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FTS 2001: HOW AND WHY TRANSITION DELAYS

HAVE DECREASED COMPETITION AND INCREASED PRICES

HEARING

BEFORE THE

SUBCOMMITTEE ON TECHNOLOGY AND

PROCUREMENT POLICY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

APRIL 26, 2001

Serial No. 107–21

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

——— ———

——— ———

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT POLICY

THOMAS M. DAVIS, Virginia, Chairman

JO ANN DAVIS, Virginia

STEPHEN HORN, California

DOUG OSE, California

EDWARD L. SCHROCK, Virginia

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

MELISSA WOJCIAK, Staff Director

VICTORIA PROCTOR, Professional Staff Member

JAMES DECHENE, Clerk

TREY HENDERSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on April 26, 2001 .............................................................................. 1

Statement of:

Bates, Sandra N., Commissioner, Federal Technology Service, U.S. General Services Administration, accompanied by Frank Lalley, Assistant

Commissioner for Service Delivery .............................................................. 21

D’Agata, Anthony, vice president and general manager, Sprint’s government services division ................................................................................... 112

Doherty, John J., vice president, AT&T government markets ..................... 129

Edgerton, Jerry A., senior vice president, Worldcom government markets 100

Flyzik, James, Acting Assistant Secretary for Management, and Chief

Information Officer, U.S. Department of the Treasury ............................. 73

Koontz, Linda D., Director, Information Management Issues, U.S. General Accounting Office, accompanied by Kevin Conway, Assistant Director ................................................................................................................... 6

Payne, James F.X., senior vice president, Qwest Communications International Inc ................................................................................................... 146

Premo, Brigadier General Gregory, Deputy Director for Operations, Defense Information Systems Agency .............................................................. 58

Letters, statements, etc., submitted for the record by:

Bates, Sandra N., Commissioner, Federal Technology Service, U.S. General Services Administration, prepared statement of ................................ 23

D’Agata, Anthony, vice president and general manager, Sprint’s government services division, prepared statement of ........................................... 114

Doherty, John J., vice president, AT&T government markets, prepared

statement of ................................................................................................... 131

Edgerton, Jerry A., senior vice president, Worldcom government markets,

prepared statement of ................................................................................... 103

Flyzik, James, Acting Assistant Secretary for Management, and Chief

Information Officer, U.S. Department of the Treasury, prepared statement of ........................................................................................................... 76

Koontz, Linda D., Director, Information Management Issues, U.S. General Accounting Office, prepared statement of ........................................... 8

Payne, James F.X., senior vice president, Qwest Communications International Inc., prepared statement of ........................................................... 148

Premo, Brigadier General Gregory, Deputy Director for Operations, Defense Information Systems Agency, prepared statement of ...................... 61

(1)

FTS 2001: HOW AND WHY TRANSITION

DELAYS HAVE DECREASED COMPETITION

AND INCREASED PRICES

THURSDAY, APRIL 26, 2001

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON TECHNOLOGY AND PROCUREMENT

POLICY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:03 p.m., in room

2154, Rayburn House Office Building, Hon. Thomas M. Davis

(chairman of the subcommittee) presiding.

Present: Representatives Davis, Turner, Schrock, Cummings, and

Burton [ex officio].

Staff present: Melissa Wojciak, staff director; Amy Herink, chief

counsel; David Marin, communications director; Victoria Proctor,

professional staff member; James DeChene, clerk; Trey Henderson,

minority counsel; and Jean Gosa, minority chief clerk.

Mr. DAVIS. We have a formal voting on the House floor in just

a few minutes, so if I can get through the opening statements here,

we’ll try to get that out of the way, go over and vote and come back

hear testimony.

I also have a committee markup in Commerce right around the

corner. And if I have to leave urgently it will be for final passage

of a very controversial bill out of there on telecommunications. I

will hand the gavel to someone for that interim period.

But let me just call the meeting to order. I want to welcome everyone to today’s oversight hearing on the FTS 2001 program. As

many of you know, FTS 2001 is the program through which the

Federal Government buys long distance telecommunications services. FTS 2001 is the follow-on contract to the FTS 2000 program

and was intended to build on the changes in the telecommunications marketplace. Specifically, this program is supposed to create a Government marketplace that replicates the intentions of the

Telecommunications Act of 1996.

Today the subcommittee will analyze whether these goals have

been realized. Additionally, the subcommittee will review the need

for changes, if any, to the FTS 2001 program to increase competition in the program and ensure delivery of the most up-to-date

services to Federal customers.

When the FTS 2001 contracts were originally awarded, the primary objectives of the program were to ensure the best service and

price for the Government and to maximize competition for services.

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But, according to a report issued by the General Accounting Office

today, these two goals may be in jeopardy because of the delays in

transition.

Let me be clear at this point. The GAO now considers the FTS

2001 program goals in jeopardy because of transition delays. It’s

clear to me that the goal of competition in the program has, at

least to date, not been realized. The ongoing delays also appear

close to ending the Government-wide buying power envisioned in

the program, as agencies frustrated by the delays and cost opt out

of the program.

FTS 2001 contracts were awarded to Sprint in December 1998

and to WorldCom in January 1999. At that time, GSA had allowed

for a 1-year transition period of telecommunications services from

the FTS 2000 providers, who were AT&T and Sprint, to 2001. GSA

had anticipated some transition delays, and did plan for up to another year of transition.

Unfortunately, it’s now April 2001, and transition is not complete

for many Federal agencies. In December 2000, GSA announced the

extension of the transition contracts for FTS 2000 services for 6

months for Sprint and an additional year for AT&T. This time

delay is now causing agencies that have not transitioned to incur

significantly higher long distance costs. And of course, those costs

go back to the American taxpayer.

The GAO has estimated some agencies will spend at least 10

cents a minute on long distance under the extension contracts, with

rates continuing to rise to a potential high of $1 a minute as the

last agencies transition to FTS 2001.

I’m greatly concerned that agencies did not receive adequate information on transition in order to prepare for these cost increases.

Moreover, these costs will substantially impact on agencies’ budgets as Congress and the administration are requesting the agencies

update their information security systems and move to e-government solutions.

Will the increased costs hinder these important goals? The FTS

2001 program strategy also included contract awards for local telecommunications services to ultimately allow those contractors to

offer both local and FTS 2001 long distance services. Over 20 of

those contract awards have been made in localities across the

United States under the Metropolitan Area Acquisition program,

that’s the MAA program.

The MAA program allows contract awardees to apply for crossover to compete in other local markets or the FTS 2001 long distance contracts once a year if service has been successfully completed in the local market. To date, crossover has not been issued

to any contract awardees through the ongoing transition delays in

the FTS 2001 contract.

The delay in crossover is based largely on the delays in reaching

the minimum revenue guarantees in the FTS 2001 program. The

long distance contracts run for 4 base years with four 1 year options, and each contractor is guaranteed minimum revenues of

$750 million over the life of the contract. The delay in transition

has significantly slowed meeting the minimum revenue guarantees

of both Sprint and MCI WorldCom. According to the most recent

numbers from the GAO, MCI WorldCom is not scheduled to meet

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the MRG until late 2005. And Sprint won’t meet it until some time

in 2006.

While these MRGs are now delayed and have hindered the overall program goals, the FTS 2000 transition contractors have not

had nearly the same difficulty in earning revenue. The GAO estimates that AT&T has made over $800 million during the transition, and Sprint has earned over $300 million that does not count

toward their MRG. Yet Federal agencies are having difficulty in acquiring the most up to date telecommunications services.

A significant ongoing part of the Federal Government’s mission

is enhanced service delivery to citizens, agencies, State and local

governments. Delays in agency acquisitions of end to end network

services could impede progress to delivering more information and

services electronically. Insufficient contract management appears

to have slowed this goal.

As the manager of FTS 2001, GAO is responsible for overall contract management administration, coordination and procurement of

services, planning, engineering and performance support to agencies and customer service. Today’s hearing is going to examine how

GSA can do better in this role, or if they should. If Federal agencies are unable or reluctant to allow GSA to assist with the FTS

2001 program, maybe we should make Federal agencies responsible

for purchasing their own telecommunications services. Maybe we

should create a telecommunications services schedule. These are

options we can explore.

Transition delays have been blamed on a number of different

problems: the year 2000 rollover, the Verizon strike in August 2000

and vendor staffing, just to name a few. I’m sure there’s plenty of

blame to go around for transition delays, but it’s critically important we move away from the blame game to solutions that will salvage the future of this program, allow us to build on lessons

learned.

FTS 2001 is a Government-wide contract for services. We have

increasingly asked the Federal Government to coordinate across

agencies and achieve appropriate economies of scale in the acquisition of services. Did the FTS 2001 achieve these goals? We have

to also ask the GSA how overall contract management and agency

coordination was handled. For instance, why did GSA and the

Interagency Management Council, the coordinating body for all the

FTS 2001 participating agencies, consistently offer conflicting information on the progress made in transition?

GSA predicted that transition would be completed much earlier

on, whereas the IMC predicted transition wouldn’t be completed by

the December 2000 deadline. And they predicted that as early as

last July. Who were the agencies to believe?

I’m also unclear on other aspects of GSA’s contract management.

GSA awarded FTS 2001 contracts but then waived performance requirements for the vendors during the transition period. What

leveraging authority did the individual agencies have when they

were disappointed with contract performance during transition? If

GSA didn’t agree on the format at the delivery of critical transition

information, did they remove any incentives for vendors to comply?

The GSA states that the transition data base is still not in place

for providing weekly updates on progress to GSA and the agencies.

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Since January of this year, WorldCom has been providing GSA

with the correct information, Sprint is scheduled to begin providing

this information in May 2001. I hate to ask the obvious question,

but isn’t that a little late?

GSA seemed reluctant to negotiate on the format of the information. At what programmatic cost did this unwillingness to reach

agreement impact agencies in their planning efforts?

Another significant delay factor was caused by the agencies

themselves. The GAO cites several agencies that had tremendously

difficult time inventorying their telecommunications services and

infrastructure. While I’m concerned about the delay these factors

caused, I hope they provided the agencies and GSA with important

information that will be the building blocks for any upgrades or future transitions.

This is a lesson that should not be lost, and I’m anxious to hear

from the Department of Defense and Treasury how they collected

this information and how they are managing it in the future.

Last, I have a serious concern about the MAA program, the status of that transition, the fees charged by GSA and the impact on

crossover. I’ve deliberately not focused on those issues during this

hearing, because I have requested a GAO audit of that program

and I’ll be holding a followup hearing on the MAA program June

13th. It’s my hope that the June hearing will not reveal the same

contract management difficulties.

The subcommittee will hear testimony from GAO, GSA, Department of Defense, Department of Treasury. On our second panel

we’ll hear from Jerry Edgerton from WorldCom, Tony D’Agata from

Sprint, John Doherty of AT&T and James Payne of Qwest.

I now yield to Congressman Turner.

Mr. TURNER. Thank you, Mr. Chairman.

I want to commend you for holding this hearing. It’s my understanding that we have not had an oversight hearing on this subject

for over 4 years. And a program such as this, with the delays that

you’ve mentioned in transition, certainly deserves our attention,

our study and our oversight. The difference in doing it right and

not doing it right literally can mean hundreds of millions of dollars

in costs to the taxpayer. So I’m very pleased that you have chosen

this opportunity to have this hearing on this very important subject.

There are two goals that I understand are critical to the FTS

program. That is ensuring the very best service and price to the

Government while maximizing competition. Those goals are at the

heart of what this hearing is all about, and I look forward to hearing from all of our witnesses today.

Thank you, Mr. Chairman.

Mr. BURTON [assuming Chair]. We have a lot of the Members

who’ve gone to vote. They’re going to come right back. If you want

to stay, you can, or you can go vote. I will stay until the last

minute, then I’ll run and vote and they can come back and take

over the chair once again.

But in the interim, and I don’t want to be redundant, I was

chairman of this committee when we first held a hearing on the

FTS 2001 contract 4 years ago. And the entire program was being

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redesigned. And I can remember a lot of controversy about that

contract.

It finally all worked out. It was supposed to be implemented in

a timely fashion. As I understand it, GSA awarded the new contract over 2 years ago to Sprint and MCI WorldCom. It was supposed to be a 1-year transition period. That wasn’t enough time. So

they extended it 6 months. And that wasn’t enough time. So they

extended it another 6 months. And that wasn’t enough time. And

they extended it another 6 months.

You know, we’re supposed to run Government efficiently around

this place. I cannot for the life of me figure out why all these extensions. We have an Accountability in Government Act which I coauthored and I just don’t understand why these things just—anyhow, it’s a very complex job and we understand that. And we understand a lot of progress has been made.

But in other areas, according to the GAO, there’s still a long way

to go before the job’s finished. Under this latest extension, some

agencies are paying extremely high prices for phone service. I’ve

been told that under the new contract, agencies were supposed to

get long distance service for under 4 cents a minute. But according

to that GAO report, agencies that haven’t been switched over are

paying about four to five times that much.

So the taxpayers are getting shortchanged. And the longer they

wait for transition, the more it’s going to cost. And on top of that, the GSA had to make a one time payment of $8 million for the previous contractor, AT&T, just to keep the phones on. So there are

a lot of problems, and that’s why you’re here to try to explain those

to the subcommittee chairman. I’ll try to stay here as long as I can,

I’ve got another meeting to go to. But I’m going to monitor this

very closely as well as the chairman of the subcommittee.

So I’d like to ask a couple of questions here that can be added

to your opening statements or in the question and answer period.

First of all, when is the work finally going to be done? When is it

going to be done? How long is it going to take?

How much are these delays going to cost the taxpayers? I don’t

know if anybody can give us that, but we want to know. Because

we’re supposed to be accountable to them. And we want to find out

who’s to blame. Is it the GSA? The agencies? The new contractors?

The old contractors? We want to know where the responsibility lies,

so that we can take a fork and stick them in the right place so they

help get this job done. That’s an Indiana cliche. Only we’re a little

more graphic in Indiana. [Laughter.]

I think there’s probably enough blame to go around. All the people here today who are going to testify can hopefully give us the

answers. And maybe by working together, we can get some of these

problems solved a little more efficiently and quickly than we have

in the past.

With that, the chairman of the subcommittee will be back in just

a minute. And I’ll be back just as fast as my fat little legs will get

me back. And with that, we stand in recess until the fall of the

gavel.

[Recess.]

Mr. DAVIS [resuming Chair]. Ms. Linda Koontz of the GAO, Sandra Bates of the General Services Administration, Kevin Conway,

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also with GAO, Brigadier General Gregory Premo, Frank Lalley

with GSA and Jim Flyzik of the Department of Treasury.

As you know, it’s the policy of this subcommittee all witnesses

be sworn before they may testify. If you would rise with me and

raise your right hands.

[Witnesses sworn.]

Mr. DAVIS. Thank you very much.

