[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





                  THE RURAL LOCAL BROADCAST SIGNAL ACT

=======================================================================

                                HEARING

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                                   on

                               H.R. 3615

                               __________

                             MARCH 16, 2000

                               __________

                           Serial No. 106-119

                               __________

            Printed for the use of the Committee on Commerce



                    U.S. GOVERNMENT PRINTING OFFICE
64-021CC                    WASHINGTON : 2000

                    ------------------------------  





                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

   Subcommittee on Telecommunications, Trade, and Consumer Protection

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,              EDWARD J. MARKEY, Massachusetts
  Vice Chairman                      RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               BART GORDON, Tennessee
PAUL E. GILLMOR, Ohio                BOBBY L. RUSH, Illinois
CHRISTOPHER COX, California          ANNA G. ESHOO, California
NATHAN DEAL, Georgia                 ELIOT L. ENGEL, New York
STEVE LARGENT, Oklahoma              ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming               BILL LUTHER, Minnesota
JAMES E. ROGAN, California           RON KLINK, Pennsylvania
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ROY BLUNT, Missouri
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Crippen, Dan L., Director, Congressional Budget Office.......    13
    Goodlatte, Hon. Bob, a Representative in Congress from the 
      State of Virginia..........................................    11
    McLean, Christopher A., Acting Administrator, Rural Utilities 
      Service....................................................    23
    Parsons, R. Kent, Vice President, National Translators 
      Association................................................    27
    Viadero, Roger C., Inspector General, U.S. Department of 
      Agriculture................................................    20

                                 (iii)



 
                  THE RURAL LOCAL BROADCAST SIGNAL ACT

                              ----------                              


                        THURSDAY, MARCH 16, 2000

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Cox, Deal, 
Largent, Cubin, Shimkus, Wilson, Pickering, Bliley (ex 
officio), Markey, Boucher, Luther, and Sawyer.
    Staff present: Justin Lilley, majority counsel; Cliff 
Riccio, legislative clerk; and Andy Levin, minority counsel.
    Mr. Tauzin. The committee will please come to order.
    Today the subcommittee takes up the issue of loan 
guarantees. This important legislation almost made it to the 
finish line in the last session of Congress. It fell short, 
though, because of procedural objections, as you know, in the 
Senate.
    Still, it was very clear at the time that broad support 
existed for the idea that Congress enact legislation that would 
provide loan guarantees to companies that carry local broadcast 
signals to those markets where satellite carriers currently do 
not and in many cases do not plan to do so.
    We now have the opportunity to look at this matter in a 
deliberate and considered fashion, which frankly is a good 
thing. While many can agree that this is an important matter, 
it is equally important that we get it right. This includes 
asking some very precise and critical questions such as the 
prospects for actually providing universal access to 
subscription based systems that will carry local broadcast 
systems.
    We also must ensure that we legislate in a technology 
neutral manner. We do not pick among the industry's potential 
winners and losers. We should be indifferent as to how many 
companies head the multi-channel video market, and concern 
ourselves more with companies who simply enter those markets.
    Along these lines I would note that some claim that the 
version of the legislation in the House is not yet technology 
neutral, whereas the Senate version may be. I look forward to 
hearing from our dear friend Mr. Goodlatte and the others on 
this issue as to whether such is the case and we might be able 
to remedy it.
    We must also take this opportunity to explore the existing 
loan programs administered by the Department of Agriculture. We 
have with us today Mr. Chris McLean, the Administrator of Rural 
Utilities Service, who can help the subcommittee better 
understand the issues raised by two very recent disturbing 
audits by the Inspector General.
    Particularly we need to ensure that the legislation before 
this subcommittee doesn't invite more of the same problems 
pointed out in those audits, or whether the legislation's 
strict underwriting requirements can actually become a model 
for improving the existing programs that were so heavily 
criticized in those audits. We need to talk about that this 
morning as well.
    In the end this matter deals not only with the Federal 
credit policy, but indeed with telecommunications policy. In 
particular, we are attempting to define the role of the Federal 
Government in ensuring that multi-channel video providers have 
affordable access to capital. Help us find the right balance, 
and we'll try to get it right.
    Finally, let me also say that the National 
Telecommunications and Information Administration could not be 
with us today. I understand most of them are in Peru with the 
Chairman of the FCC. Legislation before the subcommittee this 
morning would assign the NTIA an important critical 
certification role.
    And of course we will need and look forward to hearing the 
views of the NTIA at some point, and we will be communicating 
with the agency in writing on this matter. In the meantime I'm 
very interested in hearing from our distinguished witnesses, 
and of course my good friend Mr. Goodlatte.
    The Chair will recognize the gentleman from Virginia, Mr. 
Boucher, for an opening statement.
    Mr. Boucher. Thank you very much.
    Mr. Tauzin. Mr. Boucher of course is the cosponsor of Mr. 
Goodlatte's legislation.
    Mr. Boucher.
    Mr. Boucher. Thank you very much, Mr. Chairman. And I am 
indeed pleased to be a cosponsor with Mr. Goodlatte on the 
legislation that will provide this very much needed loan 
guarantee. The changes that this Congress made in 1999 to the 
Home Satellite Viewer Act enabled that important new service, 
and that new service is the ability of the direct broadcast 
companies to offer not just their national fare but also, for 
the first time, local television programs.
    And the availability of those programs will produce an 
enormous benefit. Cable rates will for the first time be market 
based, because the direct broadcast satellite companies can now 
become a full and complete and viable competitor for local 
cable TV, offering exactly the same services that cable 
television provides.
    The new service also provides a potentially tremendous 
benefit for millions of rural residents who live primarily in 
mountainous terrain and who because of that terrain do not have 
access at the present time to their local television programs. 
They're blocked by the mountain from receiving those signals 
over the air, and cable TV does not extend to where they 
reside. And so the new local into local service for the first 
time will offer to rural residents an opportunity to get their 
own local TV signals.
    The business plans, however, of the major direct broadcast 
satellite companies do not extend into rural America. Those 
business plans in fact don't even extend to the small and 
medium sized cities across the United States. The DBS companies 
have announced the intention to serve initially 33 of the 
largest cities in the Nation with the new local into local 
service, and potentially over time to serve as many as 66 of 
the largest cities in the nation. But that still excludes the 
medium sized and small cities and virtually all of rural 
America.
    Realizing this fact, Mr. Goodlatte and I, who both served 
as conferees on the Home Satellite Viewer Act last year, 
proposed to the Conference Committee an approach that would buy 
down the cost of capital sufficiently to enable this local into 
local service to be provided, not just in the largest cities, 
but in all 211 television markets across the United States.
    Our approach is a loan guarantee of $1.25 billion, and a 
great deal of advice has been received of a technical and 
financial nature indicating that a loan guarantee of this level 
would be sufficient to enable the launch of enough satellites 
to provide this service to all 211 local television markets 
across the United States.
    The conference committee adopted this proposal unanimously. 
The conference agreement that contained it was then approved in 
the House of Representatives by a vote, as I recall, of 418 to 
11. But a single United States Senator suggested that his 
committee should have an opportunity to review this proposal, 
and as a consequence of his request the local guarantee 
provision was removed from the conference report.
    But at the time that it was removed, the leadership in both 
the House and the Senate made a pledge that a freestanding bill 
introduced this year containing the loan guarantee would be 
considered on the floor of both Houses by no later than April 
1, and in fact we are on track to meet that schedule.
    A bill introduced by that Senator in the Senate has been 
approved unanimously by the Banking Committee in the Senate. 
Mr. Goodlatte's legislation has been approved unanimously by 
the Agriculture Committee in the House. And I want to commend 
Mr. Goodlatte on what is an absolutely extraordinary 
performance of legislative skill, in having a bill be 
introduced 1 week and then be approved unanimously in committee 
the next week. I've been in Congress for 18 years, and I don't 
recall that record having been surpassed in any instance. So 
Mr. Goodlatte has done a wonderful job in bringing this measure 
forward.
    The legislation is in fact technology neutral. It is very 
much in the tradition that has been established in this 
Congress over decades of enabling people who do not get basic 
services, because the for-profit companies can't afford to 
provide it in their region, to receive that service as a 
consequence of government facilitation. This was done when 
electricity service was introduced into rural America. It was 
done again when telephone service was introduced into rural 
America.
    And even today, rural telephone co-ops and rural electric 
co-ops receive government financial assistance in order to make 
that service affordable where it is not affordable for private 
companies to provide. And we are simply through our legislation 
extending that time honored tradition to the next generation of 
technology and making sure that rural Americans and people who 
reside in the small and medium sized cities around the country 
can receive the same benefits of this local into local service 
that the residents of the larger cities are going to receive.
    I want to commend Mr. Goodlatte again. I'll look forward to 
his testimony and that of our other witnesses. And I thank you, 
Mr. Chairman, for scheduling this timely and very important 
discussion.
    Mr. Tauzin. I thank my friend. I might add that Mr. 
Goodlatte did such a remarkable job on that bill that Hollywood 
is looking at making a movie about him, ``Looking for Mr. 
Goodlatte.''
    Mr. Sawyer. Will that be a short?
    Mr. Tauzin. We're extremely pleased now to welcome the 
Chairman of the full committee, Mr. Bliley, the gentleman from 
Virginia.
    Chairman Bliley. Thank you, Mr. Chairman.
    Let me begin by welcoming my friend and colleague from 
Virginia, Mr. Goodlatte. It's been a pleasure working with him 
over the years. Virginia can count on him for his energy and 
enthusiasm for many years to come.
    Today the subcommittee considers an issue that I know is 
very important to him, the issue of loan guarantees. 
Congressman Goodlatte has introduced legislation that would 
authorize the Federal Government to subsidize the construction 
of multi-channel video systems that could deliver broadcast 
signals to rural markets as well as other services such as high 
speed Internet access.
    Congress has a strong and historical commitment to rural 
infrastructure development, and I commend Congressman Goodlatte 
for opening a dialog on whether we should expand this 
commitment to cover subscription based television services. I 
urge my colleagues today to examine closely the potential cost 
to the American taxpayer. CBO notes that providing local 
television service in rural areas is likely to prove 
financially and technically risky.
    I suspect that this is true. For any multi-channel service 
provider to make money, millions of households will have to be 
willing to pay a premium to satellite or other service 
providers to receive local television stations, even though 
most Americans can view those stations today at no additional 
charge through their over-the-air antenna or existing cable 
subscription.
    Let me also say a word about the proposed program. The 
proposed legislation would delegate responsibilities to the 
Rural Utilities Service which currently administers loan 
programs for the development of telephone networks and electric 
utilities in rural areas. It is noteworthy that unlike rural 
electrification or telephone services, there is immediate and 
intense competition in the video programming marketplace. I'm 
concerned about taxpayer risk in such a high stakes game.
    The Wall Street Journal reported this morning that the 
Inspector General, who is with us today, has found that the 
telephone and electric utility programs are in need of serious 
review. The Inspector General found, for example, that many of 
the telephone companies that borrow from the RUS are 
financially strong and more than capable of obtaining financing 
from private lenders.
    As for the electric utilities that borrow from the RUS, the 
Inspector General found that these utilities are playing the 
stock market, rather than investing in their communities as 
Congress had intended. I look forward to hearing from the RUS 
today on the Inspector General's finding. In the meantime, 
Congress needs to proceed very cautiously before expanding the 
RUS's authority. I look forward to working with my colleagues 
as matters proceed.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    [The Wall Street Journal article follows:]

               [March 16, 2000--The Wall Street Journal]

  Rural Utilities Invest Funds in Markets Instead of Local Projects, 
                               Audit Says
 By Kathy Chen and Bruce Ingersoll, Staff Reporters of The Wall Street 
                                Journal
    WASHINGTON--An Agriculture Department audit found that the nation's 
rural utilities are sinking billions of dollars into stocks, bonds and 
other investments instead of rural development, and the report is 
becoming fodder for a congressional battle over a rural television 
bill.
    The audit shows hundreds of electricity cooperatives with low-
interest government loans had nearly $11 billion of outside investments 
during 1997, the last year for which figures are available. But only 
$61 million, or about 0.5%, went into local business ventures or rural 
infrastructure.
    Contrary to Congress's intent, the 787 borrowers on the roster of 
the department's Rural Utilities Service put most of their cash and 
other assets into a vast array of government securities, stocks, bonds, 
real estate and other nonrural investments. These findings by the 
department's inspector general are set to be released at a House 
Commerce Committee hearing today. The audit follows an inspector 
general's report in February that faulted the Rural Utilities Service 
for continuing to lend large sums of money at discount rates to rural 
telephone companies that no longer need government assistance.
    The audit comes as Congress is considering legislation that would 
give the agency oversight for a third $1.25 billion loan guarantee 
program to help companies that want to beam local TV signals to rural 
and other underserved areas.
    The House and Senate are working on different versions of the 
legislation, which would supplement the new law allowing satellite TV 
shows. However, satellite carriers have said they plan to roll out the 
service to only the top urban markets, leaving many of their rural 
customers without access to local TV shows.
    Some members of Congress are pointing to the audits as a reason not 
to allow the agency to administer the rural TV plan--or not to approve 
the plan at all. Citing the agency's ``somewhat lax oversight'' of 
previous loan programs, Rep. Steve Largent (R., Okla.) is ``somewhat 
skeptical of the need to hand out another $1.25 billion in loan 
guarantees,'' said bob Bolster, his telecommunications staffer. ``He 
feels we should let the marketplace take care of itself.''
    But Rep. Bob Goodlatte (R., Va.), the sponsor of the House bill, 
said the measure is essential to bring local TV shows to tens of 
millions of satellite TV consumers. And the Rural Utilities Service has 
an ``excellent reputation'' for administering loan programs, he added.
    A Rural Utilities Service spokesman said the agency's record is 
``pretty good'' for administering loan programs. Regarding the audit of 
utilities' loans, he said there are no specific requirements on how co-
ops should invest and ``we followed the statute.''
    The audit singles out several examples of cash rich rural utilities 
that could afford to invest significant sums in their communities. The 
biggest utility in the audit, Oglethorpe Power Corp., with $5.1 billion 
in assets, had $399 million of outside investments in 1997, but the 
Atlanta utility sunk no money into rural development.
    Oglethorpe spokesman Gregory Jones said the auditors overlooked the 
fact that Oglethorpe's mission is to supply smaller electricity 
cooperatives with cheap power. ``They, in turn, can afford to get 
involved in economic development and they can attract industry into 
their areas with their very competitive [electricity] rates,'' he said. 
Oglethorpe also runs an economic development program throughout 
Georgia.
    In testimony today, Inspector General Roger Viadero is likely to 
question the investments of Northern Virginia Electric Cooperative, 
which serves a rapidly urbanizing part of the Washington metropolitan 
area. In 1997, the cooperative invested $100,000 in a marketing 
subsidiary and began selling two big companies' satellite TV dishes to 
northern Virginia and Washington residents. The money, Mr. Viadero 
contends, could be better spent on badly needed services for rural 
Americans.
    A spokesman for the Manassas, Va., cooperative said its rural 
customers are being offered the same satellite TV service as city 
dwellers. In 1999, the cooperative had $128 million invested, including 
$27 million of stocks and bonds managed by a brokerage firm for 
``maximum return,'' the spokesman said. ``The investment income helps 
us keep our rates as low as possible,'' he said, adding that the 
cooperative ``never has been approached'' for venture capital.

