The GSA Report to Congress

on the

Cost Effectiveness of the FTS2000 Program

December 1997

TABLE OF CONTENTS

Page

EXECUTIVE SUMMARY

PURPOSE

BACKGROUND

METHODOLOGY FOR THE PRICE COMPARISON

Cost Effective Defined

Development of Demand Set

Selection of Commercial Equivalents

Unique Government Requirements

Costs of Discontinuing FTS2000 Services

FISCAL YEAR 1997 FTS2000 PRICES ARE THE LOWEST

FTS2000 PRICES ARE REDUCED IN FISCAL YEAR 1998

FTS2000 IS COST EFFECTIVE

APPENDIX: DEFINITION OF FTS2000 SERVICES

Tables

Table 1. Commercial and FTS2000 FY 1997 and FY 1998 Prices

Table 2. Commercial and FTS2000 Price Comparison by Service

Table 3. FTS2000 FY 1997 and FY 1998 Price Comparison by Service

Executive Summary

The Administrator of the General Services Administration (GSA) has
determined that the Federal Telecommunications System 2000 (FTS2000)
prices are lower in the aggregate for the Government's
telecommunications requirements than the lowest commercial prices. This
comparison affirms the continued cost effectiveness of the FTS2000
program.

The determination is based on a cost effectiveness study conducted by
the General Services Administration. The study used a large sample of
FTS2000 traffic and circuits as a basis for the comparison of FTS2000
prices to those of the least expensive of 7,100 commercial tariffs
surveyed since 1993. The results by FTS2000 service are summarized in
Table 1. The commercial tariffs selected as the lowest priced are AT&T
FCC Tariff No. 12, Option 182 for the first three services and AT&T
Accunet Packet Service for the fourth.

The primary comparison is between commercial prices in effect June 1997
and FTS2000 fiscal year 1997 prices---displayed in the
[Commercial]{.underline} and [FTS2000 FY97]{.underline} columns,
respectively. The aggregate total monthly commercial price is \$42.2
million, compared to \$36.3 million for FTS2000. Thus, the FTS2000
fiscal year 1997 total price is \$5.9 million/month, or 14.0 percent,
less expensive than the lowest priced equivalent commercial offerings.
FTS2000 prices are lower for all services and circuit speeds except for
Switched Voice Service (SVS) and Dedicated Transmission Service (DTS)
T45 circuits. The exceptions are the result of unusually competitive
rates provided by AT&T FCC Tariff, Option 182, reflective of declining
telecommunications prices for large commercial customers.

FTS2000 rates in fiscal year 1998 will produce lower prices than in
fiscal year 1997. The [FTS2000 FY98]{.underline} column presents the
results of applying the rates to the same FTS2000 traffic and circuit
data used for the 1997 comparison. The aggregate monthly FTS2000 price
of \$36.3 million for fiscal year 1997 is reduced by \$2.7
million/month, or 7.4 percent---to \$33.6 million for fiscal year 1998.
Every service and circuit speed price is below the corresponding 1997
commercial price.

Table 1. Commercial and FTS2000 FY 1997 and FY 1998 Prices

(\$/Month in thousands)

  --------------------------- -- -------------------------- ------------------------ --- ------------------------- ------------------------ --- ------------------------- ------------------------ --
                                 [Commercial]{.underline}                                [FTS2000                                               [FTS2000                                           
                                                                                         FY97]{.underline}                                      FY98]{.underline}                                  

  [Service]{.underline}          *[\$/Unit]{.underline}*    [\$/Month]{.underline}       *[\$/Unit]{.underline}*   [\$/Month]{.underline}       *[\$/Unit]{.underline}*   [\$/Month]{.underline}   
  [^1][(Units)]{.underline}                                                                                                                                                                        

                                                                                                                                                                                                   

  **SVS** (Minutes)              *0.0512*                   23,379.8                     *0.0529*                  24,170.5                     *0.0505*                  23,050.1                 

                                                                                                                                                                                                   