To support sufficient time for questioning, I have read

everybody’s testimony. And my staff certainly has, and I think the

other Members’ staff. If you could try to limit yourself to about 5

minutes on your opening and then we’ll get into the questions.

Your full written statement is in the record, so that will be made

part of the permanent hearing record.

Why don’t we begin with Ms. Koontz, followed by Ms. Bates,

Brigadier General Premo and Mr. Flyzik. Let me just ask, Mrs.

Davis, did you want to make any opening statement?

Mrs. DAVIS. No.

Mr. DAVIS. Thank you.

Thank you all for being with us today. I hope this will be a productive hearing.

STATEMENT OF LINDA D. KOONTZ, DIRECTOR, INFORMATION

MANAGEMENT ISSUES, U.S. GENERAL ACCOUNTING OFFICE,

ACCOMPANIED BY KEVIN CONWAY, ASSISTANT DIRECTOR

Ms. KOONTZ. Mr. Chairman, thank you for inviting us to participate in today’s hearing on the FTS 2001 long distance telecommunications program. Kevin Conway is with me today. He’s the

Assistant Director who’s responsible for this study.

My testimony will focus on the findings in our report which is

being released today on the Government’s transition from FTS

2000 to FTS 2001. Although GSA has clearly made progress in

completing this very complex transition, the Government did not

meet its deadline of December 6, 2000, and this effort is not yet

complete. As of April 11th, the overall transition was 92 percent

complete.

According to its schedule, Sprint expects to complete most of its

transition by June 30th, although there are nine requirements for

which completion dates have yet to be determined. WorldCom expects to substantially complete transition during June, with two

additional requirements scheduled for completion in August and

October.

The reasons for delay are many and involve all the key players

in the program. First, while GSA developed an automated system

to track transition progress, the FTS 2001 contractors did not provide GSA with the necessary management data so that the system

could be used to accurately measure and effectively manage the

transition.

Second, the inability of GSA and the long distance contractors to

rapidly add transition critical services to the FTS 2001 contracts

impeded agency efforts to order services. Third, customer agencies

were slow to make orders for transition services, due in part to

year 2000 computing concerns and in part to a lack of staff resources dedicated to managing their transition efforts.

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Fourth, problems with staffing shortages and turnover, billing

and procedural problems impaired the efforts of FTS 2001 contractors to support agencies’ transition activities. Fifth, some local service providers outside the FTS 2001 program did not provide services and facilities as scheduled that were needed to deliver services

to discrete locations.

Although GSA has made progress in resolving these issues, these

delays have jeopardized the timely achievement of two program

goals of FTS 2001, ensuring best service and price to the Government and maximizing competition.

First, the delays have increased the cost of services. Discounts on

FTS 2000 services ended; costs rose as the volume of calls decreased, and GSA imposed a surcharge to recover a one time payment to AT&T of $8 million negotiated as part of the most recent

extension of FTS 2000. Second, the Government cannot ensure that

the service provided by the contractors meets expectations, because

performance requirements are waived until the transition is complete.

Last, delays slow the accumulation of revenues needed to meet

the minimum revenue guarantees to the current contractors, and

as a result, GSA has not added competition to the program.

In our report, we recommended GSA expeditiously resolve billing

concerns, process contract modification proposals and obtain the

management information that is required under the contract. GSA

agrees with these recommendations and is taking action to implement them. For example, GSA has received management information from WorldCom and is working with Sprint to obtain acceptable information.

When GSA and Federal agencies conceived the FTS strategy,

they envisioned an environment of robust competition where agencies would have greater choice of contractors and services and have

flexibility in how they would acquire those services. Completing the

actions we have recommended and bringing the transition to a successful conclusion is crucial if GSA is to realize its vision and to

fully achieve FTS 2001 goals.

That concludes my statement, and I’d be happy to answer any

questions you may have at the conclusion of the panel.

[NOTE.—The GAO report entitled, ‘‘FTS 2001, Transition Challenges Jeopardize Program Goals,’’ GAO–01–289, may be found in

subcommittee files, or by calling GAO at (202) 512–6000.]

[The prepared statement of Ms. Koontz follows:]

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Mr. DAVIS. Thank you very much.

Ms. Bates.

STATEMENT OF SANDRA N. BATES, COMMISSIONER, FEDERAL

TECHNOLOGY SERVICE, U.S. GENERAL SERVICES ADMINISTRATION, ACCOMPANIED BY FRANK LALLEY, ASSISTANT

COMMISSIONER FOR SERVICE DELIVERY

Ms. BATES. Thank you. Mr. Chairman, thank you for the opportunity to appear before you today to continue to discuss the challenge of provisioning telecommunications services for the agencies

and departments of the Federal Government.

In your invitation to me, you addressed several important questions to GSA regarding the FTS 2001 program strategy and the

transition experience. I have provided detailed responses to each of

these questions in my written testimony submitted for the record.

You last heard from one of my predecessors in a setting like this

in the spring of 1997. At that time, you, many other members and

staff, helped us create the strategy under which the FTS 2001 program has been conducted. That strategy gave us a solid framework

for bringing Government’s use of telecommunications technology

forward into this new century.

I have included as part of my testimony the statement of principles drafted in 1997. We recognized then that maximizing competition should be our hallmark principle, and to achieve this, we

called for separate local and long distance competitions with mutual crossover options for additional competition.

Your invitation asked whether or not the program has accomplished its primary goals of first ensuring the best service and price

to the Government and second, maximizing competition for services. The results of the competition have been astounding. The

services offered by the winning contractors are advanced, state-ofthe-art, commercial grade services. And these services will continue

to be enhanced with the latest commercial offerings.

On the cost side, costs are the lowest in our business. Our agencies and departments will save billions of dollars and are guaranteed declining prices each year. For example, the price of an average domestic long distance call made between Government locations will eventually fall to below 1 penny per minute. When you

consider these results, there can be no question we maximized competition during the acquisition.

Having the contracts with state-of-the-art services and unparalleled low prices is only step one. Transitioning services to those

contracts, a massive undertaking, is step two. The Federal Technology Service has overall responsibility for the FTS 2001 program.

This includes program management, contract administration, performance monitoring, customer support to agencies, billing and the

procurement of new service offerings.

With regard to the transition, we have provided a comprehensive

array of planning, engineering, pricing and customer support services during that period of time. We’ve used every available mechanism to inform and support our customers in their decisionmaking

processes and then to expedite the transition activities. We’ve

worked closely with our customer agencies through the Interagency

Management Council and the transition task force.

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Nevertheless, despite these considerable efforts, we have been behind where we want to be with the overall transition. It has taken

longer than we expected. And as GAO indicated, we face challenges

in all of these areas. We agree with the GAO’s recommendations

to address our shortcomings and are implementing all of them.

But the good news is that today, we are 95 percent complete with

our efforts to transition more than 51,000 customer locations. We

expect transition to be complete by this summer.

When transition is complete, we will be assured of meeting the

Government’s commitment to the minimum revenue guarantees. As

you recall, industry informed us during the strategy formation

process that substantial minimum revenue guarantees would provide the greatest possible incentives to competition. We agreed

with that assertion, based on our analysis of the largest telecommunications contracts being negotiated at that time.

The completion of transition also means that we will be able to

add even more competition to FTS 2001. One of the contract mechanisms we established as part of the strategy allows competitors to

offer long distance services. When transition is complete this summer, we will move ahead on implementing that portion of the strategy.

Mr. Chairman, in conclusion, I believe the strategy we jointly

crafted is as sound today as it was when it was developed 4 years

ago. The acquisition was a great success in terms of services and

prices. The transition has posed significant challenges for GSA that

require us to take steps to improve our ability to manage and coordinate the program.

While there are two capable contractors competing continuously

in this program, we are committed to adding additional competitors

when transition is complete this summer. Mr. Chairman, we appreciate your leadership and that of the committee. I look forward to

your continuing support.

With me today is Mr. Frank Lalley, Assistant Commissioner for

Service Delivery. Frank will assist me in answering any questions

you or the other members may have.

Thank you.

[The prepared statement of Ms. Bates follows:]

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Mr. DAVIS. Than you very much, and congratulations, Mr. Lalley.

I know you are looking forward to our questions later on. [Laughter.]

So it’s bring your daughter to work day, and your daughters are

here, too?

Ms. BATES. They are.

Mr. DAVIS. They get to see you in action in a few minutes.

Ms. BATES. They’re our good luck charm.

Mr. DAVIS. Excellent. You’re going to need them. [Laughter.]

General, you’re on.

STATEMENT OF BRIGADIER GENERAL GREGORY PREMO, DEPUTY DIRECTOR FOR OPERATIONS, DEFENSE INFORMATION

SYSTEMS AGENCY

General PREMO. Thank you, Mr. Chairman, for this opportunity

to testify before your committee on the Department of Defense’s

[DOD] role in the transition of FTS 2000 to FTS 2001. I’m Brigadier General Greg Premo, Deputy Director for Operations at the

Defense Information Systems Agency [DISA].

DISA was designated as the lead for the transition, and the DOD

transition team was formed within DISA’s operational directorate,

of which I am the director. To appropriately frame the discussion,

please let me describe first how DOD’s telecommunications requirements are satisfied.

DOD’s requirements for video, voice, and data services between

bases, facilities, locations, and operating elements around the world

are satisfied through the Defense Information Systems Network

[DISN]. The DISN is a warfighter’s global interoperable command

and control services backbone. The DISN has military readiness

features which are not present in commercial offerings such as FTS

2001.

These special military features include interoperability, assured

connectivity, security, multilevel precedence and preemption, surge

capacity, and survivability. Through an innovative acquisition

strategy that exploits the commodity nature of commercially available telecommunications, DISA has been able to accommodate the

substantial growth in demand while at the same time significantly

reducing costs for service. For example, the cost for 1 minute of

DISN voice in 1997 was 10 cents per minute. Today it’s less than

4 cents per minute. That, coupled with unique military features, is

better or equal to many commercial offerings.

Although the DISN is the department’s primary network for command and control, the DOD has a long history of using FTS services. It should be noted that even though our primary command

and control network is the DISN, DOD was still the largest single

user of FTS 2000, spending over $100 million per year.

As the FTS 2001 transition process got underway, DOD, as a

member of the Interagency Management Council, partnered with

other Federal agencies in the recompetition of the contract and

worked actively with GSA, the vendors, to make the FTS 2001

transition successful. In November 1998, DISA established a DOD

transition management office. The DOD transition management office coordinated the establishment of a DOD-wide transition team,

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which was made up of representatives from all DOD services and

agencies and reported to the transition management office.

For a number of reasons, some smaller DOD agencies, including

the Corps of Engineers, Army National Guard and Navy Exchange

Services, chose not to transition under the management of the

DOD team. However, as of today, I understand the National Guard

is transitioned and the Corps of Engineers is about 60 percent complete.

A key factor in our success was the existence of the FTS 2000

data base, which we used as the baseline for everything we did.

The other factor in DOD’s success was our expertise in two previous major transitions, FTS 2000 and the DISN transition in 1996

and 1998. Using our baseline data base, DOD completed its known

FTS 2000 switched voice and data service requirements with the

FTS 2001 vendors.

The DOD team conducted a best value assessment and awarded

its switched voice services to MCI, and switched data services to

Sprint. It became obvious, as we got this effort underway, that a

rapid transition would lead to a greater cost avoidance in the Department, potentially $365 million over the life of the contract.

Therefore, we augmented the DOD transition team with representatives from GSA, Sprint, MCI WorldCom and established an aggressive target of June 2000 for our completion.

To fund this transition, we made an up-front investment of al- most $8 million. And of this figure, almost $3 million was borrowed

from GSA and subsequently repaid. The transition from FTS 2000

to 2001 has been extremely complex. Since AT&T is not an FTS

2001 provider, our transition required the physical removal and replacement of every single AT&T-provided service.

Each circuit termination and reconnection had to be coordinated

with the incumbent vendor, the new vendor, the local exchange carrier and each end user. The timing and coordination involved in

any given transition was extensive. In many cases, successful cutover of service required that transition activities be performed simultaneously; this is also very intense.

The Department’s transition team established a centralized transition operations center to track and coordinate on a daily, weekly

and monthly basis the transition of every single circuit throughout

the 50 United States, Guam, and Puerto Rico. The transition management office held monthly DOD transition meetings to discuss

progress, major obstacles and lessons learned.

The team also held weekly meetings with the operations center

and vendors to review similar topics. A DOD Web site was established to post information bulletins and the detailed information required to keep customers up to date on the progress of the transition effort. The transition management office and MCI WorldCom

developed and delivered a transition training program to over 175

local base personnel at 6 separate sites across the United States.

The transition management office’s objectives were to keep open

communications with the field and support them during transition.

Were there tough issues? You bet. Other than the sheer number

of actions that had to be tracked, DOD’s major issues were in provisioning, otherwise known as circuit acquisition process. One of

the major provisioning issues involved the local exchange carriers.

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The local exchange carriers are not part of the contract, but are

critical to success of the provisioning process. The FTS 2001 vendors depend on the local exchange carriers to connect the backbone

to the customer locations. In many cases, there was a different

local exchange carrier at the end of each circuit.

Further complicating the local access issue was the Verizon

strike. The strike delayed transition of approximately 40 percent of

our services for up to 120 days. Although we have now transitioned

the majority of services in Verizon territory, approximately 40 out

of more than 1,500 remain.

We continue to work two major outstanding issues, accommodation of our switched video service and some billing process issues.

DOD immediately and aggressively attacked this transition strategy. We started as we would any other military operation. This approach and our historical data helped us get a head start on the

other departments and agencies in the transition process.

In the light of our initial experiences, we recommended to the

Interagency Council the formation of a transition task force. The

transition task force, we believe, resulted in a smoother transition.

DOD has finished 95 percent of its transition and as of April, we

have issued a total of over 100,000 orders, transitioned more than

50,000 switched voice services, 1,400 dedicated point to point services, 1,400 frame relay services and a host of others. In summary,

the DISN continues to provide military-ready, best value global

service, video and data and transport services that assure interoperability and security.

However, DOD will continue to use FTS 2001 to satisfy unique,

non-command and control requirements when they make operational and economic sense. We feel our aggressive efforts to complete the transition helped realize significant cost avoidance which,

regardless of the complexities of the transition process, has made

this transition well worth the effort for our services and agencies.

DOD is still policing up the transition’s loose ends, but we’re

proud of the entire team’s effort in this transition success.

Mr. Chairman, that concludes my statement. At this time, I’d be

happy to respond to any questions.

[The prepared statement of General Premo follows:]

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Mr. DAVIS. Thank you.

Mr. Flyzik.

STATEMENT OF JAMES FLYZIK, ACTING ASSISTANT SECRETARY FOR MANAGEMENT, AND CHIEF INFORMATION OFFICER, U.S. DEPARTMENT OF THE TREASURY

Mr. FLYZIK. Mr. Chairman, members of the subcommittee, I appreciate the opportunity to appear today to discuss the FTS 2001

transition. I would like to thank the chairman and other members

of the subcommittee for your continued support and interest in the

improvement of information technology performance and accountability in the Government.

