Informational Hearing

Update On The Department Of General Services
California Integrated Information Network (CIIN) Contract

State Capitol, Room 112
December 3, 2003
10:00 a.m.

Opening Comments

• Senator Debra Bowen, Chairwoman
  Senate Energy, Utilities, & Communications Committee
   
• Senator Dean Florez, Chairman
  Senate Banking, Commerce & International Trade Committee

A Historical Overview

• Anna Brannen, Principal Fiscal & Policy Analyst (PDF)
  Legislative Analyst’s Office

Witnesses

• Dr. William J. Jefferds, Director
  Department of General Services
   
• Barry Hemphill, Deputy Director
  Department of General Services Telecommunications Division
   
• Dr. Clark Kelso, Chief Information Officer
  State of California
   
• Ed Mosbaugh, Regional Vice-President
  SBC
   
• Patrick Quarry, Program Manager for CALNET
  MCI

Update On The Department Of General Services
California Integrated Information Network (CIIN) Contract

Background

The Department of General Services (DGS) contracted with a private vendor in 1989 to create a voice and data telecommunications system for state government. The California Network System (CALNET) was to provide the state with its own telephone system and the ability to provide networking and data transmission services for the state’s various information technology programs. The $67 million contract called for the system to be fully operational in 1992.

By the 1996-97 budget year, pieces of CALNET were up and running but the project still hadn’t been completed and the cost to finish it had been increased to an estimated $100 million. Many state departments were reluctant to use CALNET, in part because they felt they could acquire better services at a lower cost from outside vendors. According to the Legislative Analyst’s Office analysis of the 1998-99 budget proposal, DGS had been operating the system at a loss to the tune of about $2 million a year between the 1994-95 and 1997-98 budget years, and the state still owed approximately $20 million on the equipment it bought to build and implement CALNET.

In 1996, DGS began looking to move away from CALNET and decided to sell off its CALNET hardware and contract with a private vendor to provide telecommunications services for state agencies and departments. DGS released its strategic plan for providing statewide telecommunications services, known as the California Integrated Information Network (CIIN), in 1997. The plan included moving to a privately owned and operated CALNET network, which would involve a contract with a vendor that could cost up to $500 million over five years.

The Contract

Shortly after the release of the CIIN strategy, the state began the competitive procurement process for the new telecommunications contract. In December 1998, the Wilson Administration signed a contract with Pacific Bell (now known as SBC) and MCI to provide voice and data communication services to state and local entities. The contract is a seven-year agreement, running through 2005, and it contains three one-year option clauses that allow DGS, SBC, and MCI to extend the contract through, at maximum, 2008, without putting the contract out to competitive bid. The annual contract amount is currently estimated by DGS to be about $300 million.

Under the contract (which is available at https://ebiznet.sbc.com/calnetinfo/) specific voice, data, video, and Internet services, as well as a selection of equipment for all applications, are provided by either SBC or MCI. State agencies are – with certain exceptions noted below – required to use the CALNET contract for "mandatory services," while constitutional offices and local agencies have the option of using the contract. The contract also contains a number of "optional services" that state agencies can use if they have a need for them (such as video conferencing), but state agencies are free to contract with any vendor for an "optional service" through the normal procurement process. According to DGS, nearly 2,000 local agencies have opted to receive their telecommunications services through the CALNET contract, accounting for about 60% of the CALNET revenue.

Related Legislative Action in 2003

AB 1765 (Committee on Budget), Chapter 157, Statutes of 2003, is the annual Budget Bill which was signed into law on August 2, 2003.

The budget assumes $100 million in savings from "reduced contract costs," $50 million of which is from the General Fund. Section 5.50 of the Budget Bill directed DGS to:

". . . work with state agencies to focus on the reduction of state operational costs in areas such as contracting, leasing, and procuring goods and services. In reviewing contracts, DGS shall take into consideration opportunities for entrepreneurial efficiencies that would result in savings."

AB 296 (Oropeza), Chapter 757, Statutes of 2003, was a related budget trailer bill passed by the Legislature on September 13 and signed into law on October 10. The measure contained nearly a dozen budget-related issues, including one giving DGS the flexibility to implement the provision of the Budget Bill noted above.