    Mr. Tauzin. I thank my friend the chairman.
    Now the ranking minority member, the gentleman from 
Massachusetts, Mr. Markey, for an opening statement.
    Mr. Markey. Thank you, Mr. Chairman. I want to commend you 
for holding this hearing on rural television issues. The 
legislative effort underway stems from the debate last fall 
concerning revisions in the Viewer Act and the advent of local 
to local service from direct to home satellite providers. 
Satellite provided local to local service promises to extend to 
millions of consumers much needed competition in the multi-
channel video marketplace.
    When Congress was considering legislation last year, it was 
clear that the two existing DBS companies would not be 
providing local to local service beyond the top markets in the 
most populated areas of the country. The legislation before us 
today was prompted by a desire to extend local to local service 
that urban America was going to receive to rural communities as 
well. This effort to do so is built upon America's experience 
in extending electricity and phone service to rural towns and 
hamlets.
    I have long supported the universal concept. It ensures 
that the poor as well as rural Americans do not fall behind, 
and that they can receive the basic services that more affluent 
urban Americans do, at affordable prices. I know that my 
grandfather and grandmother would not have left the farm in 
Ireland if they had local into local direct broadcast service, 
coupled with a very strong price support system for the goods 
which they were raising on the farm. Unfortunately the New Deal 
had not arrived in the southeastern corner of Ireland by 1902, 
and so we came here to America.
    But there's no question that we want to preserve those 
people in rural America with those price supports for their 
farm products and with additional programs to help them get 
local into local direct broadcast television service as well. 
These are critical programs to maintain that lifestyle.
    The legislation before us, however, needs some additional 
analysis and clarifications. For instance, the legislation 
establishes a loan guarantee program to improve access to local 
television stations in unserved and underserved rural markets. 
From a universal service perspective I understand what an 
unserved market is. It is someone who doesn't get the service.
    Yet in this context it isn't clear whether the service they 
are failing to receive is satellite delivered local to local 
service or the delivery of local television stations by any 
other means, such as provision of local TV stations from an 
incumbent cable operator. Depending on what the answer to that 
question is, then we have to delve into what an underserved 
market is.
    Underserved could mean a rural community that in fact does 
receive local TV stations from the cable operator in town but 
doesn't get local to local from a DBS provider. If people can 
already get local TV stations from a cable operator, then the 
government doesn't need to get involved to extend service to 
that area in the same way that we extend electricity and phone 
service to areas that otherwise wouldn't get it. The cable guy 
is already there.
    Consumers into that area, however, may understandably want 
an alternative to the cable operator, perhaps one they could 
use in conjunction with their satellite dish. If we are 
proposing to extend loan guarantees to provide alternatives to 
the local TV service rural consumers already receive from an 
incumbent, it makes zero sense in my view to permit incumbents 
to be eligible for loans.
    If the incumbent monopoly already provides local TV 
stations to a community, then rural consumers in that community 
are choosing not to subscribe to that service for some reason. 
That reason is most likely price. Why would Congress ask these 
rural citizens for their taxpayer dollars to subsidize the only 
choice in town they don't want anyway? To do so would stand 
competitive telecommunications policy on its head, rather than 
addressing the lack of competition, our lingering concern about 
affordable cable rates.
    We're proposing to allow the sole multi-channel provider in 
a rural area a chance to solidify their position with help from 
the United States taxpayer and without any obligation from the 
loan recipient to price the subsidized service to consumers 
affordably.
    I hope before this bill leaves this committee we can make 
it crystal clear that incumbents are not to be eligible for 
subsidies, as well as clarifying other areas of the bill, so 
that we bring the benefits of competition and local TV service 
to rural America without extending the headaches of a monopoly 
era of telecommunications that this committee has time and 
again tried to end.
    I thank you, Mr. Chairman. I yield back.
    Mr. Tauzin. I thank my friend. I point out to my dear Irish 
friend from Massachusetts, with St. Paddy's Day coming 
tomorrow, it's an absolute enlightenment to me to learn it was 
really the potato couch famine that sent your family to 
America.
    I yield to my friend the gentlelady from New Mexico, Mrs. 
Wilson.
    Mrs. Wilson. Thank you, Mr. Chairman. I'm tempted to just 
yield my time to Mr. Markey and Mr. Tauzin so we can be 
entertained more this morning. But I will yield my time and put 
any statement in the record.
    Mr. Tauzin. I thank the gentlelady.
    The gentleman from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you very much, Mr. Chairman. I am 
inspired by the example of the gentlelady from New Mexico, and 
also insert my statement into the record.
    Mr. Tauzin. I thank the gentleman. The gentlelady, Mrs. 
Cubin from Wyoming.
    Mrs. Cubin. I'm going to inspire you with an opening 
statement, Mr. Chairman.
    Mr. Tauzin. The gentlelady may proceed.
    Mrs. Cubin. I thank you for bringing what I consider to be 
this very important bill before the subcommittee today. As an 
original cosponsor of the measure, I am pleased with this plan 
that will ensure that all consumers, specifically those in 
medium and small markets, have access to local broadcast 
signals by way of satellite.
    The conference report to H.R. 1554, the Intellectual 
Property and Communications Omnibus Act, included this same 
$1.25 billion loan guarantee to help support the launch of 
certain systems dedicated to provide television service to 
hundreds of rural and underserved and unserved markets. 
Unfortunately the bill ran into some roadblocks in the Senate, 
not on the merits of the bill, I don't believe, but on supposed 
jurisdictional grounds.
    I am pleased that we have this bill in front of us today, 
because without this plan only the largest television markets 
in America will be able to receive local into local service 
authorized by this legislation. The cities that will be served 
will only be those with millions of television households. As 
we all know, the largest TV markets are currently enjoying 
local into local service over their satellite systems, because 
of the hard work and dedication of this subcommittee.
    Wyoming I think is a perfect example of why we need to 
enact the legislation that's before us today. The two largest 
television markets in Wyoming are Casper and Cheyenne. They 
rank 197 and 199 respectively. Even under the most optimistic 
local into local plans, I don't believe that Wyoming TV markets 
would ever receive local into local without the loan guarantee 
provision that's included in this bill.
    So today's testimony from CBO Director Crippen details some 
of the financial pitfalls that may occur if we enact this 
legislation. And I can only say that in lieu of mandating that 
satellite providers serve rural areas, this is our only option. 
Some of our concerns I think can be alleviated with the 
recommendations that are put forth by the USDA's Inspector 
General to ensure that Rural Utilities Service the Rural 
Utilities Service makes better use of RUS loan funds and invest 
more wisely in rural America.
    I am committed to moving this piece of legislation so rural 
satellite customers can enjoy the same television programming 
as our urban friends. And I truly appreciate Mr. Markey's 
support of the concept if not the words. And I would like to 
point out that when we live in a country like America, where we 
are so diverse geographically and socially, in places like 
where Mr. Markey lives, people are crowded more together than 
they are in places like where I live, but we're all one 
country.
    There isn't one single kilowatt of electricity generated by 
nuclear power in the entire State of Wyoming and in some of the 
other Western States. And so I see the rural contribution in 
exchange for the contribution for universal service is that we 
take some of the--you know, we'll be storing maybe in New 
Mexico, maybe in Idaho, we'll be storing and treating some of 
the nuclear waste products that result from generating 
electricity.
    And so it is one country. We all have to make sacrifices 
for one another. Sometimes we have to identify what those 
sacrifices we make actually are. I'm happy to do it for urban 
America, and I appreciate the folks in urban America being 
willing to do the same thing for rural America.
    And I yield back the balance of my time, as if I had some, 
Mr. Chairman.
    Mr. Tauzin. I thank the gentlelady. The gentleman, Mr. 
Shimkus from Illinois, is recognized.
    Mr. Shimkus. Thank you, Mr. Chairman. I want to thank Bob 
for his efforts and for joining us today. I want to thank you 
for calling this hearing. I want to mention our colleagues 
Joanne Emerson and Eva Clayton who have re-energized the Rural 
Caucus, which I am a member of. I look forward to following 
this legislation very closely and reporting back to them on how 
successful we will be in pushing something that everyone 
understands and realizes is very important.
    I represent a large rural district, it covers 19 counties 
over 300 miles. Only one third is now receiving and will be 
finished receiving local into local St. Louis market, which 
should be the end of the month of April, we should have the 
full coverage of that area, which is a good sector of the 
district, but still leaves a lot of the areas still uncovered. 
And we've been through the drill before, talking about the 
benefits of local broadcast for community broadcast, emergency 
service broadcast warnings.
    I harken back to the flood of 1993, when the levies broke 
and people had to get out of their towns and communities. So 
I've been a strong advocate of the importance of the local 
broadcasters in providing the service that we asked them to 
provide.
    This ability to help rural Americans get access to their 
local stations and using any means possible is one that we want 
to make sure we do with respect to obviously the conservative 
ideology of this Congress, that it's not wasteful, but it's in 
a way that we encourage and empower those to provide services 
that we know are important for all citizens irrespective of 
whether they're from an urban area or rural area.
    And I appreciate the hearing. I look forward to learning 
more, Mr. Chairman. I yield back my time.
    Mr. Tauzin. I thank the gentleman. The gentleman from 
Oklahoma, Mr. Largent, is recognized.
    Mr. Largent. Thank you, Mr. Chairman. Only a few months ago 
Congress responded to the concerns of millions of American 
television viewers by enacting the Satellite Home Viewers 
Improvement Act. One of the primary reasons for the legislation 
was to offer consumers a complete alternative to cable by 
granting satellite carriers the ability to carry local 
broadcast signals back into their local markets, otherwise 
known as local into local.
    To a large extent the Act appears to be working. The 
largest carriers appear to be providing local into local to 26 
metropolitan markets. It's projected that ultimately satellite 
providers will be providing local into local service to 70 
percent of American households. The question before us today 
is, what do we do about the remaining 30 percent of Americans 
who live in sparsely populated rural areas?
    One option is H.R. 3165, the Rural Local Broadcast Signal 
Act introduced by our colleague Mr. Goodlatte. This legislation 
would authorize the Department of Agriculture through the Rural 
Utilities Service to provide $1.25 billion in loan guarantees 
to finance the delivery of local television programming to 
subscribers of satellite and cable and wireless delivery 
systems.
    Frankly I've always had reservations about loan guarantee 
programs. And after reviewing the testimony submitted by the 
Congressional Budget Office and the Department of Agriculture's 
Inspector General, my concerns have grown. According to the 
testimony submitted by Mr. Crippen, Director of CBO, ``Federal 
assistance for this venture would likely prove costly. Most of 
the proposals envision large capital investments. But the 
market for delivering local television signals would be most 
subject to competition and relatively small, making it 
difficult to ensure that large investments can be recovered, 
especially in the near term.''
    I also took note of CBO's analysis that, based upon its 
review, the default rate for companies that may qualify for 
this program could be as high as 44 percent. I hope all the 
taxpayers in America are listening to this testimony. The 
testimony submitted by Mr. Roger Viadero, the Department of 
Agriculture's Inspector General, raises even more serious 
questions about how the Rural Utilities Service administers its 
loan programs and its commitment to stimulate investment in 
rural America.
    Recently the Inspector General's office conducted two RUS 
audits, one on the electric program and the other on the 
telephone program. What did the Inspector General's audit 
reveal? According to Mr. Viadero's testimony, the audit of the 
electric program ``discovered that RUS electric borrowers have 
not become major players in financing America's rural 
infrastructure, despite the fact these borrowers hold almost 
$11 billion in total investments. Disappointingly, only one 
half of 1 percent of this $11 billion, about $61 million, is 
actually invested in rural America.''
    So where are these subsidized loans going? According to the 
audit, these loans are being invested in money market 
certificates, stocks, bonds, and mutual funds, not in rural 
America. The audit of the telephone program released on 
February 11 of this year discovered that more than half of the 
815 RUS loans, totaling almost $1.9 billion, went to 434 
companies that are strong enough financially not to need 
government assistance.
    People living in rural America deserve a choice in video 
delivery systems. However, in light of the financial risk to 
the American taxpayer and the lack of oversight of existing 
loan programs, I'm extremely skeptical if now is the time to 
grant RUS an additional $1.25 billion in lending authority.
    Thank you, Mr. Chairman. I look forward to the testimony of 
the panel.
    Mr. Tauzin. I thank the gentleman. The gentleman from 
Minnesota, Mr. Luther, is recognized.
    Mr. Luther. I have no comment. Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentleman. The gentleman from 
Georgia, Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman. I want to thank Mr. 
Goodlatte for bringing this legislation to the committee. I 
look forward to both his testimony and the panel that will 
follow him. I think there are some interesting questions to be 
asked and hopefully some interesting answers to be received.
    As someone who represents a rural part of this country, the 
mountains of north Georgia, and a Congressional District that 
borders four states and is served by three media markets, two 
of which are out of my State and one of which is also out of my 
district, I do have gaps in this television service that is 
provided to the communities that make up my Congressional 
District.
    And I think any effort to try and fill in those gaps in a 
financially sound method is certainly one that I am interested 
in, and I look forward to the testimony. Thank you, Mr. 
Chairman.
    Mr. Tauzin. I thank the gentleman. The Chair asks if there 
are any other opening statements. And all written statements by 
unanimous consent will be made a part of the record, including 
those of our witnesses, which are now indeed made part of our 
record.
    And we will now welcome the first panel, which is a single 
panel represented by our good friend, Mr. Bob Goodlatte of the 
great State of Virginia. And Bob, I want to join your colleague 
from Virginia, Mr. Boucher, in commending you for your 
excellent work here in the Congress on this issue. And you 
heard from the members the great concerns they have about how 
this program as you propose it might work and how we might 
ensure that we don't have the problems that the audits recently 
came out seem to indicate exist in the current loan programs. 
And we welcome your testimony. We would urge you to address 
those concerns today.
    Mr. Goodlatte.

 STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF VIRGINIA

    Mr. Goodlatte. Well, thank you, Mr. Chairman. I have a 
chart that I would like to put up for the members. First of 
all, let me thank you for holding this hearing and allowing me 
to testify; also for your cosponsorship of this legislation, as 
a great many other members of the committee have done, along 
with 110 other Members of the House. I also want to thank 
Chairman Bliley for his participation in this hearing and for 
the opportunity to work with him on the Satellite Home Viewer 
Act of 1999 and many other pieces of legislation that I've 
worked on with both of you.
    I especially want to thank my colleague Rick Boucher, chief 
democratic cosponsor of the legislation, and who was very much 
involved with coming up with the proposal to put to the 
Conference Committee last fall, which you and other members of 
the committee have adequately described the history of how we 
got to this.
    So I would like to devote my time to where we are now and 
why we're here, and address some of the matters that were 
raised here by the panel. I do have a statement which I would 
ask to be made a part of the record.
    Mr. Tauzin. Without objection, it is.
    Mr. Goodlatte. We have a chart over here which is a little 
dogeared, because it's been on the road quite a lot, to make 
the point about this issue, which we call another digital 
divide. If you look at the circles that are on the map, those 
show the cities served as of January 31 by local into local 
following the legislation that enabled the satellite companies 
to get into the local into local service.
    And the yellow circles are the cities that are probably 
going to receive local into local service based upon the market 
plans of the existing satellite companies. There are some 
additional proposals, as mentioned by the gentleman from 
Oklahoma, that some new companies might reach as many as the 
top 67 markets in the country. But that is far from certain. 
And it is certain that the existing companies will not reach 
them.
    And I would further point out there are 211 television 
markets in the country. And no plan, no plan by any existing or 
proposed private satellite company will reach more than 140 of 
those markets. So if you look at the map you'll see a stunning 
picture of the overwhelming majority of the geographic area of 
the country not being reached.
    And it is important to note that while this legislation is 
geared to make sure that rural Americans share in local into 
local service, and in fact every square mile of rural America 
is covered by this legislation, it is also to be made clear 
that a great many urban areas in this country are also not 
served, including Tulsa, Oklahoma, and Oklahoma City, Oklahoma; 
Cheyenne, Wyoming; Albuquerque, New Mexico; most of Georgia, 
except for Atlanta; New Orleans, Louisiana; many parts of Ohio; 
Springfield, Illinois; for the gentleman from Massachusetts, 
Boston is covered, but my original hometown of Springfield, 
Massachusetts is not covered by this legislation. So it's 
important to consider that fact.
    The legislation is designed to do two things; to solve the 
problem for rural Americans who cannot receive local into local 
service, but also to bring new competition to the urban areas 
not served on this map. The areas served on the map are getting 
that competition now. People who have the option of having 
cable or over the air broadcast will now also have the 
competitive option of choosing satellite service.
    But no one else in America will have the opportunity to do 
that. Now, the issue has been raised this morning about whether 
the Rural Utilities Service is the best agency to administer 
this loan and whether they have done their job appropriately in 
the past. I am well aware of the article in the Wall Street 
Journal this morning, and I have also reviewed the testimony of 
my good friend Roger Viadero, who is the Inspector General of 
the Department of Agriculture, who testifies before my 
subcommittee, the Department Operations Subcommittee in 
Agriculture, many, many times, and I have a great deal of 
respect for his independence. And I very much agree with many 
of the observations in his testimony regarding where the money 
that is loaned is going and whether it should be going there.
    But it's also important to note that that is a separate 
debate that this Congress should probably have about whether or 
not loan guarantees and the loan portfolio of the Rural 
Utilities Service should be going into some of the investments 
and some of the places that it is going. But this legislation 
is different in the respect that it is intended to reach more 
than all of rural America which it reaches.
    It's intended to reach many, many urban areas and suburban 
areas and so on. And so I think it's important to draw a clear 
line between the criticism offered of the agency in terms of 
whether or not the loans that it is making now are going to 
where Congress intended them to go or whether or not it is 
possible to have--I've just been advised I have a vote in the 
Judiciary Committee. I think I would like to sum up here.
    The point I want to make to you, Mr. Chairman, is this. The 
Rural Utilities Service is the successor of REA in 
administering these loans. For 60 years a loan portfolio of 
more than $42 billion, and never, never in the entire 60-year 
history has there been a default. So when you talk about the 
Rural Utilities Service administering loans, if the question is 
are they going to take care of the taxpayers' money and make 
sure it is not lost, I can't think of anyone better to 
administer this than an agency that has never experienced a 
default and has a loan portfolio of $42 billion, nearly 40 
times the size of what we are proposing in this legislation.
    So I would hope that the committee would keep that in mind. 
And while I share the concerns of Mr. Viadero regarding whether 
or not some of the loans they guaranteed are appropriate, I 
would also say that the rural electric cooperatives who have 
received many of these loan guarantees have also, because 
they've never defaulted on them, a very excellent record, and 
have invested the money soundly. Whether the money invested 
soundly is invested in the right place is I think a separate 
issue for another time and another place.
    The issue before us today is, is this legislation important 
to ensure that more than 85 million Americans will have the 
opportunity to receive what the rest of the country in the 
urban areas is getting now, and will the country have it 
properly administered by the appropriate agency. And I think 
that, as you will hear from their testimony, they are very 
capable of administering these loans.
    I thank you very much.
    Mr. Tauzin. I thank the gentleman. The gentleman does have 
a vote in his other committee. Mr. Goodlatte, if you would like 
to come back and join the other panel, you are more than 
welcome to do that. That's your call.
    Mr. Goodlatte. I thank you, Mr. Chairman.
    Mr. Tauzin. I'll call the second panel, which will include 
Mr. Dan Crippen, Director of the Congressional Budget Office; 
Mr. Roger Viadero, Inspector General, United States Department 
of Agriculture; Mr. Christopher McLean, Acting Administrator, 
Rural Utilities Service; and Mr. R. Kent Parsons, Vice 
President, National Translators Association.
    We're pleased to welcome you all. You heard my earlier 
statement that your written testimony is a part of our record. 
We have copies of them before us. You needn't read them to us. 
We would appreciate if you would abide by our 5-minute rule, 
which means summarize your testimony within 5 minutes.
    Mr. Crippen.

 STATEMENTS OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
  OFFICE; ROGER C. VIADERO, INSPECTOR GENERAL, UNITED STATES 
   DEPARTMENT OF AGRICULTURE; CHRISTOPHER A. McLEAN, ACTING 
 ADMINISTRATOR, RURAL UTILITIES SERVICE; AND R. KENT PARSONS, 
        VICE PRESIDENT, NATIONAL TRANSLATORS ASSOCIATION