I serve as the Acting Assistant Secretary for Management and

the Chief Information Officer for the Treasury Department. Since

February 1998, I have also served as the vice chair of the Federal

CIO Council, where I play a key role in the direction of information

technology for the Federal Government.

In performing these jobs, I’ve witnessed the growth of online

services changing the way customers expect to interact with their

Government. I would like to preface my remarks with an overall

statement about transition.

In any business, a large scale investment must make business

sense. Information technology is a business investment and should

be treated as such. Today we buy solutions and services, not pieces

and parts. We need to carefully consider the impact to agencies and

services when they have to transition over 100,000 employees in

thousands of locations.

Treasury transitioned from a commercial AT&T infrastructure to

FTS 2000 network B Sprint in 1989 and 1990 time period, from

network B back to Network A in 1996 and 1997 during the price

redetermination and service reallocation. In year 2000 and 2001,

we again transitioned back to Sprint to meet requirements for FTS

2001.

Each of these transitions was time consuming, complex and costly. Two of the transitions were never completed due to problems.

One resulted in significant litigation.

I am a big proponent of Government-wide approaches to IT programs. However, we need to look at details of each program in light

of changing market dynamics and business sense. The new regulations for procurement, the ability to negotiate performance based

contracts, shared savings contracts and the competitive telecommunications marketplace allow us to build new models for partnerships with the private sector. We need to take advantage of the

opportunities at hand and make choices that make business sense

for Government.

Knowing that my time is limited, I would like to address the specific questions in Representative Davis’ letter. I will submit for the

record my comments on the Treasury Department transition during price redetermination and transitions in general.

You asked about specific steps Treasury took. In March 1998, the

acting director of my Office of Corporate Systems Management prepared a memorandum to all bureau chief information officers, advising them of the transition. We then created a Treasury working

group to lead the transition. We held meetings beginning in April,

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monthly thereafter, until award. Each bureau had separate bureau

specific meetings on an as-needed basis. Most bureaus held weekly

or bi-weekly meetings during the transition. I had representation

at all the meetings. Milestones were set and monitored.

Did we take a comprehensive inventory? General Services Administration provided us with a baseline inventory for Sprint and

AT&T as of October 1998. Each bureau identified those, verified

and looked at ways we may consolidate or better engineer the service. This was an ongoing process that became part of our Y2K effort.

Did the Interagency Management Council provide us timely information? The IMC did form a transition subcommittee. A member

of my staff was the chairperson. It was the committee’s role as

stated in their charter to serve as the communication vehicle. They

kept us apprised as best as possible.

Did the IMC and GSA operate in concert? As best they could.

The challenges with transition are substantial and many are unforeseen. The IMC did its best to manage the complex process.

Did Treasury have concerns regarding transitioning to FTS 2001

during the same time as Y2K? Yes. In a memorandum dated July

2, 1999, I stated that no transition activity should take place that

would impact the year 2000 work efforts. I also worked with the

Administrator of GSA and the Commissioner of the IRS to put in

place a 3-year agreement to preclude IRS from transitioning its

customer 800 services. I did not believe then nor do I believe now

that it is possible to transition the IRS infrastructure concurrent

with modernizing its computer system.

In your view, have delays in allowing competition impacted

Treasury? Treasury has many options to acquire telecommunications services. Delays in ordering and transitioning in the first

year after award forced us to look and find other alternative solutions.

Are we concerned that the lack of competition adds cost? As I

mentioned, Treasury has many options for acquiring services. However, in a highly competitive telecommunications marketplace, we

need to encourage as much competition as possible. Advances in

the wireless industry, satellite communications, digital cable services and other deregulated markets will continually change the

telecommunications landscape. We need to position the Government to quickly seize those opportunities as they arise.

In summary, we have been one of the largest civilian users of

GSA FTS services since its inception in 1989, generating over 15

percent of the annual revenue. Our department has always been a

supporter of FTS, participating in the executive and managerial aspects of the program. We use the telecommunications of FTS 2000

to support the largest local and nationwide enterprise networks in

the civilian government. The Treasury network provides mission

critical voice and data communications to both internal and external customers.

Treasury staff also chaired the Interagency Management Council

subcommittee, which advised the IMC, Federal agencies and GSA

on the intergovernmental aspects of the program. We were the first

agency to select an FTS 2001 vendor in January 1999. We did comVerDate 11-MAY-2000 10:07 Jan 29, 2002 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 C:\DOCS\76250.TXT HGOVREF1 PsN: HGOVREF1
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mit to transition all FTS 2000 services to FTS 2001 with the exception of IRS 800 services.

I will submit for the record details of all of our prior Treasury

experiences with transitions. At this point, I’ll be happy to address

any questions the subcommittee wishes to raise. Thank you for inviting me to testify on this important matter.

[The prepared statement of Mr. Flyzik follows:]

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Mr. DAVIS. Thank you, and I want to thank everybody for testifying.

I’m going to start the questioning with Chairman Burton, and

we’ll do 5 minute increments and go to Mr. Turner and come back.

Mr. BURTON. Thank you, Chairman Davis.

Ms. Bates, I’m glad you’ve got your kids here. Do you want to

bring them up to the table with a bullet proof vest? [Laughter.]

I’m kidding.

You said that you were 95 percent switched on voice service. But

you neglected to say that you’re only 55 percent switched on data

service. Why didn’t you mention that?

Ms. BATES. Mr. Chairman, my remarks that we are 95 percent

complete of the transition was an overall completion rate number.

Mr. BURTON. So overall everything’s 95 percent?

Ms. BATES. Overall. There are varying percentages within the

different service elements. But overall, we are 95 percent complete

as of today. And we are targeting a summer timeframe for total

completion.

Mr. BURTON. What percentage of the voice service is completed

right now?

Ms. BATES. 99 percent.

Mr. BURTON. And what percentage of the data service frame

relay, what percentage of that is completed?

Ms. BATES. Better than 80, but the exact figures I will be glad

to submit to you for the record.

Mr. BURTON. These figures, I believe my staff said, are about a

month old, is that right? It’s a month old and it says 55 percent.

You had that kind of a quantum leap in the last month?

Ms. BATES. We are moving ahead very rapidly on some of the

services. The services that are left to transition are very well

known and identified and are being worked very, very hard by the

agencies, and our FTS 2001 contractors. And I’ll be glad to submit

to you the specifics on that.

Mr. BURTON. We’d like to have the specifics. I’m sure Chairman

Davis would like to have them, I’d like to have them.

Ms. BATES. I will submit those.

Mr. BURTON. Because it seems that’s a tremendous amount of

progress that’s been made since this report was issued. There were

three 6 month delays past the 1-year deadline where there wasn’t

that kind of progress. That just seems interesting.

Ms. BATES. I will do so.

Mr. BURTON. The cost for long distance per minute I understand

ranges from 15 cents per minute to $2.10 per minute, depending

on the volume of calls made. The average cost, if the transition had

been completed, would be 3.8 cents per minute. Can you tell us

how much it’s cost the Government and the taxpayers of this country because of these delays?

Ms. BATES. Yes, sir. The delay period that I assume you’re speaking about is from December 6, 2000 to the targeted completion

date.

Mr. BURTON. It’s supposed to be 1 year it was supposed to be

completed. And you had three 6 month extensions. So from the

date of the completion target, yes.

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Ms. BATES. As you recall, right after contract award and right

before transition actually began, both of the incumbent contractors

on FTS 2000 lowered, Sprint and AT&T, lowered their prices to

those of the FTS 2001 contract and continued to track those prices

through late last year.

Mr. BURTON. You don’t need to go into a big long dissertation.

How much additional cost did the taxpayers incur because of the

delays?

Ms. BATES. The delay, the number that I have, sir, is the delay

from December 6, 2000 to the projected completion date, and that

number is $74 million.

Mr. BURTON. $74 million?

Ms. BATES. Yes, sir, from December 6, 2000 through the projected completion date of this summer.

Mr. BURTON. How does GSA justify allowing this to happen? How

do you justify that? I can understand, you know, a slight delay, 3

months, 6 months. But 6 months and then another 6 months and

then another 6 months, why? How do you justify that?

Ms. BATES. The transition planning originally included 2 years.

The transition was targeted to be completed on December 6, 2000.

Such, as I said in my opening statement, did not occur. A lot of

good work went on. There were a lot of mitigating circumstances

with the agencies, as well as the industry, as well as GSA and certainly, as Ms. Koontz said in her statement, there’s certainly a lot

of reasons to go around. Where we found ourselves on December

6th, or the end of last year, was the need to extend the bridge contracts to accommodate the people that had not transitioned. Basically at that time we had two choices, either terminate service or

extend the bridge contracts.

We entered into negotiation with the two incumbent contractors,

AT&T and Sprint.

Mr. BURTON. If I might ask one additional question, Mr. Chairman.

Did you not see these problems beforehand, when they were coming down the pike, as far as the delays and the costs that were

going to be involved, the $78 million? Couldn’t you see those well

in advance so that you could have taken the fork I talked about

earlier and stuck it where it needed to be stuck to get them to get

the job done?

Ms. BATES. I think we all had the fork stuck out, plenty of times.

I’m not being facetious. I think everybody was moving ahead. We

had anticipated that we would be completed. It became to our

knowledge and others late last year that the target completion date

was not going to be met by some of our agencies. We were about

82 percent complete at that time, and we saw that it was not going

to be done, and it was not through lack of effort on the part of anyone.

At that time, we realized that we needed to extend the bridge

contracts.

Mr. BURTON. Let me just say one final thing and then I’ll yield

back to the Chair. That is that, I was in the private sector before,

and I know this is a much larger endeavor. But I was in the private sector, and when a contractor or a contract was negotiated, if

it was not going to meet the time requirements in the contract, we

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would police it, and we would jump on it, and we would try to

make sure that it got completed. If there was an extension required

in a subdivision or something we were working on, we would grant

that.

But we pushed and pushed and pushed. And it just seems like to me, especially since $78 million has been lost because of the

time delay, that GSA could have been a little bit more diligent in

getting this thing done.

Ms. BATES. I believe we did push and push and push, and I think

we took many actions to try and complete the transition, as did our

customers, as did our industry, through the Interagency Management Council, the transition task force, the tremendous coordination effort, the support of all the industry. It was not through lack

of effort on the part of any of the parties.

Unfortunately, it did not occur. The good news is, though, that

many people had transitioned by that time and were achieving the

savings afforded by FTS 2001.

Mr. BURTON. Thank you, Mr. Chairman.

Mr. DAVIS. Thank you very much. I will recognize my ranking

member, but before that, let me just ask a quick question. You’ve

given us incurred costs as of today. But it is possible, looking at

the GAO report, that long distance rates are going to rise under

this during the transition. Ten cents a minute could be as bad as

$1 a minute under the worst scenario, isn’t that correct?

Ms. BATES. Yes, sir.

Mr. DAVIS. So the losses could mount even more until we get into

the FTS 2001 transition service?

Ms. BATES. The $74 million figure that I’ve provided you today

includes all anticipated costs through the end of transition this

summer.

Mr. DAVIS. So that’s our goal, to hold the losses there?

Ms. BATES. Pardon me?

Mr. DAVIS. Our goal is to hold the losses to $74 million?

Ms. BATES. Yes, sir.

Mr. DAVIS. OK. Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

One issue, Ms. Bates, I want to ask you about the payment that was made to AT&T under the bridge contract, that initial $8 million payment, could you tell the committee what that payment was

for?

Ms. BATES. The $8 million payment is a part of the bridge contract, as a part of the overall negotiation of that contract. AT&T

provides FTS 2000 services today via a private network. AT&T in

its proposal had stated that to keep the entire network up at that

time did cause them to incur additional costs.

In addition, the $8 million payment, and perhaps in the second

panel, AT&T would be best to answer this for the specifics, better

than I. But it was essentially to keep that private network up and

going in some of its business systems.

At the time we were negotiating these contracts, Mr. Turner, you

must realize that the Government was in a position where we were

negotiating a short term contract with declining revenues, no guarantees, could be terminated at any time. We were not in the best

position. GSA, at that time, in reviewing the contract and doing the

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negotiations, did make the determination that in a case or circumstances such as this, the overall costs were fair and reasonable.

We checked the marketplace for contracts of similar nature as

well as the cost for tariff services and satisfied ourselves that such

action was appropriate.

Mr. TURNER. When it was apparent that you needed to have a

bridge contract, did you make efforts to try to secure competitors

at that point for the bridge contract?

Ms. BATES. No, sir, we did not. The reason being is the problem

that was at hand was that people were remaining, were still obtaining service off of the FTS 2000 contracts. They had to continue

that service until they could transition to the 2001 contract, so they

could get there. So not extending those contracts would mean termination of service. Adding additional companies to select from at

that time would not have solved the problem. The problem was,

they needed to continue their service until they could move to

something different.

Mr. TURNER. Was it a viable option for an individual agency,

since the FTS is not mandatory, to go to another competitor at that

point in time, rather than going with the bridge contract?

Ms. BATES. You are very correct in stating that the FTS 2001

program is not mandatory. Agencies were free to select all along

the way and still are. People were faced with the dilemma that

they needed to continue the current service until they could transition to something else, whether it be the FTS 2001 contract or

other companies selected through their own acquisition vehicles. So

they needed to continue the service until they could do something

else.

Mr. TURNER. Ms. Koontz, what’s the General Accounting Office perspective on the questions that I just asked about the $8 million

and the lack of competition on the bridge contract?

Ms. KOONTZ. First of all, on the $8 million one-time payment to

AT&T, I think we have to recognize it was a negotiation. There

may be legitimate reasons why AT&T has certain fixed costs associated with them continuing to operate their dedicated network for

the Government in this extension period. However, our view is that

actually none of that would have been necessary had the transition

been completed on time. I think that’s perhaps the perspective to

keep in mind at this point.

Your second question had to do with seeking additional competition at the time.

Mr. TURNER. Yes, whether the agencies themselves could have

done better on their own at that point in time.

Ms. KOONTZ. The agencies were certainly permitted to seek other

competitive means of getting telecommunications. The problem is,

I think, that doing that in a very short-term environment in terms

of running a competition and awarding a contract may have not

been all that reasonable or realistic, pragmatic, at that point in

time.

Mr. TURNER. Is it the burden that the agencies have with regard

to seeking such alternatives, what prohibits them? In other words,

if it had been a private business, I would think that a private business could have handled it and moved to something else and saved

the money.

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Ms. KOONTZ. Perhaps.

Mr. TURNER. Perhaps because it’s Government, somehow we

have constrained the agencies to the degree that they can’t move

that quickly? Is that the problem?

