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





 FOREIGN GOVERNMENT OWNERSHIP OF AMERICAN TELECOMMUNICATIONS COMPANIES

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

                                HEARING

                               before the

                  SUBCOMMITTEE ON TELECOMMUNICATIONS,
                     TRADE, AND CONSUMER PROTECTION

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 7, 2000

                               __________

                           Serial No. 106-153

                               __________

            Printed for the use of the Committee on Commerce

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

                    U.S. GOVERNMENT PRINTING OFFICE
67-113CC                    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:
    Bahr, Morton, President, Communications Workers of America...    97
    Di Gregory, Kevin V., Deputy Assistant Attorney General, 
      Criminal Division, Department of Justice...................    33
    Dunn, Hon. Jennifer, a Representative in Congress from the 
      State of Washington........................................    17
    Fisher, Ambassador Richard W., Assistant United States Trade 
      Representative, USTR.......................................    47
    Hollings, Hon. Ernest F., a United States Senator from the 
      State of South Carolina....................................    10
    Kennard, Hon. William E., Chairman, Federal Communications 
      Commission.................................................    29
    Lipman, Andrew D., Vice Chairman, Swidler Berlin Shereef 
      Friedman, LLP..............................................   148
    Noll, A. Michael, Annenberg School for Communication.........   166
    Parkinson, Larry R., General Counsel, Federal Bureau of 
      Investigations.............................................    40
    Sidak, J. Gregory, Weyerhaeuser Fellow in Law and Economics, 
      American Enterprise Institute, Public Policy...............   101
    Stanton, John W., CEO and President, VoiceStream.............    91
Material submitted for the record by:
    Donohue, Thomas J., President and Chief Executive Officer, 
      U.S. Chamber of Commerce, prepared statement of............   180
    Fisher, Ambassador Richard W., Deputy United States Trade 
      Representative, USTR, responses for the record.............   189
    Stanton, John W., CEO and President, VoiceStream, letter 
      dated September 15, 2000, enclosing material for the record   184

                                 (iii)

  

 
 FOREIGN GOVERNMENT OWNERSHIP OF AMERICAN TELECOMMUNICATIONS COMPANIES

                              ----------                              


                      THURSDAY, SEPTEMBER 7, 2000

              House of Representatives,    
                         Committee on Commerce,    
                    Subcommittee on Telecommunications,    
                            Trade, and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:20 a.m., in 
room 2123, Rayburn House Office Building, Hon. W.J. ``Billy'' 
Tauzin (chairman) presiding.
    Members present: Representatives Tauzin, Oxley, Stearns, 
Gillmor, Cox, Deal, Largent, Shimkus, Pickering, Fossella, 
Markey, Gordon, Eshoo, Wynn, Luther, Sawyer, Green, McCarthy, 
and Dingell (ex officio).
    Staff present: Justin Lilley, majority counsel; Mike 
O'Rielly, professional staff; Robert Simison, legislative 
clerk; and Andy Levin, minority counsel.
    Mr. Tauzin. The committee will please come to order. We 
will ask all of our guests to take seats and to get 
comfortable. Members are on their way back and we should have a 
larger dais for you in a minute, Senator.
    Let me indeed welcome our first guest and witness, the 
Honorable Ernest Fritz Hollings, U.S. Senate, one of my dearest 
personal friends, probably second only to John Breaux, himself 
from Louisiana.
    Senator Hollings.  That is a good close friendship.
    Mr. Tauzin. Fritz, welcome to our hearing. Under our rules, 
all written statements of the committee and of our witnesses 
will be made a part of the record. The Chair will recognize 
himself first for an opening statement, and then members in 
order, and then we will be happy to take your testimony, sir.
    Let me first point out that the United States has been at 
the forefront in bringing about a global telecommunications 
marketplace, working within the WTO to open up markets, 
increase business opportunities available to U.S. companies 
abroad. Foreign telecom companies have been aggressively 
penetrating the U.S. market, which continues to be the envy of 
the world.
    Jennifer, welcome. I welcomed the Senator ahead of you, but 
we are also pleased to welcome the Honorable Congresswoman 
Jennifer Dunn here.
    These foreign companies are injecting large amounts of 
capital in our market, and we all like to see that, frankly. 
Likewise, U.S. companies are busily developing and implementing 
business plans that include entering and exploiting foreign 
telecommunications markets. We all know the benefits of 
increasing competition. They include more choices for 
providers, increasing superior service, product innovation, 
hopefully better prices. None of us want to see this stop.
    However, concerns involving foreign government ownership of 
the United States telecom carriers have been raised by key 
policymakers. Thirty senators sent a letter to the FCC urging 
it to consider national security implications of any foreign 
acquisition of a U.S. telecommunications firm. And, in fact, 
Senator Ernest Hollings of South Carolina, the ranking member 
of both the Senate Commerce Committee and the Senate Commerce, 
Justice, State Appropriations Subcommittee and our first 
witness today, has introduced legislation that would forbid any 
foreign company owning more than 25 percent--owning more than 
25 percent by its government--from taking over a U.S. 
telecommunications business; as well as having attached 
comparable language, I think, in the CJS appropriations bill 
that is in the Senate.
    Members in the House also have expressed concerns. And 
while it is no secret that I personally am a strong proponent 
of free trade, I have always felt and think today that the USTR 
needs to do more to push, pressure, prod, foreign government-
owned telecom companies to privatize in an expeditious manner. 
And when the foreign monopolist is also the regulator in a 
country, there is a perception, real or not, that they will act 
in an anticompetitive manner to the detriment of the U.S. 
interests.
    USTR has to, must, protect the interests of the United 
States citizens in that regard.
    I think, therefore, this is a timely hearing. Deutsche 
Telekom, one of Europe's largest telecom companies, has just 
cleared the regulatory hurdle over at DOJ in its proposed 
acquisition of VoiceStream Wireless Corporation in an effort to 
penetrate the lucrative North American mobile phone market.
    Today the DOJ let an antitrust review period lapse without 
opposing the merger. We would like to hear from DOJ about the 
process by which it arrived at its determination that in fact 
this merger does not raise competitive or other concern.
    Currently, the German Government enjoys a 58 percent stake 
in Deutsche Telekom, and with the consummation of this merger, 
that share would be diluted to 45 percent. However, the DOJ's 
blessing is not the end of the regulatory process for this 
acquisition.
    Other U.S. regulators, including the FCC, the Committee on 
Foreign Investment in the U.S., must also weigh in on this 
merger. And I am interested in hearing from the witnesses today 
as to whether or not they think the U.S. Government has the 
tools necessary to condition or deny mergers between companies 
owned by foreign governments and private U.S. companies to 
ensure that our telecom market remains competitive and, of 
course, that national security concerns are always properly 
considered and addressed.
    I want to ensure that the process does not somehow allow 
foreign governments and foreign government-owned telecom 
companies that possess monopoly power in their own country to 
distort the robustly competitive telecom marketplace that we 
have all fought for and continue to fight for in this great 
United States, and would never want to see a process that would 
harm not only that marketplace but the companies that compete 
so effectively within it.
    I yield back the balance of my time and welcome and 
recognize the ranking minority member, my friend from 
Massachusetts, who is equally worn out as I am, I know, this 
morning, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much. I thank you 
for holding this hearing. I thank Senator Hollings and 
Congresswoman Dunn and all of our witnesses for helping us out 
today with their expert testimony.
    This committee has a long history of battling to open up 
our domestic telecommunications marketplace to ever more 
competition in telecommunications services, wireless services, 
cable, across the board. We have fought hard to make sure that 
we created a marketplace where innovation could flourish, jobs 
could be created, and prices lowered for consumers.
    In addition, the members of this committee do not have to 
be sold on the benefits of increased trade, especially in the 
high-tech sector. I voted to support NAFTA and GATT because I 
believed they gave America a great opportunity to lay the 
groundwork for jobs and services in this new economy.
    Today we will focus on the job that foreign countries have 
done in liberalizing their telecommunications markets and 
specifically deal with the issue that many foreign governments 
continue to own and control telecommunications assets in their 
own domestic markets. With respect to our market, consistent 
with our international commitments, the American 
telecommunications market is open for business. Foreign 
companies that want to come to the United States and invest and 
compete are welcome to do so.
    The WTO Basic Telecom Agreement was intended to foster such 
investment and global competition among free market, high-tech 
companies. It was not designed or intended to foster or 
encourage government investment. The agreement was for trade in 
telecom services, not trade in government services.
    We are trying to foster a dot-com revolution, not a dot-gov 
revolution. In the new economy of global proportions, 
governments have no place competing in the private marketplace. 
They should not be both market participant simultaneous with 
being market regulator. They should not be permitted to skew 
capital markets by artificially inflating stock prices through 
government backing; and foreign government participation in the 
United States marketplace also raises thorny law enforcement 
and national security issues.
    The WTO Basic Telecom Agreement is wholly silent on any 
distinction between foreign investment and foreign government 
investment, and the agreement appears to have left to foreign 
governments to decide what privatization means to them. This 
was obviously a glaring omission from the agreement, and unless 
the administration starts to get real about its implications, 
it will turn out to be a giant loophole for foreign government-
backed goliaths to exploit.
    If we truly believe in a free marketplace, we should insist 
on it. Privatization should mean totally private. That is what 
we have in the United States and what exists in England, New 
Zealand and Canada. Many other countries, however, have not 
undertaken full privatization and have significant government 
stakes in their companies. Australia, Japan, Germany, France, 
Sweden, Singapore and South Korea all have government ownership 
in excess of 50 percent. However, any other companies not owned 
by the government in those very same countries are more than 
welcome to enter the United States marketplace.
    So every other company in every one of those countries 
could come to the United States. No problem. We are only 
talking about a small handful of companies, the government-
owned companies.
    Even if we cannot get foreign countries to zero government 
ownership soon, we should endeavor to limit the competitive 
unfairness and security implications by inducing them to dilute 
sooner. That is what the legislation is designed to do. It is 
not protectionist. It is not driven by xenophobia. It is driven 
by an ardent desire to have other countries fully embrace the 
free marketplace and to accelerate the liberalization of 
telecommunications markets.
    In the absence of such a policy, what are the implications? 
Foreign government involvement in the United States market 
obviously will complicate law enforcement and national security 
efforts. Foreign governments seeking to establish their 
companies as global players may favor their own companies in 
their domestic marketplace to the detriment of those companies 
in which the government does not have a financial stake. In 
addition, governments with significant ownership stakes can 
spend their artificially inflated stock prices and buy their 
way into foreign markets.
    Over time, such purchasing will obviously dilute a 
government share of the overall company but it will come at the 
expense of other private sector companies who have to go to the 
capital markets without government backing in order to fund 
acquisition strategies. That is a patently unfair way to 
proceed.
    We have persevered over many years in the Congress to make 
the American telecommunications marketplace the envy of the 
world. We welcome foreign investment in telecommunication 
services from those foreign companies not owned by their 
governments. Yet we should not allow free market underachievers 
overseas to unfairly compete with government-controlled 
companies and to thereby gain all the benefits of our hard work 
here in the United States, on the cheap.
    It is inconceivable that the WTO, which was set up 
essentially to get government out of the way, out of markets, 
and to foster free market trade across borders, could be used 
instead to foster government involvement in the marketplace and 
government investment across borders. I don't think that is 
what Adam Smith had in mind.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Tauzin. Who is Adam Smith?
    The Chair thanks the gentleman.
    Mr. Markey. Congressman.
    Mr. Tauzin. Congressman from the South somewhere, I am 
sure.
    The Chair thanks the gentleman. The Chair recognizes the 
vice chairman of the committee, Mr. Oxley, for an opening 
statement.
    Mr. Oxley. Thank you, Mr. Chairman. And welcome to our 
distinguished witnesses, our good friend from the Senate side, 
Mr. Hollings, and Representative Jennifer Dunn.
    I had the opportunity to confer with Jeff Lange and 
Ambassador Barshefsky during the negotiations on the 1997 WTO 
Basic Telecommunications Agreement, and I must say that I was 
pleased with their determination to consult regularly with 
Congress during the talks. More to the point at hand, I was 
deeply impressed by what was achieved in Geneva in 1997. The 
agreement covered 95 percent of world telecom revenues, giving 
U.S. firms unprecedented access to markets in Europe, Asia and 
Latin America. The treaty built upon the principles of 
competition, deregulation, and market opening embodied in the 
1996 Telecom Act.
    The accord included pro-competitive regulatory principles 
similar to those of the Telecom Act, allowing new entrants to 
compete fairly with incumbents, and it ensured U.S. companies 
could acquire a significant stake in telecom companies 
worldwide. This would not have been possible without a U.S. 
offer which included unlimited indirect investment in American 
telecom firms.
    A more restrictive interpretation of Section 310(b) of the 
Communications Act, which governs international investment and 
radio license holders, would have resulted in a far less 
sweeping agreement. The U.S. offer to provide market access and 
national treatment for foreign telecommunications common 
