B-231044, Dec 4, 1989, 69 Comp.Gen. 112

B-231044: Dec 4, 1989

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General Services Administration billings to the Navy only are required to approximate the cost of Federal Telecommunications System (FTS) service provided. The information provided this Office does not support a conclusion that GSA's billings were unreasonable approximations. The General Services Administration (GSA) is authorized to assess Navy with direct costs associated with Navy's withdrawal from FTS. The Federal Telecommunications System (FTS). /1/ The total amount in dispute is $9.25 million of which $2.4 million is related to actual measured usage of FTS by the Navy with the remaining $6.85 million representing termination charges assessed by GSA for Navy's withdrawal from the FTS. Nothing in Navy's submission convinces us that the amounts assessed by GSA are otherwise improper.

B-231044, Dec 4, 1989, 69 Comp.Gen. 112

Under 40 U.S.C. Sec. 757 (1982), General Services Administration billings to the Navy only are required to approximate the cost of Federal Telecommunications System (FTS) service provided. The information provided this Office does not support a conclusion that GSA's billings were unreasonable approximations. The General Services Administration (GSA) is authorized to assess Navy with direct costs associated with Navy's withdrawal from FTS. Nothing in 40 U.S.C. Sec. 757 (1982) requires GSA to recover such costs only through rates imposed on remaining FTS users.

GSA's Billing Navy for FTS Use and Termination Costs:

This decision responds to a request submitted by Raymond A. Fontaine, Comptroller of the General Services Administration (GSA), regarding the Department of the Navy's refusal to pay GSA's billing for Navy's usage of, and transition from, the Federal Telecommunications System (FTS). /1/ The total amount in dispute is $9.25 million of which $2.4 million is related to actual measured usage of FTS by the Navy with the remaining $6.85 million representing termination charges assessed by GSA for Navy's withdrawal from the FTS. Navy disputes the validity of the measured usage and contests GSA's authority to assess termination charges for withdrawing from the FTS. For the reasons given below, we concur with GSA that 40 U.S.C. Sec. 757 (1982) authorizes the charges. Nothing in Navy's submission convinces us that the amounts assessed by GSA are otherwise improper.


The FTS was established in 1961 to serve the day-to-day needs of civil agencies and to provide engineering features of value during an emergency. Initially, the FTS was funded on a reimbursed basis by GSA through the Buildings Management Fund. In 1962, Congress created the Federal Telecommunications Fund to handle FTS funding. Section 110 of the Federal Property and Administrative Services Act of 1949 (1949 Act), as added by Pub.L. No. 87-847, 76 Stat. 1117, (1964) (codified at 40 U.S.C. Sec. 757 (1982)). As a result, specific requirements of the FTS fund, as opposed to other more general provisions of law, governed GSA operation and funding of the FTS. Effective January 1, 1987, Congress merged the Federal Telecommunications Fund and the Automatic Data Processing Fund to establish the Information Technology Fund, which assumed all liabilities, obligations and commitments of the merged funds. Section 110 of the 1949 Act, 40 U.S.C. Sec. 757, as amended by Pub.L. No. 99-591, Sec. 101(m), 100 Stat. 3341-345 (1986); Pub.L. No. 99-500, Sec. 101(m) 100 Stat. 1783-345 (1986).

The Federal Telecommunications Fund established in 1962 was available without fiscal year limitation for expenses, including personal services, other costs, and the procurement by lease or purchase of equipment and operating facilities necessary for the operation of the FTS, to provide local and long distance voice, teletype, data, facsimile, and other communications services. GSA was required to credit the FTS fund with advances and reimbursements from available agency appropriations and funds for telecommunications services rendered and facilities made available thereto:

"... at rates determined by the Administrator to approximate the costs thereof met by the fund (including depreciation of equipment, provision for accrued leave, and where appropriate, for terminal liability charges and for amortization of installation costs ... which expenses may be charged to the fund and covered by advances or reimbursements from such direct appropriations). ..." 40 U.S.C. Sec. 757.

Congress envisioned that the FTS fund would permit GSA to manage the FTS in a unified and businesslike manner. Under the law, GSA pays all FTS operational costs, and recovers these costs from agencies using the FTS. However, the basis of allocating FTS costs is not "actual" costs but merely "approximate" costs associated with providing agencies with FTS service. See also S. Rep. No. 2262, 87th Cong., 2d Sess. 1-2 (1962); H. R. Rep. No. 2164, 87th Cong., 2d Sess. 1-2 (1962).


