI.

We performed the audit in accordance with generally accepted government auditing standards and included tests and procedures necessary to accomplish our objective. However, we may not be considered by others to be completely independent of INS as required by the standards, because INS has reimbursed us for work that pertained to INS fee-supported programs. The Office of Management and Budget and the Department of Justice (including the OIG, INS, and Justice Management Division) disagree with INS funding our work and are attempting to have the funds appropriated directly to the OIG. In FY 1996, the OIG will receive $5 million for fee-related audits, investigations, and inspections. That dollar amount will fund approximately 14 percent of the total OIG staff positions. Nonetheless, we consider ourselves independent and do not believe that our reimbursement arrangements with INS have had any effect with regard to our conduct of this audit.

To identify and assess management controls, we reviewed fuel procurement practices and interviewed Headquarters staff at the FBI, BOP, and INS.

To assess the cost effectiveness of bulk fuel purchases, we worked with the FBI, BOP, and INS and developed a comprehensive fuel survey. The survey requested documentation and answers on each location's last three bulk purchases by fuel type. We used this documentation to determine whether the: fuel supplier was a DFSC contractor, sites paid any unnecessary taxes, and type of fuel purchased was correct based upon the intended use as entered on the purchase order. The fuel survey was mailed to 145 field sites, and all were returned. From this, we created and analyzed a database containing over 5,000 entries of data.

We coordinated with staff at the Defense Logistics Agency's DFSC to: (1) identify sites which did not supply forecasted bulk fuel requirements, (2) determine the applicability of state excise taxes to purchases by civilian federal agencies, (3) check the accuracy of base contract prices, and (4) determine billing requirements for federal and state taxes on fuel purchases (some taxes are included in the base contract price, while others are separately invoiced).

We also coordinated with staff at the Internal Revenue Service to obtain information on the applicability of FET and other taxes to bulk fuel purchases.

· information on fuel purchases by fuel type (regular, mid-grade, and premium);

· the number of fleet vehicles, identifying high performance and standard type vehicles, and the number by make and model of high performance vehicles;

LOCATION	TOTAL DIESEL (Note 1)	ESTIMATED DYED (Note 2)	FET AVOIDANCE (Note 3)
Lompoc, CA	77.7	48.2	$11.7
El Reno, OK	31.6	25.3	6.1
Sheridan, OR	34.2	12.3	3.0
Florence, CO	34.3	17.5	4.3
TOTAL	177.8	103.3	$25.1

2. The applicable facility managers/garage foremen at the above sites provided estimates of the off-road use of diesel fuel as follows:

3. Estimated dyed diesel fuel usage multiplied by the FET rate, $.243 per gallon.

2 DFSC is responsible for negotiating bulk fuel prices for all federal agencies.

3 We calculated our savings using the net present value over the estimated 30 year life of the tanks. Net present value is a method of calculating the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present, using some predetermined minimum rate of return. Our calculation is based on the assumption that the annual use of dyed diesel fuel and the FET on clear diesel fuel remains constant. A change in these factors will either increase or decrease the net present value amount.

4 Our calculation is based on the four sites total annual FET cost avoidance of $25,100 less the $1,600 total annual maintenance cost. This amount was multiplied by the present value of $1 discounted at 7 percent, the approximate current yield on a 30 year treasury bond (federal borrowing rate).

5 Purchase and Installation Costs: 4 field sites x $17,500 for each fuel tank = $70,000.

6 The internal rate of return is another accepted method for calculating the cost effectiveness of a potential investment. Specifically, the internal rate of return is the rate that makes the present value of the cash inflows from an investment equal to an investments' cost.

7 The internal rate of return was calculated by subtracting the $1,600 maintenance cost from the $25,100 FET cost avoidance for an annual net savings of $23,500. The initial outlay of $70,000 for the four tanks divided by $23,500 equals 2.9787, which corresponds to about a 34% rate over 30 years based on the present value of that annuity.

8 The price differentials for bulk gasoline were obtained from the surveys and the American Automobile Association.

9 Excludes usage for the Quantico, Virginia training facility because Quantico buys in bulk from the military.

FUNDS TO BETTER USE		AMOUNT	PAGE
Installation of Fuel Tanks: Net present value based on savings over the 30 year life of the tanks, from the avoidance of federal excise taxes.
	BOP	$221,612	4

Unnecessary Taxes: Annual savings by not paying inapplicable FET and SET.
	BOP	18,569	5

Gasoline Octane Levels: Annual savings resulting from use of regular gasoline instead of premium gasoline.
	FBI	28,653	7

Annual savings resulting from the use of regular gasoline instead of mid-grade and premium gasoline
	BOP INS	16,053 13,320	7 7

Central Procurement: Annual savings by increasing its purchases through the DFSC.
	BOP	15,665	8

Retail Purchases: Annual savings resulting from use of regular gasoline instead of mid-grade gasoline.
	FBI	$602,640	10

Total Funds to Better Use		$916,512