carrier service providers was key to securing equivalent 
commitments from our trading partners in opening the global 
telecommunications market to American businesses. The point is 
to keep looking forward, not backward.
    We should strive to find new ways to lower barriers to 
investment and promote the free flow of goods, services and 
capital, rather than second-guessing recent accomplishments. I 
firmly believe that in the vast majority of cases, artificial 
limits on international investment only harm U.S. firms by 
denying them access to foreign capital in foreign markets.
    That said, I certainly support the goal of encouraging 
privatization of national telephone companies abroad. If we can 
find positive ways to do that without inviting retaliation from 
reliable trading partners, then I can lend my support.
    Thank you, Mr. Chairman. I yield back.
    Mr. Tauzin. Thank the gentleman.
    The Chair recognizes the gentlelady from California, Ms. 
Eshoo, for an opening statement.
    Ms. Eshoo. Thank you, Mr. Chairman, for having this 
hearing, and good morning to you and to those that have joined 
us and are here to speak to the committee.
    The technological revolution of the past decade has allowed 
our country to achieve grand levels of prosperity; not just 
great, but really I think grand and quite sweeping. Today 
America is enjoying unparalleled economic success. We are the 
envy of the world. Economic growth is sustained. Unemployment 
is low. Inflation has been kept at bay and the new economy has 
brought new wealth and new opportunities to our Nation and its 
workers. It has also opened international markets to foreign 
investment.
    I think that our newfound prosperity did not result from 
simple happenstance, but rather is closely related to the 
increasingly global economy. For this reason, open markets are 
important to both our economy and to our continued leadership 
around the world. International trade is a benefit to all that 
are involved. America's policy of free trade has created fierce 
competition in many of the world's telecommunications markets 
and has sparked innovation as well.
    I have a deep faith in American ingenuity and innovation 
and resolve, and a continued adherence to a free trade policy I 
think will only help our national economy use these inherent 
characteristics to take full advantage of international 
opportunities.
    We are looked upon as a leader in free trade, and this 
credibility is not something we should take for granted. 
President Kennedy said ``economic isolation and political 
leadership are fully incompatible, but we cannot ourselves 
stand still. We must adapt our own economy to the imperatives 
of a changing world and once more assert our leadership.''
    It was through America's leadership and determination that 
the WTO Basic Telecommunications Agreement was forged in 1997. 
In this agreement, we pledged that we will grant favorable 
trade and investment treatment to foreign carriers in domestic 
communications markets.
    When 20 percent of all international communications 
services involve the United States market, and when more than 
40 percent of the world's multinational corporations are 
headquartered in the United States, and when we advocate the 
liberalization of telecommunications systems around the world, 
we cannot simply reverse course when it comes the our markets. 
To do so, I think, undermines our credibility at the least, and 
at worst exposes our economy to retaliation. I am concerned 
that the legislation we are considering may be inconsistent 
with our current trade policies and will be very difficult to 
reconcile with the pledges we have made to our foreign trading 
partners.
    Methods to review telecommunications mergers or 
acquisitions exist within the FCC's authority. These existing 
rules rely on the expertise of agencies such as the FBI and the 
Department of Defense when national security concerns exist. I 
think a more reasonable way of resolving these concerns may be 
through continued efforts to convince foreign governments to 
divest themselves of their holdings in their domestic carriers 
so that they may realize the benefits of true competition and 
avoid trade conflicts.
    I share the concerns of some of my colleagues with the FCC 
merger review process. Under the Commission rules, foreign-
owned firms from a WTO member country enjoy a rebuttable 
presumption that entry or investment in our markets is in the 
public interest. Perhaps a modification of this review process 
could reach the same end without the potentially drastic 
ramifications of legislation. These alternative solutions may 
outweigh the need for legislation when considering its 
potential consequences, which may include withdrawals from the 
WTO or retaliatory trade measures taken against our companies 
by those countries we pledged to open our markets to.
    We stand at the beginning of a new century--we say that 
over and over again in this committee and in the Congress--and 
with it comes new opportunities. I look forward to learning 
more about these issues from our excellent panel of witnesses, 
with their wishes, and I thank you again, Mr. Chairman, for 
holding this hearing.
    Mr. Tauzin. I thank the gentlewoman.
    The Chair recognizes the gentleman from Florida, Mr. 
Stearns, for an opening statement.
    Mr. Stearns. Thank you, Mr. Chairman. Let me also welcome 
Senator Hollings and also the distinguished gentlewoman from 
the State of Washington, Jennifer Dunn.
    Mr. Chairman, thank you for holding this hearing. I see 
from the audience it is a very, very popular hearing here. They 
run around to the back of the building here. But the genesis of 
this debate started in 1934 with the Communications Act, and 
debates continue.
    I remember serving on the Conference Committee on the 
Telecommunications Act of 1996, of which Senator Hollings was 
very active and a participant and was one of the ultimate 
deciders of some of the issues. But in today's 
telecommunication market, mergers are taking place at 
lightening speed and the effect is that we are going into 
foreign countries, they are coming into ours. I have letters 
here from the European Union who have pointed out they are 
against your bill, Senator Hollings, as you know, and evidently 
the Chamber of Commerce also feels that way, which we will hear 
later from today.
    Basically, in a nutshell, Section 310 of the Telecom Act 
already prohibits companies in which foreign governments' 
holdings are greater than 25 percent from acquiring American 
telecommunications companies unless, unless, it is in the 
public interest to approve the merger. Recently it appears that 
the FCC's interpretation is that it is in the public interest 
to approve the entry of foreign companies if the country is a 
member of WTO. Now, that's the question, Mr. Chairman, of 
whether that's a compromise that we would go back to the FCC 
and allow--pass legislation that would clarify, legislation 
that would clarify for the FCC what this public interest 
equation is, because the committee is well aware the FCC has 
relied on that little thing called the public interest as an 
instrument to carry out its own desires and agenda and we have 
had our confrontation with the FCC in that regard.
    Let me state that due to the 1996 act, this country has 
been privileged to benefit from a deregulated and competitive 
telecommunication marketplace. Proponents of this legislation 
raise valid concerns in allowing foreign governments owned by 
companies, government-owned companies, to acquire U.S. 
companies. The global economy has reduced barriers to free 
trade and are major contributors, I think, to our booming 
economy here. In fact, American telecommunications companies 
are successfully competing in foreign markets and bringing 
competition and lower prices to those nations, even though 
those countries have telecommunications corporations that are 
owned by their governments in greater than 25 percent.
    However, these American companies do not have the United 
States as an active partner and investor and overseas foreign 
companies compete with American companies, not the United 
States. The tables will be turned with foreign government-owned 
companies competing in the United States with American 
companies.
    Senator Hollings' legislation is not perfect. Perhaps, Mr. 
Chairman, we can work with this bill to, as I pointed out 
earlier, find what the public interest is. Is it 25 percent? Is 
it 26 percent? Is it 28? I don't know, but somewhere during 
this hearing we should come up with an answer. And so, again, I 
applaud you for this hearing.
    Mr. Tauzin. I thank the gentleman.
    The Chair now recognizes the ranking minority member of the 
full Commerce Committee, the gentleman from Michigan, Mr. 
Dingell, for an opening statement.
    Mr. Dingell. Mr. Chairman, I thank you, and I commend you 
for holding this important hearing. The question today that we 
will address is very simple: Should foreign governments be 
permitted to own or exercise control over vital 
telecommunications infrastructure in the United States? In my 
view, the answer to that question is a simple no, and I believe 
that U.S. law, specifically Section 310 of the Communications 
Act, already dictates that result.
    Unfortunately, the Federal Communications Commission, the 
FCC, and the United States Trade Representative hold a contrary 
view. Their interpretation has necessitated a fresh look at 
congressional policies regarding competition and the national 
security that underlie this important provision of law. I 
stress, we are not talking about foreign ownership of American 
telecommunications facilities; we are talking here about 
something that I strongly oppose, and I think most Americans 
do, and that is foreign government ownership of American 
telecommunications equipment.
    To clarify any ambiguity, Congressman Markey and I recently 
introduced H.R. 4903, a competitive measure to that offered by 
our good friend, Senator Hollings--and I certainly welcome him 
this morning to the committee--to make sure that this 
longstanding U.S. competition policy is maintained. I do extend 
a special welcome to my good friend, the Senator, and look 
forward to his testimony with interest.
    I would also note that Senator Hollings has been joined in 
this legislative effort by leading Members of both parties in 
the Senate, including Senators Lott and Daschle, leaders of the 
Appropriations, Intelligence, and Foreign Relations Committees, 
as well as a bipartisan majority of the Senate Commerce 
Committee.
    The reason this measure has received such widespread 
support is clear. It is just plain unfair to the competitive 
telecommunications industry in this country, as well as to 
American workers and consumers, to permit foreign governments 
and their monopoly subsidiaries to compete against private U.S. 
companies in the high-tech sector. Foreign government control 
of American firms not only puts our competitors at a 
disadvantage in all markets, but very especially in our own. It 
also compounds the difficulties for our companies overseas when 
that foreign government acts as both a competitor and a 
regulator in the same market simultaneously.
    For the past several decades, the U.S. has worked 
diligently, notably through the 1984 breakup of AT&T and the 
1996 Telecommunications Act, to open its telecommunications 
markets to competition. In so doing, we have made sure that the 
safeguards were firmly in place to prevent historical 
monopolies from leveraging their embedded market share to 
engage in competition with a brand-new, unfair advantage in new 
competitive lines of business.
    The FCC has imposed stringent accounting, audit and 
structural separation requirements to prevent cross-
subsidization and other anticompetitive practices. Most 
notably, the Bell companies are still prohibited from entering 
the long distance market until their telephone businesses are 
sufficiently open to competition. This provision was designed 
to provide a strong incentive for the Bell companies to open 
their markets to competitors, and I daresay that the FCC in its 
zeal to open markets domestically has held their feet at the 
fire at every turn.
    So I find it curious that in the international context, the 
FCC is far from zealous in applying appropriate incentives to 
foreign governments to ensure that their markets are 
sufficiently open for U.S. competitors. In fact, instead of 
applying Section 310 to preclude foreign government-owned 
monopolies from entering the U.S. market, which would provide 
ample incentive to privatize, the Commission has tortured its 
reading of the law to achieve precisely the opposite result.
    The question, then, is how can we expect foreign 
governments to fully privatize their telecommunications 
industry if they get a free pass to compete unfettered in the 
United States? Full privatization is widely regarded by 
telecommunications and trade experts as the optimal way to 
achieve open market conditions. Yet, inexplicably, the FCC 
policy is to simply let them in, regardless of a rational 
reading of the law, and hope that full privatization will 
magically occur.
    Unfortunately, they are joined by the U.S. Trade 
Representative in this tortured approach to the law. This 
approach flies in the face of both common sense and real world 
experience. We have to look very little to find problems. One 
need only look at the recent attempt by KPN, the Dutch 
government-owned telecommunications commission, to buy 
Telefonica de Espana, a newly fully privatized telephone 
company in Spain. The deal was scuttled, mainly due to Spanish 
concerns about foreign government ownership. It should be no 
surprise, then, that the Dutch government, after being spurned 
by Spain, subsequently announced that it would sell down its 
stake in KPN to 20 percent. I find 20 percent to still be high, 
but it does show that virtue can be induced by intelligent 
regulation.
    I have little doubt that other foreign government-owned 
companies wishing to acquire American firms would do likewise.
    Finally, I would be remiss if I failed to mention another 
serious reason to preclude foreign-government ownership of 
critical telecommunications assets in this country. While 
globalization can be a boon to our national economy, it also, 
however, brings with it new threats to our national security 
and law enforcement efforts. While the Justice Department and 
FBI are working diligently to mitigate this threat, they 
believe the risk is heightened substantially when a foreign 
government is involved in the transaction.
    The Hollings-Markey-Dingell legislation is narrowly 
tailored to protect the United States from this most acute risk 
to our national security. It would therefore free the FBI and 
Justice to harness their resources to safeguard American 
interests put at risk by a number of transactions involving 
nongovernmental foreign investment. I repeat, the question 
before us is not do we allow foreign companies to buy interests 
in U.S. companies. It is do we allow foreign governments to 
assume control of American companies in defiance of what I view 
as good public policy?
    Thank you, Mr. Chairman, for holding this hearing. I look 
forward to examining the witnesses.
    Mr. Tauzin. I thank the gentleman from Michigan.
    Let me just make a point and maybe the members can help me 
with this. The Chair is receiving messages from our first 
witnesses that they are under an extremely tight schedule, and 
might we interrupt the opening statements, hear their 
testimony, and then we will go back to finalize opening 
statements? Is there any objection to that procedure? We will 
come back and hear your opening statements at that point. I 
thank you very much.
    Let me also remind the members that all the mikes are open, 
so if you have to say anything about Mr. Clymer or anybody else 
in the audience, be careful.
    Mr. Tauzin. The Chair is now pleased to welcome the 
Honorable Senator Fritz Hollings of the U.S. Senate. Mr. 
Hollings.

