However, Congress has repeatedly noted weaknesses in DOD’s ability to use this mechanism to effectively control costs and operate in a business-like fashion. In fiscal year 2001, the Defense Working Capital Fund—which consisted of the Army, Navy, Air Force, Defense-wide, and Defense Commissary Agency working capital funds—was the financial vehicle used to buy about $70 billion in defense commodities including fuel. Cash Movements Masked the Full Cost of Fuel and Affected the Budget

Substantial cash movements (adjustments) into and out of the fund, while disclosed to Congress in budget documents, have kept prices from reflecting the full cost of fuel and affected the development of future years’ stabilized annual fuel prices. Table 1 shows the various cash movements out of the working capital fund from fiscal years 1993 through 2002. For example, $800 million removed in fiscal year 2001 caused the stabilized price in fiscal year 2003 to be $7.27 per barrel higher than necessary. Surcharge Inaccuracies also Affect Budget Information

The estimated surcharge portion of the price supporting budget requests has not accurately accounted for fuel-related costs consistent with DOD’s Financial Management Regulation. We found that no adjustments for these overcharges, as required by DOD’s Financial Management Regulation, were made in fiscal years 1994 through 2001. As a result, we could not determine whether the Defense Energy Support Center was charged the appropriate amount. Conclusions

Fuel prices have not reflected full costs. Recommendations for Executive Action

To improve the overall accuracy of DOD’s fuel pricing practices, we recommend that the Secretary of Defense direct DOD’s comptroller to:   Provide a rationale to Congress, consistent with language in the applicable appropriations act, to support the movement of funds from the working capital fund and to identify the effect on future prices.
What GAO Found

The Department of Defense (DOD) Defense Working Capital Fund was used to buy $70 billion in commodities in fiscal year 2001. This amount is estimated to grow to $75 billion for fiscal year 2003. The department's financial management regulation states that fund activities will operate in a business-like fashion and incorporate full costs in determining the pricing of their products. The National Defense Authorization Act for Fiscal year 2001 requires that GAO review the working capital fund activities to identify any potential changes in current management processes or policies that would result in a more efficient and economical operation. The act also requires that GAO review the Defense Logistics Agency's (DLA) efficiency, effectiveness, and flexibility of operational practices and identify ways to improve services. One such DLA activity, the Defense Energy Support Center, sold $4.7 billion of various petroleum-related products to the military services in fiscal year 2001. DOD's fuel prices have not reflected the full cost of fuel as envisioned in the working capital fund concept because cash movements to the fund balance and surcharge inaccuracies have affected the stabilized annual fuel prices. Over $4 billion was moved into and out of the working capital fund from fiscal year 1993 to 2002. These adjustments affected the extent to which subsequent years' prices reflected the full cost of fuel. In addition, the surcharges did not accurately account for fuel-related costs as required by DOD's Financial Management Regulation.