Specifically, AB 296 amended Public Contract Code Section 6611 to allow DGS, if it determines it’s in the best interest of the state, to negotiate amendments to the terms and conditions of existing contracts for goods, services, information technology, and telecommunications. These changes can include altering the scope of work and apply regardless of whether or not the original contract was the result of competitive procurement. The authority granted to DGS by AB 296 expires on July 1, 2006.

Developments In 2003 Regarding The CALNET Contract

DGS, SBC, and MCI began discussing the current CALNET contract in the spring of 2003 to see if there was a way to reduce the cost of the contract to allow the state to save money in the current budget year. In August, the deputy director of DGS’ Department of Telecommunications agreed to exercise the three one-year options in the contract to extend the agreement through 2008 in exchange for what would amount to an average 10% price reduction beginning in 2003. Furthermore, SBC and MCI would be able to use "case-based pricing" instead of being required to operate under the "postage stamp pricing" requirement in the current contract. This would allow them to reduce prices on a case-by-case, agency-by-agency basis without being required to lower rates on that particular service for every state and local agency using the service.

DGS initially had informally estimated the savings from the renegotiated contract at $75 million for state agencies and $85 million for local agencies over the final five years of the agreement if the renegotiated contract was executed on July 1. Those savings projections are lower each day that the state continues with the current contract and by December 1, the projected saving had dropped to $63 million for state agencies and $78 million for local agencies over about a four-and-a-half year period.

The fundamental question is whether state and local agencies would be able to save even more money if DGS were to put the contract out to bid in 2004 or 2005 with an eye toward opting-out of the contract at the end of 2005 and awarding it to the winner of that bidding process, or whether they’re better off with the deal that’s been negotiated to date.

The renegotiated contract proposal hasn’t been agreed to yet by the new head of DGS or the new Administration, and has in fact been placed on hold pending further review.

CALNET Contract Exemptions or Off-Ramps

Questions have been raised about whether the CALNET contract and the proposed exercising of the options to take it through 2008 will lock the state into antiquated technology, won’t allow agencies to take advantage of new services and products on the market, and precludes the state from taking advantage of lower prices it may find elsewhere on particular services.

One provision of the current contract requires an annual review of both pricing and service functionality. According to DGS, if the state wants to have a "mandatory service" upgraded or to add a service to the contract that currently isn’t provided for, it’s allowed to contract with a non-CALNET vendor following that annual review if SBC or MCI can’t or doesn’t want to provide the product or service at a price the state wants to pay. The contract has been amended 12 times since being signed in December 1998, and many of the amendments were designed to add updated services and products to the CALNET system.

There are also opportunities for individual state agencies to contract with another vendor outside of the annual review process for services not provided under the CALNET agreement. A request for this type of an exemption must be approved by DGS.

Arguably though, opportunities to opt-out of CALNET’s "mandatory services" are somewhat limited, because the cost of providing one service no doubt subsidizes the cost of providing other services as a part of the overall contract. Plus, allowing agencies to negotiate for individual products or services where they may be able to improve their individual situation may negate the presumed benefit of having a single, statewide contract that uses the purchasing power of the state to contract for a wide variety of telecommunications services at the lowest possible overall cost, as the current contract does.

It’s also important to note the existing contract was awarded with a requirement that state agencies pay a "postage stamp" rate for services, regardless of how much it actually costs to provide a service. So, for example, agencies in Los Angeles pay the same rate as agencies in Eureka, even though the cost of providing the service in a major metropolitan area such as Los Angeles is, in many instances, substantially less than providing the same service in Eureka. Allowing a state agency in Los Angeles to opt-out of the CALNET service if it finds a lower rate on a particular service could reduce the value of the contract for the vendor, or it could require the rates to be raised for agencies operating in more remote locations.

As noted earlier, part of the proposed contract extension would allow SBC and MCI to engage in "individual case-based pricing" so they could drop service prices in certain areas without being forced to reduce the "postage stamp" rate for all state and local entities using the service under CALNET. For example, if a state agency in Los Angeles were able to get a rate on a particular service that’s 20% cheaper than the rate it’s currently paying, SBC or MCI could opt to reduce their rate by 20% to that agency in order to keep it as a client without having to reduce the rate to every state and local agency served under CALNET.

Gartner, Inc., has been hired by DGS to provide an independent assessment of the proposed contract extension. A draft of the report is expected to be delivered to DGS by December 5, 2003.