    Mr. Crippen. I'm pleased to be here with you this morning 
to discuss providing Federal loan guarantees to increase access 
to local television markets. We need to keep in mind there are 
at least two objectives of this legislation, and I think Mr. 
Markey's terminology went to exactly that. He talked about the 
unserved and the underserved.
    So there are two differing objectives to this: providing 
broadcasts to folks not now receiving them, and providing 
competition to existing multi-channel providers. We often hear 
these objectives, Mr. Chairman, mixed together. And we need to 
keep them separate or clearly understood not so much as a 
matter of policy but in order to understand how we evaluate 
this legislation.
    Our conclusion is that Federal assistance to this venture 
would likely prove to be costly. The market for delivering 
local television signals would be both subject to competition 
and relatively small, making it difficult to ensure that large 
investments could be recovered, especially in the near term. 
The cost to the taxpayers would depend on the size of the 
program and how much of the risk would be borne by the 
government.
    The budgetary treatment of loan guarantee programs is 
governed by the Federal Credit Reform Act of 1990. That Act 
makes commitments of Federal loan guarantees contingent on the 
appropriation of enough funds to cover the estimated subsidy 
associated with the guarantees. Under credit reform, the 
subsidy cost of a loan guarantee is the estimated long term 
cost to taxpayers.
    The subsidy cost of federally guaranteed loans depends 
primarily on expected defaults and the degree to which the 
losses can be offset by collateral and by income from fees or 
other charges. In CBO's view, providing local television 
service in rural areas is likely to prove financially and 
technically risky, with an attendant regulatory risk we have 
not attempted to assess.
    For such services to be economically viable, millions of 
households have to be willing to pay a premium to satellite or 
other service providers to receive local television stations, 
even though most households can view those stations at no 
additional charge through their over-the-air antenna or 
existing cable. We have, I think, if David can put it up, a 
chart as well.
    Let me say, Mr. Chairman, too, this should not be 
interpreted as a chart that discounts anything Mr. Goodlatte 
said. He was making the point about the desirability or the 
appropriateness of the policy. This chart I show you just to 
explain why we estimated what we did. You have undoubtedly seen 
this chart before. It's a mapping of areas currently receiving 
at least ``Grade B'' television broadcast signals.
    Obviously most of the country and even more of the 
population can receive local broadcasts over the air. And many 
of the folks in the white areas or yellow areas can get local 
broadcasts through cable or MMDS or other alternatives. In 
fact, as you know, more than 97 percent of television 
households are covered by cable. For the remaining 3 percent, 
or roughly 3 million households, local signals may be available 
over the air or by other means. In other words, there are fewer 
than 3 million--more likely something like 2 million--
television households that cannot currently receive local 
broadcasts in some fashion.
    This is the primary market for any alternatives. This then 
is Mr. Markey's unserved. In addition, unlike companies that 
provide rural electrification or television service, these new 
entrants would immediately confront established competitors 
everywhere else. Thus, borrowers of the proposed guaranteed 
loans might have trouble achieving the necessary local market 
penetration to support a new television service.
    They would also face numerous technical risks, including 
the risk that emerging technologies will allow local broadcast 
signals to be delivered through less costly methods. As I said, 
our analysis did not include regulatory risk, such as the 
availability of spectrum and appropriate satellite slots or the 
ability of any new entrant to gain licenses to those.
    CBO has now completed estimates of both the House and 
Senate bills. The House bill--similar to the legislation 
included in last year's conference report on H.R. 1554--would 
provide a subsidy of 28 percent of the face value of the 
guarantee, a cost we estimate to be $350 million, therefore, 
based on $1.25 billion total. The Senate bill, because it would 
allow a guarantee for only 80 percent of any loan, would have a 
subsidy rate of approximately 20 percent, or $250 million.
    To reiterate, the cost of a loan program to the taxpayer is 
determined by the riskiness of the venture and how much of that 
risk the government will bear. As is evident from our scoring 
of the Senate bill, one way to reduce the cost of the loan 
guarantee program significantly is to reduce its size, either 
by decreasing the total obligation level or by guaranteeing 
less than the full value of each loan.
    About half of existing Federal loan guarantee programs 
guarantee less than 100 percent. Some guarantee as little as 50 
percent. Guaranteeing less than full value can obviously reduce 
the cost to the taxpayers. First, it lowers the total amount of 
exposure.
    Second, and perhaps more important, it can reduce the 
default risk by encouraging private lenders, who have more 
expertise in analyzing credit risk, to scrutinize their own 
exposure more carefully. Modifying the terms of the loan 
guarantees can also change the subsidy cost, but for the most 
part, such technical changes will have a relatively small 
effect on the cost of the program. Such other options include 
requiring borrowers to pay fees, enhancing the government's 
security in the event of default, and ensuring underwriting 
criteria.
    It is possible to reduce the cost of proposals to guarantee 
loans for delivering additional television services to rural 
areas, but it is not possible to eliminate all of the risk or 
cost. The purpose of a Federal loan guarantee is to provide 
credit for activities that the private marketplace considers 
too costly or too risky to pursue. Such support comes at a 
cost.
    Thank you, Mr. Chairman.
    [The prepared statement of Dan L. Crippen follows:]
          Prepared Statement of Dan L. Crippen, Director, CBO
    Mr. Chairman and Members of the Subcommittee, I am pleased to be 
with you this morning to discuss providing federal loan guarantees to 
increase access to local television services. The proposed loan 
guarantee program is designed to encourage investment in systems that 
deliver local television signals to mostly rural markets that are 
unlikely to receive those signals through existing direct broadcast 
satellite (DBS) companies. In my statement today, I will provide an 
overview of some of the factors that affect the budgetary cost of such 
loan guarantees. I will also discuss options that might reduce the cost 
of the proposed program to the federal government.
    Federal assistance for this venture would be likely to prove 
costly. Most of the proposals envision large capital investments. But 
the market for delivering local television signals would be both 
subject to competition and relatively small, making it difficult to 
ensure that large investments could be recovered, especially in the 
near term. Federal credit programs can shift--but not eliminate--the 
risk of such projects. The cost to the federal government would depend 
largely on the size of the program and how much of the risk was borne 
by the government.
       factors that affect the budgetary cost of loan guarantees
    Many options to provide federal loan guarantees for rural 
television service are under consideration. The Congressional Budget 
Office (CBO) has estimated the cost of one proposal this session--H.R. 
3615, as ordered reported by the House Agriculture Committee. My 
testimony this morning is based on our analysis of that program 
proposal.
    H.R. 3615 envisions a $1.25 billion loan guarantee program. Up to 
half of that amount could be awarded to a single borrower, with the 
remainder divided among several smaller borrowers (each receiving no 
more than $100 million). The loans would be used to finance the 
infrastructure needed to deliver local television broadcast signals--
whether through satellite facilities, cable systems, or other wired or 
wireless systems. Although the legislation was written to cover a 
variety of possible technologies, key supporters argued that the 
program should be used to finance satellite transmission of local 
television signals.
    The budgetary treatment of loan guarantee programs is governed by 
the Federal Credit Reform Act of 1990 (as amended). That act makes 
commitments of federal loan guarantees contingent on the appropriation 
of enough funds to cover the estimated subsidy associated with the 
guarantees. Under credit reform, the subsidy cost of a loan guarantee 
is the estimated long-term cost to the government, calculated on a net 
present-value basis. Budget authority for the subsidy is recorded in 
the year it is provided; outlays are shown in the year in which the 
guaranteed loans are disbursed.
    The subsidy cost of federally guaranteed loans typically depends on 
the extent of any defaults and the degree to which those losses are 
offset by proceeds from liquidating collateral and by income from fees 
or other charges. (Some loan guarantees also provide an explicit 
interest rate subsidy, which adds to the cost.) The credit risk of 
existing loan guarantee programs varies widely. Some programs have 
average default rates of less than 2 percent; others, between 10 
percent and more than 20 percent, net of recoveries. Most existing 
programs guarantee a high volume of loans each year, effectively 
pooling the credit risk of many individual borrowers. In addition, 
fees--especially up-front fees--offset some of the subsidy cost of most 
loan guarantee programs.
    In CBO's view, providing local television service in rural areas is 
likely to prove financially and technically risky. For such services to 
be economically viable, millions of households would have to be willing 
to pay a premium to satellite or other service providers to receive 
local television stations--even though most households can view those 
stations at no additional charge through their over-the-air antenna or 
existing cable subscription. Thus, borrowers of the proposed guaranteed 
loans might have trouble achieving the necessary level of market 
penetration for a new television service. In addition, unlike companies 
that provide rural electrification or telephone services, those 
borrowers would immediately confront competitors in the marketplace. 
They would also face numerous technical risks, including the risk that 
emerging technologies will allow local broadcast signals to be 
delivered to the home through less costly methods.
    To estimate the subsidy cost of the loan guarantee program for 
rural television service, CBO consulted industry experts and investment 
analysts and examined the credit ratings of firms in the satellite 
television industry. That information is useful in estimating subsidy 
rates because the different credit ratings reflect analysts' 
expectations of defaults. For example, a January 2000 report by 
Standard & Poor's indicated that the cumulative default rate for 
investments with a ``BBB'' rating is less than 5 percent; for those 
with a single ``B'' rating, the default rate is 28 percent; and for 
those with a ``CCC'' rating, the rate is 44 percent. Based on our 
review of publicly available information about the ratings of companies 
in similar industries, we anticipate that the credit rating for rural 
television projects would be at the riskier end of that range.
    We also examined the legislative terms and conditions that might 
mitigate such risk. For example, the loan guarantee program in H.R. 
3615 would give the government a superior lien on the assets of a 
borrower in the event of default, but it would let the Administration 
decide how much collateral to require. Likewise, judgments about the 
reasonableness of borrowers' business plans and about the total amount 
of the loan guarantees would be made by the Secretary of Agriculture 
Administrator of the Rural Utilities Service. Finally, H.R. 3615 would 
authorize the Secretary Administrator to levy fees and accept a payment 
from a nonfederal source to fund all or part of the credit-risk 
premiums.
    CBO estimated that the loan guarantee program authorized by H.R. 
3615 would have a subsidy rate of about 28 percent of the total amount 
guaranteed. For a $1.25 billion loan guarantee program, that translates 
into an estimated subsidy cost of about $350 million (assuming that the 
optional fees would not be charged or collected). Because H.R. 3615 
would make implementation of the program contingent on future 
appropriation action, those costs would be discretionary. (A copy of 
our letter to Congressman Goodlatte about cost estimate for H.R. 3615 
is attached.)
         options to reduce the cost of loan guarantee programs
    As I noted earlier, the cost of a loan program is determined 
largely by the riskiness of the venture and how much of that risk the 
government will bear. One way to reduce the cost of a loan guarantee 
program significantly is to reduce its size--either by decreasing the 
total obligation level or by guaranteeing less than the full value of 
each loan. Modifying the terms of the loan guarantees can also change 
the subsidy cost, but for the most part, such technical changes would 
have a relatively small effect on the cost of the proposed program. 
Other options to reduce subsidy costs include requiring borrowers to 
pay fees, protecting the government's security in the event of default, 
and ensuring effective underwriting criteria.
Reduce the Obligation Level
    The simplest way to decrease the size of the program is to reduce 
the amount of loans that the government is offering to guarantee. H.R. 
3615 would authorize guarantees totaling $1.25 billion. Lowering the 
amount of obligations would cause a proportional reduction in the 
government's exposure and thus in the subsidy cost.
Guarantee Less Than the Full Value of the Loan
    Another way to reduce the potential cost to taxpayers is for the 
government to guarantee less than 100 percent of the value of each 
loan. About half of existing federal loan guarantee programs guarantee 
less than 100 percent of insured loans; some guarantee as little as 50 
percent of the value of their loans. Examples at the lower end of the 
range are the Development Credit Authority program at the Agency for 
International Development (AID) and the Section 7(a) General Business 
Guaranty program at the Small Business Administration (SBA).
    Guaranteeing less than the full value can reduce the cost to the 
government in two ways. First, it can lessen the government's direct 
exposure for each loan by lowering the dollar amount of the guarantee. 
Although that would reduce the cost of the proposed program, it would 
run the risk that private lenders might be unwilling to lend enough 
funds to meet borrowers' needs. Second, it can reduce the default risk 
by encouraging private lenders to exercise more care in underwriting 
loans. The profit motive should push lenders to lend only to those 
borrowers most likely to repay the debt. Private lenders also have more 
expertise in analyzing business plans, industry trends, and financing 
options than their federal counterparts. However, having some degree of 
private financing is not a panacea for eliminating risk--both the AID 
and SBA programs mentioned above have default rates of about 15 
percent.
Require Borrowers to Pay Fees
    Most current loan guarantee programs require borrowers to pay 
either an up-front fee (when the loan is made) or an annual fee 
(collected as the borrower pays off the loan). Up-front fees are more 
common and typically range from less than 1 percent to more than 5 
percent of the loan amount.
    If properly designed, up-front fees can reduce the subsidy cost by 
a corresponding amount. Two caveats apply, however. First, there is a 
limit to the amount of fees that borrowers would be willing to pay--and 
that amount is likely to be far smaller than the subsidy cost of this 
program. Second, unless borrowers are prohibited from capitalizing the 
fee either directly (by adding it to the loan amount) or indirectly (by 
having third parties pay the fee, which would in turn be recovered 
through higher costs for equipment or services), their debt-service 
costs, and thus the risk of default, will increase. Capitalizing fees 
can also result in borrowers' having insufficient collateral to support 
the loans.
    Many federal programs, especially those involving housing and 
business loans, impose annual fees. The fees typically range from about 
0.5 percent to 0.75 percent of the outstanding balance of a loan. Such 
fees can significantly reduce subsidy costs for programs that are 
characterized by a low risk of default and long maturities (between 15 
years and 30 years). However, annual fees cannot be collected if a loan 
is in default, so they may not significantly reduce subsidy costs for 
programs in which the expected default rate is high.
Protect the Government's Security in the Event of Default
    H.R. 1554 would allow the government's guarantee to be subordinate 
to any private-sector financing. Subordination would reduce the 
incentive for lenders to assess the riskiness of the loan and would 
increase the likelihood that if a default occurred, the government's 
loss would be significant.
    Recoveries from subordinated debt have been lower than recoveries 
from senior debt in federal credit programs and in the private debt 
market. For example, the SBA guarantees financing to businesses in the 
Section 504 Certified Development Company and the Section 7(a) General 
Business Guaranty programs. In the 504 program, the government's 
guarantee is subordinate to that of the lender; in the 7(a) program, 
the government's guarantee is equal in priority. Recoveries from 
defaulted loans have been significantly lower in the 504 program, even 
though it requires collateral in real estate and equipment and the 7(a) 
program does not. Making government liens superior to all other liens 
on the assets of the borrower could reduce the federal subsidy, 
relative to that of H.R. 3615.
Ensure Effective Underwriting Criteria
    H.R. 3615 would direct the Secretary of Agriculture to develop 
underwriting criteria for the guaranteed loans in consultation with the 
Office of Management and Budget and an independent accounting firm. 
Although CBO expects the resulting standards to be consistent with 
current government practice, lawmakers may want to spell out some of 
the criteria in law. For example, legislation could require that the 
liquidation value of the collateral be equal to the outstanding 
principal balance of the loan. Even at that level, however, collateral 
alone would not eliminate the subsidy cost of a program because of the 
time and expenses associated with care and preservation, liquidation, 
and litigation of the collateral.
    The criteria for evaluating loans could also be strengthened. H.R. 
3615 would allow projections of an applicant's ability to repay a loan 
to include the value of collateral pledged to protect the government's 
interest. Collateral provides a basis for recoveries in the event of 
defaults; it is not a substitute for cash flow. As a result, it is not 
a useful basis for determining whether an applicant's project is 
viable.
                               conclusion
    It is possible to reduce the cost of proposals to guarantee loans 
for delivering additional television services to rural areas, but it is 
not possible to eliminate all of the risk or cost of making such 
guarantees. In theory, the purpose of a federal loan guarantee is to 
provide credit for activities that the private marketplace considers 
too risky to pursue on its own. Such support comes at a cost.
    The surest way to reduce the cost of proposals like the one 
included in H.R. 3615 would be to reduce the size of the federal loan 
guarantee. Other modifications, such as charging fees or improving 
underwriting criteria, are unlikely to reduce the estimated subsidy 
appreciably because the activities being financed are fundamentally 
risky. Options designed to reduce the cost to the government could make 
the program less attractive to potential borrowers or lenders, which in 
turn could reduce the demand for the loan guarantees.
               congressional budget office cost estimate
                             March 1, 2000
              H.R. 3615--Rural Local Broadcast Signal Act
 As ordered reported by the House Committee on Agriculture on February 
                                16, 2000
                                SUMMARY
    H.R. 3615 would establish a loan guarantee program for certain 
companies to provide local television service to areas of the country 
that do not receive local television stations from satellite companies. 
The bill would authorize the Administrator of the Rural Utilities 
Service (RUS) at the Department of Agriculture to guarantee loans to 
qualified borrowers, totaling up to $1.25 billion. The bill would 
authorize the appropriation of amounts necessary for the costs of the 
loan guarantees and associated administrative expenses.
    Under the bill, one guaranteed loan could be as much as $625 
million, but all other loans would have to be $100 million or less. 
Qualifying loans would be payable in full within the lesser of 25 years 
or the useful life of the assets purchased. H.R. 3615 would allow the 
government's guarantee to be subordinate to any private-sector 
financing and would give RUS broad authority to modify the terms and 
conditions of loans. The authority to guarantee loans would be 
contingent upon future appropriation action and would expire on 
December 31, 2006.
    CBO estimates that implementing H.R. 3615 would cost about $365 
million for loan subsidy and administrative costs over the 2000-2005 
period, assuming appropriation of the necessary amounts. H.R. 3615 
would not affect direct spending or receipts; therefore, pay-as-you-go 
procedures would not apply. H.R. 3615 contains no intergovernmental or 
private-sector mandates as defined in the Unfunded Mandates Reform Act 
(UMRA) and would not affect the budgets of state, local, or tribal 
governments.
                estimated cost to the federal government
    For the purpose of this estimate, CBO assumes that H.R. 3615 and 
related supplemental appropriations will be enacted in fiscal year 
2000. The estimated budgetary impact of H.R. 3615 is shown in the 
following table. The costs of this legislation fall within budget 
function 370 (commerce and housing credit).

                                        Spending Subject To Appropriation
                                     By Fiscal Year, in Millions of Dollars
----------------------------------------------------------------------------------------------------------------
                                                                   2000    2001    2002    2003    2004    2005
----------------------------------------------------------------------------------------------------------------
Estimated Authorization Level...................................       5     352       2       2       2       2
Estimated Outlays...............................................       2     233     124       2       2       2
----------------------------------------------------------------------------------------------------------------

                           basis of estimate
    Under procedures established by the Federal Credit Reform Act of 
1990, the subsidy cost of a loan guarantee is the estimated long-term 
cost to the government, calculated on a net present value basis 
(excluding administrative costs). We estimate that the loan guarantees 
provided under the bill would cost about 28 percent of the total amount 
guaranteed--or $350 million, subject to the availability of 
appropriated funds. In addition, CBO estimates that administering the 
program would cost about $5 million in 2000 and about $2 million in 
each subsequent year. The bill would authorize the Secretary of 
Agriculture to charge fees, which could offset some of the subsidy or 
administrative costs, but this estimate assumes no fees would be 
charged.
    To prepare this estimate, CBO consulted with industry experts and 
investment analysts and examined the credit ratings of firms in the 
satellite television and related industries. The information on credit 
ratings is useful because different credit ratings reflect analysts' 
expectations of defaults. Based on this information, we assume that the 
rural television loans likely to be guaranteed under this bill would 
have a credit risk comparable to debt rated as ``B'' or ``CCC,'' which 
typically have default rates ranging from about 30 percent to 45 
percent, respectively. We also estimate that provisions in H.R. 3615 
allowing the government's guarantee to be subordinate to private-sector 
financing would increase the subsidy cost of such guarantees. 
Subordination would reduce the incentive for lenders to assess the 
riskiness of the loan and increase the likelihood that if a default 
occurred, the government's loss would be significant. Recoveries from 
subordinated debt have been lower than recoveries from senior debt in 
both federal credit programs and the private debt market.
    PAY-AS-YOU-GO CONSIDERATIONS: None.
              intergovernmental and private-sector impact
    H.R. 3615 contains no intergovernmental or private-sector mandates 
as defined in UMRA and would not affect the budgets of state, local, or 
tribal governments.
    ESTIMATE PREPARED BY: Mark Hadley (226-2860)
    ESTIMATE APPROVED BY: Peter H. Fontaine, Deputy Assistant Director 
for Budget Analysis

    Mr. Tauzin. Thank you very much, sir. So we can understand 
your testimony, I just want to, before we move on, understand 
the charts you've given us. The red areas are the areas 
covering consumers with over-the-air broadcast local signals, 
is that correct?
    Mr. Crippen. Right.
    Mr. Tauzin. And that includes areas that receive good 
signals, bad signals, any kind, a signal intensity map?
    Mr. Crippen. Grade B contours.
    Mr. Tauzin. And the yellow areas do not receive over-the-
air but may receive it through cable or some other means?
    Mr. Crippen. Precisely.
    Mr. Tauzin. Thank you, sir.
    We will move on to Mr. Roger Viadero, Inspector General of 
the United States Department of Agriculture. And we'll 
appreciate your testimony, Mr. Viadero.