Ms. KOONTZ. Well, they have to follow the procurement system

in order to procure additional telecommunications services. And exactly what the lead time would be in any one situation, I certainly

couldn’t tell you. But it would be something that they would have

to take into consideration in terms of trying to move very quickly

to another solution.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. DAVIS. Thank you very much. I want to go back to the $74 million figure again and ask GAO,

do you have any estimate in terms of how much money you lost because of the lateness in transition?

Ms. KOONTZ. I just heard today, as you did, the number of over $70 million associated with the delays in transition. We haven’t

had a chance yet to independently verify this or to come up with

an independent number at this point.

Mr. DAVIS. I think rather than beat a dead horse here, what I’d

like you to do is to get together with them and do an addendum

to the hearing, where we can get some agreement on what the

numbers are. Let me just ask you, what do you base it on? If you

could tell us how you get to that number.

Ms. BATES. What we did was based on the current schedule for

transition of the remaining people that are left. We priced out that

schedule transition according to the current bridge extension.

Mr. DAVIS. Under the old versus what they’d be paying under the

new, is that the difference?

Ms. BATES. Right. Yes, sir.

Mr. DAVIS. OK. Let me ask, was there any thought given to, for

example, to Sprint, that maybe you could have put this against

their minimum when you were giving them an extension on the old

contract?

Ms. BATES. Certainly—— Mr. DAVIS. See, these minimum guarantees are driving, for better or for worse, great idea when you started. But when you go to

a late transition, it just throws sand in the gears. The thing is, as

you were looking at this and trying to deal with the delays and

stuff, I just wondered, when did you realize that the minimum

guarantees were all of a sudden giving you a problem?

Ms. BATES. Well, let me spend a few minutes here, not too long,

talking about the MRGs and where we are. We’ve had GAO with

us several times helping us determine, with the use of our tools,

when the minimum revenue guarantees will be achieved. And we

are fairly consistent in our projections now that once the transition

is complete and that traffic is moved over that the minimum revenue guarantees will be achieved in year 5 and 6 of the contracts.

I believe Ms. Koontz testified to that or I read it in your report,

but that is our projection at this time.

That precipitated and certainly validated our decision to move

ahead this summer and open up the contracts to further competition. Relative to your original question, if we considered traffic

moving and additional adjustments to the MRG, that has been part

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of a consideration. It’s never been ruled out. It’s not something that

we are actively pursuing at this time.

Mr. DAVIS. Ms. Koontz, you testified that GSA couldn’t obtain usable and complete transition management information from the

contractors, so that they could input into their automated status

tracking system. For instance, in January 2000, Sprint didn’t have

complete information in its data base regarding the status of the

transition.

How feasible would it be to build into future contracts an accountability mechanism which may include penalties that GSA

could apply against the contractor’s guaranteed minimum revenue

over the life of the contract? What’s the feasibility of renegotiating

the current contracts? In this case the contractors had some culpability in that snowball end. Does GAO have suggestions for addressing problems created in large part by contractors? Although it

wasn’t exclusively contractors in this instance, but there’s some

culpability there.

Ms. KOONTZ. I would agree with that. I think the suggestions

that you raised aren’t things that we have specifically studied right

now. But those are all things that would be worth looking at in the

future, not only for this contract, but for future procurements as

well.

Mr. DAVIS. Let me go to the report. At one point, they say long

distance rates could rise to over $1 a minute. That’s more than I

pay in a hotel when I call out. How do you get to that point? How

did we get there? And is it likely to happen, or is that just a theoretical possibility?

Ms. KOONTZ. My understanding for GSA is that it’s not very likely to happen. It has to do with the fact that——

Mr. DAVIS. You’d be crazy as an agency to pay $1 a minute.

You’d be better off going down to a phone booth and putting coins

in.

Ms. KOONTZ. The pay phone would be better, you’re right.

From my understanding, as the revenue comes off the old FTS

2000 contracts and you look at the volume discounts and the volume banding that’s offered under those contracts, the cost of an individual cost can rise pretty high. But, the likelihood of that happening is not very high.

Mr. DAVIS. But it will go over 10 cents a minute, certainly?

Ms. KOONTZ. I don’t have the exact figure. We can get that for

the record, if you like.

Mr. DAVIS. You would concede that it will go to 10 cents a

minute under this?

Ms. BATES. Oh, yes. Yes, the current FTS 2001, the average rate

is about 3.8 cents. Today on the bridge contracts it’s a little over

10, around the 10 to 12 range, depending on the company.

Mr. DAVIS. If you didn’t have the delays in transition, this would

be a great contract. We wouldn’t be here, isn’t that fair to say?

Ms. BATES. I agree. I think, as I said in my statement, that the

program is sound. I think the contracts are good, and transition,

as Mr. Flyzik said in his statement, and General Premo, and all

of us agree, is a difficult thing. It’s something that none of us have

mastered.

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Mr. DAVIS. My time is up. I’m going to ask a question later, you

might be thinking about it, about what if you just had a schedule

where people could buy telecom off the schedule and would that be

more efficient and what are the ramifications of that. I’ll ask everybody to think about that. I’ll ask all of you that, but my time’s up

right now, and I’m going to yield to my colleague from York County.

Mrs. DAVIS. Thank you, Mr. Chairman.

Ms. Bates, you stated in your testimony that GSA will allow local

service providers that currently participate in the Metropolitan

Area Acquisition program to compete for long distance under the

FTS 2001 program in the near future. What’s your understanding

on the MAA contract holders’ eligibility to provide long distance

service in compliance with the 1996 Telecommunications Act?

Ms. BATES. Certainly the ability for companies to come into the

FTS 2001 long distance market is predicated on FCC approval. If

they have not yet received FCC approval to do so, they must do

that. It is predicated upon all of those approvals.

Currently with the MAA program, we have awarded contracts in

over 20 cities to date, and they have been for the most part multiple award contracts. Some of the companies that have been

awarded contracts in the local services area have expressed interest in coming into the long distance market. So I would assume

when we open that up this summer that they will continue with

that interest.

Mrs. DAVIS. I have to apologize, I wasn’t here before, and I

wasn’t here for the 1996 Telecommunications Act, either. But my

understanding—don’t we have to have an act of Congress to allow

some of these guys that you’re talking about as competition to come

in and be the competition? I might have to ask one of my colleagues that.

Mr. DAVIS. I think contracting out, you have discretion, don’t

you?

Ms. BATES. Some of the contract holders of our MAA contracts

are such as the AT&T company and Qwest Communications that

would be our long distance providers today, and I’m sure they

would be interested in coming into the long distance market.

Where it comes into play relative to the act of 1996 is the regional Bell operating companies do have to receive approval from

the Federal Communications Commission and other approvals to

enter into long distance markets. Certainly us awarding a contract

to them would be predicated on receiving the appropriate approvals.

Mrs. DAVIS. I’d like to go back to the minimum revenue guarantees, just to get a clarification myself. As I understood someone to

say, it was not mandatory to do the transitioning and go into the

FTS 2001. But yet we had a very high minimum revenue guarantee.

What would happen with that contract if most of the people

opted out of FTS 2001? Then what kind of cost would it be to the

taxpayer?

Ms. BATES. I referenced in my testimony the Interagency Management Council, as did Mr. Flyzik and General Premo. The Interagency Management Council consists of senior representatives from

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the 14 Cabinet agencies, 4 large independent agencies, as well as

a representative from the small agency council. The IMC has

served as the FTS program board of directors over the last 10 or

so years. They also participated actively in the development of this

strategy.

At that time, the IMC believed that the Government, by combining its requirements and maximizing its buying power could get

the best deal for the Government, both in technical services and

price. In so doing, the IMC committed in a letter to the Administrator of the General Services Administration, to transition their

current traffic and to stay with the FTS 2001 program. They did

not waive their choice to do other things, but they committed to the

program.

Therefore, and as it has played out, the major agencies have

stayed with the program. So I have every reason to believe, based

on the facts and the figures, and the projections, that those minimum revenue guarantees will be achieved in year 5 and 6 of the

contract.

Mrs. DAVIS. Would it be safe to say if a lot of the agencies opted

out, we’d be in trouble?

Ms. BATES. If a lot of agencies opted out, we would be in trouble.

But I’m confident that the current service providers will rise to the

occasion and provide the service in accordance with the terms and

conditions of the contract, not only to keep the service that has

transitioned to them, but also to compete actively for gaining the

new requirements and the requirements of the telecommunications

industry are ever-increasing.

Mrs. DAVIS. Thank you, Mr. Chairman.

Mr. DAVIS. Thank you very much. Chairman Burton.

Mr. BURTON. Yes, I have to leave, but I did have one more question. I was interested in the Treasury Department’s comments. You

froze its transition to the FTS 2001 program and set up your own

contract. And can you elaborate a little bit more and just tell us

why you felt that was absolutely necessary?

Mr. FLYZIK. Yes, sir. What I froze in transition was during the

price redetermination of the FTS 2000. Treasury was selected in

year 7, the transition at that time from Sprint to AT&T. Following

transitioning of our IRS and our voice services, we had a lot of

delays and a lot of problems. The delays were substantial.

At that point in time, I chose to stop transition and not transition any data. In retrospect, it turned out to be to Treasury’s advantage, because we were within a year of awarding FTS 2001, and

AT&T did not win. Had I transitioned during that year, I would

have transitioned again the following year.

So we chose at that point in time to stop that particular transition. We also negotiated in the late 1980’s a separate contract with

an integrator, which provides telecommunications services to the

Treasury Department.

I also chose during the FTS 2001 transition to not transition

AT&T 800 services. I did not believe it was possible to transition

IRS 800 services again while at the same time trying to modernize

the IRS where some of their very first applications to the modernization dealt with automatic call routing and better customer

service to paying taxpayers.

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So consequently, Treasury winds up in a situation where we

have IRS 800 services via AT&T, we have access to Sprint and

MCI WorldCom under FTS 2001, and I have access to Qwest and

Sprint under my own Treasury communications system contract. In

all cases, we negotiated these agreements to be prices equal to or

better than the FTS 2001 prices.

This has allowed me to position Treasury to be in a very favorable position to constantly have forces. I believe our program and

GSA’s complement each other quite well, because we’ve added a

pool of competitiveness in the Government market. Even though

we put all this in place, I still contribute, or we, Treasury, contribute over 15 percent of the revenue to the FTS 2000 program. I am

one of the largest programs there. Yet we do have a mix of services

that allows me to pretty much get to whichever provider that I

need do.

Mr. BURTON. Do you think the competitiveness that you’ve been

able to utilize has been to the benefit of your department?

Mr. FLYZIK. Absolutely.

Mr. BURTON. And do you think that should be the case with

every other department in Government?

Mr. FLYZIK. I can’t speak to the other departments.

Mr. BURTON. Let me phrase that question a little differently. Do

you think if every other Government agency adopted the policy

that you did, it would save money and be more efficient?

Mr. FLYZIK. Yes.

Mr. BURTON. Mr. Chairman, I think that answers any questions

I have. Thank you very much.

Mr. DAVIS. Thank you. Let me just continue on that for a minute,

and then I’ll recognize Mr. Turner.

Mr. Flyzik, go ahead on that. With all the economies of scale that

GSA gets in trying to put together a very complex telecommunications contract for the Government, and here you have one agency

undercutting you, it just goes back to the question I was going to

pose earlier, and that is something you noted in your testimony,

Mr. Flyzik, that we need to look at the details of each program in

light of changing market dynamics and business sense.

The new regulations for procurement, the ability to negotiate

performance based contracts, shared savings contracts, the competitive telecommunications marketplace, all allow us to build new

models for partnerships with the private sector. We need to take

advantage of the opportunities at hand, make choices that make

business sense for Government. That’s what you said, and I think

you’ve got a great reputation across the Government for what you

do.

In your view, what changes could be made to the FTS 2001 contract vehicle to reflect the changing marketplace now? And do you

believe the FTS contract vehicles are too lengthy in time?

Mr. FLYZIK. As I mentioned, I think that the FTS program 2001

has benefited Treasury greatly, and Government in general. It has

been a great tool to leverage, and the prices are, you can’t argue

that the prices, taking out transition, the prices have been absolutely phenomenal in terms of savings to the Government.

Mr. DAVIS. But that sets a ceiling for you when you go and negotiate with somebody else, right?

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Mr. FLYZIK. That’s right. And I think, though, if you look at it,

it’s complementary. GSA and Treasury are complementary in

bringing forces to nature. The only thing that I’m concerned about

in a new model is we need to think down the road where the industry’s going. Clearly, wireless Internet and advances in digital cable

and everything else are going to offer tremendous opportunities to

the Government and to the country in general in terms of productivity improvements. We just need to be positioned in the mainstream to move quickly to take advantage of those.

I think it’s very possible that the FTS 2001 can position itself to

offer these services. And I think by keeping some other competitive

forces in the community, like people like Treasury are doing, it’s

going to encourage creativity and innovation in the FTS 2001 contracts to be flexible, to make sure that we can capture these services when they become available.

Mr. DAVIS. Thank you.

Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

Ms. Bates, now you’ve heard Mr. Flyzik, how he is able to leverage against your FTS 2001 contractors to get a better deal. Why

did you decide to select only two vendors for the FTS 2000 contract,

rather than three or four or whatever?

Ms. BATES. I did hear Mr. Flyzik, and I want to say that I do

agree with Jim’s position. I think we have complementary services,

and I appreciate the fact that because of FTS 2001, he was able

to achieve the prices he has. I think that’s an example of good Government.

Why we selected two contractors on the initial round, I’m going

to make the point that we selected two at the initial. The strategy

does call, as I stated earlier, for opening of competition and addition of new entrants, which we will be doing this summer.

At the time we were doing this acquisition, there were three companies in the industry that were vying for this business. In order

to maximize our principles of robust competition, in achieving a

competition to the level that we wanted to see in technical services

and price, we felt it was in the Government’s best interest to have

some winners and perhaps some losers. The strategy called for one

contractor and perhaps two.

And through the acquisition process, which by some acquisition

officials would be considered sporting, we conducted the first round

of competition. We awarded one contract which turned out to be

Sprint. Then we gave all additional offerors, including Sprint, a

chance to bid again and better those prices to see if we would make

a second award.

Indeed, as we know now, MCI WorldCom did do that and they

were granted the second award. If that had not been the case,

there would have only been one award.

So our goal is to achieve maximum competition while also getting

the very excellent prices for the Government. And also offering our

customers choice. We really wanted to, because we do have robust

competition within the contract today. These two contractors are

constantly fighting it out for each agency’s business and their new

business. We’re gone from the days of where an agency was assigned to a contractor or that our contracts were mandatory.

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So we’re seeing competition, I think pretty strong competition

today. And certainly after this summer we’ll see even more.

Mr. TURNER. How many additional vendors do you expect to be

competitive for the contract?

Ms. Bates. Well, you know, in this marketplace, sometimes I’m

reluctant to say, because the companies change. But certainly we

have the two incumbents, Sprint and MCI WorldCom. I have heard

from other companies such as AT&T and Qwest that they are certainly interested in learning more about the program. Perhaps

some of the regional Bell operating companies, as they receive approval from the FCC in accordance with the Telecom Reform Act,

may be interested. It’s an evolving process, as people are in different stages of their business.