  **SDS** (Minutes)              *0.1990*                   683.7                        *0.1986*                  682.2                        *0.1900*                  652.8                    

                                                                                                                                                                                                   

  **DTS** (Circuits)                                        15,298.2                                               10,142.3                                               8,651.7                  

  4.8A                           *1,190*                    778.2                        *523*                     342.0                        *494*                     323.4                    

  9.6A                           *721*                      3,252.0                      *423*                     1,908.3                      *401*                     1,807.7                  

  9.6D                           *684*                      1,184.0                      *475*                     821.3                        *447*                     772.5                    

  56D                            *1,322*                    4,804.8                      *573*                     2,082.2                      *476*                     1,728.7                  

  T1                             *2,735*                    4,625.0                      *2,536*                   4,271.8                      *2,083*                   3,522.3                  

  T45                            *38,485*                   654.2                        *42,158*                  716.7                        *29,244*                  497.1                    

                                                                                                                                                                                                   

  **PSS** (Ksegs)                *0.765*                    2,860.5                      *0.356*                   1,330.4                      *0.345*                   1,290.5                  

                                                                                                                                                                                                   

  Total                                                     \$42,222.2                                             \$36,325.4                                             \$33,645.1               

                                                                                                                                                                                                   
  --------------------------- -- -------------------------- ------------------------ --- ------------------------- ------------------------ --- ------------------------- ------------------------ --

PURPOSE

The purpose of this report is to document the Administrator\'s
determination that the FTS2000 program is producing prices that satisfy
the Government\'s requirements in the most cost effective manner.

BACKGROUND

FTS2000 is the GSA-managed program that provides domestic long-distance
telecommunications services to Federal agencies in the United States and
certain territorial possessions. The program offers integrated voice,
data, and video telecommunications services to meet Government-wide
common-user needs. Services are provided through two 10-year contracts
which have a projected total value of \$5 billion over the program life.
During fiscal year 1997, total payments to the contractors were \$629
million.

The two contracts, which replaced the old Federal Telecommunications
System, were competitively awarded on December 7, 1988, to AT&T and
Sprint for 60 percent and 40 percent, respectively, of the
then-projected revenue over the life of the contracts. The contracts are
for intercity services and were initiated to use available off-the-shelf
products to satisfy the Government\'s existing requirements as well as
requirements for future enhancements. Charges to customer agencies for
FTS2000 services are composed of the contractor charges plus an overhead
fee of seven percent for GSA management services and one percent for an
innovation fund.

To ensure that prices continued to be competitive, Price
Redetermination/Service Reallocation (PR/SR) processes were conducted at
years 4 and 7, with the two contractors competing with each other for up
to 40 percent of the estimated remaining revenue on each contract. For
these recompetitions, the vendors proposed prices for the remainder of
their respective contracts. The service reallocation decision was made
after evaluation of each contractor's prices and a determination that
the decision would be in the best interest of the Government while
accounting for the FTS2000 and agency transition costs. The PR/SR year 4
(PR/SR 4) was concluded in 1992 with AT&T and Sprint retaining their
respective revenue split of 60 and 40 percent.

The PR/SR year 7 (PR/SR 7) was concluded in 1995 and the resulting
prices were implemented on December 7, 1995. AT&T gained 40 percent of
Sprint's share of the program, with the effect that AT&T and Sprint were
awarded 76 percent and 24 percent, respectively, of the estimated
program revenue over the remaining term of the contracts. Total savings
to the Government from the two PR/SR actions was estimated to exceed

\$1 billion.