                  STATEMENT OF ROGER C. VIADERO

    Mr. Viadero. Thank you, Mr. Chairman, and members of the 
committee here today. I'm pleased to be here today to speak to 
you about the Office of Inspector General's recommendations to 
the Rural Utilities Service, RUS. With me today to my left is 
Mr. James R. Ebbitt, Assistant Inspector General for Audit. 
Before I begin my testimony, I would like to submit two 
recently issued audit reports for the record, sir.
    Mr. Tauzin. Without objection, they will be included.
    [The report appears at pg. 63.]
    Mr. Viadero. Thank you, sir. I share your concern that 
rural America be made a full partner in the information age. To 
that end two reports issued by my office describe options for 
the RUS Administrator to stimulate rural investment and make 
better use of RUS loan funds. Funds made available through 
implementation of the report's recommendations could be used to 
better connect rural communities to rapidly developing 
information technologies.
    Electric borrower investments. We audited RUS electric 
program borrowers to determine the extent of their investment 
activities and the degree to which borrowers invested in rural 
America. We discovered that RUS electric borrowers have not 
become major players in financing America's rural 
infrastructure, despite the fact that these borrowers had 
almost $11 billion in total investments.
    Disappointingly, only one half of 1 percent of this amount 
or about $61 million is actually invested in rural America. The 
Northern Virginia Electric Cooperative provides a good example. 
NOVEC has borrowed about $129 million from RUS and holds $128 
million in investments, none of which is classified as rural 
development.
    Among the electric co-op's investment is a subsidiary 
called NOVASTAR, a company that is partnering with DISH Network 
and DIRECTTV to sell premium satellite services to the northern 
Virginia and metropolitan Washington, D.C. Areas.
    I want to emphasize that NOVEC is not, I'll say again, is 
not violating any laws by investing in satellite TV for our 
metropolitan area. However, I believe encouraging RUS borrowers 
to invest more heavily in rural America just makes good sense. 
The same dollar that provides satellite TV to the area right 
here on Capitol Hill could be used to bring much needed 
services to the underserved communities in rural America.
    Unfortunately RUS electric program borrowers on their own 
have not invested heavily in rural America. Instead, investment 
dollars are used for such things as money market certificates, 
stocks and bonds, and mutual funds. We recommended that RUS 
develop and implement a strategy to encourage electric 
borrowers to use some of their $11 billion portfolio to make 
discretionary investments in rural America.
    RUS has agreed to develop and implement policies and 
procedures to strongly encourage borrowers to meet the intent 
of Congress. This new strategy could promote investment 
practices to ensure the delivery of local television 
programming to subscribers of satellite television in rural 
markets. Through increasing investments for rural access to 
telephones, computers, and the Internet, RUS electric borrowers 
would help close the digital divide.
    Let's talk about telephone borrowers who do not need 
assistance. In another recent audit we identified 434 RUS 
telephone program borrowers with loan balances totaling $1.87 
billion that appear to be in good enough financial condition to 
satisfy their credit needs from their own financial 
organizations or from other credit sources.
    Our findings echo and expand on conclusions reported by the 
General Accounting Office in a January 1998 report that 
detailed options to make the RUS telephone program more 
effective and less costly. GAO reported that some borrowers may 
retain loans longer than needed and are therefore able to take 
advantage of the favorable terms provided by the government.
    RUS continues to incur interest and other administrative 
costs in servicing the accounts of its financially healthy 
borrowers. The law requires RUS to encourage and assist rural 
telephone systems to achieve the financial strength needed to 
enable them to satisfy their credit needs from their own 
financial sources.
    Our trend analysis of key financial ratios showed steady 
improvement in the telephone loan portfolio, and that half of 
RUS borrowers are in strong financial condition. However, RUS 
does not have discretion to refuse a loan because a borrower is 
in strong financial condition. And the Rural Electrification 
Act is silent regarding loan graduation, that is, requiring 
borrowers to move to private credit when they're financially 
able. We recommended that RUS work with the Congress to clarify 
policy regarding loan graduation and requiring financially 
strong borrowers to obtain credit from commercial sources. RUS 
disagrees with our recommendation.
    RUS should seek clarification about loans to borrowers who 
do not need government assistance. As decisions are made about 
funding rural America's move into the information age, it is 
important to remember that over half of the RUS telephone loan 
borrowers may not really need government assistance.
    The money freed up could perhaps be used in other ways. For 
example, preserving and enhancing access to local and network 
television signals is important to rural America's economy. As 
enunciated in bill number 3615, local television, with its mix 
of crop reports, local news, weather reports, public service 
announcements, and advertisements from local businesses is 
vitally important for development efforts.
    According to the National Telecommunications and 
Information Administration, Americans living in rural areas are 
lagging behind the national average in computer and Internet 
access regardless of income level. At some income levels those 
in urban areas are 50 percent more likely to have Internet 
access than those with similar earnings in rural areas. The 
$1.9 billion currently loaned to the telephone program 
borrowers who do not need Federal assistance could go much 
further in closing the digital divide.
    In summary, my office has identified two potentially 
important options for increasing the effectiveness of RUS 
loans. Electric program borrowers hold about $11 billion in 
investments that could be used to build technological 
infrastructure for rural America. Telephone borrowers who could 
likely finance their operations privately owe the government 
$1.9 billion, money that could with appropriate authority be 
used to foster access to technology and electronic media.
    We are currently working on another audit that will address 
additional opportunities for RUS to increase the sufficiency 
and thus its contribution to rural America.
    Mr. Chairman, thank you for inviting me here today to talk 
about our recommendations on RUS.
    [The prepared statement of Roger Viadero follows:]
Prepared Statement of Roger Viadero, Inspector General, U.S. Department 
                             of Agriculture
    Thank you, Mr. Chairman and members of the committee. I am pleased 
to be here today to speak with you about the Office of Inspector 
General's recommendations to the Rural Utilities Service (RUS). With me 
today is James R. Ebbitt, Assistant Inspector General for Audit. Before 
I begin my testimony, I would like to submit two recently issued audit 
reports for the record.
    I share your concern that rural America be made a full partner in 
the information age. To that end, two reports issued by my office 
describe options for the RUS Administrator to stimulate rural 
investment and make better use of RUS loan funds. Funds made available 
through implementation of the reports' recommendations could be used to 
better connect rural communities to rapidly developing information 
technologies.
                     electric borrower investments
    We audited RUS electric program borrowers to determine the extent 
of their investment activities and the degree to which the borrowers 
invested in rural America. We discovered that RUS electric borrowers 
have not become major players in financing America's rural 
infrastructure, despite the fact that these borrowers hold almost $11 
billion in total investments. Disappointingly, only one-half of 1 
percent of this amount--about $61 million--is actually invested in 
rural America.
    The Northern Virginia Electric Cooperative (NOVEC) provides a good 
example. NOVEC has borrowed about $129 million from RUS and holds $128 
million in investments, none of which is classified as rural 
development. Among the electric coop's investments is a subsidiary 
called NOVASTAR--a company that is partnering with DISH Network and 
DIRECTTV to sell premium satellite TV services to the Northern Virginia 
and Metropolitan Washington, DC areas. I want to emphasize that NOVEC 
is not violating any laws by investing in satellite TV for a 
metropolitan area. However, I believe that encouraging RUS borrowers to 
invest more heavily in rural America makes good sense. The same dollar 
that provides satellite TV to the area right here on Capitol Hill could 
be used to bring much needed services to underserved communities in 
rural areas.
    Unfortunately, RUS electric program borrowers, on their own, have 
not invested heavily in rural America. Instead, investment dollars are 
used for such things as money market certificates, stocks and bonds, 
and mutual funds. We recommended that RUS develop and implement a 
strategy to encourage electric borrowers to use some of their $11 
billion portfolio to make discretionary investments in rural America. 
RUS has agreed to develop and implement policies and procedures to 
strongly encourage borrowers to meet the intent of Congress. This new 
strategy could promote investment practices to ensure the delivery of 
local television programming to subscribers of satellite television in 
rural markets. Through increasing investments for rural access to 
telephones, computers and the Internet, RUS electric borrowers could 
help close the ``digital divide.''
             telephone borrowers who do not need assistance
    In another recent audit, we identified 434 RUS telephone program 
borrowers with loan balances totaling $1.9 billion that appear to be in 
good enough financial condition to satisfy their credit needs from 
their own financial organizations or from other credit sources. Our 
findings echo and expand on conclusions reported by the General 
Accounting Office in a January 1998 report that detailed options to 
make the RUS telephone loan program more effective and less costly. GAO 
reported that some borrowers may retain loans longer than needed, and 
are therefore able to take advantage of the favorable terms provided by 
the Government. RUS continues to incur interest and other 
administrative costs in servicing the accounts of its financially 
healthy borrowers.
    The law requires RUS to encourage and assist rural telephone 
systems to achieve the financial strength needed to enable them to 
satisfy their credit needs from their own financial resources or from 
other sources. Our trend analysis of key financial ratios showed steady 
improvement in the telephone loan portfolio, and that half of RUS 
telephone borrowers are in strong financial condition. However, RUS 
does not have discretion to refuse a loan because a borrower is in 
strong financial condition, and the Rural Electrification Act is silent 
regarding loan graduation--that is requiring borrowers to move to 
private credit when they are financially able.
    We recommended that RUS work with Congress to clarify policy 
regarding loan graduation and requiring financially strong borrowers to 
obtain credit from commercial sources. RUS disagrees with our 
recommendation.
    RUS should seek clarification about loans to borrowers who do not 
need Government assistance. As decisions are made about funding rural 
America's move into the information age, it is important to remember 
that over half the RUS telephone loan borrowers may not really need 
government assistance. The money freed up could, perhaps, be better 
used in other ways. For example, preserving and enhancing access to 
local and network television signals is important to rural America's 
economy. As enunciated in H.R. 3615, local television, with its mix of 
crop reports, local news, weather reports, public service 
announcements, and advertisements for local business, is vitally 
important for rural development efforts.
    According to the National Telecommunications and Information 
Administration, Americans living in rural areas are lagging behind that 
national average in computer and Internet access, regardless of income 
level. At some income levels, those in urban areas are 50 percent more 
likely to have Internet access than those earning the same income in 
rural areas. The $1.9 billion currently loaned to telephone program 
borrowers who do not need federal assistance could go far in closing 
the ``digital divide.''
                                summary
    My office has identified two potentially important options for 
increasing the effectiveness of RUS loan programs. Electric program 
borrowers hold about $11 billion in investments that could be used to 
build technological infrastructure for rural America. Telephone 
borrowers, who could likely finance their operations privately, owe the 
Government $1.9 billion--money that could, with appropriate authority, 
be used to foster access to technology and the electronic media.
    We are currently working on another audit that will address 
additional opportunities for RUS to increase its efficiency and, thus, 
its contribution to rural America. Thank you for inviting me here today 
to talk about our recommendations to RUS.

    Mr. Tauzin. Thank you, Mr. Viadero. The chair is now 
pleased to welcome Christopher McLean, the Acting Administrator 
of the RUS.

               STATEMENT OF CHRISTOPHER A. McLEAN

    Mr. McLean. Thank you very much, Mr. Chairman. Thank you 
very much, Mr. Markey. As a former staffer of Senator Exon, who 
spent so many hours at this table working on the Telecom Act, 
it is a very honoring and humbling experience to appear in this 
capacity at this table as a witness.
    If I may have my statement on the satellite bill inserted 
into the record.
    Mr. Tauzin. Without objection.
    Mr. McLean. I would appreciate it if I could use my time to 
comment on the comments of the Inspector General. The Rural 
Utilities Service administers a $22 billion portfolio, 
telephone, electric and water. In many cases people say we're 
all wet; water, electric, telecommunications. We also 
administer distance learning and telemedicine programs.
    And our program is not to be a lender of last resort, in 
differentiation from other programs within the Department of 
Agriculture, perhaps like rural housing or rural business. The 
purpose of our program is to help roll out the most advanced, 
the best, highest quality, the most affordable service to rural 
America.
    And we want telecommunications companies and co-ops to be 
in our program, because to be part of the RUS program you 
accept responsibilities to comply with State modernization; 
that you comply with RUS engineering standards; that you comply 
with civil rights obligations; that you limit your charging of 
high connection fees, one of the biggest barriers to service in 
rural America; that you commit to area wide coverage; and that 
you restrain yourselves from charging zone and mileage charges, 
in other words having a higher rural rate.
    Now, since I left my position in the staff of the United 
States Senator, I have worked in the RUS as Deputy and now for 
the last several months as Acting Administrator. And as I 
traveled across this country I have not met a single customer 
of an RUS financed system who wishes they could be served by 
one of the large telecommunications companies that serves rural 
America.
    Nobody wants to trade places the other way from an RUS. 
People come to us and say, how can we get that quality of 
service into my community that's not served by an RUS borrower? 
The same situation in the electric program. The RUS family of 
co-ops have higher reliability rates than their counterparts in 
the investor owned utilities.
    The RUS program has encouraged economic development, and I 
accept the Inspector General's request that we redouble our 
efforts to encourage more investment in rural economic 
investment, although I think he went a bit too far in his 
statement that rural electrics are not investing in rural 
infrastructure.
    Anybody who visits rural America and sees 
telecommunications, the distance learning, the water projects, 
that rural electrics and rural telephone companies are 
investing in their communities, and the scholarship programs 
that they've put together for their kids, they know that that's 
not a true statement.
    Now, in the Northern Virginia example that Roger used, we 
at the RUS have been working very closely with the auditors of 
the Inspector General to try to explain the multi-layered 
system of cooperatives. Cooperatives are owned by their 
members. And in the $127 million of investments cited by the 
Office of Inspector General, and that was included in their 
exhibit, $56 million of those assets are patronage capital from 
the distribution co-op, from their generation of transmission 
capital, their generation of transmission cooperative.
    This is not cash that's available to be invested. Five 
million dollars are the capital investments in the National 
Rural Utilities Cooperative Finance Corporation, a private 
sector cooperative owned lending institution that helps finance 
supplemental private sector lending to leverage RUS investment, 
to do exactly the kind of thing that Roger is asking us to do 
in our program. That is not cash that is available.
    There's $12 million on the balance sheet of Northern 
Virginia Power for prepayment of their power bills. That was a 
very smart thing to do. They invested $12.7 million to prepay 
their power. Now, we're having a demonstration here on Capitol 
Hill from truckers who, if they could have prepaid $12 million 
of oil and energy, they would not be demonstrating today.
    We want to work with the Office of Inspector General to 
make our program as good as it can be. But if you evaluate the 
fundamental criticism in both of these reports, it's that we 
are lending to institutions that are too financially strong.
    Now, to make the record clear, in the telecommunications 
program, 50 years of experience, there has not been one 
writeoff in the telecommunications program. There have been 
writeoffs, I shall acknowledge, in our electric and water 
programs. The serious problems have been concentrated in 
nuclear investments that go back over 20 years. But the record 
of this agency and the record of this administration in running 
a program that fosters rural economic development is very good.
    And I will work closely with Roger in my new position to 
make sure that we're making this program as good as it can be. 
But I do think that there is not one dollar of RUS loans that 
are not going toward rural electric infrastructure or rural 
telecommunications infrastructure or water infrastructure.
    [The prepared statement of Christopher A. McLean follows:]
 Prepared Statement of Christopher McLean, Acting Administrator, Rural 
           Utilities Service, U.S. Department of Agriculture
    Mr. Chairman, it is an honor to testify today on HR 3615, which 
authorizes a new loan guarantee program to finance the delivery of 
local television programming in rural and small markets. The United 
States Department of Agriculture (USDA) appreciates the Committee's 
concern, both in the existing coverage of rural access to local 
broadcasting and the possibility that developing technologies can 
broaden that problem.
    The Rural Utilities Service (RUS) is a rural development agency of 
USDA. We administer a $42 billion loan portfolio of more than 9,000 
loans for telecommunications, electric and water and wastewater 
infrastructure projects throughout rural America. Our agency also 
administers the Distance Learning and Telemedicine loan and grant 
program and is a leading advocate for rural consumers before federal 
and state regulatory bodies.
                         rus record of success
    For nearly sixty-five years the REA and RUS have been empowering 
rural America. Just this last October, the RUS telecommunications 
program celebrated its 50 th anniversary. In those fifty years, the RUS 
telecommunications program has helped close the digital divide in rural 
areas. The telecommunications program has maintained an unprecedented 
level of loan security over the history of the program.
    Since 1993, the RUS has financed more than $1 billion in fiber 
optic facilities and more than $725 million in digital switching for 
telecommunications companies and cooperatives serving rural areas. In 
1999 alone, RUS provided nearly half a billion dollars in financing for 
rural telecommunications infrastructure. In addition, since its 
inception in 1993, the RUS Distance Learning and Telemedicine (DLT) 
program has provided $83 million in funding to 306 projects in 44 
states and two territories.
    The RUS is fortunate to have an accomplished corps of engineers, 
accountants, financial specialists and rural infrastructure experts. I 
am confident that the RUS has the necessary skills to administer new 
initiatives that will bring the benefits of the information revolution 
to all America.
                       the need for local access
    For America's rural residents, access to television signals has 
long been a challenge. Distance and geography have been significant 
impediments to the reception of consistently viewable broadcast 
signals. While cable television is available in many rural towns, it 
does not reach America's most rural citizens.
    Since its inception, satellite delivered television and now direct 
broadcast satellite services have provided increased access for all 
communications services to rural residents. Satellite television gave 
America's many rural residents first time access to vital sources of 
news, information, educational programming, entertainment and sports. 
As good as these services were, satellite services did not connect 
rural residents to their local communities.
    The 1999 amendments to the Satellite Home Viewers Act (SHVA) 
dramatically changed the dimensions of satellite service by giving 
carriers the right to deliver local television signals to viewers via 
satellite. However, that legislation limited the ability of these 
carriers to deliver distant network programming to consumers.
    Since the enactment of the SHVA amendments, satellite broadcasters 
have announced significant new initiatives to provide local signals to 
viewers. Current satellite carriers are offering ``local to local'' 
service primarily to larger urban markets. There is little evidence 
that under current conditions significant ``local to local'' offerings 
will be made in the markets below the 40 largest markets. The smaller 
the market, the more rural residents will be affected.
    Once the amendments to SHVA are fully implemented, many rural 
residents will likely lose their ability to purchase distant network 
signals. Many will still be unable to receive a suitable signal via 
antennae from their local broadcaster. Given the capacity limitations 
of current satellite providers, and the cost of nationwide local to 
local service, it is doubtful that current carriers will provide local 
signals to many smaller markets.
    The availability of local programming will become more problematic 
as the television industry converts to a digital system of signal 
delivery. The propagation of digital signals is different from analog 
signals. Analog signals fade out with distance from the transmitters. 
Digital signals drop off suddenly. The likely result is that some 
current rural viewers of broadcast television may lose their ability to 
receive a viewable signal once the conversion to digital is complete.
    Without the ability to retain and perhaps expand their viewer base, 
rural broadcasters may not have the financial ability to upgrade their 
systems. Once digital conversion is complete, the technology will make 
it likely that rural viewers will be able to receive fewer channels 
over a conventional TV antenna than currently available in analog mode.
                         ensuring public safety
    Access to a full range of news, weather, sports, entertainment and 
information is certainly important to maintaining and enhancing quality 
of rural life. But maintaining and expanding access to the most local 
sources of news, weather and information is critical to rural public 
safety. The 1999 violent tornado season, and recent weather events such 
as this year's back to back winter storms in the South and East, 
highlight the importance of local television as a means of 
disseminating life saving information.
    Linking local residents to their communities of interest is also 
important to maintaining and enhancing the vitality of the local rural 
economy and civic life. From both an educational standpoint and one of 
public safety, it is in the public interest that rural citizens have 
access to local and network programming. Rural America should not fall 
into a new digital divide: either as a result of the amendments to SHVA 
or the coming conversion to digital television. The infrastructure 
necessary to deliver ``local-to-local'' programming can also be a 
platform for other needed services such as broadband internet access, 
weather radio signals, and educational programming.
                            loan guarantees
    The delivery of local signals to rural viewers will require 
significant infrastructure investment, regardless of the technology 
utilized. RUS loans, loan guarantees and grants have helped bring 
modern electric, telecommunications, and water infrastructure to the 80 
percent of America that is rural. This public-private partnership has 
been the hallmark of rural infrastructure investment. RUS is capable of 
helping rural America meet this new infrastructure challenge.
    We believe HR 3615 is a step in the right direction and look 
forward to working with the Committee to fully develop a loan guarantee 
program that is technologically neutral, includes eligibility for 
broadband investments, expands consumer choice, and is consistent with 
Federal credit policies, consistent with OMB Circular A-129.
                               conclusion
    Preserving and enhancing access to local and network television 
signals is important not only for rural quality of life, but is vital 
to rural public safety and community. Linking rural viewers to more 
local signals will also enhance the economics of rural broadcasting and 
their rural advertisers. In addition, the infrastructure necessary to 
deliver ``local into local'' services, regardless of mode, can bring 
new broadband capacity to rural areas. Just as the Rural 
Electrification Administration helped rural America become part of the 
national economy, the Rural Utilities Service can help rural America 
thrive in the information age. The Administration looks forward to 
submitting to you in writing at a later date more detailed comments.
    Thank you Mr. Chairman.

    Mr. Tauzin. Thank you, Mr. McLean. And our final panelist, 
Mr. Kent Parsons, vice president of the National Translators 
Association.
    Mr. Parsons. If you'll pass him a mike, please. You've got 
two of them now. You've got a bigger loan than you needed 
there, Mr. Parsons.