Mr. TURNER. Ms. Koontz, from your perspective, would you say,

be able to say or have an opinion as to whether or not as a result

of FTS 2001 competition that the Government’s receiving the best

service and the best price that’s possible?

Ms. KOONTZ. We haven’t really examined the prices or compared

them to the market at this point in time. I think the thing that’s

critical to remember about FTS 2001, and it’s something that was

alluded to earlier, is the fact that it’s not mandatory. It’s a very

powerful incentive for the current contractors to provide competitive prices. Because agencies can go elsewhere if they find the services are non-appealing or if they find out that the prices are too

high. When more competition is added, I think that will put the

pressures on even more.

So I think that it will be agencies that ultimately tell us whether

the services are good or whether the prices are good and whether

they stay with the program.

Mr. TURNER. Do you make any evaluation of the choices available to the individual agencies to determine how aggressive agencies are in selecting the best provider?

Ms. KOONTZ. We haven’t done that kind of evaluation. I will say,

though, that with the FTS 2001 awards, the agencies had to select

their vendor this time. Under the prior program, they were just assigned to a vendor by GSA. But during this time period, they had

to make an analysis and had to determine which vendor they

thought they wanted maybe for all of their services or part of their

services. Some agencies decided to take both vendors for different

kinds of services.

This was a new experience in many agencies, to say the least.

And obviously, those agencies who had a lot of capacity, who are

very sophisticated buyers like DOD and Treasury, had a lot easier

time of it perhaps than some smaller agencies who don’t have those

kinds of telecommunications resources available. Although GSA

certainly did help them with making those decisions.

Mr. TURNER. Thank you, Mr. Chairman.

Mr. DAVIS. I just have a few more questions. General, let me ask

you a few questions. Agencies, including DOD, have raised a number of problems during transitions, including inaccurate, inconsistent late notification of service order acceptance and completion

from the contractors, a variety of billing issues that impair DOD’s

efforts to properly charge back users for services, as well as problems with pre-transition and post-transition customer support, inVerDate 11-MAY-2000 10:07 Jan 29, 2002 Jkt 000000 PO 00000 Frm 00100 Fmt 6633 Sfmt 6633 C:\DOCS\76250.TXT HGOVREF1 PsN: HGOVREF1
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cluding the timely resolution of the preceding problems as they’ve

come up.

Defense personnel had a particular problem trying to verify and

accurately bill out millions of dollars worth of invoices. What do

you view as the most difficult transition support issues that the

Department faced, and how were you able to resolve those issues?

General PREMO. I think the most difficult issue of the transition

at the beginning was the fact that the 2000 contract and the 2001

contract caused us to change every service and unplug and then

replug operations. That presented a challenge, because there was

no rollover of service through the old contract. But we got that

under control through our operations center and our aggressive approach to that.

The outstanding problem right now is the resolution of these billing issues that are based on our data base and the issues with the

vendor’s data bases. I think we’re going to get these under control.

They were painful. We’re still working our way through that, but

I believe that ultimately this last problem will be resolved. I think

the fact that it was an unplug and then a replug and then every

single service had to be reattached was the biggest issue.

Mr. DAVIS. Were there problems that seemed to be unique to

FTS 2001 transition, or do you think they were problems that

might have been encountered in any project of that magnitude?

General PREMO. Well, they’re similar to problems we had in our

own recompete of our DISN contract where we had a new contractor and had to unplug and replug. So we’d been through that before.

Mr. DAVIS. As you look ahead to the future, what lessons, if

you’re doing this again, what perspectives could you offer GSA, and

even yourself, as you’re looking ahead to this next time?

General PREMO. I guess the data base. An accurate data base of

your current holdings and how that would be used to transition

your future holdings. We’re fortunate in DISA, and we were the

agent for DOD in this process, that this is what we do. So we have

our own data base based on FTS 2000. That helped us immeasurably in getting the process underway.

So if I had one recommendation, it’s that all agencies have access

to an accurate, current data base that you can use to spring to the

next transition should that occur.

Mr. DAVIS. That would be the next question which I’ll ask Ms.

Bates. Ms. Bates, in your testimony, you state that customers estimated that the contractor maintained inventories were no better

than 60 percent accurate. If inventories were inaccurate in vendor

data bases, why did GSA, or what did GSA do to ensure that the

contracts were properly modified to reflect that lack of service?

Ms. BATES. As I stated in my opening remarks, I think the entire

Government as well as the industry, finds maintaining inventories

is difficult. It’s not something that people like to do. And configuration control and configuration management was a problem, even in

Y2K. I think that we now know, both GSA, our customer agencies

and the industry, that we need to do a better job in the future of

maintaining these inventories so we are more flexible.

We in FTS have put in place and have decided, at the recommendation of GAO, will maintain an inventory that will be accuVerDate 11-MAY-2000 10:07 Jan 29, 2002 Jkt 000000 PO 00000 Frm 00101 Fmt 6633 Sfmt 6633 C:\DOCS\76250.TXT HGOVREF1 PsN: HGOVREF1
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rate and up to date, of these assets as they move forward, we will

pay stronger attention, both our customers as well as ourselves.

Mr. DAVIS. GAO notes that the $8 million fee paid to AT&T was

passed on to agencies as a 20 percent service fee over a 2-month

period. Now, I want to understand why the fee was passed on to

the agencies that were already handling sharp price increases. I

guess maybe you had nowhere else to get it. Some agencies could

face increases up to, as we said before, $1 a minute on the long distance.

Have agencies complained to you regarding the overall budgetary

impact?

Ms. BATES. Certainly agencies complained. The worst thing, having been a customer and been in NASA for many years, the Government for many years, for that matter, the worst thing that can

happen to a program manager in an agency is to have a budget increase, or a cost increase in the current budget year. No one greets

that with a smile. It’s very, very difficult.

So when the agencies did realize that there was going to be an

increase, they really had a difficult time. I credit very much the

strength of the Interagency Management Council in this case. The

IMC came together, addressed the issue, decided how they wanted

us to bill it to them and in what fashion. And it was clearly, I

think, representative of teamwork and collegial effort, of recognizing there’s a problem and dealing with it.

Mr. DAVIS. Has GSA considered renegotiating this contract now?

Ms. BATES. Renegotiating the current FTS 2001 contract?

Mr. DAVIS. And the MRGs or anything else.

Ms. BATES. We have not closed out any options at this time.

Mr. DAVIS. I think that’s really all I wanted to get on the record.

I think I’ll ask one other.

You note in your testimony that agencies are free to leave the

FTS 2001 program. The subcommittee has gotten some information

that may not be the case always. We’ve been told that IMC has

been used to keep agencies in the contract, and also Qwest testified

that Energy had a punitive clause in their contract that states fees

would go up at any part of the department unless the FTS 2000

transitioned, which would be a barrier to competition. Are you

aware of any of this?

Ms. BATES. I certainly can’t speak to the Department of Energy.

But as I stated earlier, the IMC is the governing body and the

board of directors for FTS. On behalf of their departments, as well

as thinking Government-wide, this was their decision that we bring

together the buying power of the Government and pool our requirements to achieve the highest technical solutions at the lowest costs.

In order to do that, you have to stay with the program. And the

IMC, in a commitment to the then-administrator, Dave Barram, of

GSA, made that commitment. Certainly that does not in any way

affect the fact that they do have a choice. I think the challenge is

FTS and our FTS 2001 contractors now to keep those agencies on

the contract by providing them with the highest level of service,

new technology and low costs. The challenge is ours.

Mr. DAVIS. If you could go back a couple years, what would you

do different? If you could wave a wand, I know putting a contract

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together like this is very complex, what would you do differently

to avert transition problems?

Ms. BATES. Well, you know, and I have to tell you, I’m always

one that’s quoted as saying it’s OK to look back, as long as you

don’t stare. I’m really not one—— Mr. DAVIS. You can just blink here. [Laughter.]

Ms. BATES. I quite frankly, as being one that participated, I

think our strategy is sound. I think the strategy is as sound today

as it was when we were here discussing it in 1997. I think at the

time, where the industry was, where the Government was, we

broke new ground.

So I really feel that all the actions to date and where we’re going

in the future are the right things to do. We’ve learned some lessons

with the transition. As General Premo and Mr. Flyzik have stated,

transitions of this magnitude are very, very difficult. Any transition

is difficult. And this is difficult. We’ve learned lessons.

I think what we need to do is to make sure to capitalize on those

lessons learned, we document them and as we move ahead and define the strategy for the future and what comes next, that those

lessons aren’t lost.

Mr. DAVIS. I don’t think they are lost, but could you go back 2

years, and you saw you were having this transition, you would

have made some changes in the contract, right?

Ms. BATES. You said I wouldn’t change the acquisition at all, and

I wouldn’t change anything having to do with the strategy. On the

transition, I think that I would have tried to encourage and facilitated to a greater degree more up front planning. Planning, which

includes getting your inventories up to date, planning, deciding

whether or not you want to do a like for like transition, or do you

want to do a major upgrade and reconfiguration. That type of planning is something I think that would have facilitated the process,

and something I probably would have done differently.

Mr. DAVIS. But if you’d known the transition was going to be delayed like this and you were going to be paying all this money to

existing contractors, wouldn’t you have constructed it differently?

Ms. BATES. Yes.

Mr. DAVIS. That’s all I’m trying to get. I thought I heard you saying no.

Any other questions any panelists have? Anyone here want to

add anything? I understand, Ms. Bates, you’ll be here for the second panel, if you want to say anything at that point.

Ms. BATES. I’ll save my closing remarks for then.

Mr. DAVIS. That will be fine. I’m going to give you ample opportunity.

Let me thank all of you for coming. If you think of anything

when you get back that you want to rebut or add, the record will

be kept open for a couple of weeks. We’d appreciate hearing from

you and building as complete a record as we can.

So thank you very much, and we’ll move on to the next panel.

We’re going to now welcome our second panel, Mr. Jerry

Edgerton of WorldCom, Mr. Anthony D’Agata of Sprint, Mr. John

Doherty of AT&T and Mr. James Payne of Qwest.

Ms. Bates, you can sit at the table or you can sit back there and

take a break. Whatever you’d like. You did fine.

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Gentlemen, it’s the policy of this committee that we swear all

witnesses. If you would rise with me and raise your right hands.

[Witnesses sworn.]

Mr. DAVIS. Thank you.

To afford sufficient time for questions, if you would just limit

yourself to 5 minutes in the opening remarks. All written statements from witnesses will be made part of the permanent record.

Why don’t we start with Mr. Edgerton and go down. Thank you for

being here.

STATEMENT OF JERRY A. EDGERTON, SENIOR VICE

PRESIDENT, WORLDCOM GOVERNMENT MARKETS

Mr. EDGERTON. Thank you. My name is Jerry Edgerton. I’m a

senior vice president for WorldCom Government Markets.

WorldCom is the second largest provider of long distance services

in the United States, and a leader in all distance communications

services with operations in more than 65 countries.

WorldCom now proudly serves more than 75 Federal agencies

and organizations through the FTS 2001 program, the largest,

most diverse telecommunications program ever attempted. I’m

proud that WorldCom has taken such a key role in bringing advanced technologies and competitive pricing to the Federal Government at such significant savings over the previous contract.

Members of the subcommittee may remember a time when there

was little or no competition in the telecommunications industry.

Thankfully, those days are behind us. I commend the General Services Administration and Congress for creating a framework that

has harvested the benefits of competition for the Government and

ultimately for the taxpayer.

GSA estimates that last year alone the FTS 2001 contract saved the Federal Government $150 million. It will save another $250

million this year over the previous contract. As a result of FTS

2001 competition, savings to the Government will continue to grow,

even as new and enhanced services are added.

Despite this success, I recognize the subcommittee members have

concerns regarding the pace of transition. We share those concerns

for one simple reason: delayed transition means delayed revenue

for us. We estimate the transition delay has cost us more than

$100 million in lost revenue.

In anticipation of the FTS 2001 contract, we began putting tools

into place and resources to make our transition to the service a

success. For example, we established a program management and

business office. We initiated the systems development for the FTS

unique requirements before being awarded the contract. We implemented switch augmentation and a build-out program to ensure

our success.

When we were awarded the contract, we immediately began the

following actions. We increased our staff to assure we had adequate

resources. We implemented intensive training for our staffs as well

as the Government agencies. We put processes in place for pricing

an order and implementation. We established a dedicated order

entry and provisioning hub for FTS 2001.

We worked with the local exchange carriers to establish focused

FTS 2001 teams. We expanded our use of small business subVerDate 11-MAY-2000 10:07 Jan 29, 2002 Jkt 000000 PO 00000 Frm 00104 Fmt 6633 Sfmt 6633 C:\DOCS\76250.TXT HGOVREF1 PsN: HGOVREF1
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contractors to help with implementation. We also conducted high

level reviews of the program within our own WorldCom organization, and we conducted extensive executive agency visits to assure

and encourage rapid transition.

Unfortunately, the factors affecting the majority of transition

delays were beyond our control. They’ve been referenced here, I’ll

repeat them again: the agency selection process in choosing its vendor, Y2K concerns, incomplete or inaccurate records or agency

records, delayed orders, certainly local phone company delays in

implementation, and occasionally upgrades and redesigns that

went beyond a like for like transition.

Let me address some of these issues specifically. The first agency

to choose WorldCom was the Department of Interior in March

1999, 2 months after we were awarded the contract. The last major

agency to select WorldCom did so in April 2000, 16 months after

contract was awarded, and only 8 months prior to the end of the

FTS 2000 bridge contract.

Understandably, some agencies were distracted by potential Y2K

concerns and delayed their FTS 2001 decisionmaking process. Once

agencies made their choices, some were delayed from placing orders

for services to WorldCom. This was often caused by out-of-date

agency or incumbent vendor records.

By April 30, 2000, which was the date we told agencies we needed their orders to be able to complete transition on time, we had

received only 35 percent of expected orders. Many agencies did not

place their orders until last summer. That said, I must commend

agencies like the Department of Agriculture, the Department of Defense, which has already testified here, and the Social Security Administration, for putting the processes in place to assure a timely

transition.

The local phone companies contributed significantly to these

delays. As already has been mentioned, the largest company,

Verizon, faced a strike last year that produced delays that we’re

still contending with. Currently we have 78 outstanding FTS orders with Verizon that are more than 100 days old.

Verizon is not the only culprit, as the volume of FTS 2001 transition orders has overwhelmed many of the local phone companies.

Qwest, for example, has 32 outstanding FTS orders that are now

over 100 days old.

We’ve heard a lot of debate about the minimum revenue guarantee. Let me put the MRG in perspective from a WorldCom point of

view. FTS 2001 presents a tremendous opportunity. It also presents a tremendous risk. To ensure that WorldCom and our competitors would respond to the unique requirements of the solicitation and propose the best possible prices and services, GSA provided a minimum revenue guarantee to the eventual winners,

again with congressional review.