METHODOLOGY FOR THE PRICE COMPARISON

FTS2000 cost effectiveness is determined by comparing FTS2000 contractor
prices to commercial vendor prices.[^2] The process for accomplishing
this was to (1) obtain and refine FTS2000 traffic and circuit data from
AT&T and Sprint for the month of October 1996 to use as a demand set,
(2) review Federal Communications Commission (FCC) tariffs to identify
low price candidates for detailed analysis, (3) calculate the monthly
prices of FTS2000 for fiscal year 1997[^3] and of the selected
commercial tariffs at the time of the analysis in June 1997 by applying
their respective rates to the demand set[^4], and (4) compare the total
of the lowest commercial equivalent prices to those of FTS2000. Looking
ahead, the effect of prospective price changes is also examined by
applying fiscal year 1998 FTS2000 rates to the demand set used for the
1997 comparison.

Cost Effective Defined

For the purposes of this determination, the cost effectiveness of
FTS2000 is evaluated on a total program basis. Comparison of prices on
an individual service, such as switched voice or switched data, would
not adequately reflect the overall cost to the Government. Cost
effectiveness is determined by an analytical comparison of the aggregate
FTS2000 prices and the lowest equivalent commercial prices. In addition,
prices for individual services are expected to be competitive with the
best commercial prices.

The Administrator declares the FTS2000 program to be cost effective if,
when taking all the services in the analysis together, the Government\'s
telecommunications needs met by FTS2000 could not be met at lower prices
by commercial equivalent tariffs.

Development of Demand Set

Telecommunications cost comparisons require a "demand set" of traffic
and circuit data so that appropriate weights are applied to rates, i.e.,
unit prices, to obtain a total price. For this comparison, the demand
set was derived from a sample of the applicable FTS2000 activity from
October 1996. GSA and the two FTS2000 contractors have determined that
October is a suitable month to represent the year. As requested by GSA,
AT&T and Sprint provided the traffic and circuit data from the same
files used to calculate the invoices for services provided in October
1996. GSA reviewed and refined the submitted data in preparation for
sampling the traffic and circuits in the contiguous United States.

The Switched Voice Service (SVS) calculations rely on the statistically
random sample of 191,000 minutes. The Switched Data Service (SDS) and
Packet Switched Service (PSS) calculations (which are simpler than for
SVS) use samples consisting of most of the traffic, with sizes of 3.1
million minutes and 3.2 million kilosegments, respectively. Dedicated
Transmission Service (DTS) samples, totaling over 12 thousand circuits,
represent most of the inter-LATA[^5] circuits.

Compressed Video Transmission Service (CVTS), an FTS2000 service
included in previous reports, is not included this year because sharply
reduced usage (to about 50 hours per month) is too low for a meaningful
analysis. SDS volume has been increasing as video transmission usage
migrates to it from CVTS.

Selection of Commercial Equivalents

The FTS2000 contracts require ubiquitous coverage of the United States
and are Indefinite Quantity, i.e., not defining specific quantities of
services to be purchased. Rather, both contractors were provided minimum
revenue guarantees, which have been satisfied. Better commercial prices
can sometimes be obtained from geographically limited contracts or
contracts which define very specifically the items to be purchased. Even
leaving aside Unique Government Requirements (discussed in the following
section), there are no commercial contracts with FTS2000's combination
of attributes. These include the long term of ten years, the many
services offered, and the reliance on end-to-end usage based pricing.

For commercial comparisons, the best publicly available commercial rates
for interstate services are to be found in negotiated contracts which
have been filed as tariffs with the FCC. These negotiated tariffs are
primarily found in AT&T FCC Tariff Number 12 options, AT&T FCC Contract
Tariffs, Sprint Custom Network Service Arrangement (CNSA) Tariffs, and
MCI Special Customer Arrangement (SCA) Tariffs.

The selection of the lowest price commercial tariffs for comparison to
FTS2000 is from among 7,100 tariffs surveyed since 1993. The best of
4,800 previously identified were reconsidered and an additional 2,300
were reviewed for the first time. To ensure reflection of current
marketplace trends, only tariffs negotiated or re-negotiated within the
year preceding June 1997 were considered.

In order to conduct valid comparisons between FTS2000 and commercial
offerings, rates for all services listed in a selected commercial tariff
were used to develop the FTS2000 commercial equivalent. However, the
commercial negotiated tariffs do not usually have rates for PSS.
Therefore, it is necessary to obtain rates for PSS from an FCC standard
tariff.