 STATEMENT OF HON. ERNEST F. HOLLINGS, A UNITED STATES SENATOR 
                FROM THE STATE OF SOUTH CAROLINA

    Senator Hollings. I thank you very much, Mr. Chairman. I 
thank you and the distinguished committee for the opportunity 
to be heard. And since my statement has been filed, I will just 
highlight it.
    Right to the point, about 2 months ago I was reading The 
Washington Post and there was an article in the business 
section, by Mr. Peter Goodman to the effect that Deutsche 
Telekom had a $100 billion kitty and all American companies 
were subject to takeover, and that he was not going to 
eliminate any of them, AT&T, MCI, VoiceStream, Sprint, the 
whole crowd. And the concluding paragraph in that story said he 
knew it was not a joint venture that he was looking to join in 
in America, but rather he wanted control.
    Well, you and I and all of us in this committee have been 
in this game now for years, and we know good and well we didn't 
get into deregulation, Chairman Oxley, you and I particularly, 
back with Congressman Markey, in 1996 to deregulate from 
American government control to put it under German Government 
control. Necessarily, I got alarmed and particularly nettled in 
the sense that the next article by the same gentleman said that 
the trouble with Hollings was that he was a veteran from World 
War II and he was anti-German, and that he was a big 
protectionist and didn't understand globalization.
    Well, I don't want to sound like Vice President Gore, but I 
invented globalization.
    I, along with Luther Hodges and all, Mr. Chairman, back 
when Uncle Earl was there in Louisiana, I went in 1960, 40 
years ago, and knocked on the doors there in Dusseldorf and 
Frankfurt, and today as I testify we have 116 German industries 
in South Carolina, my little State. We are proud of them. We 
have the British, the Swiss, the French--Michelin--and all the 
rest of them. We are proud of it.
    My point is that we don't object, as Chairman Dingell was 
talking, about foreign companies. We welcome foreign companies, 
not foreign governments, because we are trying--as the 
distinguished Chairman said, we are pushing Barshefsky and WTO 
and our special trade crowd to privatize, not to governmentize.
    In that light, I am looking at the handout they gave us 
yesterday: ``Protectionism is Not the Answer,'' by my good 
friend, Congressman Oxley, and good friend, John McCain, the 
chairman of our committee. Come on. Protectionism? They live in 
a life of symbols.
    Let me, if you don't mind, put that in the record, Mr. 
Chairman, because they are the ones trying to protect. When we 
deregulate, we get the government control out of it.
    What does Deutsche Telekom have? Well, everything that I 
guess Michael Armstrong would like to get ahold of right now. 
They have $100 billion. They just had earlier this year a bond 
issue for $14 billion. We don't have any communications company 
that can get a bond issue of that kind. But necessarily we all 
join in it, because you know the government is not going to 
allow them to fail, and you are bound to make a profit on the 
thing. With that $100 billion that they have, they can go 
around, even though their stock is way down, I think it has 
gone from 100 down to less than 40. If that was a private 
company, I would get ahold of T. Boone Pickens, an icon, and I 
would say, Look here, you fellows know how to do it; I have the 
idea; let's go grab that one and pay for it with $100 billion 
out of the stock easy, and run with the money. You and I know 
it. That's what happens. When you get the government in, it has 
got government control and protection, government financing, 
and that's exactly why we deregulated in 1996.
    Now, historically, right to move quickly, back in 1995, we 
have been talking about this issue for at least 5 years with 
this administration. The Special Trade Representative, Mickey 
Kantor, came and he wanted to change Section 310, to start 
competition, foreign competition and otherwise. There was an 
exchange of letters which has been in the Congressional 
Record--we will put it in there--between Senator Robert Byrd 
and Kantor, but he got ahold of me and you and the others and 
everything like that; so in the 1996 act, during 1995 and 1996 
when we were considering repealing the 1934 act, we looked at 
this very, very closely. During that time, it came dramatically 
to our attention because Scott Harris, the head of the 
International Bureau at the Federal Communications Commission 
testified before our committee on the Senate side, and he said, 
Wait a minute, Section 310(a) is categorical, it cannot be 
waived, and foreign governments can't be licensed in 
telecommunications in the United States.
    Thereafter, again, during the negotiations, because we all 
talked about it, Mr. Harris had left the Federal Communications 
Commission and in the National Law Journal he wrote the same 
thing, and we put that in our letters not only to the FCC and 
everyone concerned but to Mr. Summers and Deutsche Telekom so 
they would understand what the law is; that in 1996 you and I, 
Chairman Oxley and all the rest of us, Chairman Bliley, we 
talked this out. We agreed not to change the 1934 act with 
respect to foreign government ownership.
    The law is there. I don't need a bill. You don't need a 
bill or anything else of that kind. We are just trying to clear 
up, as Congressman Dingell says, the appearance perhaps of an 
ambiguity. The European Union knows. Oh, yes, the European 
Union; this room is filled up with these arbitragers who think 
they are educating the European Union. It amuses me.
    In 1999, the European Union stated this in its report, it 
said, and I ``Section 310 of the Communications Act of 1934 
remains basically unchanged following the adoption of the new 
Communications Act of 1996.'' This situation has not changed 
through the Basic Telecom Agreement. So all of Europe knows it. 
Any lawyer with any sense can read it, and it has never been 
changed, but you have got that cabal--the White House, 
Ambassador Barshefsky, and Chairman Kennard--and they think 
they invented competition.
    Let me remind them that we have had competition. ITT was 
overseas, AT&T was overseas in 1910. That's why they covered 
foreign ownership and foreign company ownerships in the 1934 
act.
    I will never forget, Mr. Chairman, I landed about 10 years 
ago in Argentina, Buenos Aires. The Ambassador, trying to make 
conversation, turned to me in the car coming out of the 
airport. He said, Well, your company is doing good, Senator. I 
said, What company? He said, Bell South. I said, Are they down 
here?
    He said, Oh, yes, they have about 12 to 14 million 
subscribers in wireless.
    So I went to the record, and prior to the 1996 Act itself 
Bell South has been in 12 countries, all over Latin America, 
Israel and otherwise.
    We find that former Bell Atlantic, our friends at NYNEX, 
Verizon they call it now, they are in 9 countries; SBC in 22 
countries; AT&T in 7 countries; I could go down the list. But 
mind you me, the Special Trade Representative is not starting 
competition, nor are the children over at the White House.
    The FBI is going to be heard before this committee, and 
they submitted their statement and they have already adjusted 
the statement over at the White House. You know, they are good 
at adjustments. And you ought to know about this and watch this 
crowd and Kennard, who thinks he is judicial saying, I am to 
give careful review. Just read the law. That's why I put in the 
bill now.
    Spain, when the KPN tried to take over Telefonica, they 
said no. They didn't say since the Netherlands you are a WTO 
country, like Ambassador Barshefsky, we made an agreement, we 
made an agreement, but the agreement can't change the law. Only 
the Congress can do that.
    Same with Singapore tel trying to take over Hong Kong 
Telephone. Hong Kong said no. They are WTO countries. Same with 
Italy. When Deutsche Telekom tried to take over Telecom Italia, 
Italy said no. It wasn't, as they are going to argue before 
this committee, that we made a firm agreement as long as you 
are a member of WTO then you ipso facto--the public interest is 
served by you coming in and having government ownership in the 
United States of America.
    And finally, Mr. Chairman, let me just say this about this 
so-called protectionism that they have got here. This brings it 
right into focus. It reminds me of Chairmen McCain and Oxley 
talking about protectionism. The young lad who went to the 
psychiatrist and the psychiatrist drew some lines up and down 
on the board and he said, Now, young man, what does that make 
you think of? He said, Sex. He drew some parallel lines. He 
said, Sex. He drew some crosses, and the young man said, Sex.
    The doctor looked at him and he said, Young man, you are 
the most oversexed, depraved individual. ``Me, Doc?'' the young 
man says, ``You are the one drawing the dirty pictures.''
    They are the ones that are asking for protectionism. I am 
not asking for protectionism. Chairman Oxley, I ask your 
support now. Come on. You and I had this out, and I know you 
and I are for opening up markets and we have a wonderful 
competition going. Just don't let the government come in there 
where they can print money. Can you imagine coming and running 
around with $100 billion and your stock down to 40, giving $55 
billion? No one has ever given per subscriber, in all of these 
mergers, over $12,000 per subscribers, now they come with 
$22,000; $55 billion. Necessarily my distinguished friend here, 
the Congresswoman, she necessarily is for that. I guess if I 
was VoiceStream, whoopee, let's give me the money. I would get 
out of the Congress. That's the way it goes.
    I thank the committee and would be glad to answer any 
questions.
    [The prepared statement of Hon. Ernest F. Hollings 
follows:]
Prepared Statement of Hon. Ernest F. Hollings, a U.S. Senator from the 
                        State of South Carolina
    In June of this year, I, along with a number of my colleagues, 
introduced legislation to clarify the rules governing the takeover of 
U.S. telecommunications providers by state-owned foreign companies. The 
legislation has been favorably received and now has 17 co-sponsors, 
including the majority and minority leaders, the chairman and ranking 
member of the Senate Appropriations Committee, the chairman of the 
Foreign Relations Committee, the chairman of the Intelligence 
Committee, and a majority of the members of the Senate Commerce 
Committee.
    A companion piece of legislation has been introduced by the ranking 
members of the House Commerce Committee and its Subcommittee on 
Telecommunications. I want to thank Chairman Bliley for asking me to 
testify at this hearing and I commend Ranking Members Dingell and 
Markey for their work on this important issue.
    It is important to emphasize at the onset that this legislation is 
narrowly targeted to prohibit substantial foreign government ownership 
of U.S. telecommunications companies. In fact, I am quite proud of the 
fact that hundreds of private foreign companies have invested in my 
State of South Carolina. For example, from Germany alone, there are 
over 100 companies with a presence in South Carolina.
    On a national level, I must also point out that no objection was 
raised when Vodaphone (a foreign private company) purchased Airtouch, 
Cellular Properties located in Silicon Valley. Nor was there any outcry 
when France Telecom and Deutsche Telekom (DT) sought to acquire a 
minority 10% stake in Sprint.
    Rather, we are troubled by substantial foreign government-ownership 
of U.S. telecommunications properties that allows foreign governments 
to hold and operate U.S. telecommunications licenses. Ours is an effort 
aimed squarely at privatization.
    This legislation is necessary for two reasons. First, it is needed 
to rectify the FCC's misinterpretation of existing law that clearly 
prohibits foreign government ownership of U.S. telecom firms. Second, 
this legislation is justified by compelling public policy rationale 
that argues against allowing state ownership of U.S. telecom assets.
    First the law. I believe that any acquisition of a U.S. telecom 
company by a foreign government owned provider violates Section 310 (a) 
of the Communications Act. That section plainly prohibits foreign 
governments or their representatives from purchasing U.S. 
telecommunications entities. Deutsche Telekom, France Telecom, or NTT 
clearly fall within the prohibitions contained in Section 310(a).
    In 1995, the Chief of the FCC's International Bureau, Scott Blake 
Harris, testified before the Senate Commerce Committee in favor of 
maintaining ``the general ban, now in Section 310(a), on foreign 
governments or their representatives owning radio licenses.''
    Subsequent to the enactment of the 1996 Telecommunications Act, he 
wrote in the National Law Journal in October 1996--``Section 310(a) 
flatly prohibits a foreign government or its representative from 
holding any wireless license, directly or indirectly. This limitation 
is not subject to being waived by the FCC.'' In that article, he 
specifically mentioned Deutsche Telekom and France Telecom relative to 
that ban.
    That brings me to Deutsche Telekom's takeover of VoiceStream. 
Deutsche Telekom is a formerly wholly state-owned company that has been 
partially privatized, but remains majority owned by the German 
government. Under the plain language of Section 310(a), this 
transaction appears to be prohibited.
    This conclusion is not without significant justification in fact, 
for starters, DT, FT, NTT, and several other international telecom 
giants are significantly owned by the governments that regulate them. 
Using Deutsche Telekom as an example, we know that the German 
government owns 58% of DT. In addition, a recent SEC filing states that 
41.3 percent of Deutsche Telekom's employees are statutory civil 
servants who cannot be terminated except in extraordinary statutorily 
defined circumstances.
    The VoiceStream-Deutsche Telekom merger agreement reveals that 
Deutsche Telekom waived its foreign sovereign immunity for service of 
process in its merger documents. Why do they have this to waive? Only 
governments have sovereign immunity. Clearly, VoiceStream's lawyers 
were worried that Deutsche Telekom could assert that Deutsche Telekom 
is the government.
    So, if DT is not the government or its representative as 
contemplated by Section 310(a), I don't know who is. Unfortunately, the 
FCC has read Section 310(a) completely out of the law. They possess no 
such authority.
    Nonetheless, some argue that these transactions come under Section 
310(b) of the Communications Act. As a bit of background, in 1995, U.S. 
Trade Representative Mickey Kantor wrote Senator Robert Byrd that 
Section 310(b) is regarded by foreign companies as a barrier to market 
access in America's telecommunications marketplace. He went on to 
indicate that legislative authority was needed before administration 
officials could ``remove this restraint through international 
negotiations.''
    As most of you remember, after extensive debate and 'consideration 
of this issue in both the House and Senate, the 1996 Telecommunications 
Act reaffirmed Sections 310 (a) and (b) providing no authority to our 
trade negotiators. In spite of this, the U.S. negotiators in the 1997 
WTO telecom negotiations reached an executive agreement that violates 
Section 310.
    The FCC, then implemented rules to presume entry into our market, 
so long as the acquiring company originates from a WTO member country, 
without regard to whether that company is government owned.
    The EU itself appears to acknowledge that the FCC order is 
inconsistent with U.S. law, stating in a 1999 trade barriers report 
that Section 310 retains force and effect notwithstanding the 1997 WTO 
telecom agreement. specifically, the EU report states: ``Section 310 of 
the Communications Act of 1934 remains basically unchanged following 
the adoption of the new Communications Act of 1996 . . . this situation 
has not changed through the basic telecom agreement.''
    As the EU correctly recognizes, an executive agreement cannot 
repeal U.S. statutory law--a principle that brings to mind George 
Washington's farewell address, in which he stated: ``If the 
distribution or modification of the powers under the Constitution be in 
any particular wrong, let it be changed in the way the Constitution 
designates, for while the usurpation in the one instance may be the 
instrument of good, it is the customary weapon by which free 
governments are destroyed.''
    Having touched upon the law, I will now turn to the policy that 
justifies prohibiting state ownership of U.S. telecom companies. State 
ownership is troubling because it is fundamentally inconsistent with 
America's domestic telecommunications and competition policy.
    Beginning with the breakup of AT&T, and culminating in the 
Telecommunications Act of 1996, the United States has consistently 
encouraged a free enterprise system in which competition prevails. 
Businesses are free to succeed, but they are also subject to the very 
real threat of failure.
    In this ``survival of the fittest'' system, entrepreneurs and 
businesses ``build a better mousetrap'' and are rewarded in the 
marketplace. Others who don't quite cut it are left behind.
    This is the level playing field of the competitive marketplace. 
Unfortunately, if we permit foreign state-owned companies into the U.S. 
market we will be facilitating the entry of new players who don't 
participate on a level playing field. Companies that are substantially 
owned by their governments are not subject to the rigors of either the 
competitive marketplace or the financial markets to the same degree as 
their private sector counterparts.
    Government shareholders have different goals from private 
shareholders.
    As a result, it is simply unfair to allow these state-owned 
companies to compete against other private companies, both U.S. and 
private foreign based. I find it constructive to compare two 
companies--one government owned, and/or one private--to illustrate this 
point. Deutsche Telekom (DT), which is 58% owned by the German 
government, recently completed an unprecedented bond offering where 
they raised nearly $15 billion dollars in a single offering--which was 
larger than any single offering by a ``private'' company in history. DT 
has also reportedly maintained a store of 100 billion euros, prompting 
their CEO to boast that no U.S. telecom company is ``out of reach.'' 
These foreign government owned companies operate under a different set 
of rules--written and unwritten--that allow them to obtain favorable 
financial terms in a manner unavailable to their private sector 
counterparts.
    In the private sector, we know that the financial markets would 
never permit companies to hold onto that much capital for an extended 
period of time. Rather, they would be required to return it to their 
shareholders in one form or another or be subject to a takeover.
    Recently, AT&T's stock has significantly under performed the 
overall stock market. As a result AT&T's executives, have been meeting 
with investment bankers in an effort to raise its share price by 
discussing various corporate strategies. In fact, if press reports are 
to be believed, they too are considering a high profile merger, perhaps 
as the target company.
    Contrast that with Deutsche Telekom, which has seen a similar 
plunge in its share price in the past three months. Yet, the only 
reason DT's executives are meeting with investment bankers is to decide 
which company they will purchase next. No matter how low DT's share 
price goes, they are unlikely to be a takeover target. Why?--the 
government could veto the acquisition. Thus, unlike AT&T, DT can hang 
onto its 100 billion euros and take its time seeking telecom targets 
without having to answer to shareholder criticism or demonstrate 
progress in their next financial report.
    As the August 28th Barrons recently stated,
        ``Often management is removed at a company the size of DT after 
        such a debacle in the stock price. Will the knives come out 
        here? DT is still controlled by the German Government, so 
        [their CEO] Sommer's position is safe.''
    Mr. Sommer is doing exactly what his majority shareholder, the 
German Government, wants, by increasing global presence and increasing 
market share with less of a focus on profits.
    As a practical matter, there are only a few remaining government 
owned telecom companies that this legislation would impact. In many 
ways, those companies represent the last vestiges of a collectivist 
past when governments, and not markets, dictated industrial policy.
    This legislation establishes all of the correct incentives by 
narrowly prohibiting foreign government investment. We encourage these 
vestiges of the past to privatize by offering entry into the lucrative 
U.S. market, provided their government stake in the acquired entity is 
lower than 25 percent.
    In fact, this approach already has a proven track record. Spain 
recently rejected Dutch government-owned KPN's attempt to purchase 
Telefonica, a privatized telecom company in Spain. In response, the 
Dutch government has reportedly decided to reduce its 43% stake in KPN 
to approximately 20%. Moreover, the Finnish government has also 
publicly signaled its intention to lower its stake in its government-
owned provider Sonepa. Just this week, Israel made a similar 
announcement.
    Such government divestment follows closely on actions by other 
governments to prevent similar takeovers by state-owned 
telecommunications providers. To be precise, three WTO member 
countries--Spain, Italy and Hong Kong--have formally and informally 
rebuffed efforts by state-owned providers to acquire domestic 
telecommunication providers. Moreover, at the urging of Spain, this 
month the EU will begin a review of the market distorting effects that 
are occasioned by the purchase of a privatized telecom company by a 
state owned entity.
    It is important that these state-owned entities divest for another 
reason. There is a clear conflict of interest in the EU's current 
merger review process, particularly when that process examines mergers 
involving American companies. Many of the member states that make up 
the EU in fact own the very companies that compete with their American 
counterparts seeking EU approval to merge.
    So, while Worldcom and Sprint barely met the commission's threshold 
for reviewing mergers in the first place, the EU recently rejected that 
merger. And, while AOL is not the dominant ISP in Europe, and Time 
Warner has only incidental holdings in Europe, the EU recently filed 
several objections to that transaction. Who is the number one ISP in 
Europe? Deutsche Telekom's T-Online. This conflict of interest is 
undeniable. If these state-owned companies privatize, however, the 
appearance of this conflict should disappear.
    I would be remiss if I did not also mention the significant 
national security and privacy implications of foreign state ownership 
of American telecommunications facilities. The technology exists today 
to surreptitiously monitor virtually every telecommunications medium. 
In the wireless industry, for example, this monitoring can include the 
substance of our conversations and the locations of our calls. We 
already are too aware of the threat to individuals' privacy on the 
Internet. And in the wireline telephone industry, current U.S. law 
mandates that companies equip their networks to permit surveillance. Do 
we want a foreign government in charge of such surveillance? The answer 
most certainly is no.
    Finally, I would like to make a point about the Telecommunications 
Act. In 1996, I worked with many of you to deregulate our 
telecommunications market. It was an extraordinary effort, and we are 
slowly beginning to see progress. Our efforts to foster competitors 
have begun to benefit consumers. These efforts, however, have also 
depressed the earnings and stock prices of many U.S. domestic 
providers. Under normal circumstances, that would be of no interest to 
us, but in ``promoting competition'' here at home we may be 
facilitating the ease by which foreign government-owned providers may 
emerge with key assets.
    Opponents of our legislation argue that our concerns are misguided 
because DT is making progress in divesting its government stake and 
that the German market is more open today than it was years ago. 
Deutsche Telekom was 74% owned by the German government in 1996 and is 
now 58% government owned. I suppose that represents some progress.
    But we did not tell our U.S. companies--``go ahead, make progress, 
and then we'll let you compete by leveraging your market dominance 
against your competitors.'' We did not tell Verizon and SBC--who are to 
be commended for opening their markets in New York and Texas--``go 
ahead, meet 10 of the 14 checklist points and then you can enter the 
long distance marketplace.''
    The market opening requirements that we have imposed on U.S. 
providers represent the appropriate incentives which have begun to 
break open the local telephone market. We should impose no less of a 
standard on foreign entrants that are government owned. Progress is not 
good enough. Only divestiture and the consequent competition that will 
result should suffice.
    Contrast that approach with DT's recent statement in a SEC document 
from April that ``DT does not yet face significant competition in the 
market for local calls for which an area code is required.'' DT 
concedes in the same document that it ``has not lost significant market 
share in the market for local calls.'' In fact, the German monopoly 
commission has concluded ``that effective competition in the 
telecommunications sector does not yet exist.''
    To permit state-owned monopolies to enter the U.S. market flies in 
the face of the Telecommunications Act of 1996. We didn't deregulate 
telecommunications from under U.S. government control to put it under 
German government control.
    In conclusion, I would like to read you one final passage from DT's 
April filing before the SEC.
        ``As long as the Federal Republic directly or indirectly 
        controls the majority of Deutsche Telekom's share it will, like 
        any majority shareholder in a German stock corporation, have 
        the power to control most decisions taken at shareholders' 
        meetings, including the appointment of all of the members of 
        the supervisory board elected by the shareholders and the 
        approval of proposed divided payments.''
    While DT argues that corporate acquisitions will reduce the German 
government's stake via dilution, does anyone believe that a 40% or 35% 
government shareholder does not exercise significant control?
    The issue of foreign government ownership of private U.S. telecom 
firms is essentially one of privatization. For fifty years, the U.S. 
government has encouraged privatization around the globe because we 
recognize that government shareholders are different from private 
investors and that markets operate more efficiently than governments. 
Our legislation does not bar entry into the U.S. market.
    It implicitly welcomes foreign private investment in the U.S. and 
establishes the appropriate incentives for these remaining vestiges of 
antiquated industrial policies to privatize sooner rather than later. 
Privatization should in turn lead to more open markets abroad, and a 
fuller and freer flow of trade throughout the globe. Its the American 
way--and we should demand no less.

