Opportunities for Reducing Costs

Published by the Government Accountability Office on 1971-07-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                      UNITED ST141 &~W?AL~ACCOUNTING
                                      REGIONAL              OFFICE
                               ROOM   1800   FEDERAL       OFFiCE    BUILDING
                                         911 WALNUT        STREET

                               KANSAS        CITY,     MISSOURI          64106   ,

                                                                                          July 9, 1971

Colonel Seymour Stearns                                                                     r

Defense Commercial Communications Office
Scott Air Force Base, Illinois   62225
Dear Colonel Stearns:                                  L

                                       o' ortunities
      This letter is a summary of the L?P            for reducing costs which
our staff has discussed with you and other personnel of the Defense 2 ommercial
Communications Offlee (DECCO). Briefly,    the staff observed that costs could
be reduced through:
       --avoidance of interstate     routzag of antrastate services,
       --improved evaluations of competitive quotations,
       --se-evaluation    of service contracts when changes occur
          in tariffs   or policies  of carriers,                        .
       --avoidance of polar1 operation charges, where feasible,
       --use of Telpak application      1-n lieu of certain higher
          cost local channel and interexchange services, and
       --use of Government-fmanced facllitles        where practzcable.
       Details   concerning these matters              follow.
         Clrcults were,belng routed interstate         in the Telpak2 network when they                     ' .
could be routed intrastate.          This mcreases the cost of services because
charges associated with interstate          circuits     are usually higher than those
for intrastate        circuits.  Although conditions may require that clrcu~ls be
initially       routed or rerouted interstate,       conditions often change so that
zntrastate routing can be used. But there were no established procedures
in DECCOfor re-examining clrcult          routing.
     The benefits from re-exarmnlng the routzngs are demonstrated by circuit
SB 3OP 01206 which was being leased to provzde service between Eglm, MacDlll,
and Homestead Air Force Bases, all In Florida.  For several years the circuit

lPolar operation is the use of directional                          current to trsnsrmt    telegraph
  signals thereby providing quality service                         between termmals.

2Telpak is an industry term for reduced pricing arrangement offered                              to users
 leasing quantities   of czrcuits between rate centers.

was routed in Telpak through Georgza and the carrier charged interstate
rates of $105 a month for the three service terminals.    After we brought
this to the attention of the proper DECCOaccount manager the circuit    was
routed intrastate   and service terminal charges were reduced to $45 a month,
or $720 a year less.
       We referred to DECCOpersonnel 55 other circuits      with terminal poznts
m the same states but being leased at interstate       rates.    Forty-four of
these czrcuits were rerouted intrastate      in Telpak and annual costs were
reduced $21,120. Of the 11 clrcwts      not rerouted, 2 had been dzsconnected,
intrastate    Telpak routing was not available for 4, and 5 were more economical
An interstate     routmg.
     We understand that under new procedures circuits     having terminal points
in the same state but routed interstate  will be identified     and reviewed at
90-day intervals  to determine whether they can be changed to intrastate.
       Although competitive quotations are to be obtained when more than one
carrier can provide services, we found instances where services were not
leased at-the lowest possible costs because DECCOdid not adequately evaluate
the quotations.
       A contract for service between Andrews, Maryland and Ft. Meade, Maryland
(circuit    WU T 03441) was awarded to one carrier whzch quoted a monthly re-
curring price of $70 for the two service terrmnals.      The quotation contained
no circuit mleage charge, indicating     that the carrzer assumed the circuit
would be placed in Telpak.
      Another carrPer quoted a monthly recurring charge of $100.80 comprised
of $60 termznal service charges and $40.80 for interexchange circuit          mileage.
Although this is higher in total,   the terminal service charges are lower.
Therefore, the secondlcarrler's   quotation containing the interexchange
mileage charge shuuld not have been compared with the fjrst        carrier's   quo-
tation until DECCOdetermined whether the circuit       could have been placed in
an intrastate  Telpak. The rou%ing of circuits     in an intrastate     Telpak would
have permtted DECCOto lease the service from the second carrier at $10 a
month less costs, since the intrastate     Telpak charge of $6.09 a month 18
the same for both carriers.
     But DECCO's procedures do not require a preaward determination as to
whether a required service can be placed in Telpak although DECCOcontrols
the leasing and routing of Telpak.
       Circuits CPB 06T 00320, 00321 and 00322 are other examples where DECCO
awarded contracts for services to the seemingly low bidder when a competing
carrier would have been cheaper had the routmgs been determined prior to