Unique Government Requirements

Unique Government Requirements (UGRs) are services required by the
Government to be provided in FTS2000 without a specific charge even
though they are not ordinarily provided without additional charge in
commercial contracts or tariffed commercial services.[^6]

*The GSA Report to Congress on the Cost Effectiveness of the FTS2000
Program* dated February 1993 contained an estimate that the UGRs in the
FTS2000 program could be valued between \$0.85 million to \$3.8 million
per month. Because UGRs considerations are incorporated in the prices of
FTS2000, their value could be added to equivalent commercial prices and
would result in FTS2000 appearing even more cost effective. This
adjustment to commercial prices has not been done here because of the
complexity of quantifying UGRs for analysis.

Costs of Discontinuing FTS2000 Services

If services were transitioned to other contractors as a result of
discontinuing FTS2000 services, the Government might incur costs, e.g.,
one-time charges or reductions in volume discounts to remaining users.
Such prospective costs were not considered in this analysis.

FISCAL YEAR 1997 FTS2000 PRICES ARE THE LOWEST

The critical determination is whether FTS2000 provides the least
expensive prices available for the traffic and circuits on the FTS2000
networks. **AT&T FCC Tariff 12, Option 182** was selected for SVS, SDS,
and DTS because it offered the least expensive commercial price overall
when applied to the aggregated FTS2000 demand sets. This tariff does not
offer PSS, so the most favorable standard tariff, **AT&T Accunet Packet
Service**, was used to compare PSS. The FTS2000 contract prices are
filed in AT&T FCC Tariff Number 16 and Sprint FCC Tariff Number 4.

Table 2 presents the calculated average unit and total prices resulting
from the application of commercial and FTS2000 rates to the demand set.
The [Commercial]{.underline} column displays the prices for the selected
lowest price tariffs. The [FTS2000 FY97]{.underline} column displays the
FTS2000 prices for fiscal year 1997. The [FTS2000 Compared to
Commercial]{.underline} column shows how much more or less FTS2000
prices are than the comparable commercial prices.[^7]

The FTS2000 total price is \$36.3 million per month compared with the
commercial equivalent of \$42.2 million per month, i.e., \$5.9 million
or 14.0 percent less. Furthermore, FTS2000 is less expensive in each
service and circuit speed except for SVS and DTS T45.

The commercial equivalent prices are lower for these services because of
the unusually competitive rates offered under AT&T FCC Tariff, Option
182. Those rates demonstrate the trend of telecommunications vendors
offering declining prices to large commercial customers in the
fast-changing telecommunications market. The tariff requires a revenue
commitment in excess of \$1.6 billion over the eight-year contract
life---commitment and life magnitudes atypical of contract tariffs.

Table 2. Commercial and FTS2000 Price Comparison by Service

(\$/Month in thousands)

  --------------------------- -- -------------------------- ------------------------ --- ------------------------- ------------------------ --- ------------------------- ------------------- --
                                 [Commercial]{.underline}                                [FTS2000                                               [FTS2000 Compared to                          
                                                                                         FY97]{.underline}                                      Commercial]{.underline}                       

  [Service]{.underline}          *[\$/Unit]{.underline}*    [\$/Month]{.underline}       *[\$/Unit]{.underline}*   [\$/Month]{.underline}       [\$/Month]{.underline}    [%                  
  [^8][(Units)]{.underline}                                                                                                                                               Coml]{.underline}   

                                                                                                                                                                                              

  **SVS** (Minutes)              *0.0512*                   23,379.8                     *0.0529*                  24,170.5                     790.7                     3.4%                

                                                                                                                                                                                              

  **SDS** (Minutes)              *0.1990*                   683.7                        *0.1986*                  682.2                        -1.5                      -0.2%               

                                                                                                                                                                                              

  **DTS** (Circuits)                                        15,298.2                                               10,142.3                     -5,155.9                  -33.7%              