The amount of the MRG was a fundamental issue in our business case. That is exactly why the prices continue to decline and

as a consequence of the MRG, will allow us to continue to make

the necessary investments to ensure that the Government stays in

front from a competitive price and a technology perspective. As has

already been mentioned, we anticipate reaching the minimum reveVerDate 11-MAY-2000 10:07 Jan 29, 2002 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 C:\DOCS\76250.TXT HGOVREF1 PsN: HGOVREF1
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nue level in year 6 despite decreasing prices and competition on

many fronts.

WorldCom is pleased with the progress of transition. We and our

customers consider FTS 2001 to be a success. As of today, more

than 95 percent of the transition has been completed, and we will

be at 100 percent by summer. We have modified the contract with

more than 50 enhancements such as advanced Internet services

and managed data network services. We’ve also looked at adding

electronic Government services that will further improve services

to the citizen and reduce cost.

We believe that the FTS 2001 contract has lived up to its promises and delivered to the Federal Government great innovations in

telecommunications technology, exceptional services, all at truly

competitive prices. The contract marks a new era in Government

telecommunications, an era of which we all should be proud. We

will continue to work closely with this subcommittee, GSA, the

Interagency Management Council and our customers to ensure continued success of this contract throughout its life.

Thank you. I will answer any questions you have.

[The prepared statement of Mr. Edgerton follows:]

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Mr. DAVIS. Thank you very much.

Mr. D’Agata.

STATEMENT OF ANTHONY D’AGATA, VICE PRESIDENT AND

GENERAL MANAGER, SPRINT’S GOVERNMENT SERVICES DIVISION

Mr. D’AGATA. Good afternoon, Mr. Chairman, members of the

committee. My name is Tony D’Agata, vice president and general

manager of Sprint’s government systems division.

I would like to thank the committee for inviting me to speak

today. Sprint’s position as an FTS 2000 and 2001 program provider

is a matter of great pride to the entire corporation. The award of

FTS 2000 in December 1988 brought Sprint the recognition and

credibility it needed to become a leader in the industry.

My testimony makes three points. First, Sprint’s FTS 2001 transition is substantially completed. Second, Sprint ensured that all of

its customers were eligible for FTS 2001 prices independent of their

actual stage of transition. And three, Sprint urges the committee

to stay the course and continue to support FTS 2001.

First, the FTS 2001 transition was by all measures a massive

and complex undertaking. To put it in perspective, the voice traffic

that Sprint had to transition to FTS 2001 was about three times

that transitioned to FTS 2000 in 1990. And more importantly, the

FTS 2001 traffic now represents less than half the network that we

had to transition. The remainder was made up of complex data

transmission services, most of which did not even exist in 1990.

In spite of the fact that one, the transition did not really begin

until Y2K, two, that there were shortages of agency resources necessary to assess the needs of the agency and make vendor selections, three, that the parties had to add modifications to the contract to complete transition, and four, that there were shortages of

local access services due to unprecedented demand for bandwidth,

and a labor stoppage, this monumental task was substantially finished in less than 18 months after Y2K.

Did the transition of every circuit at each of the 26,000 locations

go perfectly? No. However, this task was accomplished in about the

same time required for the much smaller FTS 2000 voice transition

10 years ago.

As shown in exhibit 1, 92 percent of the transition is complete.

The balance of all Sprint’s FTS 2000 bridge contract customers will

be transitioned to FTS 2001 contract rates by May 1. Second,

Sprint has always been a responsible partner to the Government.

In September 1999, Sprint reduced its prices for all of its existing

bridge contract customers to FTS 2001 levels. It was the right

thing to do. That price promotion saved the Government more than

$62 million.

However, the unintended impact of that price promotion was

that it removed the financial incentive to participate vigorously in

the transition process. As shown in exhibit 2, Sprint did not begin

to receive a significant amount of transition orders until the end

of the first quarter of 2000.

Exhibit 3 shows that in October 2000, Sprint still had not received approximately 3,000 transition orders. The expiration of the

promotion on October 1, 2000 encouraged participation in the tranVerDate 11-MAY-2000 10:07 Jan 29, 2002 Jkt 000000 PO 00000 Frm 00116 Fmt 6633 Sfmt 6633 C:\DOCS\76250.TXT HGOVREF1 PsN: HGOVREF1
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sition. Outstanding transition orders fell from about 3,000 on October 1, 2000 to 345 by the end of the first quarter of 2001.

Notably, the extension of the transition period beyond 2000 did

not increase the cost of the FTS 2001 transition. Our price promotion meant that Sprint’s customers paid bridge contract prices

for only 10 months. That is shorter than any period contemplated

by any customer at contract award.

Finally, Sprint urges that you stay the course. No one can dispute that the FTS 2001 competition was fair and vigorous. The

FTS 2001 award prices reset the price of telecommunications services in the marketplace. By contract, those prices decrease about 20

percent each year. Competition exists on a day to day basis. Agencies continue to have competitive choices.

When the arduous and complex FTS 2001 transition is com- pleted, Sprint will have invested approximately $100 million in

preparing to deliver FTS 2001 services to the Government. This investment was predicated upon representations by the Government

that we would have the time and the opportunity to recover this

expense within a program valued at $5 billion.

We are almost through that challenging transition period, and

with your support, we can make this program even more successful

than FTS 2000. Though the program is in its infancy, it has saved

the Government $150 million in fiscal year 2000 and will save the

Government an additional $250 million in fiscal year 2001. To

weaken the program now would be at a significant cost to the taxpayers, the agencies and the vendors.

I’d be happy to answer any questions that you may have.

[The prepared statement of Mr. D’Agata follows:]

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Mr. DAVIS. Thank you very much.

Mr. Doherty.

STATEMENT OF JOHN J. DOHERTY, VICE PRESIDENT, AT&T

GOVERNMENT MARKETS

Mr. DOHERTY. Chairman Davis, ranking Member Turner, and

members of the subcommittee, I’m John Doherty, vice president of

AT&T government markets. AT&T appreciates the opportunity to

appear here before you today to discuss the FTS 2000 program.

You have asked questions regarding the impact of the lack of

competition in the Federal telecommunications market. What I

plan to do this afternoon is address that issue. I have a more complete discussion of AT&T’s position in our written testimony.

AT&T appears before you today as a major provider of telecommunications services to the Federal Government. We have provided a vast array of voice and data services to numerous agencies

under the predecessor contract to FTS 2001, FTS 2000. FTS 2000

was a highly successful program and we are proud to have had a

hand in saving taxpayers billions of dollars over its 10 year life and

providing the Government state-of-the-art telecommunications

services.

FTS 2001 replaces the FTS 2001 contract in December 1998. We

supported the concept of open, end to end competition for telecommunications services. And thus, AT&T was a willing competitor

for this procurement.

The program envisioned utilizing multiple contracts of overlapping scope and duration. Indeed, for this reason, under the terms

of the FTS 2001 contract, and MAA contracts, contractors are permitted by modification to provide services under the other contract

after a 1-year forbearance period. That 1 year forbearance period

ended for FTS 2001 services in December 1999.

Although the program awardees were WorldCom and Sprint, because the program envisioned utilizing multiple contracts, AT&T

remained enthusiastic to provide competitive services to the Government. We competed for and won the first three and seven other

MAAs. Despite the presence of several MAA competitors, however,

GSA had not modified the MAAs to provide FTS 2001 services, citing the need to fulfil the FTS 2001 minimum revenue guarantees.

Mr. Chairman, the delay of increased competition has deprived

agencies of access to multiple vendors, new service offerings and innovation directed toward each agency’s mission. Moreover, under

the current model, agencies have been effectively discouraged from

entertaining offers from the marketplace. Throughout the process,

Mr. Chairman, AT&T has supported the agencies. Specifically, we

have submitted a modification proposal in December 1999 to the

GSA to permit us to bring competitive telecommunications services

to agencies under our MAA contracts.

We’ve executed extensions to the FTS 2000 contract, first in December 1998, with a base period of 1 year and two 6 month options,

saving the Government a total of $130 million. At a request of GSA

and because the transition was delayed, we executed another extension contract that terminates in December of this year. Because

of the greatly reduced volumes on our current FTS 2000 network,

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we were unable to continue the discounts offered in the previous

extension contracts.

Mr. Chairman, we have heard today about the challenges associated with the FTS 2001 program. The question is, where do we go

from here. The dynamics of this marketplace are such that familiar

solutions are no longer sufficient to address the needs of agencies

today.

For this reason, AT&T is not here to say simply, give us an MAA

modification to allow us to offer FTS 2001 services, and the program will be competitive. No, instead, we believe the Government

should take a broad view of the agencies’ telecommunications

needs. The market is offering new commercial technologies and

services that offer the agencies the benefit of savings and the timely delivery of services.

In light of the availability of alternatives to the FTS 2001 contracts, and the changes in the telecommunications marketplace,

GSA should open the programs to competition. Indeed, GSA should

maximize commercial offerings from the market and open its supply schedules to include telecommunications services. In this way,

agencies will receive the benefits of competition, and being able to

select the services they need and customize those services to fill

their respective missions.

Mr. Chairman, AT&T also believes that GSA should eliminate

the minimum revenue guarantees, or at the very least, offset those

minimum revenue guarantees by the revenue that was available to

those contractors during the period of transition but delayed, and

they did not receive because the consequence of their own failure

to perform under the 2001 contract. Moreover, agencies should

have the freedom to execute a range of market focused options to

permit competitive forces to bring savings and state-of-the-art technology to the agencies.

Mr. Chairman, AT&T stands ready to assist the agencies, the

GSA and this committee in these efforts. We appreciate the opportunity to testify today, and look forward to answering any questions the committee may have.

[The prepared statement of Mr. Doherty follows:]

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Mr. DAVIS. Thank you very much.

Mr. Payne.

STATEMENT OF JAMES F.X. PAYNE, SENIOR VICE PRESIDENT,

QWEST COMMUNICATIONS INTERNATIONAL INC.

Mr. PAYNE. Good afternoon, Mr. Chairman, members of the subcommittee. My name is Jim Payne.

Thank you for the opportunity to testify today. I’m proud of my

long history with the FTS, starting with the original FTS in the

mid-1980’s, and also as a key player in Sprint’s FTS 2000 and 2001

contracts. Over the last 18 months, I’ve been senior vice president

for the government division of Qwest. In fact, from 1995 to the

award of the contracts, I was intimately involved in the negotiation

of guiding principles as you can see on chart one that is supposed

to govern the FTS program. These principles were carefully negotiated with this committee and most of the vendors present in this

room today.

Qwest is the Nation’s fourth largest long distance provider and

a recognized leader in new and emerging IT based complex data

and broad band technologies. Qwest is also a facility based provider

with networks in the Untied States, Europe and the Pacific Rim.

Qwest is also a stakeholder in the FTS program. We have four

MAA contracts, which were awarded to us last year, for local services.

If you take a look at graph No. 2, we have taken the principles

and we have put them in a depiction. As indicated in the graphic,

you will see before you the MAA contracts were central to the

group of multiple, overlapping and staggered contracts. This is language pulled from the principles. They were established to inject

intense competition into the FTS marketplace.

The competition created by the MAAs was to be augmented also

by niche contracts, a tool for the GSA to focus competition where

and when needed. In fact, the GSA characterized its environment

as ruthless in many public declarations.

Under the FTS program strategy, GSA was to aggressively pursue MAAs, niche contracts and other opportunities to maximize

competition. It was intended that this new world order would replace the old world order, with mandatory use with only two FTS

providers. The new FTS program was to mirror the Telecom Act of

1996.

Mr. Chairman, I’m here to report that simply hasn’t happened.

Qwest absolutely endorses the FTS goals of maximizing competition and to achieve the best service and prices for the Government

as expressed in the FTS guiding principles.

As depicted on graph No. 3, however, there’s a different reality

model we believe that’s happening. We like to explain that the GSA

has been able to essentially execute the plan. After almost 3 years

from the expiration of FTS 2000, there simply is not enough competition. Agencies still have choices that are limited to Sprint, MCI

and AT&T. The sole source, FTS 2000 bridge contracts, prove this

point. The Federal agencies will be paying as much as $1.10 per

minute.

I believe everyone in this room has aunts and grandmothers living in single room apartments that pay 5 cents per minute. Plus

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the GSA paid AT&T $8 million for what we feel is a signing bonus.

So I ask the panel, where is the buyer’s market and where is the

ruthless competition we looked for starting back in 1995 when the

principles were established?

Some may expect Qwest to challenge the FTS 2001 program. In

fact, as you can see from my statement, we fully support the principles as established in 1995. The problem has been execution.

GSA’s transition and the MRG issues have precluded an openly

competitive marketplace. As a result, the GSA has delayed the

opening of the MAA contracts for long distance marketplace providers.

At the GSA FTS conference in Las Vegas last month, we also

learned that the GSA additionally has hired a Government sales

force and sent it to sell Sprint and MCI services. Presumably this

is related to the MRG. Under FTS 2000, vendors, not the GSA, sold

these services. Given the exploding demand for bandwidth that

Qwest sees every day, why can’t the current vendors achieve these

goals by themselves?

Federal agencies are feeling the effects of GSA’s deliberate MRG

driven policy every day. The FTS 2000 services are taking up to 6

months as indicated in today’s GAO report released this morning,

for simple private line services, and the lack of many technical innovations which could make them more efficient and responsive to

the Government. The taxpayer is losing. For the record, Qwest is

provisioning the same bandwidth of services under Treasury and

related contracts in approximately 36 days.

The solution is simple. Let’s get back to the plan. It should not

take a vendor to protest to get there. Competition must rule.

Qwest recommends that the GSA open the MAA contracts to FTS

2001 immediately. Don’t let an obsession with retiring the FTS

2001 minimum revenue guarantees distort the overriding goals of

the program. Qwest has another recommendation. Since this MRG

issue is central to FTS 2001, the GSA should report publicly and

monthly on all bridge contracts, revenue and FTS 2000 revenue by

vendor and by month. This issue needs more sunshine.

Mr. Chairman and members of the subcommittee, the marketplace can work wonders. I invite you to give us a chance. Let’s get

back to the plan and let’s give competition an opportunity to work.

Thank you for this opportunity to share Qwest’s views. I am prepared to answer your questions.

[The prepared statement of Mr. Payne follows:]

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Mr. DAVIS. Well, thank you all very much. That was very interesting.

Let me start with WorldCom. Jerry, two of the five reasons you

cite for unexpected transition delays is the time taken by agencies

to select their FTS 2001 service providers and the slow pace of

agency ordering. You mentioned the examples of Interior as having

selected you just 2 months after you were awarded an FTS 2001

contract. Although according to GSA’s current transition status report, Interior now is about 82 percent complete in its transition.

If the timing of agency selection was a critical factor in delay,

why hasn’t the Interior Department’s transition been completed?

