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PacBell, MCI Expected to Get Unprecedented State Contract

Telecom: In a $1-billion deal, California government is looking to privatize its phone network for the first time.


California is poised to hand over its statewide phone system to a team made up of Pacific Bell and MCI, giving the companies a $1-billion contract that for the first time would privatize the government's telecommunications network, according to sources familiar with the decision.

The contract, put out for bid last fall, would provide government employees with a range of services, including 300,000 phone lines, long-distance service, data transmission, Internet access, calling cards and videoconferencing.

Officials from the Department of General Services and the Department of Information Technology will announce the winner of the 10-year contract this morning in Sacramento.

The phone network will replace CalNET, an in-house system the Department of General Services has run for the state since 1991. If CalNET were an independent business, it would be the third-largest phone company in California.

By buying telecommunications services from private companies, the state hopes to save millions of dollars a year and avoid paying for costly equipment upgrades. Privatizing the phone network was one of the major recommendations proposed by Gov. Pete Wilson's Task Force on Government Technology.

"This is going to save a great deal of money--the California taxpayer will be very happy with our announcement," said Pete Dufore, a spokesman for General Services. "Running a telephone system as large as this one with all the new technology is not necessarily the core competency of the state government."

The MCI-PacBell team bested rival bids from long-distance giant AT&T and local phone company GTE. GTE led the team that built CalNET in the early 1990s and currently operates the network as a subcontractor to the state.

State government officials would not identify the winning bidders late Monday. PacBell declined to discuss the announcement, and MCI and GTE spokesmen said they did not know who had won the contract. AT&T officials could not be reached.

The deal is likely to be challenged in court, as is often the case with big-money contracts. Equipment maker NEC America, ousted early in the bidding process, is said to be among those planning to fight the pact in court.

As part of the deal, MCI and Pacific Bell would essentially buy CalNET's physical assets. The companies would then invest in the network to upgrade switches and other key elements, said Dana Hoelzel,, assistant director of the State and Consumer Services Agency.

When the contract ends, the two companies would own the network. After seven years, the state can again put the contract out to bid.

Some observers have questioned the legality of the deal, citing a prohibition on the sale of state assets without first gaining approval from the Legislature.

Dufore said the transfer is legal. "This has been gone over by our legal folks, and they feel that we're doing everything well within the spirit and the letter of the law," he said.

In addition to benefiting from lower rates, the state will be relieved of $25 million in equipment debt and will no longer need to spend $10 million to relocate switches from buildings that have been damaged by earthquakes.

The fate of the GTE employees now working on CalNET is unclear, but officials said state employees will not lose their jobs.

"However, their duties may change a little bit," Dufore said.

One state telecommunications systems analyst, who asked not to be identified, said many CalNET employees are worried that they may be transferred to non-telecommunications positions.

The employee also questioned the wisdom of selling off the state's network now that it has become self-sufficient after years of losses.

The 35,000 state employees who use the phone network will not notice any difference, because the changes will affect only behind-the-scenes telecommunications equipment. Tens of thousands of workers at cities, counties, schools and other institutions around the state use the phone system as well.

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