                  STATEMENT OF R. KENT PARSONS

    Mr. Parsons. Thank you, Mr. Chairman. I hope this small 
voice from a farm boy in Utah has a different perspective here 
than what I have heard. By introduction, by way of 
introduction, my name is Rollo Kent Parsons. I am 67 years old 
and live in Monroe, a small, rural community of 1,600 people 
located in the south central mountain valley of Utah.
    For 43 years I have been involved in the installation, 
repair, and engineering of television translators--in this 
hearing today I've never even heard that word mentioned--and am 
currently Vice President of the National Translator 
Association, a nonprofit volunteer organization dedicated to 
the preservation and extension of free over-the-air television 
and FM radio for all parts of the country.
    I think I qualify in this position of being a rural person, 
as it takes me 3 hours of driving to get to Salt Lake City to 
the airport, or 4\1/2\ to Las Vegas.
    Mr. Tauzin. Mr. Parsons, we always say in this House that 
you live in the country if you have to drive toward town to go 
hunting.
    Mr. Parsons. We appreciate this opportunity to briefly 
outline the regulatory issues that have prevented broadcast 
translators from reaching their full potential in bringing a 
full measure of free over-the-air television to rural America. 
The issues of most concern to the NTA are the infrequency of 
filing opportunities or windows and the subsequent delay of 
approval bought on by the disproportionate number of 
applications that result; the impact of new technologies on 
this process; and the preservation of free over-the-air 
television to viewers in rural areas.
    Since 1980 there have been five 5-day opportunities to file 
for permanent TV translator licenses, the most recent being in 
the spring of 1994. We believe that the implementation of a 
fast track authorization program would greatly simplify and 
expedite license applications for the underserved rural areas 
on an ongoing basis.
    The NTA filed a request for such a rulemaking in March 
1998, titled New Fast Track Authorization For Very Small Output 
Power Rural Translators. If this rulemaking could be expedited 
immediately, the burdens placed upon the regulatory agencies 
would be considerably lighter, and would give those agencies 
more time and resources to devote to the full range of issues 
related to the current technologies and their impact on the 
telecommunications industry as a whole.
    The following chain of events has occurred that have 
significantly impacted the providing of free over-the-air 
television to rural communities. It began in 1955, when the FCC 
initiated a new television service to allow TV translators to 
provide television to rural areas located beyond the direct 
coverage of the primary stations. This service was called 
secondary service, to protect the primary stations from any 
interference which may be generated by the new translator 
stations. These stations were authorized to operate on channels 
70 through 83.
    In 1978 or thereabouts, the FCC initiated a rulemaking 
which assigned the channels 70 through 83 for a new cellular 
telephone service, which required TV translators operating on 
those channels to change to a different frequency in the range 
of the authorized channels of 55 to 69. At that time there were 
approximately 3,500 translator stations in operation providing 
local broadcast television to the Continental United States.
    Within 2 years translators were assigned to operate on any 
vacant channel in the 2 to 69 range, subject to very stringent 
interference criteria. Low power television services, a plan to 
help TV translators provide some local programming to these 
underserved areas, was in development at this time, and 
licensing and administration of this new service was combined 
with the older translator licensing process. In 1980 the FCC 
declared a freeze on all applications for new and modified TV 
translator stations that lasted 6 years, until 1986.
    In 1987, a 5-day filing opportunity was opened for filing 
new applications to include both services, LPTV and TV 
translators, which included modifications for existing licensed 
stations. After another 2-year freeze, additional opportunities 
for new translators were opened in 1989, 1991, 1992, 1994, and 
an additional window was opened in 1996 for modification to 
existing stations only.
    Only five new filing operations have been available in the 
past 20 years. Many communities still do not have access to 
some of the major networks and local independent primary 
stations, even though there are 6,000 authorized TV translators 
now serving rural communities. New technological issues, such 
as digital television, the May 10, 2000 auction of channels 60 
through 69, the proposed auction of channels 52 to 59, add to 
the pressures put on the regulatory agencies.
    We are concerned that free over-the-air broadcast 
television will become increasingly lost to rural America as a 
result of the congressionally mandated transition to DTV. There 
has been no provision whatsoever to include translators in the 
DTV transition. These communities depend on translators for 
local weather bulletins such as tornado alerts, high wind 
warnings, fire information, floods, et cetera.
    While it is certain that the new technologies will produce 
many new opportunities, a larger question looms. Can the small, 
rural communities afford it? The new satellite local to local 
has provided some local broadcast signals to those who can 
afford it. The rest of the rural viewing audience without 
translators must pay or go without. At this time translator 
stations are the only viable method to serve these people with 
free over-the-air television.
    If Congress and the FCC are concerned about the people 
living in the rural areas relying on free over-the-air 
broadcast signals for critical local information, they must 
provide ways to help not only retain the present NTSC signals, 
but also ways to help in the transition to the new digital 
world. The NTA recommends a method to simplify and expedite 
license applications--is that my time?
    Mr. Tauzin. No, that goes off when Members of Congress need 
to go to the House and vote.
    Mr. Parsons. Okay--applications for rural underserved areas 
on an ongoing basis through their proposed rulemaking. The Fast 
Track Authorization For Very Small Output Translators 
specifically addresses the needs of the grassroots people. We 
believe free local over-the-air broadcasting must prevail in 
all parts of rural America through the continued expansion of 
TV translator stations. To require secondary service to go to 
auction is counterproductive to these communities.
    I'm about through here. Personnel at the FCC have been 
extremely helpful and cordial in the processing of our TV 
translator applications, as far as policy allows. We extend our 
thanks to these individuals. And as I looked at the State of 
Utah on the panel there that was portrayed, I must say at this 
time 99 percent of the people of the State of Utah have access 
to at least five networks, free, over-the-air.
    Thank you.
    [The prepared statement of R. Kent Parsons follows:]
    Prepared Statement of R. Kent Parsons, Vice-president, National 
                         Translator Association
                              INTRODUCTION
    My name is Rollo Kent Parsons. I am 67 years old and live in Monroe 
a small, rural community of 1600 people located in a south-central 
mountain valley of Utah. For 43 years I have been involved in the 
installation, repair, and engineering of television translators, and am 
currently vice-president of the National Translator Association (NTA), 
a non-profit volunteer organization dedicated to the preservation, and 
extension, of free-over-the-air television and FM radio for all areas 
of the country.
    We appreciate this opportunity to briefly outline the regulatory 
issues that have prevented rebroadcast translators from reaching their 
full potential in bringing a full measure of free-over-the-air TV to 
rural America.
    The issues of most concern to the NTA are: (1) the infrequency of 
filing opportunities or ``windows'' and the subsequent delay of 
approval brought on by the disproportionate number of applications that 
result; (2), the impact of new technologies on this process; and (3), 
the preservation of free-over-the-air television to viewers in rural 
areas.
                  FILING OPPORTUNITIES OR ``WINDOWS''
    Since 1980, there have been five, five-day opportunities to file 
for permanent TV translator licenses, the most recent being the spring 
of 1994. We believe that the implementation of a ``Fast-Track'' 
authorization program would greatly simplify and expedite license 
applications for under-served rural areas on an ongoing basis. The NTA 
filed a request for such a rulemaking in March of 1998 titled ``New 
Fast-Track Authorization for Very Small Output Power Rural TV 
Translators''. If this rulemaking could be expedited immediately, the 
burdens placed upon the regulatory agencies would be considerably 
lighter, and would give those agencies more time and resources to 
devote to the full range of issues related to the current technologies 
and their impact on the telecommunications industry as a whole.
                       IMPACT OF NEW TECHNOLOGIES
    The following chain of events has occurred that have had 
significant impact on providing free-over-the-air television to rural 
communities.
    In 1955, the FCC initiated a new television service to allow TV 
translators to provide television to rural areas located beyond the 
direct coverage of the primary stations. This service was called 
``secondary service'' to protect the primary stations from any 
interference which may be generated by the new translator stations. 
These stations were authorized to operate on channels 70-83.
    In 1978, the FCC initiated a rulemaking which assigned channels 70-
83 for a new cellular telephone service, which required TV translators 
operating on those channels to change to a different frequency in the 
new range of authorized channels, 55-69. At that time there were 
approximately 3500 translator stations in operation providing local 
broadcast television to rural areas in the continental United States. 
Within two years, translators were assigned to operate on any vacant 
channel in the 2-69 range, subject to very stringent interference 
criteria. Low Power Television (LPTV) Services, a plan to help TV 
translators provide some local programming to these under-served areas 
was in development at this time, and the licensing and administration 
of this new service (LPTV) was combined with the older translator 
licensing process. In 1980, the FCC declared a freeze on all 
applications for new or modified TV translator stations that lasted 
until 1986.
    In 1987, a five-day filing opportunity was opened for filing new 
application s to include both services (LPTV and TV translators), 
including modifications for existing licensed TV translator stations.
    After another two-year freeze, additional opportunities for new 
translators were opened in 1989, 1991, 1992, and 1994, and an 
opportunity for modifications to existing stations only was opened in 
1996.
    Only five new filing opportunities have been available during the 
past 20 years. Many communities still do not have access to some of the 
major networks and local independent primary stations even though there 
are approximately 6,000 authorized TV translators now serving rural 
communities.
    New technological issues, such as digital television, the May 10, 
2000, auction of channels 60-69, and the proposed auction of channels 
52-59, add to the pressures put on regulatory agencies. We are 
concerned that Free-Over-The-Air broadcast television will become 
increasingly lost to rural America as a result of the congressionally 
mandated transition to DTV. These communities depend on the translators 
for local weather bulletins, such as tornado alerts, high-wind 
warnings, fire information, and floods, etc.
     While it is certain that new technologies will produce many new 
opportunities, a larger question looms--Can the small, rural 
communities afford it? The new satellite ``local to local'' has 
provided some local broadcast signals to those who can afford it, the 
rest of the rural viewing audience without translators must pay or go 
without. At this time, translator stations are the only viable method 
to serve these people with free-over-the-air television.
                            RECOMMENDATIONS
    If Congress and the FCC are concerned about the people living in 
rural areas, relying on free-over-the-air broadcasting signals for 
critical local information they must provide ways to help not only to 
retain the present NTSC signals, but also ways to help in the 
transition to the new digital world.
     The NTA recommends a method to simplify and expedite license 
applications for rural under-served areas on an ongoing basis through 
their proposed rulemaking,--Fast-Track Authorization for Very Small 
Output Power Rural TV translators. This document specifically addresses 
these needs of the ``grass roots people''.
    We believe local free-over-the-air broadcasting must prevail in all 
parts of rural America through the continued expansion of TV translator 
stations. To require secondary service to go to auction is 
counterproductive to the needs of these communities.
    Personnel at the FCC have been extremely helpful and cordial in the 
processing of TV translator applications as far as policy allows. We 
extend our thanks to those individuals.
[GRAPHIC] [TIFF OMITTED] T4021.001