Any idea?

Mr. EDGERTON. Mr. Chairman, the Department of Interior has

eight bureaus, all of which have different telecommunications

needs. We worked with each of those individual bureaus, and in effect have achieved the level of implementation that we have now.

So just the mere selection by the agency did not create an order

flow. We had to go out and again deal with the problem of inadequate records. In the situation with Interior and some of the bureaus, we actually participated in the order entry process, created

orders on behalf of the individual bureaus, and subsequently have

achieved the level of implementation success that we have.

Mr. DAVIS. One of the risks you cite in satisfying the FTS 2001

contracts MRG’s concerns the MAA contractors cherry picking customers by failing to offer the complete range of FTS 2001 services.

What’s your suggestion for mitigating that risk? Will you mandate

a range of services that need to be offered? Aren’t these mandatory

services stipulated to some degree in the contract? What’s your feel

for that?

Mr. EDGERTON. I’m not familiar with the details of the MAA contracts. I certainly would not be opposed to it if they meet the same

terms and conditions of the contract obligations that we have. We

have extensive obligations from the point of view of pricing, in

terms of billing, in terms of ubiquity. If anybody can meet those

same things, then they certainly should be allowed to participate

in accordance with the program that’s been laid out.

Mr. DAVIS. The GSA does allow the FTS 2001 contractors like

yourself to submit proposals to offer local services in select MAA

markets. Should a similar stipulation be established to guard

against cherry picking on your behalf as well?

Mr. EDGERTON. Oh, absolutely.

Mr. DAVIS. So do you think——

Mr. EDGERTON. If we chose to participate in the MAAs, we would

expect to offer the same services that the current MAA providers

offer.

Mr. DAVIS. This contract, the FTS 2001, requires the contractors

to review at least semiannually all network and access service arrangements and identify opportunities to reduce the Government’s

costs through optimization of these services. Presumably, that optimization and analysis would have been done as part of the transition planning. How much of that access optimization was completed during transition and how did the compression of transition

timeframes affect your ability to complete that?

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Mr. EDGERTON. Because of the issue with the records and the

knowledge of the service that’s available, we basically have not

done any of the access consolidation at this time. We intend to do

that. In many situations, the Government facilities are shared tenant facilities, with agencies using different providers and so forth.

We’ve begun that process to make sure that the appropriate and

the most cost efficient access is utilized. That process is underway

now.

Mr. DAVIS. Let me move to Sprint, Mr. D’Agata. In your testimony, you indicated that none of your customers suffered any financial consequences from the extension of transition activities beyond December 2000, is that right? Now, Sprint’s own bridge contract prices increased as of October rather than December, so there

was no additional increase in December for those customers, but

those AT&T network A customers transitioning to Sprint were not

transitioned by December 6th, and they would have received a substantial increase, wouldn’t they, in the cost of the bridge services?

Mr. D’AGATA. Yes, the point of my testimony, Mr. Chairman, is

that the normal transition period for an undertaking of this nature

would require perhaps 24 months to complete. So one could argue

that from, say, June 1999 to June 2001, that would be the normal

transition period. Our customers, so our customers would be paying

premium prices from anywhere from zero to 24 months under the

old bridge contracts.

Sprint chose to pass on a promotion to our existing customer base to the tune of about $62 million. That equated to them only

having to pay these premium prices for about 10 months. So significantly less than they would have normally under normal circumstances.

Mr. DAVIS. You also indicate that transitioning Sprint to existing

FTS 2000 customers to FTS 2001 was challenging because it required orders be manually shepherded through your billing and ordering system to ensure that the provisioning systems didn’t automatically discount existing local access. Despite these measures,

there were instances in which those automatic disconnects did

occur, correct?

Mr. D’AGATA. That is true, sir. However, I will point out that our

record of performance is very good, if not excellent. In fact, we’ve

had fewer FCC troubles of any carrier for the last 5 years.

Mr. DAVIS. When can GSA count on having an accurate and complete transition management information data base from Sprint?

Mr. D’AGATA. We’ve delivered the data base already. We are enhancing that and the enhanced version of that data base is expected to be delivered in the May timeframe.

Mr. DAVIS. OK. Although you’ve indicated Sprint’s transition network is substantially complete, we understand that there are about

2,000 more orders still to be completed, most of which are now expected to be completed by the end of May, is that true?

Mr. D’AGATA. Yes, sir. In fact, what we have decided to do is to

provide FTS 2001 rates to our bridge contract customers by May

1st. So in effect, our bridge contract will go away on May 1st.

Mr. DAVIS. Thank you very much. I’ve got more questions for this

side, but let me turn it over to Mr. Turner.

Mr. TURNER. Thank you, Mr. Chairman.

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I’m a little bit curious, Mr. Doherty, you seem to place a lot of

the blame on the additional costs the Government has experienced

on the failure of the two contractees to implement FTS 2000 properly. Specifically, I noticed in your written testimony you were critical of Sprint for delaying implementation. Would you tell us why

you feel that is the case, and how do you evaluate that cost and

separate it from all of the other multiple reasons that apparently

there were additional costs experienced by the Government?

Mr. DOHERTY. Certainly, that’s an excellent question, Mr. Turner. As AT&T participated in the actual procurement, the FTS 2001

procurement, all of the vendors were evaluated against the same

set of requirements, which as testified earlier, Ms. Bates indicated

the transition schedule and data bases and billing capabilities, provisioning capabilities, etc.

And two points I’d like to make. First is, throughout that process, we made it very clear to the Government that we didn’t think

the transition schedule that they had in the procurement was realistic. We had been through, Mr. Flyzik testified earlier this afternoon, with the difficulty of transitions. We pointed that out numerous times to the GSA, that we thought the schedule wasn’t realistic, based on our experience, not only in the Federal marketplace,

but quite frankly, in the commercial marketplace.

Second, when we were debriefed after being told we did not receive a contract, we were told that our scores for some of our capabilities as far as systems had been downgraded compared to our

competitors. When we sought to understand why, they indicated

that our competitors had actually said they could meet those timetables that were in the RFP. We actually said we’d need additional

time to actually have all those capabilities.

So it’s our opinion that they were awarded these contracts indicating to the Government they had these capabilities, and in fact,

when the Government went to transition, those capabilities did not

exist. And therefore, the savings that the agencies would have received if in fact they would have transitioned on time were not received.

The only savings that the Government got actually in most of

1999 were the discounts that AT&T announced in the spring of

1999 to bring our prices in line with the two contracts that were

awarded.

Mr. TURNER. Mr. D’Agata, I guess I have to ask you to respond

to that.

Mr. D’AGATA. Well, Sprint also provided a promotion to our existing customers, sir, in September 1999, which carried forth for 13

months. So our customers enjoyed the benefits of FTS 2001 rates

in 1999 and through 2000.

Mr. TURNER. But I think Mr. Doherty is saying that Sprint made

misrepresentations regarding its ability to meet the transition

dates that the GSA was expecting.

Mr. D’AGATA. We delivered the system capabilities that were required to complete transition. Any limitations that we had in system capabilities did not affect transition at all. GSA alluded to

some management documentation that was not provided adequately or in the format that they were seeking. However, that had

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nothing to do with transition. That data was provided, but in a

manual format, and had no effect on transition at all.

Mr. TURNER. Mr. Doherty, your comments, were they also directed toward WorldCom, or were your comments primarily directed toward the delay experienced by Sprint?

Mr. DOHERTY. Well, Mr. Turner, actually, I’m a little surprised

by my colleague here to my right’s response. Most obviously, we are

not privileged to see how the contracts are being administered. But

I do recall in the press there was an announcement by Sprint that

they had not staffed up appropriately for the procurement and that

they would need to invest an additional, I believe, up to $100 million to bring their systems in line with what the RFP called for.

So my source of understanding is public knowledge. I am not

aware of issues with WorldCom as it pertains to systems, although

there’s been quite a bit of debate recently about the last mile in

getting access. Quite frankly, we all were aware when we did the

RFP that getting access was a significant issue, and you were to

be prepared, in the several years that we spent responding to the

RFP with GSA, to be prepared to have those negotiations with the

RBOCs and the CLECTs and everybody else that would provide the

last mile, so you could transition customers.

Mr. TURNER. I might ask you, Mr. Doherty and Mr. Payne,

whether AT&T and Qwest have been able to secure any of the

agencies’ contracts through trying to compete with the two providers, WorldCom and Sprint. Have you all been successful in achieving any of those contracts, even though you were not awarded the

contract by GSA?

Mr. DOHERTY. Certainly there are competitions that we’re participating in on a regular basis that are for services where the

bandwidth and the technology is not included in FTS 2001. To my

understanding, the bandwidth in FTS 2001 only goes up to OC3.

Qwest is regularly provisioning networks at capacities well beyond

that.

What I’d like to focus on, however, is agencies that have come

to us with requirements, asking to get off the bridge contract. Perhaps one of the agencies being charged $1.10, and being told

they’ve waited 2 years for a transition plan. This is actually a live

example, in Oak Ridge, TN, I happened to manage that PBX. I was

in the building with the contracting officer, and I literally had the

ability to go down to that basement area and make the transition

on the spot. That agency sought permission through their IMC

member and received a very prompt letter that said no.

So part of our frustration is when agencies see the lower prices

and see the better bandwidth and technology, they do go back to

their IMC members, and that’s where the enforcement process becomes problematic. Frankly, many agencies believe that this is a

mandatory use contract. Many agencies believe that this commitment that was signed by IFC members is contractually binding or

legally binding. Of course, we don’t accept the position at all. In

fact, I think the GSA openly has said it’s not mandatory. Many

agencies still believe this is mandatory.

Mr. DOHERTY. Mr. Turner, if I may. To Mr. Payne’s comments,

it’s been mentioned quite a bit about this being a non-mandatory

contract. And I can tell you personally that Ms. Bates’ predecessor,

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Mr. Fisher, called me and shared the news that AT&T was not

awarded the contract in January 1999, but indicated that AT&T

would go ahead and win an MAA contract and ‘‘you’re right back

in it.’’ We then went out and won the first three MAA contracts

and submitted a proposal to the GSA, the 1-year forbearance period, in the fall of 1999. That proposal has never been acted upon.

In addition to the point of non-mandatory, the letter signed by

agencies indicating they would help to fulfill the minimum revenue

guarantee, there were many senior people within Government at

the time that felt that they were signing up to fulfill those requirements over the 8 year period of the contract. It’s my understanding

to Mr. Payne’s point, some of the agencies have been told that if

they did not transition, they would not have access to funds in the

revolving IT fund to help with transition if they did not choose a

vendor who they were going to transition to.

Mr. PAYNE. Mr. Turner, if I could add another example. It was

recently discovered through a GAO protest that the Social Security

Administration data network had been evaluated and all of us that

were bidding, you have to understand, don’t know the FTS prices.

The Department of Justice has asked that the GSA release them,

but it’s apparently a legal dispute. At BAFO, all the bidders submitted network costs. We attempted to first guess what FTS rates

were, then we had them decide what to discount off.

It was apparently discovered in the evaluation that the Social Security Administration evaluated for the MCI offering at zero. So I

discovered that I’m actually expected to beat zero. All of us that

were expected to compete had to come up with a price and then

discount. That’s pretty alarming.

This was ostensibly an open competition which had really nothing to do with FTS 2000. And we believe it was probably an agency

misfocusing. Perhaps this will help retire the minimum revenue

guarantee. The Government thought they were saving $13 million,

and upon a hearing at the GAO, it was discovered they probably

picked the highest priced solution.

Now, that’s still in play, and we’re anxious to get more clarification, but those are the facts that have been discussed at the GAO.

Mr. TURNER. Thank you, Mr. Chairman. I’ve been told if you can

stir up a good argument, there is certainly the potential for competition. [Laughter.]

Mr. DAVIS. We certainly seem to have two sides to this one. Let

me go on to AT&T now. Mr. Doherty, over the last 5 months, I’ve

noticed an increased in your revenues provided under the bridge

contract for the FTS 2000 program. Will you explain the basis for

the dramatic rate increase?

Mr. DOHERTY. Yes, Mr. Chairman. Let me start with, at the time

of the award, AT&T never envisioned actually entering into a 3rd

year bridge contract. If you look at the requirements, of the 2001

contract, the transition was to be completed much earlier than

that. In addition, we offered discounts on our previous extension

contracts. But as we came down to the end of the second contract,

roughly 75 percent of the volume had been transitioned to other

contracts.

And as Ms. Bates testified earlier, AT&T has a dedicated network supporting FTS 2000 with dedicated systems to do that. And

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at the Government’s request, to enter in another extension period,

we were simply not able to offer those discounts any longer.

Mr. DAVIS. You didn’t have any incentive to, did you? You were

out on FTS 2001, you were sitting there, they needed you, why

would you?

Mr. DOHERTY. Well, incentive obviously is a piece of that. But as

anyone in industry will tell you, without a volume commitment,

without a time commitment, as I think Ms. Bates testified, there

was no reason to continue those discounts. The future was, quite

frankly, very uncertain.

Mr. DAVIS. OK. That’s an honest answer.

Given the sharp increases in prices per minute charged to agencies under the latest extension of the FTS 2000 bridge contracts,

as the GAO states, our rate could go up to more than $1 a minute.

Does AT&T have concerns this could hurt their competitive future

in the Federal marketplace, or you would look at each new, you

would price differently just on future vehicles?

Mr. DOHERTY. Yes. Mr. Chairman, we have attempted to enter

into other contracts, to the question asked earlier, with other agencies. In my testimony, my oral testimony, I mentioned how the

agencies have been discouraged to do that. That has been quite

frustrating, not only to us but to agencies. Because we have offered

them other contract vehicles where they could move some of their

services and we would actually extend those discounts. At every opportunity, again, they have been discouraged from doing that. Let me turn to the $8 million payment. The reason that number

wasn’t much higher is we are concerned about, we have a long

term commitment to this marketplace. Actually our costs to maintain these systems was much higher. We looked at the balance of

upsetting the agencies and their budgets, etc. So the number was

much lower than it would have been. And we continue to want to

work with the GSA to figure out ways to enter into a long term

contract so we can have rates that are just that, long term and

lower than a short term bridge contract, which was discussed earlier this afternoon.

Mr. DAVIS. I had mentioned earlier, to the earlier panel, and I’ll

ask you, you had discussed in your testimony moving to a telecommunications services schedule, kind of like a GSA schedule and

then you could shop from there. Do you want to give me a further

comment on that concept? By the way, I’ve heard that going out in

the industry, into some agencies and contractors, those same kinds

of comments. I just want to flesh it out a little.

Mr. DOHERTY. OK, well, I’d like to expand it somewhat, just a

little, going back to the question you asked Mr. Edgerton earlier.

It’s our position that any modification to the MAA contract should

be for whatever service any industry player can bring, whether it’s

one particular service, data service, a voice service. These are nonmandatory, these are optional services. We believe that GSA

should allow all industry players to bring to bear whatever those

capabilities are.