  4.8A                           *1,190*                    778.2                        *523*                     342.0                        -436.2                    -56.1%              

  9.6A                           *721*                      3,252.0                      *423*                     1,908.3                      -1,343.7                  -41.3%              

  9.6D                           *684*                      1,184.0                      *475*                     821.3                        -362.7                    -30.6%              

  56D                            *1,322*                    4,804.8                      *573*                     2,082.2                      -2,722.6                  -56.7%              

  T1                             *2,735*                    4,625.0                      *2,536*                   4,271.8                      -353.2                    -7.6%               

  T45                            *38,485*                   654.2                        *42,158*                  716.7                        62.5                      9.6%                

                                                                                                                                                                                              

  **PSS** (Ksegs)                *0.765*                    2,860.5                      *0.356*                   1,330.4                      -1,530.1                  -53.5%              

                                                                                                                                                                                              

  Total                                                     \$42,222.2                                             \$36,325.4                   -\$5,896.8                -14.0%              

                                                                                                                                                                                              
  --------------------------- -- -------------------------- ------------------------ --- ------------------------- ------------------------ --- ------------------------- ------------------- --

FTS2000 PRICES ARE REDUCED IN FISCAL YEAR 1998

Although the focus of this report is to compare 1997 FTS2000 and
commercial prices, a forward look at FTS2000 prices is also presented.
Continuing the trend of lower FTS2000 prices, the rates for FTS2000 drop
significantly in fiscal year 1998 as a result of the

PR/SR 7 negotiation.

The result of applying fiscal year 1998 FTS2000 rates to the 1997 demand
set is shown in the [FTS2000 FY98]{.underline} column of Table 3. The
[FTS2000 FY97]{.underline} column shows the fiscal year 1997 prices from
Table 2 for comparison. The aggregate price of the FTS2000 program drops
from \$36.3 million per month in fiscal year 1997 to \$33.6 million per
month in fiscal year 1998 for a reduction of \$2.7 million or 7.4
percent. The [FY98 Compared to FY97]{.underline} column shows how much
less prices in fiscal year 1998 would be, assuming the same demand set.
With the application of the FTS2000 fiscal year 1998 rates, every
service and circuit speed price is below the corresponding commercial
price in Table 2.

Table 3. FTS2000 FY 1997 and FY 1998 Price Comparison by Service

(\$/Month in thousands)

  --------------------------- -- ------------------------- ------------------------ --- ------------------------- ------------------------ --- ------------------------ ------------------- --
                                 [FTS2000                                               [FTS2000                                               [FY98 Compared to                            
                                 FY97]{.underline}                                      FY98]{.underline}                                      FY97]{.underline}                            

  [Service]{.underline}          *[\$/Unit]{.underline}*   [\$/Month]{.underline}       *[\$/Unit]{.underline}*   [\$/Month]{.underline}       [\$/Month]{.underline}   [%                  
  [^9][(Units)]{.underline}                                                                                                                                             FY97]{.underline}   

                                                                                                                                                                                            

  **SVS** (Minutes)              *0.0529*                  24,170.5                     *0.0505*                  23,050.1                     -1,120.4                 -4.6%               

                                                                                                                                                                                            

  **SDS** (Minutes)              *0.1986*                  682.2                        *0.1900*                  652.8                        -29.4                    -4.3%               

                                                                                                                                                                                            

  **DTS** (Circuits)                                       10,142.3                                               8,651.7                      -1,490.6                 -14.7%              

  4.8A                           *523*                     342.0                        *494*                     323.4                        -18.6                    -5.4%               

  9.6A                           *423*                     1,908.3                      *401*                     1,807.7                      -100.6                   -5.3%               

  9.6D                           *475*                     821.3                        *447*                     772.5                        -48.8                    -5.9%               

  56D                            *573*                     2,082.2                      *476*                     1,728.7                      -353.5                   -17.0%              