[GRAPHIC] [TIFF OMITTED] T4021.002

    Mr. Tauzin. Mr. Parsons, thank you.
    The Chair recognizes himself. I'll do a round of questions, 
and we'll try and get a second one in, then we'll take a break 
for the vote.
    Let me first of all, Mr. Parsons, tell you that I think you 
put your finger on something, that while we're talking about 
getting local into local satellite service, one of the most 
important things I think we need to keep our eye on is whether 
or not people have the option of free over-the-air service as a 
first option, because the first choice for consumers ought to 
be whether they get a free signal or they want to buy a signal 
from a company that's carrying a cable or a satellite signal 
that wants to sell it to them as an option.
    And so my first question is, why all these freezes? Why 
hasn't the FCC been more accommodating to the request of your 
members to put out more translators and deliver more on-the-air 
signal opportunities to rural Americans?
    Mr. Parsons. I'm not certain about that. We have made 
repeated requests. We met with the FCC commissioners 1 on 1 a 
year ago.
    Mr. Tauzin. What do they tell you when you meet with them?
    Mr. Parsons. That we provide a very special cause to the 
rural people, and it is something that should be done.
    Mr. Tauzin. So they blessed you on the way in and blessed 
you on the way out, but you got no relief?
    Mr. Parsons. I have no comment.
    Mr. Tauzin. Bottom line is that you offer us an opportunity 
that perhaps, Mr. Goodlatte, we need to look at, in terms of 
what we do in this bill, to ensure both elements, as you have 
correctly pointed out, not only those persons who have no 
access, the 1 remaining percent in Utah and others, but for the 
citizens in other states who are left out of any access to 
local signals because there is no choice for free signals.
    Mr. Parsons. Let me make a comment here, what's happening. 
We have some small communities--you talk about REA, I live in a 
community that happens to be an REA, and my son was on the City 
Council, and they talked about having their own local cable 
system, but this is starting to create a problem, because I'm 
thinking of a small community just north of me, that the 
community owns their own cable system because it's too small 
for the big players to come in.
    As they drop off--there's five stations that come out of 
Salt Lake on the satellite now, five locals. But as people drop 
off, the number of members on that small cable system starts to 
deplete their revenue, and so now it's getting to the point 
whether the cable system will stay on or not.
    Mr. Tauzin. The second part of this bill is connected to 
cable programming. I mean, one part of it should be designed to 
make sure nobody is left out in the whole system of coverage. 
The second point is competition for the cable programming 
together with the local programming. Customers obviously do 
like cable programming. There's a growing number of Americans 
who choose to watch cable over network programming.
    In that instance, now, Mr. Goodlatte, what we're hearing in 
terms of Mr. Viadero's testimony is that the co-ops that are 
serving America for telephone and electric do have apparently 
an awful lot of money loaned to them by the government from RUS 
in some cases that is in excess of their needs, apparently, 
because they're using it for other investments.
    Can we get some comment from you on that criticism of the 
bill and the question that Mr. Largent and others asked, why 
should we loan them more money if they already have money 
they're investing in the stock market?
    Mr. Goodlatte. Mr. Chairman, first, if I might join you in 
observing that Mr. Parsons's comments are very apt.
    It's our belief that the bill would allow the resources to 
be used for translators. But if for any reason there needs to 
be clarification put into the legislation that they could also 
avail themselves of this, we certainly would be supportive of 
that.
    Mr. Tauzin. Well, as I understand it, they're not a multi-
channel system provider, so they may not qualify. Second, it 
looks like an FCC problem we may need to address in the 
legislation as well. But I like your comments on--this is one 
of the central tenets of the debate here. Should the government 
authorize another $1.25 billion of loans to provide this 
service to rural Americans, either to unserved or underserved 
areas? And we've seen audits saying, look, we're loaning money 
to the rural electrics and telephones and they don't need it, 
they're investing it in the stock market, so why don't you use 
that money to do this job.
    What's your answer to that?
    Mr. Goodlatte. Well, the answer I think is that first of 
all, working with the CBO and later the Appropriations 
Committee in terms of coming up with whatever funding is 
necessary to fund the loan guarantee based upon what the risk 
may be, we will be looking to many sources for the purpose of 
doing that. And again, I think the question of whether or not 
the RUS is making loans and allowing loan guarantees in areas 
they may not be needed is something that we can certainly look 
at.
    Mr. Tauzin. It could be one of the offsets.
    Mr. Goodlatte. Absolutely. But one of the points that I 
think needs to be made is that this simply is not going to 
happen for a large portion of America, including some 
significant sized cities, unless Congress does get involved 
with this legislation. So I don't think you can simply say 
we'll sit back and watch money that is already out there flow 
into this area. It's going to require legislative authorization 
to do that.
    Mr. Tauzin. Before my time expires, your map indicating the 
places where local to local is going in identified the sites of 
the cities, but it did not outline the DMA, the service area of 
that local into local. It would be interesting to see that map, 
to see how much local into local coverage is going to occur 
from the cities in which the service will be provided. And we 
probably need to look at that.
    Mr. Parsons.
    Mr. Goodlatte. Mr. Chairman, can I just comment on that? 
That is absolutely correct. Some of those circles would 
actually be smaller than they appear on the map, and some of 
them would be somewhat larger. But I think as a representation 
it is fairly accurate. But certainly some of those television 
markets are a bigger circle.
    Mr. Tauzin. The DMAs are pretty large. That's why I'm 
saying we probably ought to look at that in terms of getting a 
good picture at what local into local is going to provide under 
current law.
    Mr. Parsons.
    Mr. Parsons. Yes, it might be well to note that the Salt 
Lake City market presently is number 36. If we remove the 
translators, it goes to 42.
    Mr. Tauzin. Mr. Markey is recognized.
    Mr. Markey. Thank you very much. Mr. Goodlatte, do you 
believe incumbent cable operators should be eligible for the 
loan guarantee?
    Mr. Goodlatte. The way the bill is written now, we do not 
discriminate against any form of technology.
    Mr. Markey. I'm only talking about where the cable 
companies--where it is already the incumbent. Where it's 
already providing service, would you give them subsidies, not 
where they're not providing services.
    Mr. Goodlatte. Where they're already located----
    Mr. Markey. They also have a license in a community. Would 
you give them a subsidy?
    Mr. Goodlatte. I would think it would not be necessary to 
do that.
    Mr. Markey. Okay. Good. The bill allows loans to entities 
to, quote--this is in the bill--finance the acquisition, 
improvement and enhancement, construction, deployment, launch, 
or rehabilitation of the means, including spectrum rights, by 
which local television broadcast signals will be delivered to 
an area. That's the end of the quote in the legislation.
    When the bill says the loan can be used for the acquisition 
of spectrum rights, does that mean we would extend loans to 
people to bid at FCC auctions?
    Mr. Goodlatte. That's correct. The loan guarantees--in 
other words, we're not going to give a loan to anybody, we're 
going to make a loan guarantee to somebody to----
    Mr. Markey. I appreciate that. But they----
    Mr. Goodlatte. They've got to require the spectrum. If an 
auction is the only way they can get the spectrum, this is not 
going to work unless you can put the whole package together, 
not just the physical plan, but also----
    Mr. Markey. But we have auctions where some people have 
loan guarantees getting in and other people wouldn't have loan 
guarantees getting in. We just had a C block, I don't know if 
you're familiar with it, it was a debacle, people thought they 
could get in kind of a cheap money, bidding up the price 
because they had some longer period of time. Do you support 
loans that people--you do support loans that people can use at 
auctions.
    Well, I think that, you know, in summary, Mr. Chairman, the 
argument made to immediately deregulate small cable systems in 
1996 was that they need to be deregulated so that they could 
invest in the system upgrades. I think--I know that many of 
these cable companies would like us now to give them loan 
guarantees to help them to upgrade. I think that would be a bad 
policy. I don't think we should be doing that.
    But I can work with something that, you know, again, dealt 
with the unserved areas of the country. But something that is 
more than that gets much more difficult. Thank you.
    Mr. Tauzin. Thank you. I'm going to put Mr. Shimkus in the 
chair. I'll go and vote. Mr. Shimkus will be in the chair, and 
we will have a round of questions with you, and John, if you 
can get the witnesses to talk until we get back. Thank you, 
sir.
    Mr. Shimkus [presiding]. Thank you, Mr. Chairman. Give me a 
minute to get organized. Any time I get a chance to get into 
the seat of responsibility, I try to do that. Also 
accountability, sometimes. So you have to be careful. Let me go 
to--it was CBO that put up that map, that's correct? I'm sure 
you're going to hear this from a lot of my other colleagues, 
and I know your assistant was cringing when I made all these 
facial expressions, because, you know, the FCC is using the 
contour A and contour B as a protractor, correct? A 
delineation--do you know that?
    Mr. Crippen. Yes.
    Mr. Shimkus. And the basic assumption is that we take a 
protractor, put it on the tower, spin it around, everybody 
within that grade A has perfect signals, everybody in the grade 
B has ``should be able to receive'' signals. Well, I'm going up 
tomorrow afternoon to Baylis, Illinois. Now, Baylis is situated 
definitely in that red area. I mean, the whole county is in 
that red area. It is probably 60 miles north of St. Louis, 
probably 35 miles southeast of Quincy, which has a local TV 
station, probably 65 miles southwest of Springfield.
    Obviously they have no reception. I assume this would be--
well, that's actually the Illinois River. I'm an old Army 
officer who trudged up a lot of hills. I understand contour and 
contour intervals. If you're using that as an--I just think 
that's a bad map to try to make your case, because what you'll 
find out is most of us who hear constantly from our 
constituents have areas based upon the contour that are not 
receiving signals.
    And I would ask for you first if you would talk to me about 
if you did any consideration on the actual signal strength. And 
I'll follow up with, we have had numerous discussions with the 
FCC through this committee to talk about how do you really 
judge signal strength. And I think we've actually, in the bill, 
asked the FCC to assure how we can better identify those red 
areas.
    And I think you would see, once they do that, a very 
different perspective about who is served and who is not 
served.
    Mr. Crippen. I think there are at least a couple of 
questions in there. One, I understand the problems in parts of 
the contours. In fact, the Chairman and I share an interest, if 
you will, in occasionally going out to Maryland's Eastern 
Shore, and it turns out that we are in a grade B contour and 
can't receive much over-the-air unless conditions are perfect.
    Mr. Shimkus. Can I chime in? So those red areas are grade A 
and grade B combined?
    Mr. Crippen. Yes. I mean, they're on top of each other.
    Mr. Shimkus. Grade B encompasses grade A.
    Mr. Crippen. Sure.
    Mr. Shimkus. So you're saying they don't have a signal, 
although in the introduction you're making the claim that 
everyone but the red has no signal.
    Mr. Crippen. The point is not to speak to the desirability 
of the bill; rather, in our assessment of whether or not you're 
going to have a lot of people take this service, is it 
economically viable.
    Mr. Shimkus. But you're making the assumption----
    Mr. Crippen. First, 97 percent of television households are 
served by cable. So they have available some form of local 
signal already by a multi-channel distributor. And most of the 
country, if not all, and some of the grade B contours don't get 
very good signals. But most of the country also has over-the-
air.
    So again, we're not speaking to the desirability of the 
policy. Rather, we're talking about the economics of the 
venture and about whether many of the people who get over-the-
air will be willing to pay for satellite service. People who 
have cable, would they be willing to switch? That's the point 
we're trying to make, not that there's perfect coverage or that 
there's no need for the bill.
    Mr. Shimkus. You're going to hear this today over and over 
again, because first of all, in my area, you go to Calvin 
County, there's no cable coverage there. And then if there is, 
there's no choice. And the whole emphasis of the satellite 
bill, the Satellite Home Viewer Act, was to make sure we had 
competition for cable and competition that would carry a local 
signal. So----
    Mr. Crippen. As I said, there are two objectives to the 
bill. One is to serve what would in Mr. Markey's terms be 
unserved, the places that don't get signals now, they may be in 
grade B, they may be in the red. The second is to instill 
competition, whatever multi-channel distributor is now there. 
The question, though, in terms of policy is, do you want to 
subsidize competitors through existing incumbents? I mean, 
that's up to you.
    The point we're trying to make is not about the efficacy of 
the policy, but rather, if there's competition there, then 
trying to break into that market is going to be much harder. 
There's a limit on prices. You'll have to get people to convert 
from something they now use to something new.
    The complaint that you're hearing from many of the 
constituents and that I've had some members show me in their 
mail--and I've had this experience myself--is that you can't 
get network programming over a satellite, because the local 
broadcaster won't give you a waiver, despite the fact that 
you're in a contour where you can't get it. I see what's 
happened to us in Wingate, Maryland.
    Mr. Shimkus. My point is you discredit your argument by 
using that map, for those of us in rural areas who have 
constituents who are living inside the red area that have no 
choice and they have no signal.
    Mr. McLean, do you want to add to this?
    Mr. McLean. Thank you. And the situation is going to get 
even more complicated as we proceed with digital conversion, 
because the propagation of a digital signal is that it drops 
off suddenly, whereas an analog signal fades out gracefully. 
One of the reasons that Congress enacted the Satellite Home 
Viewer Act improvement was that the grade B contour which was 
determined by a court in Florida to be good enough was at that 
time of the legislation considered to be 50 percent of the 
signal 50 percent of the time.
    And when you go to digital, you will either have a signal 
or no signal. So it's going to be even more complicated, 
looking 60 years into the future.
    Mr. Crippen. Mr. Chairman, that really doesn't have 
anything to do with our point. Our point is simply there is 
competition, and there are services available, cable in 97 
percent of the households, large areas of the country, most of 
the viewers in the country can get over-the-air. And that's 
what drives our estimate; again, not whether or not you pass 
this bill, whether the policy is right or anything else, but it 
has to do with how we come up with the estimate.
    Mr. Shimkus. Thank you. My time has expired.
    Mr. Boucher, for your sake, I've gone over the map quite 
extensively. I'm sure you had concerns about that also. And so 
you are recognized for 5 minutes.
    Mr. Boucher. Thank you. Mr. Crippen, welcome.
    Mr. Crippen. Thank you.
    Mr. Boucher. I appreciate your testimony this morning. I do 
have some differences with your conclusions. I live in a 
mountainous region of the western part of Virginia, and my 
constituents in huge numbers cannot get any local signals. They 
may live within the grade B contour of the local stations, but 
they're blocked by the mountains from getting the signals at 
all.
    And those who can get signals usually find that they're not 
viewable. And so one of the best things that happened in my 
region over the last decade in terms of the ability to get 
television programming of any kind was the advent of the 1988 
Home Satellite Viewer Act. And in that, people who could not 
get adequate local TV signals from the station were able to 
subscribe to the network programming delivered by satellite.
    I notice in your testimony you say that--and by the way, my 
district is not unique. The entire State of West Virginia is 
affected by the same concern. I don't see that highlighted on 
your map. Western North Carolina, eastern Kentucky, I daresay 
parts of the Ozarks, the Allegheny region, much of the eastern 
United States is in exactly the same condition.
    That 1988 Satellite Home Viewer Act is instructive for a 
couple of reasons, one of which is that while some households 
subscribed to the distant network signals that clearly were not 
eligible to do so, there were millions of households around the 
country that subscribed to distant network signals over the 
satellite that were eligible and are eligible today. And these 
are the homes that live in rural areas.
    I note in your testimony you say that for the services to 
be subject to this loan guarantee, to be viable, and for those 
programs to succeed and not wind up costing the government 
money, there would have to be millions of subscribers to the 
service.
    And I would suggest to you that there are going to be 
millions of subscribers. You can start with these millions who 
are eligible to get network signals delivered by satellite 
under the Home Satellite Viewer Act. Given the choice of being 
able to get their local TV signals by satellite, as compared to 
distant network signals by satellite, the vast majority of them 
would opt to get the local TV signals, for the reasons that 
many have indicated today in terms of the importance of local 
television.
    There's another source for those millions of subscribers 
that you say would be required, and that is people who are 
subscribing to cable television today throughout the balance of 
rural America and in the medium sized cities and in the small 
cities across the U.S. Who will not be receiving the local into 
local service offered by the commercial companies. These will 
be the people who will be part of the primary audience for the 
local into local service that will be subject to these loan 
guarantees.
    I wonder if in compiling this estimate you have looked at 
the phenomenal rate of growth in the DBS industry just over 
last several months. I really wonder if you have examined that. 
One of those companies in 1988 had a market capitalization of 
$9 billion. Last year it had a market capitalization of $29 
billion. Why? Because Wall Street believes these services are 
going to grow phenomenally. One of the reasons for that, one of 
the major reasons is the ability to offer local into local 
service.
    Do you happen to know the rate of growth in subscribers per 
month of these major DBS companies today? Do you know that 
figure?
    Mr. Crippen. I wouldn't. But it's----
    Mr. Boucher. I can tell you what it is. It's 100,000 per 
month. The fact that you don't know what that figure is 
suggests to me that you haven't adequately examined the 
circumstances that underlie your conclusions, because that rate 
of growth is directly related to the advent of the new local 
into local service.
    Mr. Crippen. That may well be, which suggests that Wall 
Street will probably finance into rural areas, because if it's 
worth it----
    Mr. Boucher. I haven't suggested that, Mr. Crippen. That's 
not a reasonable extension of a conclusion from what I've said, 
either.
    Mr. Crippen. If I can respond to your comments so far--some 
of the comments you made about the available audience base, for 
example--if the current people who are getting satellite 
signals want to get local signals, 97 percent of them have the 
ability to subscribe to cable, so they could take it from 
cable.
    Mr. Boucher. That's not true, Mr. Crippen. You simply don't 
understand the market. I'm sorry to say that, with all due 
respect, you just don't understand the market. In my district, 
which I'll cite as the example, most of the people can't get 
cable. Why? Because it doesn't extend out beyond the towns.
    All of America is not towns and cities. A vast part of 
America is rural terrain where cable services are not provided. 
In my Congressional District most of the people cannot 
subscribe to cable. Well over half of the people there can't 
get cable. Those same people cannot get local TV stations, and 
in large part because of the mountainous terrain. Much of rural 
America is exactly like that.
    Let me come back to my other point, if I may, and that is 
that you I think in constructing this analysis have undervalued 
the attractiveness of the new local into local service. Let me 
underscore again for you that this tremendous rate of growth of 
100,000 per month for each of the major two DBS companies and 
their subscriber base reflects the power of that new service.
    And I would hope that you would go back and reconsider your 
estimates in light of what is happening today in the market 
with regard to what now amounts on an annual basis to about 2 
million people per year largely deserting cable and signing up 
with the DBS services driven by the new local into local 
service. I would hope you would consider that and perhaps 
rethink your estimate as to what the success of the services 
subject to this loan guarantee would be.
    Mr. Chairman, my time has expired. I thank you for your 
patience.
    Mr. Crippen. Mr. Chairman, may I respond? The point is, Mr. 
Boucher, 97 percent of the households in this country are 
passed by cable. That's not in your district; I understand 
that. But what we're talking about is the economic viability of 
a very large loan program. Residents of your district who might 
subscribe are not going to be enough to support this venture in 
a financial way, which is precisely why we're here.
    If the market were able to support this activity, we 
wouldn't need a loan guarantee. But again, that's not to argue 
this is not the right thing to do or it's inappropriate. 
Rather, it's just to say there isn't going to be enough of a 
market to provide a commercially viable vehicle. If there were, 
it would happen already. So we have to recognize we're here 
because we want to subsidize the services; appropriately so, it 
may well be. But the point is it will cost something.
    Mr. Boucher. Mr. Crippen, it doesn't have to be 
commercially viable for it not to cost the government money. I 
think you're missing the key point here. The purpose of the 
loan guarantee itself is to buy down the cost of capital 
sufficiently that the service can then be viable with no lower 
cost of capital. And a viable service at that point has 
revenues coming in it. It's what the subscribers pay every 
month in order to get the signal.
    It can then sustain the service at whatever level is 
necessary to advertise that cost of capital. It doesn't wind up 
costing the government anything in that scenario. That's where 
we're trying to--that's the goal we're trying to----
    Mr. Shimkus. I'll reclaim the time. We need to go to the 
gentlewoman from Wyoming, Mrs. Cubin, for 5 minutes.
    Mrs. Cubin. Thank you, Mr. Chairman. I would like to direct 
my comments and questions to Mr. Crippen. I think that there 
might be some facts that are pertinent here that may not have 
been considered in the conclusions that your report put forth, 
and I think they're important things.
    One thing I want to tell you. I represent Wyoming, as you 
probably know. It's 100,000 square miles with 470 or 80,000 
people in it. We have just outside of the town where I live a 
mountain that's considered to be a real small mountain. It's 
8,300 feet in elevation. And then the mountains go up from 
there. In Wyoming what we consider foothills and hills are 
equivalent to mountains out here in the east where people ski.
    And the point that I'm trying to make is that while I 
appreciate your graph here with what grade B over-the-air 
service provides, I wanted to ask you, did you look at the 
difference in the scope of a grade B picture? For example, a 
grade B picture can actually be clear and acceptable, or it can 
be nothing but black and white snow with shadows in it. And 
that's really what this graph represents, not only, but 
inclusive.
    Would you agree with that?
    Mr. Crippen. Sure.
    Mrs. Cubin. And did you happen to look at the differences 
in the grade B?
    Mr. Crippen. It wouldn't change our analysis any because, 
again, 97 percent of the households are passed by cable 
already. Plus there's obviously a large number of the U.S.--
whether it is 90 percent or some lesser number; we think it's 
about 2 million--who can't receive signals at all.
    Mrs. Cubin. Well, that's another reason that, you know, 
your statement that so many people in so many areas aren't 
covered by cable, that's another reason I brought up the 
hundred thousand square miles. In Wyoming a small proportion of 
the people, I don't want to say small, but comparatively 
speaking much smaller than in other parts of the country, can 
receive cable. There are lots of areas where the only thing 
they can get is satellite.
    And even then it takes special arrangements to get that 
signal. So your statement in your report, I guess the point I'm 
trying to make is that the statement on page 3 at the bottom, 
where it says, ``In addition, unlike companies that provide 
rural electrician or telephone services, those borrowers would 
immediately confront competitors in the marketplace.''
    But not where I live. And I know you said to Mr. Boucher, 
well, you don't have enough constituents to make up the 
difference. And I don't have enough constituents. But you know 
what? Collectively we might.
    Mr. Crippen. If I might say, we don't disagree. You might. 
But the point is, on its face the market is going to be hard to 
penetrate and be relatively small, which makes it risky. Not 
that it might not succeed. Indeed, if we thought it wouldn't 
succeed, we would say the estimate is $1.25 billion. But there 
is a high degree of uncertainty here, because you're going into 
established markets that have competition where you aren't 
going to have price leverage.
    Mrs. Cubin. I would like to make two points to you, then. 
Aren't there protections that are built into this project for 
the American taxpayer, like first, any entity is going to have 
to demonstrate they have a business plan that will allow them 
to pay for the loan? And if the satellite is a solution, and I 
don't know that it will be in all cases, that this entity would 
need spectrum and orbital slots, which are very serious 
investments, they're big investments, and that they also have 
to purchase insurance for the satellite, and purchase credit 
risk premiums that would also protect the taxpayer.
    It seems to me that this bill is carefully crafted to 
ensure that local signals would not be putting the telephone at 
risk. And the second point I would like to make is that this 
loan guarantee proposal was based on a similar plan for short 
line railroad, and the CBO said that there would be no impact 
to the Treasury for that. And with the credit risk premium, why 
should this legislation be any different?
    Mr. Crippen. I'll respond to your last question. In the 
case of short line railroads, the economics were very much 
different. They were very likely to succeed. They were taking 
up established rail lines from larger railroads who wanted to 
consolidate their rail lines. But the short lines were also 
monopolists who were entering markets where they didn't have 
competition from other railroads, certainly, and were much more 
economically viable on its face, so that the risk was very 
small in terms of default.
    Here, again, all we're suggesting is that there is a risk 
that these loans ultimately will be in default.
    Mrs. Cubin. Again, the assumption is that they're moving 
into a competitive market. And my assertion would be that that 
isn't necessarily the case. And to Mr. Parsons, I would like to 
associate myself with Chairman Tauzin's remark that certainly 
absolutely the first choice needs to be over-the-air.
    Thank you for just tapping that lightly.
    Mr. Goodlatte. Mr. Chairman, may I respond to the question?
    Mr. Shimkus. Sure.
    Mr. Goodlatte. I thank you very much. I just want to say to 
Mrs. Cubin that we strongly disagree with the assertions of the 
CBO regarding the extent of this market. We think that the true 
market is 70 to 85 million Americans who will now have an 
alternative to choose from cable, and that there will be a 
great many customers who will choose a satellite package that 
includes these five network channels in that package who would 
not choose satellite as an alternative without that, because 
they don't want the inconvenience of switching back and forth 
between the antenna and the satellite.
    And so we think that the risk is much, much smaller than 
they have analyzed. And we hope to continue to work with them 
on that issue.
    Mrs. Cubin. Thank you.
    Mr. Shimkus. Mr. Crippen, take a deep breath. The calvary 
is coming to the rescue. Now we'll recognize Mr. Largent for 5 
minutes.
    Mr. Largent. Thank you, Mr. Chairman. Mr. McLean, how would 
you define rural? We're talking about--you are the 