       DECCOcontinues to lease services from carriers who received orders
several years ago although the services can now be obtained from other
carriers at less costs.    Tnere 1s no procedure in DECCOfor re-evaluating
service contracts in the light of changes made in tariffs     of competing
carriers,  and differences  u1 how the carriers classify  services as inter-
state or intrastate.
      Circuit WtJ T 03338 provides service between Ft. Meade and Andrews
Air Force 3ase, both with switching facilities.       The carrier's   policy IS
to charge interstate    rates for services between switching facilities      and
has charged such rates for this service since 1968. A competing carrier
charges intrastate   rates for services I between termrnal points within a state.
      The award was made to the first    carrier because Its interstate  rate was
$15 a month less than the competitor's.       Since the award interstate rates
have increased, but the intrastate    rates have renamed rather constant.      As
a result the second carrier 1s providing comparable service between these
two locations for $25 a month less than the first.
      We identified 66 other services of this type and examined into 26 of
them, 1S of which were leased under competitive procedures.   Of the 26
services; 23 appear to be available from carriers,  other than those holding
the contracts, at a reduction of about $5,120 a year.
     Information   on these services   has been furnished   to DECCOofficials.
        Teletype circuits  with polar transmission capability ara being leased
from a carrier at prices in excess of those charged by a competitor.       The
tariffs     of the lessor specify a monthly polar charge for each terminal
whereas the competing,carrler's      do not.
       In a test we identified   15 circuits  with polar transmission   capability
between the Pentagon and Ft. Meade, Maryland.       Nine of these circuits   are
furnished by a carrier which charges $35 a month for each servzce terminal
plus $15 for each polar operation,       Another carrier provides the other six           ,
circuits   at $35 a month including the polar capability,      If these 15 circuits
were provided by this carrier costs would be reduced $1,980 a year.
       These 15 circuits represent only a small number of the total being
leased with polar charges. DECCO's records for one of several polar classi-           '
fications   show annual costs of $46,000.
      The reason for leasing the more costly service was not evident from an
examination of records.    Many of the services were leased before DECCO
implemented competitive leasing procedures, and DECCOhas no review pro-
cedures that would uncover such situations.

                -- INAL CBANNEL
      Glrcuits are being leased to provide services in the Washington, D.C.,
area on a fractional    mileage basis - local channel service.      These services
u1 some instances can be provided by a different     carrier at lower costs
by applying Telpak. The more costly services were leased, and continued
to be leased, because DEGCOprocedures do not provide either at the start
of service, or thereafter,     for considering Telpak application    when carriers
state that local channel service is to be furnished.        The lack of such a
procedure is based on the premise that services classified        as local channel
by carriers are not eligible      for Telpak. But some services in the Washington
area classified   as local channel are interexchange channel services subject
to Telpak.
      For example, since April 1964 circuit     CPB 70T 00350 has beea leased as
a local channel at a monthly recurring cost of $134.20 for service between
Andrews, Maryland and Langley, Virginia.      The only quote received by DECCO
shows that the carrier was to provide local channel service and it has been
so classified  in DECCOrecords.     But a circuit   between these locations leased
from another carrier is in Telpak end the monthly charge is $64.20 less.
Therefore-, sn annual cost reduction of $770 IS likely to be realized by
changing the local channel service to Telpak.
     We Identified     13 other circuits    in the Washington area that are leased
on a fractional    mileage basis although they appear-to be eligible        for Telpak.
If these services can be changed to Telp,ak, costs could be reduced an estz-
mated $5,100 a year., Information        on these circuits  has been furnished to
DECCOofficials.                                    1
      The lack of renew also permits errors in service classification      to
continue undetected resulting    in higher costs.   For mstance, for circuits
CPB 70T 00606 and 00607 the carrier furnished DECCOproper interexchange
mileage quotes. These circuits,     however, are shown in DECCO1srecords as
local channels, apparently because of erroneous input data, and have been
excluded from Telpak application.      Information on the circuits was brought
to the attention of DECCOemployees and the services are now provided by
Telpak at an annual reduction u1 charges of $423.
      We also noted th~x?e interexchange services that were recorded prOp8rly
in DECCOrecords but apparently not considered for Telpak applzcation.     After
discussing these services with DECCOemployees they were placed m Telpak
which reduced the charges $1,467 a year.
       In another instance we found that the cost of interexchange mileage
was recorded u1 DECCO's records as equipment costs.     This excluded the
service from being considered for Telpak application.     When brought to the
attention of DEN0 employees the service was changed, and 1s now provided
by Telpak a% an annual savings of $1,221.                          .

         Although we did not make an in-depth review of this area, we noted
that three circuits      were being leased when Government financed and controlled
facilities      had spare capacity to meet these requirements.     We discussed these
with DSCCOofficials       and the three leased circuits   were disconnected and
the sp,are channels used to provide the service,        This will result in an annual
savings of $1,512.                                                          I

     DFCCOshould establish      procedures for re-examining:
     --existing  contracts for service, considering changes in tariff
        rates and carriers'   policies, 'to assure that the most economic
        services are currently being leased,
     --local   channel services to assure that they are properly classified
        and, if not, whether they can be incorporated into Telpak at
        reduced costs, and
     --spare Government facilities      to detemnsne whether they can
        replace leased circuits.
      To-assure that awards are made to low bidders the procedures for
evaluating quotes should be improved so that adequate consideration   is given
to the different  means of providing service proposed by competing carriers.

     We shall appreciate your comments and information           on any actions   taken
on the above discussed matters.
      A copy of this   letter   is being sent to the Director,      Defense Communi-
cations Agency. q
                                                          Sincerely    yours,

                                                         X. L, Weary
                                                         Regional Manager