    Mr. Tauzin. Senator, would you like another 20 minutes or 
so?
    Senator Hollings.  No. Thank you a lot.
    Mr. Tauzin. If you don't mind, Jennifer, Senator, I have 
heard this wonderful story about you and Petsy during the 
campaign for President that you just reminded me of. I don't 
know if it is true. Maybe you can verify it for me.
    Senator Hollings. Unfortunately, it's true.
    Mr. Tauzin. Dead tired on the campaign trail one night in 
one of these awful little motels you find yourself in as your 
tromping around New Hampshire during the early primaries and a 
reporter bothered you in the middle of night and Petsy answered 
the phone, like 2 o'clock in the morning.
    Senator Hollings.  No, it was early in the morning, Mr. 
Chairman.
    Mr. Tauzin. Tell us what happened.
    Senator Hollings. What happened was I was to come on at 7 
o'clock. We didn't get in there until 1 o'clock or 2 o'clock in 
the morning, out there at Carmel, California. And so calling us 
at 6 o'clock to make sure I would make that 7 o'clock meeting, 
Petsy answered the phone and then in a loud voice she turned to 
me and said, Honey, is your name Hollings?
    Boy, I ran around explaining that to that crowd all the 
rest of the meeting.
    Mr. Tauzin. That's a great story. That is a great story, 
Senator, thank you.
    We will now hear from the gentlelady.
    Ms. Dunn. I will yield you my 5 minutes.
    Mr. Tauzin. Jennifer, I wonder if Senator Hollings showed 
up at that fiasco in Seattle to announce that he invent 
globalization.
    Ms. Dunn. It might have worked. It might have been a lot 
calmer.
    Mr. Tauzin. Jennifer Dunn.

 STATEMENT OF HON. JENNIFER DUNN, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WASHINGTON

    Ms. Dunn. Thank you very much, Mr. Chairman. You did not 
need to warn us that the mikes are open. I am sure that Senator 
Hollings and I would have had only very pleasant things to say 
about you.
    Mr. Chairman, we still appreciate, though, having the 
chance to give testimony on an issue that I think is vitally 
important. It is a pleasure to be here and to preview in a way 
a great citizen of Washington State, whom you will hear from in 
one of your later panels, John Stanton, who is the CEO of 
VoiceStream Wireless. As you will discover today, John has been 
a visionary in cellular technology for many years. In fact, in 
the early days, he aligned with another Washington State 
resident, Craig McCaw. John and Craig really led the growth of 
this industry, not just in the Pacific Northwest, but 
nationally and internationally as well, and I think you will 
enjoy hearing from him soon.
    Today, VoiceStream, a company that is based in my district, 
now employs 8,000 people and it has 2.3 million wireless 
customers around this country. VoiceStream embodies the 
technological innovation, the quality jobs, and the 
international leadership that we have come to believe 
characterizes the new economy here in the United States and 
gives strength to us as we continue in our leadership.
    As other high-tech companies in the new economy are 
discovering, however, their desire to innovate and expand their 
businesses often faces opposition from within their own 
government. Today, VoiceStream is poised to expand their 
business to other parts of the United States and to bring 
increased competition and innovations to customers all over our 
country. Unfortunately, actions being considered by Congress 
would arbitrarily negate these plans, and I believe would send 
a chill through the new economy and the high-tech industry, 
which heavily relies on outside investment to innovate and to 
bring new products to market.
    The purpose of your hearing today is to examine the current 
procedures for the acquisition of a United States company 
holding FCC licenses by a foreign company. Under the 
Communications Act, as has been mentioned already in your 
hearing today, if indirect foreign ownership of a United States 
telecom company would exceed 25 percent, the FCC must rule that 
the purchase is in the public interest and that there is no 
national defense concern before the acquisition may be 
approved. And along that line, Mr. Chairman, I would like to 
offer for inclusion in the record the testimony of my colleague 
from Washington State, the Honorable Norm Dicks, who has been a 
member of the Intelligence Committee and speaks to the security 
issues that are related to this merger.
    Mr. Tauzin. Without objection, that's so ordered.
    [The prepared statement of Hon. Norman D. Dicks follows:]
    Prepared Statement of Hon. Norman D. Dicks, a Representative in 
                 Congress from the State of Washington
    Thank you Chairman Tauzin and Ranking Member Markey for holding 
this important hearing on the subject of foreign government ownership 
of American telecommunications companies. As technological innovations 
continue to make the world smaller, a discussion about foreign 
ownership of American companies is very timely. We must take care that 
any action we in Congress take regarding this most vibrant industry 
help, not harm American consumers and workers, and that any action we 
take can have unwanted and unforeseen negative repercussions. We would 
do well to study this issue carefully and proceed cautiously, making 
sure first of all that we understand the consequences of our decisions. 
This hearing is a first step toward making an informed decision, and 
so, again, thank you.
    Today, I want to briefly address the merger between VoiceStream and 
Deutsche Telekom and explain how it will both serve American consumers 
and workers and further our national security interest.
    First, the VoiceStream-Deutsche Telekom merger will benefit 
consumers and workers. It will do so by enhancing consumer choice, 
accelerating the pace of technological innovation, providing more 
competition, and encouraging lower costs. VoiceStream, which is now the 
fastest growing, but still smallest nationwide wireless company, will 
be able to expand its networks and service areas throughout the United 
States and thereby better compete with other much larger wireless 
telephone companies. This competition will provide consumers with more 
options and force all companies to increase efficiency, improve 
service, and lower prices. In addition, the increased competition will 
accelerate innovation and will soon enable more Americans to have one 
phone, with one number, that they can use almost anywhere in the world. 
The merger also promises to create thousands of good new jobs for 
Americans.
    The suggestion has been made that, despite these benefits to 
American consumers and workers, the VoiceStream-Deutsche Telekom merger 
somehow poses a threat to our national security. Mr. Chairman, we do 
not need to enact this legislation to protect our national security. 
Mergers such as the VoiceStream-Deutsche Telekom merger will be subject 
to a full review by our national security agencies, through the 
Committee on Foreign Investment in the United States (``CFIUS'').
    VoiceStream already has a security agreement with the national 
security agencies that it agreed to as part of the approval of a 
previous merger. The national security issues have been worked out 
satisfactorily in the past, and there is no indication that they cannot 
be fully and adequately addressed here--without sacrificing the 
consumer benefits and new American jobs that this merger will bring.
    Second, this merger will promote competition. No U.S. wireless 
consumer will lose a marketplace choice for wireless service as a 
result of this merger. In fact, marketplace choices for U.S. wireless 
consumers will increase as VoiceStream is able to continue to build out 
its existing licenses and to fill in the gaps in its nationwide 
coverage. In any event, the merger will be subject to tough scrutiny to 
ensure that it does not diminish competition. Competition. 
Specifically, the FCC already has authority to determine whether the 
public interest would be served by allowing any foreign corporation--
including one with foreign-government ownership--to receive a common 
carrier wireless license. This review takes into account factors, such 
as competition, consumer welfare, and, in consultation with the 
Executive Branch, national security, law enforcement, foreign policy, 
and trade.
    The Department of Justice also has the authority to review this 
merger. If it finds that a merger involving a foreign corporation 
threatens consumers or competition, the Justice Department has full 
authority to block it. In fact, it is worth noting that the WorldCom-
Sprint merger began to unravel after the Justice Department (not the 
European Commission) filed suit to block the transaction.
    In addition, the Exon-Florio Amendment provides a mechanism for 
blocking an international merger or requiring appropriate restrictions 
in order to protect national security and law enforcement interests. 
The Committee on Foreign Investment in the United States (CFIUS), the 
interagency committee created under Exon-Florio to review U.S. 
acquisitions by foreign companies that could threaten U.S. national 
security, includes the Departments of Commerce, Defense, Justice 
(including the FBI), State, Treasury, and the National Security 
Council. In previous telecommunications acquisitions by foreign 
companies, CFIUS has required limitations on a foreign parent's access 
to sensitive information and authority over sensitive facilities, 
including imposing requirements that facilities used to manage U.S. 
domestic telecommunications infrastructure remain in the United States. 
The CFIUS review--along with the FCC and DOJ reviews--are more than 
adequate to address the effects of any international merger on 
telecommunications competition and to require the continued maintenance 
of a secure communications system that meets national security and law 
enforcement needs.
    Finally, concerns have been raised about the potential for the 
newly-formed company to be controlled by the German government. I 
believe this fear is misguided. Deutsche Telekom, which formerly was 
wholly owned by the German government, is now an independent, publicly 
traded company. While the German government still holds directly or 
indirectly some 58 percent of Deutsche Telekom shares, it is reducing 
its stake as market conditions permit. The proposed merger with 
VoiceStream would actually dilute the German government's ownership 
below 50 percent to about 44 percent.
    Moreover, the German government, even with its current ownership 
stake, does not control Deutsche Telekom. The German government holds 
only one of the twenty seats on Deutsche Telekom's board of directors, 
consistently votes with the company's management and other board 
members, and has no special veto rights. In addition, it provides no 
subsidies or other special preferences to the company.
    The VoiceStream-Deutsche Telekom merger clearly furthers our 
national security interests for national economic security reasons. The 
United States has been the leader in encouraging other countries to 
open up their markets--in telecommunications and in other areas--to 
foreign competition. We have pressed foreign governments to 
decentralize control of former and current state-run industries. We 
have done so because we believe in the benefits open markets create and 
because we have confidence that American companies can excel in any 
market where the rules permit open, fair competition. If we were to 
close our doors and restrict access to our market in this case, we 
would undermine every argument for liberalized trade and free markets 
that we have made in recent years. Worse yet, we would shut off 
important American companies from important sources of capital that 
they need to create American jobs and create new, innovative services 
at better prices for American consumers.
    Let us make no mistake about it. Turning our back on this merger 
will not only undermine our credibility and ideals; it likely will have 
real, tangible consequences for workers and consumers, some of whom 
have no direct stake in the merger. I am referring to the potential for 
a trade war. Indeed, ``potential'' might be an understatement. European 
Union officials already have informed the United States that they will 
face strong pressure to retaliate to any measure, such as the Hollings 
bill or Dingell-Markey legislation, that would strictly limit foreign 
ownership. Whether they lash back in agriculture, intellectual 
property, or electronics, the only clear victims will be American 
consumers, workers, and businesses for whom unfettered trade has 
delivered the best available goods at the lowest prices, created 
millions of jobs, and opened new markets for business.
    Mr. Chairman, this merger is in our national interest. Enacting 
protectionist legislation and thereby inviting European retaliation is 
not. I urge the Subcommittee to reject the Hollings bill, the Dingell-
Markey bill, and any other similar attempt to impose arbitrary limits 
on foreign competition. They will only result in less robust and less 
open markets here and abroad.