Measured Usage Charges

In June and July 1986, Navy asked GSA to directionalize (i.e., limit to one direction) or disconnect by the beginning of fiscal year 1987, 141 of 379 FTS circuits serving 13 exclusive use Navy locations. Navy expected that this action would reduce their quarterly FTS intercity bill by $1.2 million. GSA advised Navy that GSA's billings for intercity billings are made one quarter in advance based on the previous quarter's usage. Thus, the decrease in Navy usage based on the removal of circuits at the beginning of fiscal year 1987 was not reflected until the billing for the third quarter of fiscal year 1987. However, the third quarter billing for fiscal year 1987 did not reflect Navy's expected savings and therefore Navy withheld $1.2 million from its third quarter payment to GSA.

Navy has advised us that it took aggressive management actions during fiscal year 1987 to reduce FTS use. All commands were directed to take necessary action to conserve FTS resources. Navy also began to remove various commands from the FTS and to significantly cut the FTS budgets of the remaining commands. In spite of these cost-cutting measures, the GSA bills showed no appreciable decrease in costs for FTS service. Navy argues that GSA has failed to document the claimed usage or explain the lack of visible savings or credits. Accordingly, Navy considers the $2.4 million withheld from the final GSA billings for "actual measured usage" to be more than fair and prudent considering the inaccuracy of the billing methodology used by GSA and the aggressive cost-cutting actions taken by Navy.

We are unpersuaded that Navy was warranted in withholding the $2.4 million from the fiscal year 1987 third and fourth quarter billings. GSA based the billings on actual measured usage as determined by statistical sampling techniques. /2/ While GSA did not provide Navy the specific documentation showing these statistical sampling computations and the actual rates applied, GSA officials advise that this information is maintained by GSA on microfilm and is available to agencies in accordance with procedures set forth in Federal Information Resources Management Regulations (FIRMR) Bulletin No. 54, paragraph 7b and g (May 7, 1987). Further explanation of the statistical sampling technique employed by GSA and cost determination also may be obtained from GSA. GSA informed Navy by letter dated June 25, 1987, and in a briefing held on September 30, 1987, the reasons the billings had not decreased in the amounts expected by Navy. GSA pointed out that there were over 40 exclusive use Navy FTS locations with an equivalent amount of Navy FTS traffic originating (billable) from GSA consolidated locations. The 13 locations selected for disconnect or directionalization comprised only a small portion of the Navy's FTS usage. Navy's projected savings of $1.2 million each quarter by disconnecting 141 of 379 circuits serving the 13 Navy locations apparently assumed that all the 141 circuits are in one large group and that all the traffic was originating traffic. That was not the case. analysis of the 141 circuits spread over 13 groups, using traffic engineering tables and assuming all the traffic was originating, indicates an actual reduction in usage would have been only three quarters of Navy's expectation. Since the circuits carried two-way traffic, the amount of originating traffic eliminated was substantially less than that.

In addition, one of the disconnected locations, the Naval Academy, had never been included in the FTS sample for billing purposes and, therefore, costs attributable to this location would not be identified and directly charged to Navy. Instead, such costs were presumably recovered indirectly from all users as part of the overhead allocation. Thus, it did not contribute to a decreased billing to the extent envisioned. GSA estimates that 10-15 percent of Navy's usage had never been billed directly to Navy. Thus, if there were errors in billings, the only ones identified worked to the benefit and not the detriment of the Navy. Furthermore, directionalization at two locations, New Orleans East and West Bank groups, was initially delayed by lack of equipment at the Navy locations. The order to directionalize these two locations were canceled with Navy concurrence in order to avoid additional costs when the Navy decided to leave the FTS system. Thus, there was no basis for attributing reductions in billings based on directionalization of these two locations.