I also believe that the GSA and other agencies ought to think

very broadly about how they allow industry to bring new emerging

services to bear. For example, the schedules. There’s no reason why

some of the services that are currently offered by industry in fact

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could be put on a schedule. And agencies could go out with task

orders and look at the different offerings from different vendors,

and make decisions independent of the FTS 2001 program.

Quite frankly, and it’s my understanding that the overhead

that’s on the schedules is much different from what is the overhead

that’s currently being applied to FTS 2000. Again, competition

within the GSA would be good for the agencies, forcing not only industry but Government to look at how they recoup their costs.

Mr. DAVIS. To what extent has AT&T had to work with the

RBOCs during the transition and did you have any delays in transition working with that, the same delays working with the

RBOCs?

Mr. DOHERTY. Our experience in the transition, you’re referring

to, Mr. Chairman? Our experience has been actually on the other

side, where we were scheduled to disconnect services, but for whatever reason the new service provider was not prepared, we got to

come back in and work with the RBOC because they don’t turn off

that circuit, because the income vendor was not prepared to transition the service.

But on the other side, we clearly have many years of working

with the RBOCs and CLECs to make sure that access is provided

in a timely manner.

Mr. DAVIS. I want to followup. Mr. Turner asked earlier of GSA, but AT&T did receive that one time payment of $8 million. What

was the reason for that? Isn’t this an outmoded infrastructure that

the Federal Government already paid for?

Mr. DOHERTY. Mr. Chairman, actually no. Over the life of the

contract, we have added, as I think you’ve heard today, a number

of new services throughout the life of FTS 2000. And as we added

new services, we needed to add new capabilities to all of our systems, and quite frankly, invest dramatically in the infrastructure

that supports this private network.

So at the time, when the Government said they’d like to go into

a third extension contract, we simply, with the volumes that had

left the network and the expenses associated with those private,

dedicated systems, we had to somehow have some type of up front

payment to cover that.

Mr. DAVIS. OK. Let me move to Qwest. In your written testimony, you comment on Qwest’s protest of a Social Security Administration decision in which MCI had an advantage because of pricing information it obtained through its involvement with FTS 2001.

As a result of this experience, do you think that limits should be

placed on a company’s contracting and subcontracting activities to

avoid the appearance of impropriety, and what if any suggestions

does Qwest have for preventing future incidents like this?

Mr. PAYNE. The SSA bid was very important, this was last summer, this was the first large complex procurement that was conducted after the award of FTS 2001. There was a lot of confusion

about the ability to use FTS 2001. Because you did have a choice

to use it as a vendor. The team that I was subcontracted to decided

to beat the FTS 2001 prices, and we were prepared to beat them

dramatically.

We did, as I was saying earlier, we were not able to know what

the FTS rates were, but I think there was enough market force

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competition that we made a reasonable guess, then we took a dramatic discount lower. Frankly, we were all stunned to see that the

team that we were on didn’t win.

Now, my team did not raise the protest. It was the Rockwell

team. And Rockwell carried forward the protest, and it was just recently disclosed that there was an evaluation mistake made. Someone thought that it was FTS 2001, it should be three, evaluated at

zero. It ties my arms behind my back. Not only did I not know the

price points, but the evaluation model was given virtually free.

If this is the carry forward of FAA, FTI contract, and other contracts, how is competition to reign here? Exactly where does a competitor go?

Mr. DAVIS. I’m going to give everybody a chance to respond. I

just have a couple more questions for you, then I’ll give you all a

chance, if there’s anything you want to add, and then allow Ms.

Bates to sum up.

Again, Mr. Payne, in your testimony you suggest that niche contracts be used for very specific services as part of the FTS program

as originally planned. What kind of service needs would they address? How would they be best used? Only during a transition period?

Mr. PAYNE. Certainly. The technology is moving, I mean, this is

a bit of a cliche, but technology is moving very rapidly. New technology is being brought forward at all times. And you can’t expect

the complex modification process on FTS 2001 to keep up with it.

You could have simple niche contracts where cybercenters, Web

hosting, total care where you can, there’s actually technology now

that you can leave networks in place and change out the management of those networks. Qwest is capable of managing AT&T,

Sprint or MCI’s network any time through products that have come

forward in technology.

So transitions are not the same as they used to be. These are the

types of technology that should be coming forward forcefully, either

in niche contracts——

Mr. DAVIS. Could MCI manage a Qwest network?

Mr. PAYNE. If the technology that we have exists on theirs, sure.

But the question is, this should come forward.

Mr. DAVIS. Just trying to be fair. [Laughter.]

Mr. PAYNE. Mr. Doherty mentioned a beneficiary. He used to regularly preach to us that the technology would come into the FTS

2001, or the MAAs would go into a niche contract, and then once

stabilized and more generally available, it would move into the FSS

side. So there would be this wonderful cycle of competition. It just

simply hasn’t happened.

Mr. DAVIS. In your testimony, you state, moreover, the current

FTS 2001 contracts are even unable to provide some of the most

basic components of existing FTS 2000 service offerings. Do you

want to elaborate on that?

Mr. PAYNE. Yes. I think a good example is the Department of

Justice. There’s new information I heard this morning, so I don’t

presume to be an expert here. But right after the contract was

awarded, up to the last year, Justice was put in the position, and

they were not the only agency, that the contract, as it expired on

FTS 2000, comparable to 1995 technology, was not available in

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2001. So there was a long period of time before these contract mods

were completed so they’d have parity, at 1995 technology.

Many of those agencies had to wait for features such as this before they could complete the transition. That process is not available to us outside vendors. We don’t know the status of contract

mods. We only can presume when we talk to the agencies. But it

has prevented, I think largely, the Justice Consolidated Network,

from moving very quickly forward into the new FTS 2001 environment.

Mr. DAVIS. Let me ask if anybody wants to add anything.

Mr. EDGERTON. Mr. Chairman, I’d like to comment on the suggestions that there was something improper about the Social Security Administration procurement. That procurement was for equipment, lots of equipment and software. And I have no idea how the

communications or 800 service was evaluated.

Mr. DAVIS. You don’t do that? That’s not your job, right?

Mr. EDGERTON. Absolutely not. But we offered superior technology and a superior solution to the request for proposal.

Mr. DAVIS. And that was in a bid protest?

Mr. PAYNE. Yes, the redacted version was released about 3 weeks

ago, as an appropriate forum where all that will be resolved.

Mr. DAVIS. Anything else anybody wants to add? Ms. Bates, do

you want to add anything?

Ms. BATES. I certainly feel I’m in good company sitting at this

table, having worked—— Mr. DAVIS. You can referee here in between them. [Laughter.]

Ms. BATES. Well, you know, that thought did come to mind, I did

stay back there until the appropriate time. I have worked with all

of these gentlemen over the past many years and many positions.

I’m encouraged from what I’ve seen here today. I think competition

is flourishing, as we imagined it would. There’s more competition

between the incumbents in our program than there has been in the

past. And the potential new entrants are already beginning to

emerge.

I think our customers are already benefiting from lower prices,

more influence on program matters, more choices of technology and

suppliers and a wider range of commercial services. Transition to

FTS 2001 is essentially complete, and we will have it complete this

summer. I would like at this time, and at that time, too, to close

the book on transition and really focus all of our efforts, at this

table, the customers, and with the help of your committee, to look

forward as to how we can bring new and enhanced services to the

Government and how we can always do our business better.

For me personally, within the Federal Technology Service, as the

Commissioner, I intend to push ahead and not look back but continue to push ahead in implementing the recommendations of the

General Accounting Office and any other thing that I can do to

make this program more robust. And I thank you for your time.

Mr. DAVIS. Thank you. I want to thank everybody for your time.

Mr. Turner, did you have any more questions?

Mr. TURNER. Yes, a couple of questions and one comment, which

we might want to ask Ms. Bates to announce very loudly that FTS

2001 is not mandatory. That seems to be the question.

Ms. BATES. FTS 2001 is not mandatory. [Laughter.]

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Mr. TURNER. We’ve got her under oath here.

And one of the things that I was kind of curious about in terms

of the comments I believe Mr. Payne made about that, is it not true

that those who win that competition do in effect receive the stamp

of approval of the GSA and, from an agency perspective, it’s just

easier to go that way? I mean, isn’t it really the advantage that it

represents to those who win that competition?

Ms. BATES. Well, I think you’re correct. It’s not only just easier

to go that way, but we have the integrity of the acquisition process

in play, the competitive forces, the way the Government does its

business. We’ve had streamlined acquisition over the last several

years. But I think getting back to our strategy and our principles

as well, of the IMC coming together, bringing together the buying

power of the Government and as such, in exchange for getting high

technology and low prices, the commitment to stay with the program, although it is not mandatory.

However, we are going to, in keeping with the principle of maximizing competition, as I’ve stated before, we have it today, we’re

going to continue by this summer opening up to additional new entrants. And I’m pleased to see that there’s already interest in that.

Mr. TURNER. After listening to the testimony today, I was going

to suggest to you that you might remind our friends at AT&T that

they spend millions of dollars on public relations when they could

have taken a little bit of that budget and eliminated that $1.10 per

minute phone charge. [Laughter.]

Ms. BATES. I thank you for doing that for me.

Mr. DAVIS. Thank you very much.

Mr. TURNER. I have just one other question. I wanted to inquire,

and this may require a bit more lengthy discussion and time than

we have now, but I’d really like each of your responses to my

thought on whether or minimum revenue guarantees really promote competition. Or are they even necessary in today’s competitive environment? Ms. Bates, you can respond to that if you’d like

and any others on the panel.

Ms. BATES. Thank you, I will. Because it is a fairly complex subject, I will also submit written comments for the record. I think the

MRGs, at the time we were doing this back in the 1997 timeframe,

were absolutely appropriate. We were advised by the industry,

which many of the familiar faces in this room were in this room

then, advised us that the non-mandatory program, the industry,

with the sizable commitment that we were asking them to make

and the high expectation of extremely low prices and high technology, that a high minimum revenue guarantee was what it would

take to bring them to the table to meet the Government’s expectations. We validated this through other contracts of this nature that

were being let in the industry. So I think it was appropriate at the

time.

In today’s environment, I think we need to take another look.

Things have changed, competition is robust, clearly, as can be seen

here today. Perhaps we don’t need the enticement of such a large

minimum revenue guarantee, nor do we want one. So this is something that we in FTS are looking at already. Within the metropolitan area access, the MAA program, we have reduced to a very minimum level the minimum revenue guarantees. For that program,

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anyway, we are still seeing robust competition, high technology and

low prices. So certainly, we’re trying to test and look and see.

But I think it’s a valid question and one we should take seriously

and study as we move ahead.

Mr. PAYNE. Mr. Turner, I’d like to offer a comment. I think it’s

still being said, in light of all the changes economically, the Internet is still doubling every 90 days. The IDG group estimates that

the Federal Government spends $40 billion every year. My question is, why can’t the vendors get these minimums?

My other question is, the scope of the FTS 2001 contract has

been enormously broadened. It includes international services, unlimited bandwidth, any technology, any hardware can be brought

to that contract. What is wrong with the economic model that this

much effort has to be devoted to fill up their buckets?

I say go back and look at the incentives in these bridge contracts.

I want to ask a question. I thought I heard that the transition with

Sprint won’t be finished until June 30th. Their bridge contract expires on June 6th. Where does this end?

I think the economic model, someone said this to me years ago,

the best contracts manage themselves. You don’t need Government

to get involved in pushing things around the table. I’d like to see

an environment where we have that.

Mr. DOHERTY. Yes, Mr. Turner, I’d like to respond as well. First

of all, I assure you, I’ll spend the next several days looking for the $1.10 minute. I was briefed earlier this week, and I understand our

average cost right now is just under 10 cents, which I think is consistent with Ms. Bates’ testimony earlier.

As far as the minimum revenue guarantees, I think to a certain

degree it doesn’t entice industry to offer potentially a lower price,

knowing there is some guarantee of business. However, when it

gets to the point where it’s an impediment and you’re now running

a program based on these commitments and you no longer can do

things you normally would have liked to have done, add new competitors, because you now are so concerned about meeting this, I

think it’s a problem.

I also believe that once, when the Government puts that out, it’s

also tied to industry performing like they said they would do when

they responded to the RFP. The fact that there’s been delays has

impacted the Government’s ability to meet that minimum revenue

guarantee, and in fact is the reason why there’s not new competitors coming in under this program today.

Mr. TURNER. I probably ought to let our other two panelists take

the fifth amendment on that one right now. If you’d like to comment, I know you probably have a little different view on it.

Mr. D’AGATA. Just to make a couple of comments, one in particular on your suggestion of a schedule situation. The minimum revenue guarantee does help contractors to propose better prices. It

helps them to assure themselves that they’re going to retire their

system investment that’s required on a contract such as FTS 2001.

We had to expend significant moneys, I think we pointed that out

in our testimony. So it does provide some assurance that we would

be able to retire that investment.

The schedule in itself may not provide the best prices to all the

agencies. A contract such as FTS 2001 assures that every agency,

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whether it’s a small agency like a PBGC or an American Indian

tribe to enjoy the benefits of a large buy like FTS 2001.

So individual agencies certainly can take advantage of having

their own programs or their own contracts. But it’s for the smaller

agencies that we would have a challenge in assuring that they

would receive the best price as possible.

Mr. EDGERTON. Mr. Chairman, I’d like to make a comment. I

brought a prop here so that you could get some feeling for what the

commitments are and the requirements are for this contract. I’d

like to share with you, this bill for 1 month that amounts to $5,000

that we make specifically because of the billing requirements for

the Government. So that’s a fairly unique requirement that we had

to plan for that was not a commercial requirement and so forth. So

that is—— Mr. DAVIS. A $5,000 bill?

Mr. EDGERTON. This is a $5,000 bill. So it almost weighs that

much. [Laughter.]

I’d also like to make one comment. I spent 10 years at the left

end of the table down here—[laughter]—and I’m beginning to smell

the fragrance of sour apples. Thank you.

Mr. PAYNE. I think the difference is that MCI was not in the FTS

2000 contract, but Qwest is. We are an FTS 2001 provider, as an

MAA. We’re in that overlapping contract.

Mr. DAVIS. Anybody else want the last word? [Laughter.]

We appreciate everybody getting everything on the record. It’s

been very, very helpful to us, very articulate spokespeople all the

way around. We appreciate your being here.

Before we close, I want to take a moment to thank everybody for

attending the subcommittee’s hearing today. I want to thank the

witnesses, Chairman Burton, Congressman Turner and other Members for participating. I want to thank my staff for organizing it,

I think it’s been a very productive hearing.

I’m now entering into the record the briefing memo distributed

to subcommittee members.

We will hold the record open for 2 weeks from this date for those

who may want to forward submissions for possible inclusions. And

these proceedings are closed. Thank you.

[Whereupon, at 5 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

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