  T1                             *2,536*                   4,271.8                      *2,083*                   3,522.3                      -749.5                   -17.5%              

  T45                            *42,158*                  716.7                        *29,244*                  497.1                        -219.6                   -30.6%              

                                                                                                                                                                                            

  **PSS** (Ksegs)                *0.356*                   1,330.4                      *0.345*                   1,290.5                      -39.9                    -3.0%               

                                                                                                                                                                                            

  Total                                                    \$36,325.4                                             \$33,645.1                   -\$2,680.3               -7.4%               

                                                                                                                                                                                            
  --------------------------- -- ------------------------- ------------------------ --- ------------------------- ------------------------ --- ------------------------ ------------------- --

FTS2000 IS COST EFFECTIVE

The FTS2000 rates have been rigorously compared with the available
public commercial rates negotiated by large corporate entities. The most
compelling result is that the FTS2000 total program price in fiscal year
1997 was 14.0 percent below the most competitive commercial equivalent.
Furthermore, FTS2000 prices are highly competitive in each service
category. These results demonstrate that the FTS2000 price control
activities have worked successfully in maintaining competitiveness with
the commercial marketplace.

The determination of the Administrator of GSA is that FTS2000 serves the
requirements of the Government in the most cost effective manner
available.

APPENDIX: DEFINITION OF FTS2000 SERVICES

**Switched Voice Service (SVS)**

An FTS2000 service which has the capability of transmitting voice or
modulated data.

**Switched Data Service (SDS)**

An FTS2000 service which has the capability of transmitting data at
rates of 56 kilobits per second using conditioned access lines.

**Dedicated Transmission Service (DTS)**

An FTS2000 service for which the private line transmission of voice or
data on a dedicated circuit between two end locations is continuously
available and for which pricing is not sensitive to the number of
minutes or calls. FTS2000 dedicated circuit types include:

[Circuit]{.underline} [Description]{.underline}

4.8A An analog circuit with transmission speed of 4.8 Kbps.

9.6A An analog circuit with transmission speed of 9.6 Kbps.

9.6D A digital circuit with transmission speed of 9.6 Kbps.

56D A digital circuit with transmission speed of 56 Kbps.

T1 A digital unchannelized circuit with transmission speed of 1.5 Mbps.

T45 A digital unchannelized circuit with transmission speed of 45 Mbps.

**Packet Switched Service (PSS)**

An FTS2000 service in which messages are broken down into smaller units
called packets, which are then individually addressed and routed through
the network. Packet switching networks are designed to carry data in the
form of packets.

**Compressed Video Transmission Service (CVTS)**

An FTS2000 terrestrial based video service that uses digital codecs to
transmit near full motion color video over FTS2000 facilities.

\\ce97-r8.doc 12/22/97

[^1]: Services are defined in the Appendix.

[^2]: FTS2000 and commercial prices do not include overhead for GSA
    management services or for innovation initiatives, which would be
    charged regardless of the contract used to procure services.

[^3]: Fiscal year 1997 is price year 8 of the FTS2000 contracts, and
    fiscal year 1998 is price year 9.

[^4]: Prices are exclusive of extra cost features such as audio
    conferencing.

[^5]: LATAs (Local Access and Transport Areas) are the approximately 190
    geographical areas in the United States within which local
    telecommunications companies operate and between which long-distance
    telecommunications companies transmit.

[^6]: An example of UGRs is National Security and Emergency Preparedness
    (NSEP), which comprise features that maintain a state of readiness
    or respond to and manage an event or crisis (local, national, or
    international) which causes or could cause injury or harm to the
    population, damage to or loss of property, or degrade or threaten
    the national security or emergency preparedness of the United
    States.

[^7]: The prices are different from last year's report because the
    demand set, FTS2000 rates, and the commercial tariff selection for
    SVS, SDS, and DTS are different. FTS2000 rates are lower than the
    previous year because of the terms negotiated in the PR/SR 7.

[^8]: Services are defined in the Appendix.

[^9]: Services are defined in the Appendix.