Nonetheless, GSA's actions did have an impact on its billings to Navy. Navy's measured usage based on statistical sampling for the locations that were disconnected or directionalized decreased by 422,782 minutes during the first quarter of fiscal year 1987 while entire Navy usage was down by 862,116 minutes for the same period. Accordingly, the third quarter billing did reflect a reduction of more than $300,000 from the previous quarter. In the second quarter Navy's measured usage for these locations decreased by an additional 283,425 minutes of usage, but the overall Navy usage decreased by only 60,324 minutes. Navy rightfully points out that official and unofficial Navy FTS usage is indistinguishable to GSA for billing purposes. However, this does not relieve Navy of the responsibility to reimburse GSA reasonably allocated costs based upon this unofficial usage. We note that under FTS the primary responsibility for determining whether FTS calls are for official business is with the agency user. GSA has already paid the bill by the time this decision is made. Agency users are in turn responsible for recovering this amount from the persons making unofficial use of the FTS system.

Additionally, while Navy may have cut FTS budgets, there is nothing inherent in this action that assures that budget cuts will be reflected in the Navy's actual FTS usage. Further, although Navy did not realize the expected savings from its cost-cutting measures, GSA's explanation reasonably accounts for Navy's failure to realize the expected savings.

We have no basis to conclude that GSA's billings to Navy were improper since GSA billings to agencies for FTS service only are required to approximate costs incurred in providing the agencies with FTS service and nothing Navy has presented demonstrates that the GSA billings based on statistical sampling represented unreasonable approximations. B-212745, Apr. 15, 1985, and B-183734, Sept. 17, 1975.

Termination Charges

In January 1987, Navy notified GSA of its intention to completely remove all locations from the FTS by October 1, 1987. In February, GSA acknowledged Navy's decision and pointed out that costs associated with their exit from the network would not be levied against remaining users. GSA informed Navy that these costs resulted from disconnecting access lines without disrupting service to other subscribers, and from direct costs associated with carrying excess capacity during network downsizing. GSA advised the Navy that it would bill Navy the cost of removing Navy from the network, estimated at $6.85 million over and above actual usage. Navy rejected GSA's assertion of authority to assess termination charges against it and payment of the $6.85 million termination charge.

Navy argues that section 201-1.103(c)(3) of the FIRMR and the 1950 Statement of Areas of Understanding (SAU) permits Navy to opt in or out of GSA telecommunications services without liability for termination charges because, under the SAU, Navy did not explicitly or implicitly agree to pay such costs. Navy also argues that GSA's attempt to bill Navy termination charges is contrary to GSA's historical practice of not assessing such costs against a withdrawing agency, and may be inconsistent with the legislation authorizing the Federal Telecommunications Fund, 40 U.S.C. Sec. 757. Navy asserts that if FTS service termination costs are recoverable at all, they must be recovered as an element of FTS service costs assessed all users of the FTS system and not as a direct charge from the agency withdrawing from the FTS system. As evidence of GSA's practice, Navy points out that GSA did not assess termination costs to disconnect the Naval Electronic Systems Engineering Activity, St. Inigoes, MD; the Naval Surface Weapons Center, Ft. Lauderdale, FL; or the Naval Avionics Center, Indianapolis, IN.

GSA first indicated its intention to assess termination charges directly on agencies withdrawing from FTS in FIRMR Bulletin No. 29 (October 15, 1985). Section 201-1.103(a) of FIRMR, 41 C.F.R. Sec. 201 1.103(a) (1986), in effect at that time, provided that the FIRMR applied to information resources activities by federal agencies to the extent specified in the 1949 Act or in other laws. /3/ Also, section 201-1.103(c)(1) of FIRMR, 41 C.F.R. Sec. 201-1.103(c)(1) (1986), provided that the FIRMR applied to the management, acquisition, and use of telecommunications resources by executive agencies. Finally, section 201-1.103(c)(3) of FIRMR, 41 C.F.R. Sec. 201-1.103(c)(3) (1986), provides that:

"The applicability of the telecommunications resources provisions of the FIRMR to the Department of Defense (DOD) is governed by the statement of areas of understanding between DOD and GSA (15 FR 8226, December 1, 1950)." /4/

The SAU sets forth general areas of understanding concerning GSA providing communication services to DOD. The SAU sets forth the situations under which GSA is responsible for procuring or providing communications services for DOD. It also establishes the criteria for determining when DOD may provide or procure the communications services directly rather than through GSA, namely when DOD determines direct acquisition is in the interest of military operations, exercise of command and/or national security. However, nothing in the SAU expressly states that GSA will provide FTS services without charges (including termination costs) to DOD or that GSA's regulations do not apply to the FTS services GSA provides DOD under the SAU. /5/ Thus, reading section 201-1.103(c)(3), the SAU, and the President's letter of July 1, 1949, together, we conclude that in those situations where GSA exercises responsibility under the SAU for procuring or providing communications services to DOD, the FIRMR applies. While DOD may not be required to have its communications needs met through GSA, having elected to do so, it is subject to the same provisions of law controlling the terms and conditions by which GSA provides those services to other agencies. Nothing in the law authorizes, let alone requires, GSA to provide agencies FTS services without reimbursement.

