Phone Carriers Will Soon Vie for Federal Contracts
In a high-stakes battle that could lower business phone rates nationwide and alter the industry’s competitive landscape, carriers are vying for up to $16 billion in telephone business from the federal government.
More than 100 phone companies, ranging from industry giants like AT&T; Corp. to upstarts like local phone carrier Teleport Communications Group, are expected to submit bids by the September deadline for the project known as FTS2001, which represents the largest contract awards outside the defense industry.
Winners chosen by the General Services Administration’s Federal Telecommunications Services will provide long-distance and/or local phone service to 1.75 million federal government workers for up to eight years beginning in 1999, said FTS Commissioner Robert J. Woods. The long-distance service contracts, worth between $8 billion and $15 billion, and local phone service agreements, worth an additional $1 billion, would replace FTS2000 pacts that expire in December 1998, he said.
The FTS contest is one of the first tests of industry competitiveness since last year’s passage of a sweeping telecommunications reform measure aimed at opening up the nation’s telephone markets. In the aftermath of the reform measure, competition has been slow to develop and consumer groups and businesses have complained that long-distance rates have been inching up in the absence of significant new challengers to the Big Three carriers--AT&T;, MCI Communications Corp. and Sprint Corp.
But the huge FTS2001 telephone contracts will change that, experts say.
The contest could cut the rates of big long-distance users as much as 5% if the federal government succeeds in its effort to secure a discount of at least that magnitude. That’s because the service contracts of such users are often tied to rates that long-distance carriers provide their best customers, said Brian Moir, a Washington lawyer and lobbyist who represents corporate telephone customers.
A cut in residential long-distance rates is less certain. In filings this week with the Federal Communications Commission, long-distance carriers signaled they may not be able to pass along $1.7 billion in rate reductions, as promised in May. The companies said some local carriers have recently raised fees they charge long-distance carriers to complete toll calls, making it impossible for the long-distance carriers to reduce rates by the full $1.7 billion.
“It’s up to the FCC to evaluate [our] critique . . . and say what the numbers should be in terms of reductions,” AT&T; spokesman Jim McGann said. “But we are going to flow through every [cost saving] we get as we’ve always said we’d do.”
Still, the FTS2001 project is expected to inject much-needed competition into local phone markets around government offices, which will choose local carriers for the first time. And it will further spur technologies like video conferencing and high-speed data transfer, as well as better telephone billing reports and disclosure of service disruptions, officials predict.
“One of the ways the federal government can most stimulate competition is not just by passing a law but putting its money where its policy mouth is,” said Robert Atkinson, senior vice president of regulatory affairs at Teleport. “The federal government is a huge customer. If you win a contract with the government, it helps you to build more and better facilities.”
The first FTS project had a significant impact a decade ago when Sprint, then a struggling, debt-ridden rival of AT&T;, was awarded 25% of the federal government’s long-distance business. The contract cut the government’s long-distance costs $5 billion over 10 years, helped spur a 25% drop in long-distance rates for business and residential users in the first two years after the contract award, and launched Sprint on its way to becoming the world’s third-largest long-distance carrier.
“That decision changed the competitive landscape . . . and the long-distance price points for the entire industry,” said Jim Payne, assistant vice president for FTS2000 in Sprint’s government systems division. “Sprint would be a different company had it not won that contract.”
This time, experts say, stakes are higher, and carriers have launched intense lobbying campaigns as they vie for contracts.
Heated protests by local phone companies this spring, for instance, prompted Congress to pressure GSA to impose a one-year moratorium on long-distance companies before they can offer local phone service to the federal government.
Last year’s telecommunications reform law opened the door for long-distance and local carriers to enter each other’s markets. But local carriers argue that long-distance carriers already serving the federal government would have an unfair advantage, since this is the first time the federal government has sought bids on local phone service.
And the telephone industry is rife with complaints that the government, which now pays about 5 cents a minute for long-distance calls--about half the lowest rate available to consumers--is pushing too hard for a good deal.
To address the concerns, GSA has agreed to meet one-on-one with carriers next month and extend the bid deadline to Sept. 16 from July 29.
“These telephone companies are not going to leave anything to chance,” said Chuck Lewis, director of the Center for Public Integrity, a campaign finance watchdog group. “They are going to everybody on the Hill and in between. It’s going to be an absolute full-court press by every one of these companies.”
AT&T; faces the greatest challenge: The company has earned more than $3.5 billion over the last decade handling 75% of the federal government’s long-distance calls under the FTS2000 contract it shared with Sprint. But the FTS2001 proposal could divide the government’s long-distance business among three companies.
Now facing stiffer competition from Sprint and MCI, AT&T; is desperate to remain the government’s No. 1 long-distance supplier.
Rand L. Allen, chairman of the government contracts division of the Washington law firm Wiley, Rein & Fielding, said AT&T; is likely to be very aggressive. Earlier this year, AT&T; underbid MCI by half a million dollars to land a $5-billion telecommunications contract from the Defense Information Systems Agency.
“They face the strong possibility that they may not get the same amount of business that they had before,” Allen said. “It’s going to be very intense.”
An AT&T; spokeswoman declined comment. But rivals say they are bracing for a fight.
“We are expecting very aggressive pricing,” said Rick Slifer, MCI’s director of the FTS2001 program.
Although the FTS2001 award for local telephone service is a far smaller contract, it could also spur improvements in rates and telephone service at government offices throughout the nation.
Indeed, as part of a Defense Information Systems Agency contract AT&T; won in February, the long-distance carrier will be required to beef up the telephone network in Hawaii to provide the agency with high-speed switched voice and data transmission. Similar improvements could come from the FTS2001 contracts, Woods said.
* TALKS SUSPENDED
Phone giants AT&T; and SBC have suspended their merger talks. D3