Administrator of the Rural Utilities Service, is that correct?
    Mr. McLean. Yes, sir.
    Mr. Largent. How would you define rural?
    Mr. McLean. As defined in our statute, there are several 
different definitions. In telecommunications, the original loan 
has to be 5,000, a community of 5,000 or less. However, as a 
community grows, it remains eligible as long as there is a 
continuous mortgage.
    Mr. Largent. How long has it been since Washington, D.C. 
Has been classified as rural?
    Mr. McLean. I don't say that the District of Columbia was 
ever classified as rural, although Northern Virginia Electric 
Cooperative is an eligible entity under our act and under the 
regulations of the agency. And the economic growth in Northern 
Virginia I think has partly--can claim that part of the credit 
for that has been affordable power.
    Mr. Largent. But you're talking about this Rural Utilities 
Service offering services to Washington, D.C. And Arlington, 
isn't that what you said in your testimony?
    Mr. McLean. Northern Virginia Power is an eligible entity, 
because at the time they applied for the REA loan they were 
within the population criteria.
    Mr. Largent. Offering services to Washington, D.C.?
    Mr. McLean. No, to rural Virginia.
    Mr. Largent. Who is the guarantor of an RUS loan?
    Mr. McLean. The full faith and credit of the United States.
    Mr. Largent. And who is that?
    Mr. McLean. Taxpayers.
    Mr. Largent. Exactly.
    Mr. Shimkus. Will the gentleman yield for a minute? Mr. 
McLean, if you could move that microphone so that everyone can 
hear you----
    Mr. Largent. Your Inspector General has said that in $11 
billion of loan guarantees that you're administering currently, 
I guess that's in electricity, that only one half of 1 percent 
is actually invested in infrastructure in rural America.
    Mr. McLean. I'll let Roger speak for his study. Every 
dollar of our $32 billion portfolio goes for electric 
infrastructure. Roger's report speaks to the co-ops' own money, 
and co-ops are owned by their members. And as we discussed in 
the exhibit on Northern Electric Power----
    Mr. Largent. Wait a second. We are talking all the time in 
this committee about the fungibility of money. Why should the 
American taxpayer loan $11 billion to anybody who already has 
nearly $11 billion, just short of it, $61 million worth of 
assets that they own themselves? I mean, investment assets.
    Mr. McLean. Cooperative equity does not equal cash 
available for investments.
    Mr. Largent. According to Mr. Viadero--let me see. I've got 
the testimony here. He's talking about it being invested in 
stocks and bonds and mutual funds and the like. Why should the 
American taxpayer have to loan money to people that could--
basically they're getting commercial lending, or could finance 
it of their own ability?
    Mr. McLean. We've had a principle in this nation that we 
are one nation indivisible, and that we----
    Mr. Largent. I understand that. What I'm saying is, why are 
we loaning money to people who don't need it? That's the 
question.
    Mr. McLean. We have a fundamental disagreement with the 
conclusion of Mr. Viadero's study, that people don't need those 
funds. It's three times on average more expensive to serve 
rural America, in both telecommunications and electricity. If 
it were not for the Rural Utilities Service, if it were not for 
that affordable capital which is the largest part of large 
infrastructure investments, that's exactly the reason that this 
committee is considering legislation to finance with loan 
guarantees a very large infrastructure investment, is that it 
reduces the cost to the people, the 25 percent of the people 
who live in the 75 percent of the geography of this country.
    That is our mission. We follow our statute. Roger in his--
both reports have acknowledged that these are not illegal 
activities, that these are in fact--in the telecommunications 
report he says to have a credit elsewhere test would require a 
change in the statute.
    We don't agree with that conclusion that a credit elsewhere 
test would further the purposes of the Rural Electrification 
Act and rural telecommunications, because we know there is a 
digital divide in rural America. We have to do everything 
possible to bring down the cost of service so we can all be 
part of this growing economy.
    Mr. Largent. But in reality what's taking place is this: 
You have Rural Electric Service or Rural Utilities Service that 
is borrowing money from you at a low cost, and it's a low cost 
because the taxpayer subsidizes the difference, they take that 
money and they borrow at 3, 4, 5 percent, whatever, at 
something below market, and then they take that money and they 
invest it in the market and get 2 or 3 points above that.
    That's good business sense, but it's at the expense of the 
American taxpayer. That's exactly what's taking place, is it 
not?
    Mr. McLean. Every dollar that is borrowed, that is lent for 
rural electric, rural telephone, is tied to actual 
infrastructure and investment.
    Mr. Largent. Then why should we loan money to people who 
don't need it? Because they have the same amount of assets that 
we're loaning to them invested, and they don't need the money 
from the American taxpayer. They can either self-fund it or get 
it on the commercial----
    Mr. McLean. The consequence of that decision, if the 
Congress should make that decision, would be the people who 
live in rural America will have higher electric rates, higher 
telephone rates, lower levels of investment in infrastructure, 
lower levels of reliability in electricity, lower levels of 
quality in telecommunications.
    Mr. Largent. But point in fact, in rural Oklahoma today 
their electric rates are lower than my rates in Tulsa, 
Oklahoma. Why? Because the American taxpayer subsidizes their 
electric bill and their phone bill and soon to be their cable 
bill and DBS bill.
    Mr. McLean. But throughout America, and I'm very proud of 
the co-ops in Oklahoma that they are doing a very good job, but 
throughout America in general rural Americans pay higher rates 
already.
    Mr. Largent. Mr. Viadero, I guess I would like to ask you 
the question, how you've come up with--reached the conclusion 
in terms of one half of 1 percent of the loans are actually 
used for infrastructure.
    Mr. Viadero. That's an easy one. That was self-reported by 
the companies. They reported it. And I would also----
    Mr. Largent. Sir, what is your response to Mr. McLean's 
answers to my questions?
    Mr. Viadero. Well, what I find, and I would like to, if I 
can, bear with me, this is a response to----
    Mr. Shimkus. This is the last question. You need to do it 
relatively succinctly.
    Mr. Viadero. Yes, sir. This is the RUS response to the 
audit report. It's on page 46 of the report.
    I read, ``RUS agrees that its borrowers should be making a 
conscious effort to provide for and facilitate rural 
development in these areas. As stated in the audit and the 
regulation, RUS assumes,'' underlined, ``assumes that borrowers 
will use the latitude afforded to them by Section 312 of the 
Rural Electrification Act to make needed investments in rural 
community infrastructures. RUS will strategically develop and 
implement policies and procedures that strongly encourage 
borrowers to meet the intent of the Congress.''
    Mr. Largent, your question is the exact same question we 
have. We don't see any investment in rural America. And I'm 
from the rural part of the South Bronx, which is very close to 
the rural part of Wall Street, where the bulk of these funds 
seem to be going.
    Mr. Shimkus. And the chair now will turn to the gentleman 
from Georgia, Mr. Deal, for his 5 minutes.
    Mr. Deal. Thank you, Mr. Chairman. My first question, in 
light of this discussion about the financial status of the 
telephone borrowers and the electric program borrowers, is can 
either of those entities or both carry out the purposes of this 
legislation under current law and without further 
authorizations as provided in this legislation?
    In other words--I suppose I should direct it to RUS. Can 
these two sets of borrowers who come to your agency, could they 
under current law use proceeds of loans from RUS to expand into 
the rural areas to provide the kind of service we're talking 
about in this legislation wanting to provide?
    Mr. McLean. No.
    Mr. Deal. Why not?
    Mr. McLean. Because the eligible investment, the eligible 
purposes for an RUS loan is the electric, telecommunications, 
water infrastructures.
    Mr. Deal. Why is this not telecommunications?
    Mr. McLean. We have a restriction in our statute that 
specifically lists CATV and broadcast television. I don't 
believe that I have the authority to make a loan for delivery 
of television services at this time.
    Mr. Deal. Has anybody ever researched that question?
    Mr. McLean. Yes, we have, in determining the comments on 
this legislation.
    Mr. Deal. Mr. Viadero, do you have an opinion on that?
    Mr. Viadero. I have an opinion on most things, Mr. Deal, 
unfortunately.
    Mr. Deal. Do you have a good opinion on that?
    Mr. Viadero. That's a much smaller list. I would like to 
say, though, that we don't--and we haven't gone into the exact 
legislation, but we don't see any prohibition that the 
companies can't use the $11 billion that they're holding of our 
money right now for that purpose.
    Mr. Deal. That would be their accumulated surpluses outside 
of a new loan, is that what you're saying?
    Mr. Viadero. That's correct, sir.
    Mr. McLean. In fact, if you look at how satellite services 
have been rolled out throughout rural America, they have been 
through rural electric co-ops and rural telephone companies and 
rural telephone co-ops. And in fact Roger's comments cited 
Northern Virginia participating in the roll-out of satellite 
services. The National Rural Telecommunications Cooperative is 
a cooperative of cooperatives that has invested in the original 
launch of DBS.
    And so that's how you have the rural service in satellite 
right now, where cooperatives have used their own money to roll 
out the service.
    Mr. Deal. So they're not prohibiting you from using your 
own money, they're just not allowed to use your loan money for 
that purpose?
    Mr. McLean. Correct. However, under the legislation that 
Roger cites, if the investments of the rural electric 
cooperative exceeded 15 percent for nonelectric purposes, they 
would have to seek a waiver or seek permission from the Rural 
Utilities Service. And that is the point of the legislation, to 
move that threshold from 3 percent to 15 percent.
    Mr. Deal. That leads to my next question. I really directed 
it to Mr. Goodlatte, but perhaps some of the panel members 
could answer it. As I was leaving to vote, he was asked a 
question related to existing cable providers being able to 
qualify and to expand their services into the rural areas. I 
believe his answer was he thought the legislation would 
authorize that. Is that correct?
    Mr. McLean. That is correct.
    Mr. Deal. Is that the answer?
    Mr. McLean. That is correct. It's the position of the 
administration that if the legislation is adopted, it should be 
technologically neutral. I should observe RTS and NTIA are 
about to publish a report on availability of advantaged 
telecommunication services in rural areas. And we've tried to 
research your 97 percent figure from the National Cable 
Association. We found out that there are about 91 million homes 
passed by cable out of a universe of about 105 million homes. 
Both from our observation and the arithmetic, we think it is 
closer to the low 90 percent.
    Mr. Deal. Let me ask the next question. If the money could 
be used by existing cable operators to expand their service to 
rural customers who are now being bypassed or not served at 
all, would this legislation also authorize loans under this 
program from RUS to rural electric cooperatives, for example, 
to purchase existing cable network operations and expand those?
    In other words, could the loan be used to purchase a system 
that is not providing the service that this legislation 
anticipates, but with the idea that by purchasing that you make 
it financially solvent enough to then perform the purposes 
under this legislation? Would that be a possibility?
    Mr. McLean. I think that might fit in the----
    Mr. Shimkus. Again, if you can speak into the microphone.
    Mr. McLean. I think that might fit in the acquisition 
section of the bill. But where that example would be 
problematic is in the priority section of the bill. In other 
words, we interpret what the Agriculture Committee is saying in 
this legislation is that you basically start from the bottom 
up. Then, all things being equal, you try to get the most 
service to the most underserved.
    Mr. Deal. I understand that. But to counter the arguments 
that CBO and others have made about the financial viability of 
this being possible, without that kind of a solid base of 
customers, don't you really have very, very jeopardized loans 
where you are reaching out to only those that are underserved 
and have no foundation of a current customer base?
    Mr. McLean. And I think that is the concept that 
Congressman Boucher has talked about and Congressman Goodlatte 
has talked about, is that in aggregating the demand of the 
lower urban markets, that the private sector has clearly said 
in three different hearings that I've participated in that they 
have no plans to serve, that by aggregating that demand plus 
the rural demand, this may be a feasible project. Now----
    Mr. Deal. Excuse me for interrupting, but I have one very 
quick last question, and my time is running out. Mr. Parsons, 
I'm just interested to know, do any of your NTA members qualify 
for RUS loans? Have they ever qualified?
    Mr. Parsons. I would not be sure about that. But I think 
Mr. Largent asked a question that needs to be answered more 
thoroughly, what really is rural.
    That is one of the stumbling blocks, why we were not able 
to produce or get additional applications through the FCC, is 
because that particular thing was never identified, what is 
rural. We've heard numbers all the way from 50,000 down. I 
don't know what is rural. Until we get that defined, then it's 
a pretty broad brush.
    Mr. Deal. Your membership, who are they?
    Mr. Parsons. The licensees of the translators would 
generally be counties, cities, towns, Lions Clubs, nonprofit 
groups. They are nonprofit, I'll guarantee you that.
    Mr. Deal. Do they use their own money then in order to 
provide this service?
    Mr. Parsons. It generally comes from recreational fees in 
the counties. It comes from small fees that's attached to the 
sets. One study that I run, three different counties in our 
state, it runs from 38 cents a month to 48 cents a month for 
eight channels of television.
    Mr. Deal. Thank you, Mr. Chairman.
    Mr. Tauzin. The gentleman's time has expired. I turn now to 
the gentleman from California, Mr. Cox, for 5 minutes.
    Mr. Cox. I thank the Chairman. I apologize, at least I have 
a microphone here so I'll get my voice across, for sounding a 
little bit like Stephen Hawking today, with one of those little 
voice devices. I wonder if I might ask Mr. Viadero, do you have 
opinions that you might have expressed when I was not in the 
hearing room about the legislation itself? Are you supportive 
or opposed to the legislation?
    Mr. Viadero. We don't have an official position on that, 
Mr. Cox.
    Mr. Cox. Do you feel free to express one, or do you feel 
constrained because of your role as IG to not comment on 
pending legislation?
    Mr. Viadero. Yes, I would prefer to see the pending 
legislation to come from the Department which we would review 
in the normal process. We would just as soon not be violative, 
if we could wait for the Department's position to come out and 
comment on it.
    Mr. Cox. And Mr. Parsons, assuming that the legislation did 
not permit access to these credit facilities by any of your 
association's members, which I take it it may not as presently 
written, would you support or oppose the legislation?
    Mr. Parsons. Well, I think there's been some reference made 
to the quality of pictures in the grade B contours. If you were 
to look at the map on the document I submitted, we go through 
as high as six and seven relay stations to get to the small 
hamlets. Better reception could be utilized had we had access 
to some of these satellite feeds. At the present time we're not 
allowed to do that, nor are the cable systems.
    Also, I would like to say at this time that once you get 
out of the metropolitan area of Salt Lake City, all of the 
cable systems rely on our translators. So if we can't improve 
them, it's not going to be a very level playing field, where 
you have DBS signals coming into the homes and signals that's 
picked up through our translator relays who are denied the 
rights to use the satellite signals. It's kind of an unlevel 
playing field.
    Mr. Cox. Mr. Crippen, you have told us that Federal 
assistance for this venture would likely be costly, and that 
you would present to us options to reduce the cost. And you 
have then stated that the best way to reduce the cost is to 
reduce the size of the program. Are you specifically suggesting 
that $1.2 billion is not the right level then, some smaller 
amount would make more sense?
    Mr. Crippen. No, actually we're just trying to make the 
point that obviously the less you cover, the less exposure to 
the taxpayer. Rather, or I should say, in addition, to compare 
the House bill with the Senate bill, which provides an 80 
percent guarantee, we estimate a much lower subsidy rate, 
because it covers 80 percent of the loan and not 100 percent. 
Obviously the lower that is, the lower the cost would be, no 
matter what the total guarantee, but the lower coverage as well 
reduces the subsidy rate.
    Mr. Cox. The purpose of this legislation, as I understand 
it, is to jump-start industry participation. What are the odds 
that once commenced this program would ever go away?
    Mr. Crippen. I don't know that I have any way of answering 
that.
    Mr. Cox. Well, using your experience as an evaluator of 
government programs, is it your experience that once started, a 
program like this sunsets itself, or that alternatively 
Congress routinely comes in and sunsets the program?
    Mr. Crippen. That's more a question for the General 
Accounting Office. I can tell you from my non-CBO experience--I 
tell this story often--my doctoral dissertation was on a 
program called general revenue sharing, which shortly after I 
finished my dissertation was eliminated. But it's one of the 
few that I know of.
    Mr. Cox. We had a hearing in here just a few days ago where 
we were considering the 3 percent Federal telephone tax, which 
was put in place for the purpose of financing the Spanish 
American War in 1898. Of course, because that tax now collects 
$6 billion a year, it has made the Spanish American War the 
most expensive war in American history.
    My concern is that this legislation as presently written 
uses taxpayer resources to finance not the kind of things that 
Mr. Parsons's members provide, which are free over-the-air 
services, but rather subscription services only. So that's 
breaking from our tradition of subsidizing this industry 
through the provision of free spectrum, for example, on the 
grounds that it's available to the public, the taxpayers who 
support it.
    Here we would be levying a tax, implicitly the principal 
amount of the loans, on the taxpaying public at the rate of $10 
a head, if you consider there are 120 million taxpayers in the 
country, and in return they would get nothing unless they paid 
for it. They would have to pay a fee for subscription service 
only.
    What is the justification for that, for breaking from this 
long-standing Federal tradition of saying Federal subsidies go 
to provide services for the public good, whereas here we're 
providing only subscription services? You can build a cable 
system with this legislation, as I see it.
    And so we've got cable TV providers who are going to come 
in and charge $40 a month, whatever they charge, and they're 
doing it with a Federal subsidy. What is the justification for 
that, Mr. McLean?
    Mr. McLean. I think the determination for this committee 
and the Congress to make, the fact that you charge for electric 
service, charge for telecommunications service, charge for the 
Internet, or charge for cable or satellite delivery of services 
is not the critical issue.
    The question is whether the marketplace will serve that 
part of the market that is rural America. And from the record 
that's been developed, I have not heard a single witness in now 
four hearings which I've had the privilege of participating in 
where anybody has said they would be willing to go below 
market, 67. There are 211 television markets in America.
    And we're facing an additional problem as we convert to 
digital where there could be a further digital divide between 
rural and urban access to broadcast signals.
    Mr. Cox. And yet the question that you put is answered only 
in the context of rather substantial Federal impositions on 
people that would be willing to provide this service. We've had 
hearings where we have the satellite providers, for example, 
come in and tell us the cost of the regulations that we impose 
on them. If they want to provide certain channels to rural 
subscribers, they're told they have to provide all the junk as 
well, they have to use up all of their capacity providing 
things that the market may not want.
    Wouldn't we be wiser, if we were trying to provide access 
to rural customers, to make it more efficient for the market to 
do that and lift these Federal regulations?
    Mr. McLean. I believe that Congress spoke in passing the 
Satellite Home Viewer Improvement Act on those very issues. But 
the model that's being pursued here is what we pursued in rural 
electrification. In 1935, 10 percent of farmers had power.
    Mr. Cox. That's the reason I asked the question I did to 
the Director of the Congressional Budget Office, because the 
REA, now renamed, having long since provided electricity to 
rural America, is still around, bigger than ever.
    Mr. McLean. There are plants that need to be replaced. The 
cost of service is still competitive. As we're working in 
telecommunications since 1949, we still need to modernize. 
There's always the next generation of technology. Whether the 
promise of the Telecom Act is kept or not is determined by 
whether there's going to be resources available to those thin 
markets.
    There's a statistic I find in my business all the time. 
Seventy-five percent of the geography is rural. Twenty-five 
percent of the population is urban. Most businesses get 75 
percent of their business off of 25 percent of their customers. 
There's always 25 percent of the marketplace that is always 
hard to crack. And it's the same thing that we see recurring in 
the satellite issue. The 67 markets that the private sector has 
said they're willing to serve without any government assistance 
represents about 75 percent of the population.
    The markets from market 67 to 211 is about 25 percent of 
the population and 75 percent of the geography. And this has 
been a time-honored model that has worked. And it's a success. 
And the very fact that we're being criticized for--taking co-
ops from being financially troubled to be financially strong is 
a good thing for America.
    Mr. Cox. On that last, if I could just conclude by asking 
Mr. Viadero for your thoughts, on whether or not the track 
record of the lending programs that you have just reported on 
justifies expanding the charter of the same people who have 
made the mistakes you've talked about.
    Mr. Viadero. Based upon Mr. McLean's statement prior to 
this, we totally agree that RUS has done just a great job in 
getting electrification and telephones out to rural America. 
And there's a pot of money that's available for use, and it's 
just not being used, that pot of money being the $11 billion. 
And it just appears that once you start getting this money, 
albeit in 1935, you're still in it in 2000.
    I mean, I moved into--and I'm a proud resident of the 
Commonwealth of Virginia for the last 18 years, and the county 
I moved into 6 months prior to that, in 1982, still had a party 
line system, telephone. And almost 20 percent of the county, 
which is less than 50 miles from the capital, didn't have 
electricity. So it's done a great job.
    But to add to what Mr. Boucher said, my son lives on a 
mountaintop in West Virginia. He doesn't get television, 
because unfortunately, Ms. Cubin would probably say it was just 
a bump in the road, but it's a mountain out there, he's blocked 
by a larger bump in the road. He doesn't get television. But it 
just appears to us that once you're getting the money, there's 
no way we're going to stop them from getting more money.
    Mr. Cox. And as a result, what do you infer?
    Mr. Viadero. It needs a legislative fix.
    Mr. Cox. Such as?
    Mr. Viadero. RUS cannot stop granting money to these people 
because of the statute. If they qualify, we have to give them 
the money.
    Mr. Tauzin. Will the gentleman yield on that? Why? Does any 
law say that they can't--I've heard there's no law specifically 
that says they can't. Is there?
    Mr. Viadero. I'm going to ask Mr. Ebbitt, if I can, to join 
me.
    Mr. Tauzin. Mr. Ebbitt, will you tell us whether there's a 
statutory prohibition against deciding not to make a loan to an 
entity that doesn't need one?
    Mr. Ebbitt. Mr. Chairman, it's our reading of the 
legislation on the telephone side and our understanding from 
working with RUS that on the telephone side, if you're in the 
program, you came in, 1935 or 1940 or whenever, that if they 
come back you to today, they're still an REA, an RUS co-op, and 
if they present a financially strong case and need money, yes, 
they have to make the loan.
    Mr. Tauzin. Is that a matter of law, or is that a matter of 
practice?
    Mr. Ebbitt. It's our understanding it's a matter of law.
    Mr. Tauzin. I would please ask that you submit the language 
of the statute that is definitive in this area for the 
committee.
    Mr. Ebbitt. May I suggest, Mr. Chairman, that Mr. McLean 
and the Department's general counsel really need to get that 
for you. I mean, I would be happy to, but you really need to 
get the position of the USDA.
    Mr. Tauzin. I thank the gentleman for yielding.
    Mr. Cox. Thank you. Mr. Chairman, I'll just conclude by 
saying that I think there are serious problems with this 
legislation as presently written. It would, for example, 
encompass application of the proceeds of the lending not only 
to construction but to the launch of the service, by which I 
understand the statute or the bill to mean even the advertising 
costs and promoting the service to people.
    This Internet economy that we live in is generating 
spectacular amounts of capital. The market capitalization of 
many of the companies in a 6-block radius of my district office 
is enough to pay for this program 10 times over. The notion 
that credit is not available to the telecommunications industry 
is rather odd. And so we have to ask ourselves what is the 
Federal Government doing to the market that's causing it to be 
unattractive to this industry.
    I'm not surprised that if my colleagues are willing to 
propose a $1.2 billion credit facility to an industry, taxpayer 
subsidized, that industry is in favor of that. I would be too. 
I wouldn't mind leveraging my private dollars on the taxpayers' 
backs. And we shouldn't begrudge the industry's support for 
legislation like this.
    But as Members of Congress I would hope we would be a 
little bit more wise in the expenditure of taxpayer funds and 
look to see what it is we're doing to these industries that 
makes it unprofitable for them or makes it not as attractive as 
other investments to serve rural customers. And I've mentioned 
just a few of the areas.
    I think the burdens we've placed on satellite providers are 
without justification. And even if we're unwilling to lift 
those burdens perhaps in urban areas, we should consider 
lifting them in rural areas. I would try each of those in turn 
before I laid out an amount of money that CBO has told us is 
about a third of a billion dollars in terms of the risk. I 
think that is such a mismatch with this industry, which has as 
its chief characteristic the ability to generate capital in 
today's markets.
    Mr. Tauzin. I thank the gentleman.
    Before I recognize you, Mr. Pickering, with unanimous 
consent, if I might ask one question. I want to read you Title 
VII, Section 930. This is a declaration of congressional 
policy. Here's what it says specifically.
    ``Declared to be the policy of the Congress that adequate 
funds shall be made available to rural electric and telephone 
systems through insured guaranteed loans at interest rates 
which allow them to achieve the objectives of this chapter, and 
that such rural electric telephone systems should be encouraged 
and assisted to develop their resources and abilities to 
achieve financial strength needed to enable them to satisfy 
their credit needs from their own financial organizations and 
other sources at reasonable rates and terms consistent with the 
loan applicant's ability to pay and the achievement of this 
chapter's objectives.''
    Isn't that clear congressional intent for your Department 
to in fact graduate these loans down when in fact people become 
financially capable of going out and making the loans 
themselves somewhere else?
    Mr. McLean. Well, in fact we meet that congressional 
statement, No. 1, when Congress created the Rural Telephone 
Bank in 1972, public private ownership. And we lend in 
concurrence with----
    Mr. Tauzin. Where in your rules and regulations do you 
prohibit financially strong companies from borrowing?
    Mr. McLean. We will have prepared for the Office of General 
Counsel a brief on this very issue. But even in Roger's report 
he acknowledges that to have a credit elsewhere test would 
require a change in the statute. Now, I----
    Mr. Tauzin. Wait. Stop there. Why is that true, in light of 
the congressional policy statement? Why do you have to have a 
credit--why is a credit elsewhere test illegal, when the 
statement of congressional policy is exactly the opposite, that 