While it is clear that GSA may include when appropriate terminal liability charges in the annual rates assessed by GSA for FTS services under 40 U.S.C. 757, their inclusion is not required. However, it is also clear that GSA is to recover all the costs incurred in operating the FTS from the agencies receiving the FTS services. /6/ Taken together, we think it clear that in appropriate circumstances, the Administrator of GSA may recover termination costs directly from agencies initiating termination of FTS services since these are FTS operating costs which the FTS Fund must recover.

Prior to the 1985 issuance of FIRMR Bulletin No. 29, GSA had not assessed termination charges on withdrawing agencies. GSA has advised us that FIRMR Bulletin No. 29 was issued, in part, as a result of the first large scale withdrawal from FTS by an agency and, in part, as a result of GSA's determination that it was more equitable and appropriate to assess the costs attributable to unscheduled withdrawal from FTS to the agencies leaving the system rather than increasing rates to the continuing users. /7/ See FIRMR Bulletin No. 29, Para. 7 (October 15, 1985). GSA notes that customers in the private sector are assessed disconnect charges upon their withdrawal from a vendor's telecommunications system. Although the termination costs in the case at hand are not identical to disconnect charges assessed in the private sector, they are analogous, and do represent costs associated with Navy leaving the network.

With regard to the instances cited by Navy where GSA did not assess termination costs, GSA points out that the Naval Electronic Systems Engineering Activity site had two FTS access lines disconnected in November 1987 when the rest of the Navy left FTS. /8/ Since these lines were disconnected at the same time that Navy was disconnected from the entire system, disconnect charges for these two FTS lines were included in the final termination charge against Navy.

The Naval Surface Weapons Center site had six FTS lines, two of which were disconnected in October 1982 and the remaining four of which were disconnected in June 1984. The first two lines were disconnected not as a result of an agency request for withdrawal from the system, but because GSA determined that usage was not great enough to make the lines cost- effective. To date, it has not been GSA's practice to assess termination charges for disconnects occurring as a result of GSA cost-effectiveness determinations. The remaining four lines were disconnected pursuant to a Navy request for withdrawal. However, as explained earlier, it was not GSA's practice at the time to assess termination charges against a withdrawing agency. More importantly, GSA does not assess termination costs that are negligible as was the case with the four lines. As we discussed earlier, these are allocated as overhead to agencies based on a percentage of GSA's total bill.

The Naval Avionics Center in Indianapolis, IN, had 18 lines disconnected not as a result of an agency request for withdrawal from the system, but because GSA determined that usage was not great enough to make the lines cost-effective. As explained earlier, it is not GSA's practice to assess termination charges for disconnects occurring as a result of cost- effectiveness determinations.

We find no basis to conclude that GSA is acting outside its authority or in an arbitrary or unreasonable manner in assessing Navy termination costs for withdrawal of the entire department from the FTS. Prior to the first large scale agency withdrawal from the FTS, there was no need for GSA to consider the question of whether to recover costs associated with large scale FTS service terminations. However, once having been confronted with the question, GSA exercised its discretion as conferred by law to identify and recover the direct costs associated with large scale terminations of FTS service to an agency.

In the situations where it is economically feasible, GSA is authorized to assess these costs directly. The law does not require that GSA recoup these costs only through rates assessed on the remaining agencies using the FTS, and to do so would thrust on agencies the burden of paying large scale costs resulting from other agencies exiting the FTS. Further, since these termination costs are not included in GSA's rate computation for usage charges, there is no potential for an agency being double billed for these costs. Finally, GSA appears to have consistently applied this policy since its adoption and offers a reasonable explanation for not recovering termination costs in certain specific situations; that is, where it is uneconomical to do so or where the disconnects result from GSA's own cost effectiveness determinations. Consequently, we find nothing warranting Navy's refusal to pay the billed direct costs attributable to Navy's withdrawal from the FTS.

