The General Services Administration is negotiating a $400 million, sole-source contract with the Chesapeake & Potomac Telephone Co. to revamp the federal telephone system in the Washington area. Business Week magazine reports today.

The magazine says the procurement plan, which has been in the works for more than three years, is being roundly criticized by other communications equipment suppliers who fear they will be frozen out of the government market in Washington.

The article, appearing in the issue dated Aug. 20, continues:

Under the proposed contract, dubbed Metrex, 250,000 phones in 25 federal agencies would be locked into the Bell System for at least five more years. The deal appears to have caught nearly all of AT&T's competitors flat-footed. "It takes some doing in Washington to keep anything this big this quiet," said K. Woodrow Benckert, chairman of International Telephone & Telegraph Co.'s Washington-based U.S. Transmission Systems.

The GSA and AT&T defend Metrex, a version of Bell's Centrex service, as an interim step that will cut government phone bills. "It is just a plan fo augmenting existing service," countered Clude A. Heintzelman, manager of C&P's federal government marketing operations. Heintzelman said the proposal was unsolicited and is not available for public inspection because it contains information C&P considers proprietary.

Frank J. Carr, the GSA's commissioner for automated data and telecommunications service, rejected complaints about the deal's alleged secrecy. "This is just an interim system intended to save the taxpayers' money," he retorted. "It gives us time to set up a competitive procurement plan. Besides, there just isn't any other company in existence that could handle a project of this size and complexity."

But one company - Northern Telecom Inc., the U.S. subsidiary of Canada's Northern Telecom Ltd., itself a subsidiary of Bell Canada - thinks otherwise. It has filed a formal complaint with the General Accounting Office protesting the impending brocurement. Northern is the leading supplier of advanced digital telephone exchange equipment in the U.S. through its sales to independent telephone companies, and it is well able to handle Washington agencies, said James G. Hix, vice president of government marketing.

"We are building a billion-dollar telephone system for Saudi Arabia," Hix said. "Compared to that, Washington would be a breeze."

Carr insists that he has no alternative but to work with C&P, "which has been running the government telephone system since the beginning." He points out that the General Accounting Office is now circulating a draft report that criticizes the GSA for not providing more modern and less costly service, and the GAO wants a quick fix to the problem.

There is a hitch in the GSA plan, according to some telecommunications managers at the agencies. To get the $1.4 million annual savings projected from Metrex, the GSA would have to reduce the number of telephones with hold buttons, intercoms and other "keyset" gadgetry to just 25 percent of all government phones now are equipped with so-called auxiliary push buttons.Without this reduction, the federal phone bill could go up by $4 million to $8 million a year.

As for competitive bids, Carr insists that the District is different from other areas where the GSA has provided for competitive bidding. He said existing contracts with C&P call for "termination charges" that rule out competitive bids. "Termination charges for the State Department alone would run over $1 million," Carr said.