AT&T Takes Battle to Courts, Congress for Fed Telecom Work

AT&T Takes Battle to Courts, Congress for Fed Telecom Work

John Doherty

Tony D'Agata

The same day AT&T Corp. won a $5 million judgment against the government for lost revenue under a long-distance contract with the Treasury Department, the telecom giant announced it would appeal the award and fight for a larger share of the $140 million sought in its original claim.

NEWS ANALYSIS

"It was not settled to our satisfaction, and we do not believe the decision was fair and equitable," said John Doherty, vice president of government markets for the company.

While AT&T had not filed the appeal as of press time, Doherty said June 11 that the company would move forward in the U.S. Court of Appeals.

The company's decision to appeal the judgment is the latest of what competitors and analysts view as aggressive moves by the New York company to reclaim its position in the federal telecommunications marketplace.

"It's absolutely clear that AT&T is eager to remain a major player in the federal telecommunications arena," said Warren Suss, president of Suss Consulting Inc., Jenkintown, Pa., a federal markets consulting company.

For more than a decade, AT&T and Sprint Communications Corp. provided long-distance telecom services to federal agencies under the General Services Administration's FTS2000 contract. The contract generated about $5.9 billion in revenue for the two companies, split roughly 70 percent and 30 percent in AT&T's favor, according to market research firm Federal Sources Inc.

But AT&T lost the follow-on FTS2001 contract to Sprint and WorldCom Inc. in December 1998 and January 1999, and with it lost a significant portion of its federal revenue.

Since that time, the company has sought to retain a share of the federal long-distance market with a multipronged approach, which Suss characterized as both a legal strategy and a business strategy. This approach, at times, has angered both competitors and GSA, a key government customer.

Among AT&T's moves:

? In August 1998, the company filed the $140 million claim against the GSA as compensation for revenue it said should have been generated for AT&T under the FTS2000 contract.

? On April 26, AT&T officials testified at a congressional hearing that GSA was moving too slowly to open up the FTS2001 contract to outside competitors.

? Following the hearing, AT&T filed a protest of the FTS2001 contract first with the GSA and then with the General Accounting Office. AT&T contends that GSA, after selecting Sprint and WorldCom, improperly changed the terms of the contract.

Some critics also have complained AT&T has been dragging its feet in turning over its FTS2000 business to Sprint and WorldCom. That transition, which was to be completed by the end of 1999, finished just this month.

In the meantime, AT&T was able to negotiate bridge contracts that, at some volumes, exceeded the rates the government
paid under either FTS2000 or FTS2001. The GAO report stated that in December 2000 alone, the government spent almost $36.5 million purchasing FTS2000 services from AT&T and Sprint.

Several industry executives grumbled that AT&T did everything it could to make the transition more difficult and now is reaping profits from the delay.

Doherty disputed these complaints. "If all that had been the case, why did we not receive one letter [of complaint] from GSA?" he said. AT&T attended every transition meeting, met every transition schedule and provided the additional resources the agency asked for, at GSA's expense, to smooth the transition process, Doherty said.

AT&T's main goal, said Suss and other industry officials, has been to find a way to pry open a spot on the government's FTS2001 contract. As holders of the FTS2001 contract, Sprint and WorldCom are each guaranteed $750 million of the roughly $2.3 billion GSA has estimated federal agencies will spend on long-distance and other telecommunications services over the contract's eight years.

Unlike the FTS2000 contract, FTS2001 is a non-mandatory deal. This means the GSA, at its discretion, can allow other companies to compete with Sprint and WorldCom for FTS2001 work.

Doherty said then-GSA Federal Technology Services Commissioner Dennis Fischer told the company the best way to become eligible to win FTS2001 work was to win some of GSA's Metropolitan Area Acquisition contracts. The MAAs provide local telecommunication services to federal agencies in individual cities.

Consequently, AT&T aggressively pursued and won sole-provider contracts for the first three MAA cities, New York, Chicago and San Francisco, plus seven other cities they share with other contractors. The company also has been lobbying Congress heavily to weigh in on the side of opening FTS2001.

During Doherty's testimony before the House panel, he said GSA should open the FTS2001 program to competition. He called on the agency to eliminate the combined $1.5 billion in guaranteed minimum revenue to Sprint and WorldCom because of their failure to perform on the contract.

Doherty's testimony appeared to some ? both then and in light of recent developments ? as applying a double standard.

"For 10 years WorldCom wanted to be a player under FTS2000, and the government wouldn't let them in," said Tony D'Agata, vice president and general manager of Sprint's government systems division. "Now, in the third year of [FTS2001], political pressures are coming to bear to add competitors."

D'Agata said Congress, AT&T and other competitors are emphasizing lost savings of $74 million that weren't realized during the transition, creating the false impression that the contract is failing. While it's true that some anticipated savings did not occur, the contract has generated $400 million in savings, he said.

"They actually saved more than anticipated," he said, adding that FTS2001 is one of the most successful initiatives GSA has taken.

Doherty agreed that WorldCom tried to break into the FTS2000 contract. "WorldCom filed 62 protests against [the contract] and lost every single one," he said. He said he finds it interesting that competitors are taking AT&T to task for using the same approach.

Within days of the congressional hearing, AT&T filed a protest with GSA of the FTS2001 awards, charging the GAO found the agency had modified the contract's terms during the transition period to accommodate the vendors' capabilities. AT&T asked that the contracts be overturned and recompeted.

In a scathing response, GSA asserted there is no evidence in the GAO report to support AT&T's claim.

"AT&T's protest, filed over two years after the onset of contract performance and during the final stage of the transition process, is an imaginative, though unsupported, use of the GAO report," the May 11 response stated.

Late in May, AT&T withdrew its protest from GSA because "they told our attorneys it's going to be denied," Doherty said. The protest has been refiled with the GAO, he said.

Regarding the $5 million dispute with the Treasury Department that the company is appealing, AT&T officials said they are simply trying to get the government to honor its contract.

"We believe that, if left to stand, the decision essentially eliminates the federal government's obligation to act in good faith in performing its end of a contract," said AT&T spokesman Wayne Jackson.

The lawsuit has been the subject of speculation and rumor among telecom competitors, which said AT&T had been asking for anywhere between $400 million and $480 million in the dispute. One observer reported the company had turned down an $80 million settlement offer from the government.

Doherty laughed off those figures. "Neither of those rumors are true," he said, adding that if a government official said that, he'd like to talk to that person.

Nevertheless, AT&T's aggressive legal strategy ? especially going to court on FTS2001 so long after the contract award ? is raising eyebrows.

"Once the lawyers are running your business decisions, I think you end up with a lot of confusing stuff going on," Suss said.

Doherty, however, dismissed outsiders' views. "It appears that AT&T is held to a different standard," he said.

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