if you can go get credit elsewhere, the congressional intent is 
that you encourage and enable them to do so?
    Mr. McLean. And in fact we do that. One of the things----
    Mr. Tauzin. Where in the rules and regulations----
    Mr. McLean. [continuing] is a regulation to facilitate 
``swifter, leaner'' accommodations----
    Mr. Tauzin. I want you to send us the rules and regulations 
wherein you carry out the policy of that section of Congress. 
And we'll submit a letter request to that effect, if you don't 
mind.
    Mr. McLean. Yes, sir.
    Mr. Tauzin. Mr. Pickering is recognized.
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. McLean, welcome to the committee. It's good to see you 
again. We had a prior life working together, and now it's good 
to see you in your new role and responsibilities.
    Mr. McLean. Thank you very much.
    Mr. Pickering. I'm speaking as one who represents a very 
rural district in Mississippi. If we look at RUS and the Rural 
Telephone Bank, what it has done for the deployment of 
broadband technologies and capabilities is fairly impressive. I 
don't know if many of you know this, but in the heart of my 
district, Decatur, Mississippi has the first fully digital 
telecommunications network, funded through RUS, I believe, and 
it's a great example of the good work that RUS does.
    But today we're asking ourselves to take a new step, and 
we're confronted with possible issues of can we make the 
program more effective and make sure that the resources that 
we're targeting for our policy objective is actually 
accomplishing our mission.
    And so, Mr. McLean, to that end I would like to ask you to 
comment. In the IG's report, toward the end, he says, ``We 
recommend that RUS develop and implement a strategy to 
encourage electric borrowers to use some of their $11 billion 
portfolio to make discretionary investments in rural America. 
RUS has agreed to develop and implement policies and procedures 
to strongly encourage borrowers to meet the intent of 
Congress.''
    What are those policies and procedures that RUS is adopting 
to accomplish that?
    Mr. McLean. We just received Roger's report I guess the day 
it appeared in the Wall Street Journal. And so we concur with 
the recommendation. We work with our borrowers, and my 
predecessor, Administrator Wally Beyer, and then in the few 
months I've been in the position of Acting Administrator, we 
have gone all over this country and encouraged our borrowers to 
participate in rural development and to participate in economic 
development for their communities.
    And I think if you look at your own experience in your own 
hometown, you'll find that that in fact is happening. We agree 
with Roger's recommendation. The disagreement is the figure of 
$11 billion. There may be a problem with our reporting forms 
that we would certainly like to work with Roger to make sure 
that they fully reflect the level of investment.
    But, you know, in the next couple of weeks here I think 
you're going to have rural electrics from all over the country 
visiting Members of Congress. And ask them, what are you doing 
for rural economic development, are you investing in 
infrastructure, are you too rich to borrow from RUS. I think 
that their answer is going to make you very proud. They're 
doing a good job.
    When you cite the sample of RUS funding for 
telecommunication, the consequence of pushing people out of the 
program would be the loss of the bargain that we have with 
those borrowers to deploy modern, affordable services, and to 
deploy them in a way that provides area wide coverage, to 
deploy them in a way that has rates that are affordable, that 
doesn't have high connection fees.
    As I said earlier, no one in an RUS financed system has 
said to me, boy, we sure would like to be served by one of the 
big telecommunications companies that don't have the RUS 
standards and the RUS engineering, the RUS effort.
    Mr. Viadero. Mr. Pickering, if I might, for a point of 
clarification, this report I signed out on the 13th, it was 
hand-carried to the RUS front office. The RUS response which 
was included in this report was dated February 28. They had the 
draft report. Just for point of clarification, Mr. McLean had 
this available before the article appeared in this morning's 
paper.
    Mr. Pickering. Thank you. Mr. McLean, just to follow up 
again, and again, as a believer in the program, as a supporter 
of the legislation, but as someone who wants to make sure that 
Federal dollars are used as intended and used most effectively 
to accomplish the objectives of the missions we both share, and 
since the IG has said, and I quote again, ``has agreed to 
develop and implement policies and procedures to strongly 
encourage borrowers to meet the intent of Congress,'' can you 
give specific examples of any reforms or any new policies or 
procedures that RUS is adopting?
    Mr. McLean. We are going to be communicating with our 
borrowers, bringing these issues to their attention. We're 
going to be reviewing our reporting forms to make sure that 
they accurately reflect what we believe in fact is happening. 
Roger and I have absolutely no disagreement on the purpose and 
the ideal of investing in rural America with funds that are 
generated by the co-ops.
    Mr. Pickering. Mr. McLean, let me just say, for the 
credibility of the program, if you could just get back to the 
committee on those specific policies and procedures and 
incentives that you will be providing those who use the program 
and who borrow, so that we can assure our colleagues that 
appropriate steps are being taken to make sure that the funds 
are used in the targeted approach that we want to rural 
America.
    And I guess as a follow-up question, there's reform that 
RUS administratively can take. Do you recommend any legislative 
reform or language that would either give greater incentive as 
a criteria for receiving an RUS loan to invest a portion of 
their portfolio into rural and economic development?
    Mr. McLean. We'll certainly consider that suggestion, 
Congressman Pickering. We have to be very careful, particularly 
in electric restructuring. Right now, co-ops and small 
companies, municipalities face uncertainty at this moment.
    And to have a mandated quota for a level of use of funds we 
think would not be well advised, given the unsettled nature of 
the regulatory scheme that electric co-ops face right now.
    Mr. Pickering. You can understand the concern, if we're 
authorizing $1.25 billion which will then leverage--what would 
it leverage in the capitalization of a loan guarantee program?
    Mr. McLean. The loan guarantee would be a $1.25 billion 
loan guarantee.
    Mr. Pickering. We just don't want to see 1.25 come in one 
door and go out another door, not into rural America. And so we 
want to make sure we maximize resources to my district and to 
others. And so that's--and how we do that, what kind of 
incentives, what kind of policies. That's how I want you to 
interpret my comments, in that way. And I don't know if there's 
any--we've struggled with this in the Telecom Act, do we have a 
definition of what is rural and what is not, do we need to 
address that for this program or any other program, again, to 
make sure that what we are authorizing here does not go to 
areas that by yours and my definition would clearly be urban or 
suburban.
    Would the rest of the panel like to comment on any of my--
Mr. Crippen, do you have any recommendations from the 
legislative perspective to make sure that we honor the intent 
of this legislation?
    Mr. Crippen. One thing that we talked about in the 
testimony was that you can reduce the potential exposure to 
taxpayers by the structure of the loan. And one thing I would 
encourage you to think about is having the private sector 
exposed as well as taxpayers in a very real sense, whether it's 
by collateral or, more appropriately, a guarantee of less than 
100 percent of the loan--the point being that private lenders 
will then have to scrutinize these projects much more closely 
than they might otherwise. And they're better able, frankly, 
than we or anyone we know to do the credit-risk analysis.
    Mr. Pickering. Thank you, Mr. Chairman.
    Excuse me, Mr. Parsons, do you have a response?
    Mr. Parsons. Yes, just one comment, in going back to the 
definition of rural. I have constant contact with Salt Lake 
broadcasters, and they have had way more requests for waivers 
for Salt Lake, Ogden, and Provo than they had for the rest of 
the State put together.
    Mr. Pickering. Thank you, Mr. Parsons.
    Thank you, Mr. Chairman.
    Mr. Tauzin. Thank you.
    Mr. Parsons, I want to know a little bit more about 
translators. Obviously the FCC can pull their license, it's a 
secondary license, right, they can re-action that spectrum. 
They've done it in the past, right? So making you eligible for 
loans may not be the best idea in the world, because if they 
pull your license you're sure to default, right?
    Mr. Parsons. Yes. It would be nice to be able to have that. 
But the economics of an area, somebody has to pay the satellite 
to deliver.
    Mr. Tauzin. Let me ask you, what are the economics of a 
translator right now? If you provide free over-the-air boosting 
of the signal for customers, how do you get paid? How does a 
translator make money?
    Mr. Parsons. In the county I live in there is a portion of 
the recreational tax that's paid that ends up being, like I 
said, 38 cents a family a month. And it comes to like $38,000, 
$40,000 a year for the budget. And from that, once in a while 
we get enough money to buy another translator.
    Mr. Tauzin. Are all the translators backed up by local 
taxes, is that the way they're funded?
    Mr. Parsons. Most of them are.
    Mr. Tauzin. So the voters themselves vote to support a 
system that will boost and deliver the free over-the-air 
broadcast signals to these rural areas?
    Mr. Parsons. That's correct.
    Mr. Tauzin. And literally I assume this occurs in areas 
where either they can't get a good, great signal from the local 
stations, or they get none at all, right?
    Mr. Parsons. Yes. I don't know whether you have a copy of 
the Exhibit 1 I have there.
    Mr. Tauzin. Describe that to me, if you don't mind.
    Mr. Parsons. The round circle up near the top, that is 
the--where the 80 percent of the people in this State live is 
within that circle. But if you notice, Park City, which most of 
you are familiar with, depends completely on translators and is 
financed by the county. The rest of that whole geographic area 
depends on translators.
    The rest of that whole geographic area provides the input 
signals to the cable systems, which is a very, very key thing. 
So if the translators go dark, the cable systems have no 
inputs.
    Mr. Tauzin. So I would take it then that both the 
broadcaster and the cable companies have an interest in 
maintaining the translator structure in rural America.
    Mr. Parsons. You just struck a very sensitive nerve. We 
have been known for a long time for being orphans. Nobody 
really wants to accept an orphan. And as long as it's part of 
the DMA, and as long as it's being done by somebody else, let's 
not do anything about it. So almost everything is done by the 
local people.
    Mr. Tauzin. Now, in your translator world, are you subject 
to FCC rules that require you to carry all the local channels? 
Can you carry the ones you want?
    Mr. Parsons. No. If you noticed on this map, there are 100 
locations. We have about 600 translators, which averages out to 
six per. It depends on the community and how much economic 
funds they have. And if they have enough money to buy another 
$5,000 translator down the road, sell cookies or whatever, then 
they add to the system.
    But many of these don't have the full complement, simply 
because of two things; we've not been able to file, and the 
other one is they have to budget money, a county has to budget 
money as it goes along. So it's been very difficult to budget 
the money in correlation with the applications.
    Mr. Tauzin. And the other problem you have of course is 
getting the licenses to operate. Now, how do you get the 
spectrum to operate a translator? Do you go through auctions, 
is that formally just granted to you by the FCC?
    Mr. Parsons. Not up to this point, we have not gone through 
auctions. If you look at a small county who is attempting to 
come up with 5, 10, $15,000 to put in another station, they're 
not going to be the high bidder in an auction. That's why I 
said in my statement it was not to the best benefit to include 
translator areas into the auction.
    Mr. Tauzin. And finally, in terms of the broadcast stations 
going digital, once they make the transition from analog to 
digital, were you going to have to upgrade all these 
translators to carry a digital signal?
    Mr. Parsons. There are already two stations on the air in 
Salt Lake City with the digital stations. At this point there 
has not been one test made by anyone about a translator 
repeating a digital signal.
    Mr. Tauzin. Are the broadcasters not interested in making 
sure that you can carry their signal further into these rural 
areas by being capable of carrying the digital signal?
    Mr. Parsons. They seem to have their hands full trying to 
get up to speed with what they're doing. And so being a 
secondary service, that thing has haunted us since 1955, that 
secondary service has haunted us, because initially we were 
only secondary to creating interference with primary stations. 
Now we're secondary to anything.
    Mr. Tauzin. Anything. Interesting. But in many places in 
America you are the only alternative to pay services from cable 
or pay, if in fact we ever get a second carrier such as a 
satellite?
    Mr. Parsons. I don't understand that one.
    Mr. Tauzin. Let me say that again. In many places of our 
country you are the only service available to bring over-the-
air free television to people other than them having to buy in 
from a cable system or perhaps 1 day from an alternate 
provider?
    Mr. Parsons. That is true. And also, again, I repeat, if we 
didn't have the translators, many of the cable systems wouldn't 
have the local.
    Mr. Tauzin. The cable system wouldn't even have the local. 
Thank you very much.
    Mr. McLean, I want to ask you some questions. We'll go back 
to that audit again, because there are some interesting numbers 
in it. Going to the audit, the Iowa Telephone Association has 
as an interest payment ratio of 4,330 to one. That's a pretty 
strong company, wouldn't you agree?
    Mr. McLean. Mm-hmm.
    Mr. Tauzin. If that company, strong as it is, were to go 
out and make private capital contracts, working through RUS, 
would that company be subject to the same rules other companies 
are subject to? It's a telephone company. Wouldn't it be 
subject to universal service, reliability and affordability 
standards set by the PUCs and the FCC?
    Mr. McLean. You're assuming they have no RUS status?
    Mr. Tauzin. Yes.
    Mr. McLean. They would have to comply with the minimum 
standards of the Public Service Commission and the----
    Mr. Tauzin. FCC?
    Mr. McLean. FCC.
    Mr. Tauzin. It doesn't matter where they get their lending, 
they're going to have to comply with those things, right?
    Mr. McLean. But very different quality of service you'll 
find in the RUS finance system.
    Mr. Tauzin. Why wouldn't a commercial lender be just as 
concerned about a quality system that he's loaning to that's 
strong financially and is going to keep a nice return on money, 
why wouldn't the private lender be just as interested in that 
as RUS?
    Mr. McLean. That's a very good question. But the facts are 
that there is a differential in quality in rural America. 
There's a huge debate about the digital divide.
    Mr. Tauzin. Where are those facts?
    Mr. McLean. You can look at the digital divide report. In 
rural areas there's lower quality service. We have a design 
philosophy at RUS that makes access to services more plausible. 
In 1993, one of the reasons we think the Congress has spoken 
very clearly to us in the English amendment to the Rural 
Electrification Loan Restructuring Act, it said there should 
be--RUS's design should facilitate advanced services, should be 
capable of----
    Mr. Tauzin. But Mr. McLean, what I don't understand is, why 
wouldn't a private lender be just as interested in making sure 
that the person he's loaning the money to is providing good, 
strong, reliable service to their customers so they can make 
sure they get their money back? What makes RUS special in that 
regard?
    Mr. McLean. It's a difference between minimum standards, 
which of course the private lender would meet the minimum 
regulatory standards, and the high quality standards that--
again, that's the bargain for the loan. That's the agreement 
between lender and the borrower.
    Mr. Tauzin. What troubles me with your argument is, I can't 
imagine a commercial lender not being equally interested in 
making sure that the person he loans it to is the best around. 
If I've got a choice between loaning somebody who's got some 
minimum quality service and somebody who's got a high quality, 
and I'm guaranteed a return on my money from that system, I'm 
going with the second every day. What's different between them 
and you?
    Mr. Viadero, I want to get your comments on that. Am I 
right about that or am I wrong?
    Mr. Viadero. We have the same questions you do. We asked 
your questions, Mr. Chairman.
    Mr. Tauzin. Did you get a good answer?
    Mr. Viadero. No.
    Mr. McLean. The vice president of a very large 
telecommunication company says capital goes where capital 
grows. That is, the private market will invest into the urban 
area, into the high growth areas. If you look at large 
telecommunications companies, you see a very clear difference--
--
    Mr. Tauzin. Mr. McLean, I think you are mixing apples and 
oranges. Let me just make a point. I'm a rural guy. I'm always 
for the co-ops, rural telephone. But for me to be able to 
support subsidized systems like that for rural customers, I 
can't bump into audit reports that tell me that rich fat 
companies with a lot of airtime who don't need the support are 
getting it, because it makes it harder for me to defend the 
program and to keep it alive for people who need it.
    I just want you guys to think about that. If this audit 
report is right, and if you have authority to carry out the 
intent of Congress, which was to wean these systems off of the 
government guaranteed loan when they didn't need it anymore, 
and you're not doing that adequately, so that we've got a 
report that says you've got companies with a 4,330 to one 
equity to interest payment ratio, then it makes it very hard 
for us to defend rural co-ops and subsidy programs, to defend 
that to the folks who are putting up the subsidy.
    Why should the taxpayers of some other State put up with 
that system for very long? They're going to ask for all of it 
to go away at some point. We're going to lose the baby with the 
bathwater.
    Mr. McLean. We certainly don't want to do that. We do have 
three products which are graduated, and we have the hardship 
rate, which is available to the most neediest, that's our 5 
percent fixed, to the Treasury rate of interest loan, which is 
at no subsidy rate in the budgetary policies. We have a loan 
guarantee program which if you lend from the Treasury 
Department it's a Treasury plus an eighth, which is actually a 
negative subsidy. So in fact we do embrace that idea.
    In fact we're also trying to facilitate private investment 
in partnership with our supplemental lenders like CFC and 
COPEC.
    Mr. Tauzin. Let me ask the IG's office here, if we included 
a loan graduation provision in this bill which would require 
the borrowers to move to private credit when they are 
financially able, what impact if any would that provision have 
on lowering the projected cost of the government subsidy, and 
would it have a beneficial impact on the program? Gentlemen?
    Mr. Viadero. Mr. Chairman, I think it's safe--I was not 
prepared for that question here, I think I'll need some further 
analysis, and we'll be happy to get back to you.
    Mr. Tauzin. Mr. Crippen?
    Mr. Crippen. I have to confess I don't know what's in our 
baseline assumptions about what the RUS loan rates are going to 
be to these kinds of companies. Presumably there would have to 
be some savings, although loans made to those companies, of 
course, are not nearly as risky as some of the others.
    Mr. McLean. Right. Exactly right, Mr. Chairman, because if 
we were----
    Mr. Tauzin. Take the mike, please.
    Mr. McLean. If we were restricted to lending to only 
uncreditworthy borrowers, the risks that CBO and OMB assess to 
our program to determine our budget authority would go up. I 
mean, it's the very security that the members of this committee 
have asked to secure in the legislation of the satellite bill 
that we're doing in the telephone program to keep the costs 
down.
    Mr. Tauzin. We're talking about a provision that provides 
for companies that become creditworthy over time. We're 
obviously talking about loaning them money when they need it, 
not the only criteria, in my view, not loaning them money when 
they don't need it. I've got something in my craw, you've got a 
lot of members who have got something in their craw about that. 
I think you heard it today.
    We're talking about taxpayer guaranteed loans to people who 
don't need them. That kind of gets in your craw. But if you're 
talking about loaning them to people who need them, but then 
wean them off as they become creditworthy and don't need it 
anymore, that ought to affect the cost of the program and ought 
to affect positively, in a very positive way, the impact of 
this program on the budget and therefore make it a more 
desirable program, I think.
    Mr. Viadero.  Mr. Viadero. Mr. Tauzin, your point, if I can 
support it, you just mentioned the one co-op in Iowa with a 
time interest rate earnings in excess of 4,300. In our exhibit 
D we have a total of 28 loan applications that couldn't be 
funded, that were hardships that couldn't be funded.
    Mr. Tauzin. You're telling me you couldn't make loans to 
people that really needed them because the people that didn't 
need them had soaked it all up?
    Mr. Viadero. That's correct.
    Mr. Tauzin. Is that what you're telling me?
    Mr. Viadero. That's correct.
    Mr. Tauzin. That's not good testimony. I mean, it's correct 
testimony, but it's not a good message.
    Mr. Viadero. That's on page 44.
    Mr. Tauzin. How do you answer that, Mr. McLean?
    Mr. McLean. I'm trying to understand the statement.
    Mr. Tauzin. Let me say it again, because I kind of 
paraphrased it for him. But I think what Mr. Viadero said was, 
on page 14, was that certain loans to people who needed it 
under the program were denied because there was no longer loan 
money available, because it had been soaked up in effect by 
people who didn't need it.
    Mr. McLean. Are you saying--I'll address through the Chair, 
if Roger is saying that hardship funds are going to those 
companies, or that the total budget authority--hardship is 
targeted to the most needy and the lowest entities and the 
highest cost.
    Mr. Tauzin. Well, we don't need----
    Mr. McLean. Hardship----
    Mr. Tauzin. We don't need to beat this thing. What I would 
suggest is for the record, again, I'll ask you this officially, 
if you will look at that page of the audit report which 
indicates that loans could not be made to folks who needed them 
because somehow they weren't available because they had been 
used by people who needed them, look at that and comment in 
writing to the committee in answer to it, I would appreciate 
that.
    Let me yield to Mr. Pickering.
    Mr. Pickering. Mr. Chairman, I was wondering if I could ask 
you to yield just a second.
    Mr. Tauzin. You've got it. Go ahead, Mr. Pickering.
    Mr. Pickering. Just to participate in the conversation, it 
seems to me there are two dilemmas here. One is possibly the 
issue being raised that funds are not being made in those 
hardship cases because funds are being soaked up by those who 
don't need it. But you have the larger question, the dilemma 
that I think this bill is trying to address is that those 
companies that are financially capable are looking at 
investment decisions.
    As they make those decisions, they're going to be looking 
at the rate of return. That's the way the market works. The 
problem we face or the dilemma we face in rural America is our 
rate of return in rural areas will not be as high as the rate 
of return for investment in urban areas or more dense markets. 
And so by giving subsidized loans, in essence lowering the cost 
of capital, you're increasing the rate of return so that those 
investments are made.
    I think we need to look at both ends of it, just because 
financially able companies are using the subsidized capital to 
meet our objective of deploying broadband or other technology 
into rural areas is not in and of itself a bad thing. But we 
should have a priority of helping those who need it most first. 
That's a legitimate issue being raised.
    Mr. McLean. I absolutely share that priority. In fact in 
the last fiscal year we used up all of our hardship money, $75 
million. But we turned back money, Rural Telephone Bank, loan 
guarantees. In the last 3 years since the passage of the 
Telecom Act, in total appropriations we have turned back under-
utilized funds. So the crowding out argument, I'm a little 
bit--I would need more clarification on it.
    We'll work together to get that. And the consequence of 
moving from the RUS loan interest rates to a private market 
rate would reflect higher rates for consumers.
    Mr. Pickering. Mr. Chairman and Mr. Shimkus, I need to 
leave, and I was just going to ask Mr. McLean one final 
question.
    Mr. Tauzin. The gentleman may proceed.
    Mr. Pickering. Mr. McLean, I just wanted to take this time 
to extend an invitation to come to my district and take a 
broadband tour of the third district of Mississippi. My former 
District Director was the REA Administrator in the Bush 
administration, and I'm sure you all would share a lot in 
common. We look forward to having you come our way.
    Mr. McLean. I would love to do that. And he is a very, very 
good man, and the program is in good shape in part because of 
his leadership, and we appreciate that.
    Mr. Tauzin. The gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. The charter of a CEO 
is to maximize shareholder equity in corporate America, and 
actually a lot of my questions were put more succinctly by my 
colleague from Mississippi, and the challenge is, how do we 
incentivise corporate America to provide in those areas that 
aren't covered. I think we've asked a lot of the questions, and 
really some of the hard questions were asked by actually 
sponsors of the legislation, the chairman, myself, Mr. 
Pickering, who want to represent rural America well, but we 
also want to do it in a response manner.
    And a question was raised of the risk pool, how big is it, 
do you lower the actual risk by having more versus do you have 
a smaller pool, higher risk; in the end, through a CBO scoring, 
would that be less risky. We don't know. But I would ask Mr.--I 
would ask the chairman, the individuals who are not represented 
are for the most part the corporate entities, and we have to 
ask that question, what will incentivise you to get into that 
area too, because I think that's where we're trying to get a 
full spectrum.
    So I just want to--I, again, don't have any follow-up 
questions. This has been a good experience. I appreciate the 
Chairman for calling the hearing. I look forward to working 
with him to rectify our cosponsorship with being responsible 
fiscal conservatives.
    I yield back my time.
    Mr. Tauzin. I thank the gentleman. Actually we did hear, as 
you know, from quite a number of the companies last year when 
we were taking up HSVA. So we've got a good, wide body of 
information about potential use of this bill.
    One thing I would like to know is, perhaps, Mr. Crippen, 
you could help me on this, if we did make translators the first 
line of defense to make sure that no one was left in a yellow 
area without, you know, over-the-air free television, if that's 
what they wanted to choose, would that reduce the CBO's cost 
estimate of the bill?
    Mr. Crippen. I'm not sure. I would have to think about it 
probably more than 10 seconds. If it were only for translators 
in those areas, if they had a revenue source--lots of ifs--it 
probably would.
    Mr. Tauzin. All right. Well, look. We've got some things 
we've left for you to respond back to us. Let me ask you to--
you've listened to the questions. Sometimes you can learn more 
by hearing a question than you can by--just learn where people 
are by the questions they ask than any other thing. I think you 
got a sense that there are a lot of members who are still 
troubled, who want to do this thinking, who want to do it 
right, as I said in the opening statement.
    What we are going to need is some help. You made some 
suggestions to us in your report, you made some, you know, some 
ideas about, if we changed it, how you might look at the bill. 
It would be very helpful if you would leave this hearing and 
think about a supplemental statement after you've learned, 
you've learned from these questions, learned from the 
testimony, your colleagues here at the dais, and perhaps give 
us a supplemental report on how we might make this bill 
accomplish its purposes in a way that, as Mr. Shimkus said, is 
something fiscal conservatives feel comfortable with, 
recognizing that we're asking Americans to generally back up 
service for some citizens of our country who without this bill 
may in fact be left behind and be not part of this new world of 
extraordinary opportunities. If you'll do that for me, we'll 
keep the record open for 30 days.
    I've also asked some specific questions of you. Please 
respond to us in writing within the next 30 days on the 
specific inquiries, the questions I've asked you about the 
rules and regulations and the statutory sites. If you'll get 
those back to us.
    Again, I thank you very much for the testimony.
    The hearing stands adjourned.
    [Whereupon, at 12:51 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
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