[House Hearing, 107 Congress] [From the U.S. Government Publishing Office] 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 _______ U.S. GOVERNMENT PRINTING OFFICE 76-250 WASHINGTON : 2001 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON GOVERNMENT REFORM DAN BURTON, Indiana, Chairman BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California CONSTANCE A. MORELLA, Maryland TOM LANTOS, California CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania STEPHEN HORN, California PATSY T. MINK, Hawaii JOHN L. MICA, Florida CAROLYN B. MALONEY, New York THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington, MARK E. SOUDER, Indiana DC JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio BOB BARR, Georgia ROD R. BLAGOJEVICH, Illinois DAN MILLER, Florida DANNY K. DAVIS, Illinois DOUG OSE, California JOHN F. TIERNEY, Massachusetts RON LEWIS, Kentucky JIM TURNER, Texas JO ANN DAVIS, Virginia THOMAS H. ALLEN, Maine TODD RUSSELL PLATTS, Pennsylvania JANICE D. SCHAKOWSKY, Illinois DAVE WELDON, Florida WM. LACY CLAY, Missouri CHRIS CANNON, Utah ------ ------ ADAM H. PUTNAM, Florida ------ ------ C.L. ``BUTCH'' OTTER, Idaho ------ EDWARD L. SCHROCK, Virginia 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 JIM TURNER, Texas STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania DOUG OSE, California PATSY T. MINK, Hawaii EDWARD L. SCHROCK, Virginia 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 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 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. 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 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. 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 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 co-authored 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, 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. 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:] [GRAPHIC] [TIFF OMITTED] T6250.001 [GRAPHIC] [TIFF OMITTED] T6250.002 [GRAPHIC] [TIFF OMITTED] T6250.003 [GRAPHIC] [TIFF OMITTED] T6250.004 [GRAPHIC] [TIFF OMITTED] T6250.005 [GRAPHIC] [TIFF OMITTED] T6250.006 [GRAPHIC] [TIFF OMITTED] T6250.007 [GRAPHIC] [TIFF OMITTED] T6250.008 [GRAPHIC] [TIFF OMITTED] T6250.009 [GRAPHIC] [TIFF OMITTED] T6250.010 [GRAPHIC] [TIFF OMITTED] T6250.011 [GRAPHIC] [TIFF OMITTED] T6250.012 [GRAPHIC] [TIFF OMITTED] T6250.013 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-of-the-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. 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:] [GRAPHIC] [TIFF OMITTED] T6250.014 [GRAPHIC] [TIFF OMITTED] T6250.015 [GRAPHIC] [TIFF OMITTED] T6250.016 [GRAPHIC] [TIFF OMITTED] T6250.017 [GRAPHIC] [TIFF OMITTED] T6250.018 [GRAPHIC] [TIFF OMITTED] T6250.019 [GRAPHIC] [TIFF OMITTED] T6250.020 [GRAPHIC] [TIFF OMITTED] T6250.021 [GRAPHIC] [TIFF OMITTED] T6250.022 [GRAPHIC] [TIFF OMITTED] T6250.023 [GRAPHIC] [TIFF OMITTED] T6250.024 [GRAPHIC] [TIFF OMITTED] T6250.025 [GRAPHIC] [TIFF OMITTED] T6250.026 [GRAPHIC] [TIFF OMITTED] T6250.027 [GRAPHIC] [TIFF OMITTED] T6250.028 [GRAPHIC] [TIFF OMITTED] T6250.029 [GRAPHIC] [TIFF OMITTED] T6250.030 [GRAPHIC] [TIFF OMITTED] T6250.031 [GRAPHIC] [TIFF OMITTED] T6250.032 [GRAPHIC] [TIFF OMITTED] T6250.033 [GRAPHIC] [TIFF OMITTED] T6250.034 [GRAPHIC] [TIFF OMITTED] T6250.035 [GRAPHIC] [TIFF OMITTED] T6250.036 [GRAPHIC] [TIFF OMITTED] T6250.037 [GRAPHIC] [TIFF OMITTED] T6250.038 [GRAPHIC] [TIFF OMITTED] T6250.039 [GRAPHIC] [TIFF OMITTED] T6250.040 [GRAPHIC] [TIFF OMITTED] T6250.041 [GRAPHIC] [TIFF OMITTED] T6250.042 [GRAPHIC] [TIFF OMITTED] T6250.043 [GRAPHIC] [TIFF OMITTED] T6250.044 [GRAPHIC] [TIFF OMITTED] T6250.045 [GRAPHIC] [TIFF OMITTED] T6250.046 [GRAPHIC] [TIFF OMITTED] T6250.047 [GRAPHIC] [TIFF OMITTED] T6250.048 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, 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 almost $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. 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:] [GRAPHIC] [TIFF OMITTED] T6250.049 [GRAPHIC] [TIFF OMITTED] T6250.050 [GRAPHIC] [TIFF OMITTED] T6250.051 [GRAPHIC] [TIFF OMITTED] T6250.052 [GRAPHIC] [TIFF OMITTED] T6250.053 [GRAPHIC] [TIFF OMITTED] T6250.054 [GRAPHIC] [TIFF OMITTED] T6250.055 [GRAPHIC] [TIFF OMITTED] T6250.056 [GRAPHIC] [TIFF OMITTED] T6250.057 [GRAPHIC] [TIFF OMITTED] T6250.058 [GRAPHIC] [TIFF OMITTED] T6250.059 [GRAPHIC] [TIFF OMITTED] T6250.060 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, 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 commit 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:] [GRAPHIC] [TIFF OMITTED] T6250.061 [GRAPHIC] [TIFF OMITTED] T6250.062 [GRAPHIC] [TIFF OMITTED] T6250.063 [GRAPHIC] [TIFF OMITTED] T6250.064 [GRAPHIC] [TIFF OMITTED] T6250.065 [GRAPHIC] [TIFF OMITTED] T6250.066 [GRAPHIC] [TIFF OMITTED] T6250.067 [GRAPHIC] [TIFF OMITTED] T6250.068 [GRAPHIC] [TIFF OMITTED] T6250.069 [GRAPHIC] [TIFF OMITTED] T6250.070 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. 