/1/ GSA submitted its request under GAO, Policy and Procedures Manual for Guidance of Federal Agencies, title 7, Sec. 7.3(a)(3) (TS 7 40, July 14, 1983).

/2/ In brief summary, GSA's sample of agency use of FTS is based upon an up to 20 percent vendor's sample of agency calls provided on tapes to GSA from vendors. Using the 20 percent sample, GSA then determines billings to agencies for 100 percent usage by applying a "Z" factor which includes consideration of the number of days in the quarter, the distance between caller and call station, the type of call (on or off network) and the agency calling pattern (on or off network). An overhead cost factor which includes recoverable costs that are not picked up through the 20 percent sample (for example installation costs and small scale service termination costs) is then allocated to all users based upon percentage of GSA's total bill. However, GSA does not allocate as overhead large scale termination costs, since GSA maintains that it is cost effective to identify them and more equitable to recover them from the exiting agency. Based on historical data, GSA has indicated that its billings based on the 20 percent sample has an accuracy of plus or minus 3 percent, although we have nothing before us that would validate this assertion.

/3/ The 1949 Act, 40 U.S.C. Sec. 471 et seq. (1982), established GSA as the central agency for managing the acquisition, use, and disposition of property for executive agencies. However, section 201 of the 1949 Act authorizes the Secretary of Defense to exempt the Department of Defense from GSA's centralized procurement of utility services when in the best interest of National Security unless the President directs otherwise. U.S.C. Sec. 481(a). In a letter to all executive agencies dated July 1, 1949, the President directed that agencies exempted from application of the provisions of the 1949 Act "shall insofar as practicable, procure, utilize, and dispose of property in accordance with the provisions of the (1949) Act and the regulations issued thereunder in order that the greatest overall efficiency and economy may be effected." See letter of July 1, 1950, 3 C.F.R. Comp. 1949-1953, pages 995, 996. The SAU apparently was entered into in order to clarify the responsibilities of GSA vis-a-vis DOD under section 201(a) of the 1949 Act, 40 U.S.C. Sec. 481(a) and to implement the President's directives set forth in the July 1, 1950 letter.

/4/ GSA has consistently included such a provision in its regulations since shortly after the FTS fund was created in 1962. See 41 C.F.R. Sec. 101-37.102(a) (1984); 41 C.F.R. Sec. 101-37.102(a) (1979); 41 C.F.R. Sec. 101-35.102(a) (1965). The 1950 SAU is reprinted in the DOD FAR Supplement 70.701, 48 C.F.R. 270.701 (1987).

/5/ Exemptions from the FIRMR are set forth in FIRMR section 201 1.103(c)(4), 41 C.F.R. Sec. 201-1.103(c)(4) (1986), which does not exempt either DOD or Navy.

/6/ The $6.85 million assessed by GSA against Navy represents the direct costs associated with disconnecting the serving access lines without disrupting service to other users and the direct costs of carrying surplus capacity during downsizing of the network to account for traffic removed. However, even in the absence of the specific statutory reference, under the decisions of this Office, termination costs are recoverable expenses from agencies that have received reimbursable services (1) initially charged revolving funds established to operate in a businesslike manner, and (2) which are required to be reimbursed costs of operation from agencies receiving the service. Compare 67 Comp.Gen. 426 (1988); 65 Comp.Gen. 795 (1986); 60 Comp.Gen. 520 (1981); 59 Comp.Gen. 515 (1984).

/7/ GSA has assessed and collected termination costs from the following agencies upon their withdrawal from FTS:

- In 1987, GSA assessed and collected from the Department of the Army $3,012,551 for costs associated with its departure from FTS on October 1, 1987.

- In 1988, GSA assessed and collected from the Department of the Air Force $489,900 for costs associated with its Departure from FTS on December 31, 1987.

-GSA has also assessed and collected termination costs against the U.S. Postal Service and the Federal Home Loan Bank Board, among other agencies.

/8/ Navy alleges that this facility was disconnected on February 13, 1984. However, GSA has no record of a disconnect order having been received prior to Navy's total withdrawal from FTS.

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