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 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 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. 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 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. 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 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. 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? 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. 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, including 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 accurate 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 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. 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 subcontractors 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 revenue 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:] [GRAPHIC] [TIFF OMITTED] T6250.071 [GRAPHIC] [TIFF OMITTED] T6250.072 [GRAPHIC] [TIFF OMITTED] T6250.073 [GRAPHIC] [TIFF OMITTED] T6250.074 [GRAPHIC] [TIFF OMITTED] T6250.075 [GRAPHIC] [TIFF OMITTED] T6250.076 [GRAPHIC] [TIFF OMITTED] T6250.077 [GRAPHIC] [TIFF OMITTED] T6250.078 [GRAPHIC] [TIFF OMITTED] T6250.079 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 transition. 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 completed, 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:] [GRAPHIC] [TIFF OMITTED] T6250.080 [GRAPHIC] [TIFF OMITTED] T6250.081 [GRAPHIC] [TIFF OMITTED] T6250.082 [GRAPHIC] [TIFF OMITTED] T6250.083 [GRAPHIC] [TIFF OMITTED] T6250.084 [GRAPHIC] [TIFF OMITTED] T6250.085 [GRAPHIC] [TIFF OMITTED] T6250.086 [GRAPHIC] [TIFF OMITTED] T6250.087 [GRAPHIC] [TIFF OMITTED] T6250.088 [GRAPHIC] [TIFF OMITTED] T6250.089 [GRAPHIC] [TIFF OMITTED] T6250.090 [GRAPHIC] [TIFF OMITTED] T6250.091 [GRAPHIC] [TIFF OMITTED] T6250.092 [GRAPHIC] [TIFF OMITTED] T6250.093 [GRAPHIC] [TIFF OMITTED] T6250.094 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, 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:] [GRAPHIC] [TIFF OMITTED] T6250.095 [GRAPHIC] [TIFF OMITTED] T6250.096 [GRAPHIC] [TIFF OMITTED] T6250.097 [GRAPHIC] [TIFF OMITTED] T6250.098 [GRAPHIC] [TIFF OMITTED] T6250.099 [GRAPHIC] [TIFF OMITTED] T6250.100 [GRAPHIC] [TIFF OMITTED] T6250.101 [GRAPHIC] [TIFF OMITTED] T6250.102 [GRAPHIC] [TIFF OMITTED] T6250.103 [GRAPHIC] [TIFF OMITTED] T6250.105 [GRAPHIC] [TIFF OMITTED] T6250.106 [GRAPHIC] [TIFF OMITTED] T6250.107 [GRAPHIC] [TIFF OMITTED] T6250.104 [GRAPHIC] [TIFF OMITTED] T6250.108 [GRAPHIC] [TIFF OMITTED] T6250.109 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 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:] [GRAPHIC] [TIFF OMITTED] T6250.110 [GRAPHIC] [TIFF OMITTED] T6250.111 [GRAPHIC] [TIFF OMITTED] T6250.112 [GRAPHIC] [TIFF OMITTED] T6250.113 [GRAPHIC] [TIFF OMITTED] T6250.114 [GRAPHIC] [TIFF OMITTED] T6250.115 [GRAPHIC] [TIFF OMITTED] T6250.116 [GRAPHIC] [TIFF OMITTED] T6250.117 [GRAPHIC] [TIFF OMITTED] T6250.118 [GRAPHIC] [TIFF OMITTED] T6250.119 [GRAPHIC] [TIFF OMITTED] T6250.120 [GRAPHIC] [TIFF OMITTED] T6250.121 [GRAPHIC] [TIFF OMITTED] T6250.122 [GRAPHIC] [TIFF OMITTED] T6250.123 [GRAPHIC] [TIFF OMITTED] T6250.124 [GRAPHIC] [TIFF OMITTED] T6250.125 [GRAPHIC] [TIFF OMITTED] T6250.126 [GRAPHIC] [TIFF OMITTED] T6250.127 [GRAPHIC] [TIFF OMITTED] T6250.128 [GRAPHIC] [TIFF OMITTED] T6250.129 [GRAPHIC] [TIFF OMITTED] T6250.130 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? 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. 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 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, 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 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 non-mandatory, 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 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 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 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.] 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, 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, 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. 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