    Ms. Dunn. Some in Congress are seeking to ensure that no 
acquisition that would result in indirect foreign government 
ownership of more than 25 percent should be approved. So the 
debate comes down to a very familiar topic: Do we grant the 
executive branch discretion to oversee international trade or 
do we micromanage it here on Capitol Hill?
    As a member of the Ways and Means Subcommittee on Trade, I 
have always supported granting authority to the executive 
branch to negotiate and, after the approval by Congress, to 
implement trade agreements on our behalf. I believe this 
represents the best opportunity to open markets abroad for 
United States products. This is especially true of the Basic 
Telecom Agreement which was finalized in February 1997, as an 
add-on to the Uruguay Round of the WTO.
    This historic agreement is helping United States 
telecommunications companies to gain a foothold in developed 
and developing countries around the world, and it provides us 
with an enforcement mechanism through the WTO to ensure 
compliance.
    Make no mistake, however--and I would agree with others who 
have spoken today at this hearing on the subcommittee--much 
more can be done along this line. The pace of 
telecommunications privatization in other countries has been 
very slow. From Mexico to Japan to many European nations, our 
trading partners continue to have major ownership over their 
telecommunications infrastructure. Such ownership has proven to 
be extremely problematic for United States companies seeking 
access to markets abroad.
    At the same time, we have processes in place through the 
FCC and the USTR to force greater concessions on market access. 
As part of the Uruguay Round Agreement, which Congress affirmed 
in 1994, our trading partners approved the FCC procedure for 
determining public interest and national security in cases of 
indirect foreign ownership of licenses.
    If we were to arbitrarily change criteria for foreign 
investment in the United States market, that would be raising 
serious questions about WTO compatibility, something you need 
to take a very close look at.
    Most importantly, however, is the fact that the FCC 
approval process allows the United States to condition these 
types of acquisitions on further privatization efforts 
overseas. Changing the law would have the ironic effect of 
reducing our ability to further privatize foreign 
telecommunications companies.
    Arguments about WTO compatibility and market access, 
although important, are secondary to the true objective of the 
market, and that is innovation and competition. In order for 
United States consumers to fully benefit from innovative 
technologies and increased competition, companies must be 
allowed to seek investment from around the world.
    The current FCC process provides more than adequate 
protection against actions that would harm United States 
businesses and consumers. And let me repeat that, Mr. Chairman, 
because it is really the crux of what I believe. The current 
FCC process does provide more than adequate protection against 
actions that would harm United States businesses and consumers.
    As many of you know, I represent an area east of Seattle, 
Washington, that has benefited greatly from the new economy. It 
is my sincere desire that every part of this country is some 
day touched by the technological revolution that is taking 
place in my part of the country. That will only happen, 
however, if innovators are allowed to create, if businessmen 
and women are allowed to market, and if investors are allowed 
to seed tomorrow's technology.
    Thank you again for your willingness to let me speak to you 
today, and I would be happy to respond to any questions you 
might have.
    Mr. Tauzin. Thank you very much, Jennifer. Jennifer, I had 
a message you had to leave. Any time you need to depart, you 
are certainly welcome, and Senator Hollings the same. Would you 
like to take a few questions, sir?
    Senator Hollings. I would be glad to try to answer your 
questions.
    Mr. Tauzin. I think in fairness to the guy who has drawn 
all those nasty pictures for you, I think I ought to recognize 
Mr. Oxley first. Mr. Oxley.
    Mr. Oxley. Thank you. Welcome, Senator Hollings. Let me 
take you back to 1996 and the conference on the Telecom Act.
    Senator Hollings.  Right.
    Mr. Oxley. If you will recall the Oxley amendment that 
passed the House dealt with 310(b) and a modified 310(b) to the 
extent that it provided for reciprocity in the process; that 
is, if we were dealing with a country that was open and allowed 
American investment, that indeed we would recognize that 
reciprocally. And unfortunately, because of your efforts, that 
language was taken out.
    I am not sure whether you have second thoughts about that 
decision, because basically what has happened is that since 
that time the FCC and USTR have taken a very good, in my 
estimation, a good approach in dealing with 310(b). They don't 
even have to consider reciprocity. I am just wondering if you 
perhaps had another shot at that amendment whether it might 
have been a good idea to put into the bill at that time?
    Senator Hollings.  No, Mr. Chairman, I definitely would--
want that out. I didn't have my way. What happened was we had 
put in S. 1822, had it all ready, and a filibuster prevented 
its being taken up. At that time, I was chairman of the 
committee. In 1994, of course, the Republicans took over the 
U.S. Senate and Chairman Pressler put in the bill, and we had 
also that same kind of provision in the Senate bill.
    We had a hard time getting that out, and the only reason I 
think we got it out, you and I agreed on the ``snap-back.'' 
Don't you remember, we said, Wait a minute, if someone had been 
allowed in the country, this foreign country and then under new 
leadership they all of a sudden unlicensed the American 
company, then we would unlicense their particular things, and 
we argued back and forth the snap-back.
    But, no, I think the law is sound. The market is dynamic. 
There is all kinds of money, and you and I have caused not only 
competition but companies to be pretty well bloodied and 
downgraded. AT&T is trying to compete. We have yet to get the 
Bell companies to comply with that 14 points. Thank heavens for 
SBC down in Texas and, of course, Verizon up in New York. But 
the others haven't just come around to complying, and that 
particular monopolistic conduct has failed to really carry 
through completely. But while we are trying to get that done 
and showing how it can be done, they tried to question the 
constitutionality, and they took it to the Supreme Court and 
everything else of that kind.
    They wrote it--the Washington lawyers wrote those 14 
points, not me, because it is all sophisticated communications 
law, and they knew about it. But now to come in and get the 
U.S. Government, in an open market here, and all of a sudden 
superimpose a country that can print dollars that is totally 
inappropriate.
    No, I wouldn't change it, I would say.
    Mr. Oxley. You wouldn't even take stake the snap-back ? You 
wouldn't go back to the snap-back provision?
    Senator Hollings.  I would consider snap-back but not 
governments. Yes, I would do it with respect to private 
companies.
    Mr. Oxley. Let me ask you----
    Senator Hollings. Yes, I like that reciprocity with respect 
to private companies.
    Mr. Oxley. Do you think the proposed merger with Deutsche 
Telekom and VoiceStream will provide more competition in the 
telecommunications industry?
    Senator Hollings.  No, it will stifle competition. Wait a 
minute, here comes--they will all of a sudden raise the ante. 
Everybody is looking around how much is it really worth? They 
don't know. They are trying to get market share and in comes a 
foreign government and jumps it all up to $21,000, $22,000 a 
subscriber. We can't--AT&T can't print money. In fact, they 
have lost a good bit of their ability to finance.
    Mr. Oxley. So you wouldn't----
    Senator Hollings.  No. The private market--they all are 
staying quiet. They favor what I have done, to a T. In fact, 
the European Union--one of you commented that the European 
Union was again--no, we have members from the European Union 
that oppose this.
    You don't want the government into this open market. I 
don't want the government. Not the U.S. Government and not the 
German Government or any other government.
    Mr. Oxley. Will the effect of Deutsche Telekom merging 
dilute the percentage of government ownership in Deutsche 
Telekom?
    Senator Hollings.  That's Washington lawyer talk, 310(a) 
still applies; none of this dilution by 10 percent, 10 percent, 
10 percent. Well, look at it. Wait a minute, all of these other 
countries have all of these 10 percents and everything; my 
interest in ownership has been diluted. Not so at all. In the 
SEC papers they said that they would waive sovereign immunity. 
As John Mitchell, the famous Attorney General said, Watch what 
we do, not what we say. Let them get rid of that 58 percent 
ownership. Get it down to 25 percent or less.
    Mr. Oxley. So in your estimation, this merger will not 
provide more competition.
    Senator Hollings.  Absolutely not. It will start stifling 
competition, hurt everybody else in the free market here in 
America.
    Mr. Oxley. Will it provide working capital for VoiceStream?
    Senator Hollings.  We don't have any shortage of working 
capital. This crowd behind me has got it. They have it coming 
and going. You and I can't catch up with it.
    Mr. Oxley. That decision has to be made in the marketplace, 
does it not?
    Senator Hollings. Sir?
    Mr. Oxley. That decision has to be made in the marketplace 
as to whether--VoiceStream obviously thought this was a good 
opportunity to get capital to be able to build a company.
    Senator Hollings.  That made in the marketplace in 
accordance about the law, but the law categorically, and like 
Scott Harris said, it cannot be waived.
    Mr. Oxley. So you don't think this will benefit consumers 
in any way?
    Senator Hollings.  No, it is not going to benefit 
consumers. It will hurt the consumers. It will benefit these 
individuals. Once they get their foot in the door in 
VoiceStream, they will come back and get--now they are looking 
at a part of the wireless over in Georgia that my Bell South 
has got part of that, and I have been sort of indirectly told 
that, wait a minute, if you quiet down, it means about $400 
million more to Bell South so don't get so wrought up and that 
kind of thing. But once they get those two, then they will come 
back and get Sprint.
    Come on. This is a foot in the door against the categorical 
prohibition against foreign governments being licensed. That's 
310(a). That has not been changed. Barshefsky can't change it, 
nor can Chairman Kennard change it. Tell them to read it.
    The question before them is not whether it is good or bad. 
It is there. And we think it is--I don't believe you could get 
a majority vote in either House right now to all of a sudden 
start putting governments in it.
    Mr. Tauzin. The gentleman's time has expired.
    Mr. Oxley. Let me just ask one more question.
    Mr. Tauzin. One more.
    Mr. Oxley. If that is the case then, we don't need your 
bill.
    Senator Hollings.  No, we don't need the bill. I think 
310(a) applies, and I want to say that loud and clear.
    Mr. Oxley. I yield back.
    Senator Hollings.  I am just making this for the record 
when it goes up on appeal.
    Mr. Tauzin. The gentleman's time has expired.
    The gentleman from Massachusetts.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Can we turn a little bit to USTR? Maybe you could give us 
your perspective of how they view these issues. They seem to 
have a fairly long-term, fairly lenient view of the question of 
how much a foreign government has to divest its ownership, and 
it keeps--it kind of has a manana mindset. Maybe they haven't 
done it yet, but there is a process; there are discussions that 
are ongoing that will lead to the full opening of it. And what 
keeps coming to my mind is, what if they were in charge of the 
domestic American marketplace? Maybe their policy would have 
been, Well, there are 14 checkpoints and SBC has fulfilled 9, 
and they seem to be sincere about doing the other 5 and so we 
will continue our discussions with them; but for competition 
purposes, we will allow them into long distance right now, even 
though they haven't opened up their own marketplace.
    Senator Hollings.  That's right.
    Well, your question includes the answer. It is an excellent 
observation, Mr. Congressman. Actually, what is wrong here is 
Ambassador Barshefsky is like that famous rooster that crowed 
in the morning and thinks it started the sun to rise. I mean, 
just because she says now she is for competition--and we all 
have been getting on her to privatize--Chairman Tauzin, I have 
it right here, and that was the best thing, I didn't need any 
testimony, pushed her to privatize. That's what the chairman 
did.
    That's all we are talking about here at this hearing, 
privatize foreign business. Come on in, but don't bring your 
government in and take control where you can print money.
    Mr. Markey. What do you think would happen if we allowed 
Secretary Glickman, for example, to set up his own agricultural 
company here and then to move to France to begin to buy up all 
the farms in France so that we could have a big company to 
compete against all the small farms in France? Do you think the 
French would welcome that as a WTO?
    Senator Hollings.  Like Napoleon, he would be banished to 
Elba, I can tell you that right now. Couldn't do it.
    We all understand that we have done a real good thing. It 
has been hard going and the FCC has been generally very, very 
good, but they think--they are getting restless and they think 
they are starting the competition, and it is very, very dynamic 
out there, all of these mergers and everything, private 
entities but not the government. Don't let the government come 
in that can print money, as they obviously have done for 
Deutsche Telekom. I mean, you can't get in the Deutsche Telekom 
market. Look at their SEC filing and you will see they say we 
have got a monopoly and we have got control. Of course, they 
put down that little paragraph we want to waive sovereign 
immunity. I am not talking about legal service. I am talking 
about money and control of the market and competition, not 
sovereignty.
    Mr. Markey. What does USTR say to you when you point out 
the Italian example and the other examples when they reject it?
    Senator Hollings.  When I pointed this out to Ambassador 
Barshefsky, Chairman Reid Hunt at that particular time just 
threw up his hands and said the FCC has no idea of licensing a 
foreign government. That's what Reid Hunt said. That's why we 
had--I had a little amendment on her confirmation, and we just 
got a minority vote, that's 15, 17 votes on it, but everybody 
says there is no use to cause any further trouble. The Chairman 
said he is not going to license any foreign government.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentleman. The gentleman from 
Florida, Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman.
    Senator Hollings.  Excuse me, Mr. Chairman. We have a vote 
at 12:20. I have to run. It began at 12:20, so I will be glad 
to answer your question.
    Mr. Stearns. I sort of have a question I think is a 
softball for you, because I have a letter here in which you 
write to Mr. Kennard, the Chairman. You say, A treaty confirmed 
by a two-thirds vote in the Senate amends a law, not an 
agreement, and the Global Telecommunications Agreement was 
never submitted to Congress. I can't emphasize enough that the 
WTO provision isn't absolute, only permissive.
    So I guess the question would be, does the FCC inciting 
public interest have any reason to do so? And I guess what you 
are saying is the bill, the 310(b)4, talks about companies that 
have 25 percent interest, so the law is in place but you feel 
your bill is necessary because of the FCC taking the liberty to 
use public interest as a fulcrum to do something?
    Senator Hollings.  Well, they are disregarding entirely 
310(a), 310(a).
    Mr. Stearns. Okay.
    Senator Hollings. You just cannot license a foreign 
government.
    Mr. Stearns. And the WTO, the people are going to say that 
we have an agreement with the WTO and we can't break that 
agreement. And your answer was, basically, that that was never 
confirmed by the Senate?
    Senator Hollings.  Well, that agreement, if you try to find 
it, it is on a little page; and under the heading Restrictions 
on Indirect Ownership, ``none.'' And with that little nuance, 
they say the law has been changed; and we have said if you are 
a member of WTO, then you automatically have got our public 
interest in mind and we are going to license you.
    Isn't that wonderful? I mean, I wish I could change laws 
like that. I mean, they haven't changed the basic law and they 
don't have the power to do so; neither the Ambassador nor the 
FCC.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Tauzin. Thank you, Mr. Stearns.
    Before you leave, Senator, I want to make sure I heard your 
answer correctly. Did you say that you believe that if a 
company dilutes its government ownership below 25 percent that 
310(a) doesn't apply?
    Senator Hollings.  That's right, because the license 
doesn't go to them. It goes to whoever has the majority 
ownership. For example, they are already into Sprint. They 
have--Deutsche Telekom this minute has got 10 percent of 
Sprint.
    Mr. Tauzin. Okay, Senator. Unless anybody has a quick 
question, I think we will have to excuse him.
    Then, with our thanks.
    Mr. Dingell, did you have any quick question you wanted to 
ask?
    Mr. Dingell. Mr. Chairman, I get the message the Chair is 
sending and I receive it gracefully.
    Mr. Tauzin. Thank you.
    Mr. Dingell. I would like, however, to welcome my old 
friend, the Senator. He is a great leader over in the Senate. 
He is a great friend of mine. He has a distinguished record and 
I am proud to be associated with him.
    Senator Hollings.  You are a great friend of mine. You make 
me feel at home. Thank you very, very much.
    Mr. Tauzin. With that, Senator, thanks for coming. We 
really enjoyed it.
    Senator Hollings. Thank you, sir.
    Mr. Tauzin. The Chair will now welcome the second panel 
which will include--I am sorry. We agreed to go back to opening 
statements. Let me bring the second panel up. You can get 
seated and comfortable. That will include Mr. Kevin DiGregory, 
Deputy Assistant Attorney General of the Criminal Division, 
Department of Justice; Mr. Larry Parkinson, General Counsel of 
the FBI; of course, our old friend, the Honorable Bill E. 
Kennard, Chairman of the Federal Communications Commission. 
Chairman, long time no see. Welcome back. And Ambassador 
Richard Fisher, Assistant United States Trade Representative, 
USTR.
    We will return quickly to any requests for opening 
statements and then take the testimony of our witnesses, 
beginning with Chairman Kennard. Are there any other requests 
for opening statements? The gentleman from Texas, Mr. Green?
    Mr. Green. Thank you, Mr. Chairman. I won't read my total 
statement. I would like to submit it for the record. But, Mr. 
Chairman, because of all the other conflicts that are going on 
today, not only votes but other committee meetings going on, I 
may not be here during the questions; and I would like to make 
a brief statement and ask a question for our Trade Ambassador, 
Mr. Fisher, who I want to welcome today, a good Texan, coming 
here.
    I also welcome on our next panel the Communications Workers 
of America president, Morty Bahr. Morty, welcome to the 
Commerce Committee.
    Mr. Chairman, the concern I think a lot of us have is that 
we don't mind the competition, but we do have some concern on 
this side of the table from government ownership of U.S. 
telecommunications companies, particularly foreign government 
ownership. And so I think Senator Hollings' legislation is well 
thought out and raises a concern we all have.
    My question for Mr. Fisher and maybe all the panelists 
today is that we realize that the intended focus is on foreign 
investment in telecommunication. However, I have a concern 
about how U.S. companies are treated when they invest in 
foreign markets. For instance, if you have seen press accounts 
of the treatment received by the U.S. corporation Southern 
Energy, a constituent of mine trying to do business in Germany. 
SCI is working to obtain a foothold in the German utility 
market and their efforts are being stifled by the actions of 
German utilities to prevent an American company from owning a 
majority stake in a German utility. Of course, we are talking 
about a U.S. company that's privately owned, and yet these 
German companies are violating the contractual rights of SCI.
    You know, it is a two-way street, and this is not even a 
fair two-way street. We are not talking about the U.S. 
Government trying to buy a utility in Germany. We are talking 
about a private company in the United States trying to do what 
the WTO has said we can.
    My concern is, I don't mind Deutsche Telekom coming in; I 
just don't want them to be government controlled and competing 
with our industries. But using the SCI's experience in Germany 
on utility, I would hope that our Trade Representative would 
realize that not only in this issue but also our companies are 
trying to do business with other companies.
    Thank you, Mr. Chairman.
    Mr. Tauzin. I thank the gentleman.
    Further requests for opening statement from any member?
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Thank you Mr. Chairman.
    Let me begin by welcoming our two Congressional colleagues, Senator 
Hollings and Representative Dunn. Welcome to the Commerce Committee.
    This morning, we will address a very important issue: foreign 
government ownership of American telecommunications companies.
    Almost four years ago, the United States and 68 other countries 
committed to opening their telecommunications services markets to 
competition. I supported those commitments then . . . and I continue to 
support them today.
    The Basic Telecom Agreement has proven to be a good deal for the 
American consumer and American labor.
    That should come as no surprise . . . given that the Basic Telecom 
Agreement was modeled on the Telecom Act of 1996. The 1996 Act broke 
down monopoly barriers to entry . . . and replaced it with a pro-
competitive model.
    The results speak for themselves: job creation and capital 
formation in the United States are at all-time highs.
    We exported the 1996 Act model when we signed the WTO Agreement. 
One key aspect of the Agreement was that member countries would 
establish independent and impartial regulators.
    This was a critical piece to the final Agreement . . . because of 
the extent to which most foreign governments literally owned and 
operated their national telecom monopolies.
    That has never been the case here in America. True, we may have 
lingering monopolies at the local level. But at least the American 
government never owned and operated that monopoly.
    Such is not the case with many of our trading partners. So the 
Agreement includes strict requirements that WTO members set up 
independent and impartial regulators. Without regulatory impartiality, 
there can be no free trade in telecom services.
    This, in turn, means that WTO members implicitly committed to 
privatizing their telecom monopolies. After all, how can the government 
be ``Impartial'' if it has a financial interest in the monopoly 
provider?
    We all know it cannot be impartial under such circumstances . . . 
and we should not pretend otherwise.
    As a result, many of us in Congress . . . myself included . . . 
supported the Agreement with the expectation that WTO members would 
quickly and fully privatize their telecom monopolies.
    But we now know that full and complete privatization is slow in 
coming . . . even in countries that have industrialized economies. For 
example:

 the Japanese government still has a 53 percent stake in NTT;
 the German government controls 58 percent of Deutsche Telekom;
 the French government holds 54 percent of the outstanding 
        shares in France Telecom; and
 the Dutch government still controls 43 percent of its national 
        telecom monopoly KPN.
    The process of full privatization is taking far too long . . . and 
the various bills pending in Congress indicate that our patience is 
running out. The time has come for governments to get out of the 
telecom services business.
    Indeed, I would note to the Administration and the FCC that, on 
matters such as this, Congress has demonstrated that it will act if 
necessary.
    For example, Congress recently passed legislation privatizing 
INTELSAT and Inmarsat . . . once it became clear that the regulatory 
process was going nowhere.
    Are we at the same point in the area of global telecom services 
where Congress needs to act? I hope not, but the answer to that 
question depends in large part on what we hear today.
    We need to hear from law enforcement as to whether it feels its 
concerns are being addressed under existing regulatory processes.
    We also need to hear from the FCC. I specifically want to know 
whether the FCC believes it has ample authority to address competitive 
concerns raised by foreign government control . . . notwithstanding the 
presumption for entry by carriers based in countries that are WTO 
members.
    And finally . . . and perhaps most importantly . . . we need to 
know from the Clinton Administration about what it is doing to push for 
full privatization.
    We invited Ambassador Barshefsky to speak to this critical issue . 
. . but unfortunately, she chose not to come. That is unfortunate . . . 
because this is one of the most important matters pending in Congress 
today.
    So we need to hear from USTR about what it is doing today . . . and 
what it will be doing tomorrow . . . to push the issue of full 
privatization.
    This is a critical moment for the Clinton Administration. It often 
points to the BTA as a landmark achievement, and rightly so.
    But now is the time to close the deal. I urge the Administration to 
do so . . . rather than force Congress' hand.
    Thank you, Mr. Chairman, and I yield back the balance of my time.
                                 ______
                                 
  Prepared Statement of Hon. Tom Sawyer, a Representative in Congress 
                         from the State of Ohio
    This hearing presents an opportunity to vet an aspect of the Basic 
Telecom Ageement (BTA) that should have been addressed in 1997. I am 
referring to the lack of incentive for foreign entities to privatize 
under the BTA and because of this, the unfair advantage that a state-
controlled telecommunications entity currently has in competition with 
a U.S. private telecommunications entity.
    To be fair, if the USTR had attempted to negotiate in 1997 any type 
of privatization requirements on top of negotiating an open and fair 
regulatory regime, the deal would have backfired and the other nations 
signing the BTA would have walked away. In order for the U.S. to gain 
at least marginal access to foreign markets, we had to give access in 
return, and the only way to allow that in 1997 was to allow foreign 
government-owned telecommunications companies into the U.S. market.
    However, that was then, and this is now. U.S. telecom companies are 
still fighting regulatory roadblocks in attempting to gain access to 
foreign markets. On top of this, it is often difficult for U.S. 
companies to compete with state-owned firms that have capital 
advantages. While approximately 18 of the 69 nations who signed the BTA 
have fully privatized their telecom industry, an estimated two-thirds 
have not.
    In order to have free and fair competition in telecommunications, 
the playing field should be leveled. The question is how this can be 
best achieved.
    Should there be an outright ban on foreign state-owned 
telecommunications companies competing in the US? While this would 
solve the problem of leveling the playing field domestically, this 
would do little to encourage cooperation and access abroad for U.S. 
companies. It is also possible that such an action would result in the 
U.S. violating its WTO agreement.
    Should the FCC amend its rules to resurrect ``the effective 
competitive opportunities'' test (ECO) for foreign state-owned telecom 
entities? The test was used by the FCC prior to the BTA to determine 
whether a foreign-based telecom company could enter the U.S. market 
based upon its offering competitive opportunities to American carriers 
in the home market.
    To re-issue this rule seems to move in the right direction--
especially if targeting only state-owned, not privatized companies. 
Regardless of the ECO or some other, new litmus test, it seems entirely 
reasonable for the FCC to ensure that foreign state-owned entities who 
would like to compete in the United States should: a) demonstrate that 
their markets are fair and open to competition, and b) prove that they 
are not subsidizing their U.S. expansion with distorted monopolistic 
prices back home.
    Finally, should the U.S. use the WTO dispute mechanism to address 
those countries not complying with the BTA? I believe the USTR has 
already pressed the case of Mexico, and it is not clear why the U.S. 
would not press ahead with other nations that have violated their WTO 
commitments.
    I am interested in the different approaches that each of the 
witnesses would take to level the playing field in telecommunications 
competition, both domestically and abroad. I look forward to hearing 
the many views today and hope that we can walk away with a better 
understanding and consensus on where to go from here.
                                 ______
                                 
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Chairman Tauzin and Ranking Member Markey for holding 
this hearing on foreign government ownership of American 
telecommunications companies. I look forward to the testimony by the 
witnesses on today's global telecommunications market and on the 
national security and competitiveness implications of the acquisition 
of American telecommunications companies by foreign companies with 
government stockholders.
    The global telecommunications market has been changing rapidly in 
the last 10 years. Many European governments are in the process of 
privatizing their government-run telecommunications companies and 
opening their markets to foreign telecommunications companies. This 
rapid change makes today's hearing timely for all concerned, especially 
consumers.
    It is important that we look carefully at our commitments under the 
Basic Telecom Agreement of 1997, which spurred the FCC to amend its 
administrative process for merger evaluations involving WTO member 
nations, to ensure that the U.S. protects its national security and 
maintains a competitive marketplace in the emerging global 
telecommunications market. I am interested in hearing from the 
witnesses whether it is necessary to adopt legislation to revise the 
review system.
    When looking at the issue of foreign government ownership of 
American telecommunications companies, we must look at how such 
ownership will affect American consumers. Deregulation and 
liberalization of markets should ultimately benefit the consumer with 
improved services and lower costs. Consumers all over the world are 
beginning to benefit from the increasingly global nature of the 
telecommunications market. VoiceStream customers in Kansas City can use 
their cell phones in cities throughout the world. This type of service 
was unheard of just a few years ago.
    Preventing the joining of American and foreign telecommunications 
providers may stifle new emerging services such as one-stop shopping 
for customer communications needs. We must consider what the future may 
be for the U.S. telecommunications industry if it is not allowed to 
join forces with foreign corporations to better serve the consumer. 
Will it be at a competitive disadvantage? Will consumers choices be 
limited? Will we set a precedent that leads to the restriction of 
Internet mergers with foreign companies? These are important questions 
that I hope we address during this hearing.
    Thank you Mr. Chairman, and I yield back the balance of my time.

    Mr. Tauzin. Hearing none, the Chair is now pleased to 
welcome our panel. We will begin with the Chairman of the 
Federal Communications Committee, the Honorable Bill Kennard.
    Mr. Kennard.

   STATEMENTS OF HON. WILLIAM E. KENNARD, CHAIRMAN, FEDERAL 
    COMMUNICATIONS COMMISSION; KEVIN V. Di GREGORY, DEPUTY 
 ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF 
JUSTICE; LARRY R. PARKINSON, GENERAL COUNSEL, FEDERAL BUREAU OF 
  INVESTIGATIONS; AND AMBASSADOR RICHARD W. FISHER, ASSISTANT 
            UNITED STATES TRADE REPRESENTATIVE, USTR

    Mr. Kennard. Thank you very much, Mr. Chairman, members of 
the subcommittee. I appreciate the opportunity to testify 
before the subcommittee this morning on this very important and 
timely issue.
    I have listened very carefully to many of the concerns that 
have been expressed by Members of Congress in both Houses about 
the issue of foreign government ownership of U.S. 
telecommunications licenses. I want to state at the outset that 
I share many of these concerns. We at the FCC believe in open, 
privatized, competitive telecommunications markets. We believe 
that no monopoly or former monopoly should be allowed to 
leverage their relationship as a monopoly or with the 
government to squash competition. Indeed, that is what we have 
worked so very hard at at the FCC since the 1996 act was 
passed.
    We are also very sensitive to your concerns about our 
critical information and telecommunications sectors and 
national security concerns and Defense Department concerns. But 
my message to the subcommittee this morning is really simple. I 
have two fundamental messages. First, the FCC does not prejudge 
any merger that is or will be coming before it. As Senator 
Hollings testified earlier that you can expect the Chairman of 
the FCC to be judicious this morning, and I will be judicious 
this morning because when you delegated to the FCC the 
responsibility to review mergers in this area of our economy, 
you gave us the power to act in a quasi-judicial capacity. We 
are acting as the judge and jury on applications that come 
before us. That means that the rights of parties are 
implicated, the rights of parties to have due process, to have 
their questions, whether it is statutory interpretation or 
questions of policy, decided on an open and comprehensive 
record.
    And we will not be in a position to prejudge the outcome of 
any transaction that we have not decided before the Commission, 
and I wanted to make that clear.
    That being said, I will say today as I have said 
previously, that having indicated that I share many of your 
concerns, we will give close scrutiny to any merger involving 
foreign-government-controlled providers. Specifically, whether 
the proposed merger poses a high risk to competition or raises 
national security or law enforcement concerns. This shouldn't 
be a surprise to anyone. This framework for decisionmaking was 
set forth very clearly by the Commission in its 1997 framework 
for determining these foreign ownership issues.
    Second, I want to be very clear this morning that the 
Commission has and regularly employs all of the authority it 
needs to conduct a rigorous case-by-case review of every 
transaction pending before us. I think it is appropriate for me 
to dispel the myth that companies coming before the FCC that 
have foreign government ownership, including foreign-
government-controlled parties get a free pass. That is not how 
it works. Every merger is looked at carefully. We determine all 
of the relevant facts and we do it on the basis of an open and 
transparent record.
    In doing so we balance the need of the American consumers 
to have more competitive choices in the marketplace against the 
essential protections for law enforcement, national security 
and competition in the United States.
    I think it is appropriate also for me to outline what the 
procedure is for merger applications involving WTO countries. 
In those cases we exercise what we call a rebuttable 
presumption that the investment is in the public interest, but 
there are two important carve-outs from that rebuttable 
presumption. One is if there is a very high risk to competition 
domestically, we would not approve such a merger. Second, if 
there are national security issues involved, we would not 
approve such a merger. This framework was laid out in 1997 and 
it is very, very clear. This rebuttable presumption is tested 
before the FCC in an open process. If there are public interest 
concerns, we determine whether these concerns can be adequately 
addressed by safeguards and conditions or whether the 
application must simply be denied. On matters of law 
enforcement and national security, we defer to expert agencies 
such as the FBI and the Department of Defense.
    Now, there are three salient features to this process that 
I hope the committee will keep in mind. This process is 
comprehensive. It is flexible and it is effective. It is 
comprehensive because the issues that we look at cover a wide 
range of public and national interests and they include the 
concerns of, in fact, many of the agencies that are represented 
here today and are assigned to protect those interests.
    Second, the procedures are flexible. They permit us to 
weigh and balance, to amend and condition, to keep up with 
technology and to remain in harmony with the Nation's 
international obligations.
    We make these decisions based on a factual record, and I 
suspect that if an application like this were to come before us 
many of the arguments that you will be hearing today would be 
presented to the FCC. Everyone would get a chance to be heard 
and we would weigh them carefully before making a decision, and 
I am confident that if government ownership presents a 
competitive issue or a threat to competition in our country, 
then we would be able to ferret out the problem and deal with 
it.
    The Supreme Court said some time ago that the public 
interest standard is a, ``supple instrument.'' It has been 
given to the FCC to use judiciously and that is exactly what we 
do. In fact, I don't think anyone, particularly the members of 
this committee, would ever accuse the FCC under my leadership 
of not using the public interest authority aggressively to 
protect consumers and to impose conditions where warranted to 
protect competition.
    Finally, these procedures are effective. They have been 
used to increase competition both from U.S. and foreign-owned 
firms, have not harmed the U.S. market and have actually 
strengthened it to the benefit of U.S. consumers.
    If you look at the record of FCC decisionmaking in this 
area under Section 310, we have conditioned approvals to 
protect competition, dealing with dominant carriers, dealing 
with the influence of foreign governments over foreign-owned 
firms. So we have a track record of imposing conditions and 
safeguards where warranted.
    So, in sum, I believe we have the tools we need to do the 
job. These tools have worked for nearly three-quarters of a 
century in our country, and use of them has allowed the entry 
of innovation and capital from abroad while protecting national 
security in the interest of American consumers here at home.
    So in conclusion, Mr. Chairman, I believe these tools that 
we have used have been part of the success story of our 
Nation's leadership in the development of competitive 
telecommunications markets, both here and around the world.
    Thank you very much.
    [The prepared statement of Hon. William E. Kennard 
follows:]
   Prepared Statement of Hon. William E. Kennard, Chairman, Federal 
                       Communications Commission
                              introduction
    I am pleased to be here today to address some of the complex and 
important issues raised by foreign investment in the United States 
telecommunications market, with particular focus on concerns raised by 
entities with substantial foreign government ownership.
    At home and abroad, the United States has led a worldwide 
revolution to bring competition to the telecommunications sector. 
Domestically, this revolution has been made possible by Congress's 
foresight in enacting the Telecommunications Act of 1996, and the 
Commission's aggressive implementation of that Act. Internationally, 
the Commission acted decisively to extend the principles of competition 
to reform the antiquated system for delivering international services.
    A key factor in enabling this revolution has been the Commission's 
vigorous defense of the public interest as mandated by the 
Communications Act, including in Section 310. The Commission has 
implemented this mandate through its procedures for reviewing 
applications for entry into the U.S. market by foreign 
telecommunications entities. The Commission's balanced and flexible use 
of the Communications Act and the Commission's procedures has enabled 
it to both protect the interests of consumers and national security, 
and at the same time take advantage of the stimulus of capital in our 
economy.
                                message
    My message to the Subcommittee this morning is simple:
    First, the Commission should not prejudge any application that 
comes before it. Prospectively, I can say that we would give close 
scrutiny to any merger involving foreign government-controlled 
providers. Specifically, we would determine whether the proposed merger 
poses a very high risk to competition, or raises national security or 
law enforcement concerns.
    Second, the Commission has full and sufficient authority to address 
the issues of both national security and domestic competition through 
the authority granted us by Congress in the Communications Act of 1934 
and the Telecommunications Act of 1996. Commission policies 
implementing these statutes provide for a rigorous case-by-case review 
of foreign ownership with sufficient flexibility to address the 
particular competitive concerns raised by individual transactions.
                         kinds of applications
    The bulk of applications before us that raise foreign entry issues 
request one of the following:

(1) permission to provide international services under Section 214;
(2) permission to exceed the 25% foreign ownership cap for spectrum 
        licenses under Section 310(b)(4); and
(3) permission to merge a U.S. firm with a foreign firm, including a 
        foreign firm controlled partially or entirely by a foreign 
        government.
                             governing law
    The prospect of foreign government control of a U.S. carrier may 
pose unique concerns. However, the standard we use to review such 
transactions is sufficiently flexible to take these concerns into 
account.
    The Commission unanimously adopted its framework for analyzing 
whether entry into or investment in the U.S. market by foreign-owned 
firms is in the public interest in the 1997 Foreign Participation 
Order.1 Under that framework, there is a rebuttable 
presumption that entry or investment by foreign-owned firms from WTO 
Member countries is in the public interest. The Commission undertakes a 
case-by-case analysis of all applications; however, to determine 
whether there are public interest factors that would overcome that 
presumption and compel the Commission to deny an application. In 
particular, the Commission assesses whether a transaction would pose a 
very high risk to competition in the United States that cannot be 
addressed by safeguards and that will thereby harm our domestic 
communications market and U.S. consumers.
---------------------------------------------------------------------------
    \1\ See Rules and Policies on Foreign Participation in the U.S. 
Telecommunications Market, IB Docket No. 97-142, Market Entry and 
Regulation of Foreign-Affiliated Entities, IB Docket No. 95-22, Report 
and Order and Order on Reconsideration, 12 FCC Rcd 23891 (1997) 
(``Foreign Participation Order''), recon. pending.
---------------------------------------------------------------------------
    In some cases, the Commission may determine that a transaction is 
in the public interest, but that the application can only be granted 
subject to conditions that address competitive concerns. In fact, the 
Commission's regulatory framework includes competitive safeguards that 
apply to firms that are affiliated with dominant foreign firms. If as a 
result of its review of an application, the Commission concludes that 
these standard safeguards are not sufficient to address specific 
competitive concerns, the Commission may impose additional, tailored 
safeguards, or deny the application altogether. In other cases, the 
Commission may determine that entry cannot be ``conditioned'' 
sufficiently to protect the public interest. The Commission will then 
deny the application.
    In addition to the competition concerns addressed as part of the 
Commission's public interest analysis, the Commission has always had, 
and continues to maintain, the ability to consider a range of public 
interest factors in considering whether to allow entry into and 
investment in the U.S. market by foreign-owned firms. These additional 
public interest factors include national security and law enforcement 
concerns. On these issues, the Commission accords deference to the 
expertise of Executive Branch agencies, such as the FBI and the 
Department of Defense.
                  public interest features of process
    The United States has long welcomed foreign investment as a means 
of achieving a specific end: strengthening competition in the U.S. 
marketplace, to the benefit of U.S. consumers.
    At the same time, the Commission has the tools at its disposal to 
ensure that foreign investment is in the public interest. The public 
interest requires that foreign investment not harm competition in the 
U.S. market or threaten national security and law enforcement concerns.
    There are three essential features to this process that I hope the 
Subcommittee will keep in mind.
    The procedures are comprehensive. They cover a wide range of public 
and national interests, and they include the concerns of the many 
agencies assigned to protect those interests.
    The procedures are flexible. They permit us to weigh and balance, 
to amend and condition, to keep up with technology, and to remain in 
harmony with the nation's international obligations.
    Finally, the procedures work. Increased competition, both from U.S. 
and foreign-owned firms, has not harmed the U.S. market, but has 
strengthened it, to the benefit of U.S. consumers. Today, U.S. 
consumers enjoy lower prices and better, more innovative services.
                                closing
    In sum, we have the tools we need to do the job. Use of them has 
allowed the entry of innovation and capital from abroad, while 
protecting national security and the interests of American consumers at 
home.
    These tools also have been part of the success story of our 
nation's leadership in the development of competitive 
telecommunications markets.
    Thank you.

    Mr. Tauzin. Thank you very much, Chairman Kennard.
    The Chair is now pleased to welcome Mr. Kevin DiGregory, 
the Deputy Assistant Attorney General of the Criminal Division, 
Department of Justice, of course a very timely appearance when 
the DOJ has just allowed the time to lapse for rejection of 
this merger.
    Mr. Di Gregory.

                STATEMENT OF KEVIN V. Di GREGORY

    Mr. Di Gregory. Mr. Chairman, thank you, and I thank the 
members of the committee for the opportunity to be here today. 
I will say at the outset, as you noted in your introduction, I 
am the Deputy Assistant Attorney General in the Criminal 
Division of the Department, and I understand that you have 
concerns about what the Antitrust Division of the Department 
did. And please understand, I am perfectly willing to hear your 
concerns and take them back, but I will not be able to give you 
any answers today and I just wanted to let you know.
    I want to, again, thank you for this opportunity to provide 
the Justice Department's law enforcement perspective on foreign 
ownership interests and foreign government ownership interests 
in the American communications infrastructure.
    Let me begin by noting that the soaring growth of 
communications is an engine that drives our developing 
information economy. Because our economy depends upon readily 
available and reliable communications systems for its most 
basic functions, we must be careful not to stifle the growth of 
communications technology through undue government action. We 
must ensure that emerging communications technologies are as 
reliable and safe to use for business, education and 
entertainment as other methods of communication and we should 
take a technology neutral approach to the degree that is 
practical when considering appropriate governmental action.
    The increasing globalization of communications entities 
implicates a variety of complicated legal and policy doctrines, 
including issues relating to national security, the protection 
of the privacy of U.S. consumers and businesses, the integrity 
of domestic law enforcement operations and public safety. Due 
to the growing importance of communications, the U.S. 
Government should ensure that the communications infrastructure 
remains safe to use when it is owned, controlled or operated by 
non-U.S. entities, especially foreign governments.
    The challenges and risks created by foreign ownership 
interests and foreign government ownership interests in our 
communication infrastructure, as well as those created by the 
globalization of the communications infrastructure, will be 
discussed at greater length by Mr. Larry Parkinson, the General 
Counsel of the Federal Bureau of Investigation, in his 
testimony today. But as Mr. Parkinson will testify, these 
challenges and risks are very real and may adversely affect the 
privacy of our citizens and our obligations to preserve the 
national security and enforce U.S. law.
    As the Federal Government examines the appropriateness of 
foreign ownership interests, especially foreign government 
ownership interests, in our communications infrastructure, we 
must ensure that the risks are minimized and that these 
challenges are met. In addition, the government must consider 
the risks posed by the globalization of U.S. communications 
infrastructure, especially the risk that specific activities 
will destabilize that infrastructure.
    These risks must be addressed if law enforcement and 
national security agencies are to have the tools and 
capabilities to enforce laws against espionage and invasion of 
privacy, to satisfy our responsibility to conduct effective and 
secure, legally authorized investigations of criminals who use 
telecommunications to aid their illegal activities, to conduct 
national security investigations, to ensure effective emergency 
preparedness, and to protect public safety.
    Our efforts to address these risks have relied thus far 
upon two existing fora. Foreign companies investing in U.S. 
communications companies may seek approval for their ownership 
interests at the Federal Communications Commission and/or may 
file notice of the proposed foreign ownership interests for 
review by the Committee on Foreign Investment in the United 
States. These processes allow the Federal Government to review 
whether a proposed ownership interest violates the FCC's public 
interest standard or in the case of CFIUS threatens national 
security in such a way that the President should on 
recommendation of CFIUS suspend or prohibit the transaction.
    In analyzing proposed foreign ownership interest in or 
transfer of control of U.S. companies, the FCC considers 
several public interest factors. The factors include the effect 
of the proposed transaction on U.S. national security, law 
enforcement, competition in the U.S., trade, and policy 
concerns, in determining whether this transaction is consistent 
with public convenience and necessity.
    There have been several applications at the FCC in the last 
2 years that involve foreign ownership interests or other 
foreign elements that potentially impaired the interests of 
U.S. citizens. Both the Department of Justice and the FBI have 
requested that the FCC not grant these applications until the 
companies involved committed to take certain steps that would 
protect the American public. I am quite pleased to say that 
those companies have worked with us to find solutions and have 
entered into agreements with the Department of Justice, the FBI 
and the Department of Defense to reduce the threat that the 
transaction posed.
    The FCC, in turn, has granted those companies licenses and 
applications on the condition that they comply with these 
agreements.
    We believe it is important to tailor solutions to the 
relevant concerns. Therefore, in our efforts to formulate these 
solutions with these companies, we seek only that which is 
necessary to preserve national security, the privacy of our 
citizens, and public safety.
    Let me briefly address one other mechanism that allows the 
Federal Government to review foreign investment in U.S. 
telecommunications and Internet companies, that is the CFIUS 
process. This mechanism empowers the President, for national 
security reasons, to suspend or prohibit an acquisition of a 
U.S. company by a foreign company or government. As a member 
agency of CFIUS, the Department of Justice has raised and will 
continue to raise national security concerns that arise out of 
proposed foreign ownership interests in our communications 
infrastructure.
    We believe that such vigilance is warranted in order to 
protect our national security interests. What protections then 
are necessary to defend national security, the privacy of our 
citizens and public safety? Variations in technology and 
business structures presented by each foreign investment make 
it impossible to identify a single solution for all companies. 
As a result, we have worked with individual companies to 
develop solutions that protect national security, privacy and 
public safety in manners that are least disruptive to those 
companies involved.
    First, one of our requirements in order to acquire those 
protections are to ensure that U.S. national security and law 
enforcement agencies are able to securely and effectively use 
lawful process to gather information during investigations.
    Second, it is critical that foreign owned and controlled 
companies protect the privacy of U.S. communications and 
customers and not leave inert the statutory protections of 
privacy under U.S. law.
    Third, we must work to protect the integrity of U.S. law 
enforcement in national security investigations, foreign 
control notwithstanding.
    We have attempted, along with the FBI, to address these 
challenges created by increasing foreign ownership interests in 
U.S. communications systems and the globalization of 
communications systems. In doing so, we always keep in our 
minds the need to balance the value of a free marketplace, to 
encourage continuing innovation in communications technologies, 
with the protection of the public's privacy, safety and 
security. We believe that thus far the processes available to 
us have allowed us to effectively address those concerns.
    Finally, I would like to comment on some pending 
legislation that we believe is as unintentional by-product 
could threaten the framework that we have discussed. The pieces 
of leglislation are S. 467 and H.R. 4019. S. 467 limits the 
time within which the SEC must rule on a transfer of control, 
while H.R. 4019 eliminates the FCC's use of the public interest 
determination. Those time limits and that elimination of the 
public interest determination could severely affect our ability 
to do what we have been doing in visiting with these companies 
and negotiating conditions to agreements--conditions to FCC 
licenses in the form of our agreements.
    Mr. Chairman----
    Mr. Tauzin. You are referring to bills that affect the 
FCC's authority, right, just now, is that correct?
    Mr. Di Gregory. That is correct.
    Mr. Tauzin. All right.
    Mr. Di Gregory. And referring to them only in the way that 
they affect our concerns with respect to the national security.
    I will sum up by thanking you, again, Mr. Chairman, for the 
opportunity to present the Department's view on foreign 
ownership interest, especially foreign government ownership 
interest in U.S. companies.
    [The prepared statement of Kevin V. Di Gregory follows:]
 Prepared Statement of Kevin V. Di Gregory, Deputy Assistant Attorney 
           General, Criminal Division, Department of Justice
    Chairman Tauzin, Congressman Markey, and other Members of the 
Subcommittee, I want to thank you for this opportunity to provide the 
Department of Justice's law enforcement perspective on foreign 
ownership interests and foreign government ownership interests in the 
American communications infrastructure.
    Let me begin by noting that the soaring growth of communications is 
an engine that drives our developing information economy. New 
communications technologies, including advancements in electronic mail, 
wireless telephones, and the Internet, are essential to new methods of 
business, education, and entertainment. Our economy depends upon 
readily available and reliable communications systems for its most 
basic functions. This has several consequences. First, we must be 
careful not to stifle the growth of communications technologies through 
undue government action. Second, we must ensure that emerging 
communications technologies are as reliable and safe to use for 
business, education, and entertainment as the methods of communication 
we have used in the past and that are still in use. Third, we must take 
a technology-neutral approach, to the degree it is practical, when 
considering appropriate governmental action.
    The increasing globalization of communications entities and 
facilities has significant consequences. The trend implicates a variety 
of complicated legal and policy doctrines, including issues relating to 
national security, the protection of the privacy of U.S. consumers and 
businesses, and the integrity of domestic law enforcement operations. 
Due to the growing importance of communications, the U.S. Government 
should ensure that the communications infrastructure remains safe to 
use when it is owned, controlled, or operated by non-U.S. entities, 
especially foreign governments. We must ensure that individuals and 
businesses can communicate privately, and with the expectation that if 
their privacy or security is harmed through the illegal use of 
communications, that law enforcement can apprehend those responsible 
and bring them to justice. In addition, we must also ensure that 
globalization does not hinder our responsibility to protect our 
citizens by blocking national security and law enforcement 
investigations.
    The challenges and risks created by foreign ownership interests and 
foreign government ownership interests in our communication 
infrastructure, as well as those created by the globalization of the 
communications infrastructure, are discussed at greater length by 
Lawrence R. Parkinson, General Counsel of the Federal Bureau of 
Investigation (``FBI''), in his testimony today. As Mr. Parkinson 
testifies, these challenges and risks are very real and may adversely 
affect the privacy of our citizens, and our obligations to preserve the 
national security and enforce U.S. law. Moreover, as Mr. Parkinson also 
notes, the President over two years ago in Presidential Decision 
Directive (``PDD'') 63 established the national security objective of 
protecting US cyber and information networks from attack or disruption. 
This is an important goal for the Administration, and the 
Administration reviews potential foreign acquisitions of both 
telecommunications and internet providers with PDD-63 in mind.
    As the federal government examines the appropriateness of foreign 
ownership interests, especially foreign government ownership interests, 
in our communications infrastructure, we must ensure that risks are 
minimized and that challenges are met. In addition, the government must 
consider the risks posed by the globalization of U.S. communications 
infrastructure, especially the risk that specific activities will 
destabilize the infrastructure. These risks must be addressed if law 
enforcement and national security agencies are to have the tools and 
capabilities to enforce laws against espionage and invasion of privacy, 
to satisfy our responsibility to conduct effective and secure legally 
authorized investigations of criminals who use telecommunications to 
aid their illegal activities, to conduct national security 
investigations, to ensure effective emergency preparedness, and to 
protect public safety.
    What protections, then, are necessary to defend national security, 
the privacy of our citizens, and public safety? There are many 
different technologies, business structures and other factors presented 
by each foreign investment. These variations make it impossible to 
identify a single solution for all companies and all transactions. As a 
result, we have worked with individual companies to develop solutions 
that protect national security, the privacy of U.S. citizens, and 
public safety in a manner that is least disruptive to the companies 
involved.
    First, one of the requirements fundamental to preserving national 
security, the privacy of U.S. citizens, and public safety is ensuring 
that U.S. national security and law enforcement agencies are able to 
securely and effectively use lawful process to gather information 
during investigations. For example, whether we are conducting an 
investigation of a foreign spy or an alleged drug dealer, we must be 
able to conduct court-authorized interceptions, acquire stored 
communications, obtain subscriber data, and access any and all records 
and information when authorized by law and with appropriate process. 
The Department of Justice believes that it is critical to national 
security and law enforcement investigations that a foreign-owned or 
controlled company to ensure that U.S. court orders and statutory 
authorities are not rendered ineffective by foreign ownership 
interests.
    Second, it is critical that foreign-owned and controlled 
communications companies protect the privacy of U.S. communications and 
customers and do not leave inert the statutory protections of privacy 
under U.S. law. The Department of Justice and the FBI have worked with 
providers to ensure that an investing foreign entity will take 
appropriate steps to prevent access to equipment and facilities under 
its control that could be used to monitor U.S. communications in 
violation of federal or state law. We also have worked to ensure that 
there will be no unauthorized or illegal sharing of subscriber 
information and related records regarding U.S. customers as a result of 
the foreign ownership interests or foreign-located facilities. Our goal 
is to prevent foreign governments, foreign companies and affiliates, or 
persons abroad from obtaining unlawful access to the communications and 
information about our citizens.
    Third, we must work to protect the integrity of U.S. law 
enforcement and national security investigations, foreign control 
notwithstanding. For example, we have worked with companies to find 
effective means to ensure that classified or sensitive information is 
not disseminated. As Mr. Parkinson testifies, when foreign government-
owned or controlled companies are those investing in the U.S. 
communications infrastructure, we must act carefully to protect our 
citizens and their privacy. In addition, as our infrastructure gains 
global capabilities, the risks to the integrity of U.S. law enforcement 
and national security investigations is increasing. For example, when 
emerging technologies such as wireless and satellite communications 
systems are configured in such a way that the communications of U.S. 
customers are processed entirely at facilities located abroad, there is 
a risk that we cannot protect our citizens' communications and privacy. 
There is also a risk that, when the most heinous of crimes occur, we 
will be unable to properly investigate and prosecute the parties 
responsible.
    The Department of Justice and the FBI, with the Department of 
Defense, have attempted to address the challenges created by increasing 
foreign ownership interests in U.S. communications systems and the 
globalization of communications systems. In my testimony, I focus on 
the foreign ownership interests. As ownership interests, mergers, and 
acquisitions present these issues, we always keep foremost in our minds 
the need to balance the value of a free marketplace, to encourage 
continuing innovation in communications technologies, with the 
protection of the public's privacy, safety, and security. In each case, 
we use available legal tools to seek a solution tailored to the 
specific concerns presented by the foreign ownership interests 
presented. We are cognizant that the relevant facts surrounding the 
ownership interests, business plans, system infrastructures, and 
technologies can vary significantly and in material respects. In some 
cases no action may be necessary; in other cases, tailored protections 
can alleviate privacy, public safety, and national security concerns.
    Because of the wide range of possible circumstances, it has not 
been feasible to identify a precise and fixed set of criteria that each 
proposed foreign investor must satisfy in order to adequately protect 
the citizens of the U.S. Accordingly, the Department of Justice and the 
FBI analyze a large number of factors in each instance where foreign 
ownership potentially threatens the government's ability to satisfy its 
national security and law enforcement responsibilities to the public.
    The factors we consider include, but are not limited to, the 
following:

 Does the proposed ownership interest create an increased risk 
        of espionage and foreign-based economic espionage against U.S. 
        companies and persons?
 Does the proposed ownership interest compromise our ability to 
        protect the privacy of U.S. citizens and their communications?
 Will U.S. national security, law enforcement, and public 
        safety capabilities be impaired by the proposed foreign 
        ownership interests?
 Does the company have existing policies for protecting 
        privacy, handling classified information, and complying with 
        lawful process? Does the company have a good record of 
        complying with lawful process relating to national security and 
        law enforcement capabilities?
 What is the degree and nature of the proposed foreign control?
 If the ownership interest is transferred to a foreign entity, 
        do we have adequate assurances that National Security Emergency 
        Preparedness and U.S. Infrastructure Protection requirements 
        are met?
    Analyzing these and other factors, we have been successful in 
negotiating narrowly tailored solutions to concerns regarding privacy, 
public safety, and national security that are presented by the 
particular foreign ownership interests.
    Our efforts to protect these critical values have relied upon two 
existing fora. In certain circumstances, foreign companies investments 
in U.S. communications companies, like domestic acquisitions, are 
subject to review by the Federal Communications Commission (``FCC'') 
and/or the Committee On Foreign Investment in the United States 
(``CFIUS'').1 These processes allow the federal government 
to review whether a proposed ownership interest violates the FCC's 
public interest standard or threatens national security in such a way 
that the President should, on the recommendation of CFIUS, suspend or 
prohibit the transaction, respectively.
---------------------------------------------------------------------------
    \1\ Even if a company does not file a notice, an agency may notify 
a proposed acquisition to CFIUS if the agency believes that the 
transaction poses national security risks.
---------------------------------------------------------------------------
    For example, before a telecommunication company may acquire control 
of facilities or transfer control of a license under Sections 214 and 
310 of the Communications Act, it must first obtain from the FCC a 
certificate that the transfer or acquisition is consistent with the 
present or future public convenience and necessity. The FCC has the 
power to issue such a certificate or refuse it, ``and may attach to the 
issuance of the certificate such terms and conditions as in its 
judgment the public convenience and necessity may require.'' 47 U.S.C. 
Sec. 214(c). In addition, Section 310(d) provides, in pertinent part, 
that ``[n]o construction permit, or station license, or any rights 
thereunder, shall be transferred, assigned, or disposed of in any 
manner, voluntarily or involuntarily, directly or indirectly, or by 
transfer of control of any corporation holding such permit or license, 
to any person except upon application to the Commission and upon 
finding by the Commission that the public interest, convenience, and 
necessity will be served thereby.'' 47 U.S.C. Sec. 310(d).
    In analyzing proposed foreign ownership interests in or transfer of 
control of U.S. companies, the FCC considers several public interest 
factors. The factors include the effect of the proposed transaction on 
U.S. national security, law enforcement, competition in the U.S., 
trade, and policy concerns, in determining whether a transaction is 
consistent with public convenience and necessity. The FCC has stated it 
accords deference to other Executive Branch agencies with respect to 
the identification and interpretation of issues of concern related to 
national security, law enforcement, and foreign policy that are 
relevant for a particular application. See e.g., Amendment to the 
Commission's Regulatory Policies to Allow Non-U.S. Licensed Space 
Station to Provide Domestic and International Satellite Service in the 
United States, 12 FCC Rcd 24094, 24171 (1997) (``Disco II Order''); In 
the Matter of Rules and Policies of Foreign Participation in the U.S. 
Telecommunications Market, 12 FCC Rcd 23,891, 23,935 para. 97 (1997). 
The Commission's public interest analysis includes input from agencies 
such as the Department of Justice, the FBI, and the Department of 
Defense, each of which has unique expertise regarding national security 
and public safety.
    The Department of Justice and FBI take seriously their 
responsibility to evaluate the national security and public safety 
concerns that might be present in foreign ownership applications 
pending before the FCC, and to work creatively to find solutions. There 
have been several applications at the FCC in the last two years that 
involved foreign ownership interests or other foreign elements that 
potentially impaired the interests of U.S. citizens. Both the 
Department of Justice and FBI have requested that the FCC not grant 
these applications until the companies involved committed to take 
certain steps that would protect the U.S. public. I am quite pleased to 
say that those companies have worked with us to find solutions, and 
have entered into agreements with the Department of Justice, the FBI 
and the Department of Defense to reduce the threat of the transaction 
on the U.S. public. The FCC, in turn, has granted those companies' 
licenses and applications on the condition that they comply with the 
agreements.
    As I noted above, we believe it is important to tailor solutions to 
the relevant concerns. Therefore, in our efforts to formulate solutions 
with the companies, we seek only that which is necessary to preserve 
national security, the privacy of our citizens, and public safety. The 
Department of Justice and the FBI recognize the many--and sometimes 
competing--interests involved with foreign ownership interests in our 
telecommunications infrastructure. In fact, we rejected several 
commitments proposed by companies because those commitments went far 
beyond what we deemed necessary.
    Before leaving this discussion of the FCC process, I would like to 
comment on some pending legislation that, as an unintentional 
byproduct, threatens the framework I have discussed. Our ability to 
protect the public interest through the FCC process has proven to be an 
effective tool to ensure that foreign ownership interests in U.S. 
telecommunications companies do not harm our citizens. Our ability, 
however, may be adversely affected by legislation pending before 
Congress. S. 467 limits the time in which the FCC must rule on transfer 
of control applications that come before the agency, while H.R. 4019 
eliminates the FCC's use of the public interest determination in merger 
applications. The Administration has opposed both of these bills 
because of their severe ramifications on our efforts to protect 
national security, the privacy of our citizens, and public safety, and 
to promote local competition and universal service. It is critical that 
we continue to safeguard our national security and the integrity of our 
infrastructure. Establishing an inflexible time frame for FCC action, 
with little consideration of national security and law enforcement 
concerns, does not provide a safeguard. Eliminating the public interest 
standard altogether essentially eliminates any safeguard we might have 
against the risks posed by foreign ownership interests in our critical 
infrastructures. As more foreign-owned and foreign government-owned 
companies gain ownership interests in our communications 
infrastructure, the necessity to protect our citizens and our national 
security will only increase. The Administration looks forward to 
working with Congress to protect and preserve national security, the 
privacy of our citizens, and public safety, and to promote local 
competition and universal access.
    Let me briefly address one other mechanism that allows the federal 
government to review foreign investment in U.S. telecommunications and 
Internet companies--the CFIUS process. This mechanism empowers the 
President, for national security reasons, to suspend or prohibit an 
acquisition of a U.S. company by a foreign company or government. See 
Section 721 of the Defense Production Act (``Exon-Florio'' provision), 
50 App. U.S.C. Sec. 2170. As a member agency of CFIUS, the Department 
of Justice has raised and will continue to raise national security 
concerns that arise out of proposed foreign ownership interests in our 
communications infrastructure that come before CFIUS. We believe that 
such vigilance is warranted in order to protect national security 
interests.
    Of course, given the quick-changing nature of the marketplace and 
technology, the Department of Justice and the FBI will continue to 
evaluate and work closely with companies with pending foreign ownership 
issues to identify new or different approaches to protecting national 
security, the privacy of our citizens, and public safety. In 
particular, the Department of Justice intends to continue to evaluate 
how specific foreign government ownership interests, as well as other 
foreign ownership interests, in our communications infrastructure 
affect these three concerns.
    I want to thank the Committee again for asking me to present the 
Department's views on foreign ownership interests, especially foreign 
government ownership, of the United States' communications 
infrastructure. I am pleased to answer any questions you have.

    Mr. Tauzin. Thank you, Mr. Di Gregory.
    The Chair now welcomes Larry Parkinson, General Counsel for 
the FBI.

                 STATEMENT OF LARRY R. PARKINSON

    Mr. Parkinson. Thank you, Mr. Chairman, and members of the 
subcommittee. It is a pleasure to be here.
    I appreciate the opportunity to talk this morning about the 
FBI's role in this process, as well as our concerns about 
foreign ownership in this arena.
    My comments today will focus on our vital national security 
and law enforcement interests that can be adversely impacted by 
foreign ownership of U.S. telecommunications carriers. These 
vital interests range from protecting the privacy of personal 
communications to preserving public safety. I also note that 
the existing processes are utilized so that foreign ownership 
can occur without jeopardizing our security and privacy 
interests.
    Telecommunications networks obviously are a critical part 
of the Nation's information infrastructure. They provide the 
central means for transacting, through voice, data and video, a 
vast amount of personal communications, private commerce and 
government business. Changes in telecommunications technology, 
infrastructure and business alignment have, however, 
transformed the nature of the industry at an ever accelerating 
rate and the traditional telecommunications model in which the 
domestic companies provide domestic services to domestic 
companies has increasingly been replaced by systems and 
organizations intended to provide services on an international, 
if not global, scale.
    These systems attempt to serve the largest possible number 
of customers from centralized communication and data facilities 
without regard to where the customer being served is located or 
without regard to national boundaries. Business ventures in 
this industry often involve technological and contractual 
arrangement with, or control or ownership by foreign entities, 
or both.
    The transnational nature of these ventures poses 
substantial legal, technical and practical challenges to U.S. 
agencies charged with enforcing the law or protecting the 
national security, including the FBI. These challenges range 
from protecting U.S. communications and data from unauthorized 
access to preserving the government's ability to intercept 
lawful communications routed by satellite to gateways outside 
the United States, without significantly impeding the 
introduction of new technologies, features or services. 
Notwithstanding the wide variety of business plans, technology 
and infrastructure that those various ventures involve, certain 
common characteristics exist and, more importantly, the 
interests of the United States in these matters generally 
remains constant.
    I would like to address briefly the risks.
    Our primary FBI interest and the most technologically 
challenging issue is the preservation of our ability to 
intercept communications and obtain communications transaction 
data pursuant to existing legal authorities despite these 
infrastructure and technological changes. To enforce the law, 
protect public safety, and preserve the national security, law 
enforcement and national security agencies must be able to 
intercept communications when necessary and obtain the 
associated identifying data in a secure, unobtrusive, and 
timely fashion pursuant to, of course, and in accordance with 
the relevant constitutional and statutory safeguards that we 
have in place. The government must also be able to obtain basic 
subscriber information and other transactional records relevant 
to the target communications.
    Actions taken to preserve this interest do not expand 
existing authorities, and that is important to emphasize. 
Rather, they are designed to ensure that existing lawful 
investigative tools are not rendered inoperative by the 
transnational nature and technological complexity of a new 
venture or new technology. This will become increasingly 
important as the highly regulated telecommunications sector 
converges with the largely unregulated Internet communications 
industry.
    Traditionally, the FBI as well as other Federal, State and 
local law enforcement agencies, have principally conducted 
electronic surveillance efforts, and obtained interception 
access and access to stored communications through those U.S. 
carriers which offer local exchange type services, and provide 
service connections directly to the public. It is vital, 
therefore, that a foreign-owned and controlled company, through 
its carrier subsidiaries, maintain within the United States 
interception access, access to the stored wire and electronic 
communications of their U.S. customers and subscribers, and any 
records and subscriber information relating to such U.S. 
customers or subscribers. If such information is unavailable 
because it is stored beyond the United States' borders, subject 
to restrictive disclosure laws of foreign countries, or 
technologically inaccessible, the national security, law 
enforcement, and public safety interests of the United States 
are degraded proportionally.
    These requirements are essential to ensure effective, 
efficient and secure service of lawful U.S. process; effective, 
efficient and secure execution of such process; and to protect 
against any unauthorized disclosure of classified national 
security and sensitive law enforcement information related to 
such process, to foreign powers and companies licensed and 
regulated by foreign powers. For this reason, the agreements 
that the Department of Justice and the FBI have negotiated over 
the last several years with foreign-owned companies contain 
provisions which address these requirements.
    Another significant area of concern is the security of U.S. 
intercept and data acquisition activity. The implementation of 
lawfully authorized national security and law enforcement 
interception and data acquisitions increasingly requires the 
cooperation of the communications service provider. In these 
cases, the U.S. Government is required to disclose very 
sensitive target information and investigative techniques to 
the service provider in order for it to provide the assistance 
required under the court order. Such targets could be foreign 
intelligence officers or agents, or could be associated with 
criminal enterprises such as international drug trafficking or 
terrorist organizations. Without adequate safeguards, the 
damage to an investigation would be done almost from the moment 
the U.S. serves process on the foreign affiliated carrier.
    The foreign affiliated carrier would also immediately 
become knowledgeable about the current technological intercept 
capabilities and the limitations of U.S. law enforcement and 
national security agencies. The disclosure of such information 
to a foreign government and its operatives could serve as a 
guide to how to evade U.S. surveillance.
    Risks associated with the potential for compromise of the 
interception, unauthorized identification of interception 
targets, and disclosure of interception sources and methods 
correspond with the level of foreign involvement in or control 
of the entity through which the intercept is to be executed. 
Also, law enforcement's ability to prevent, detect and respond 
to breaches of wiretap security are greatly inhibited if the 
equipment and the personnel responsible for the intercept are 
located outside the United States.
    The FBI and the Department of Justice are charged with 
preventing, investigating and prosecuting inappropriate 
instances in which U.S. communications and data have been 
acquired or disclosed in violation of our laws. Our ability to 
detect, investigate and assert jurisdiction is impeded, if not 
eliminated, when entire or significant components of the 
communications systems operating in the U.S. are located 
outside our borders.
    I want to just touch briefly, Mr. Chairman, on the topic of 
economic espionage.
    Mr. Tauzin. We would ask the gentleman to briefly do that. 
His time has expired. If he would quickly do that for us.
    Mr. Parkinson. Mr. Chairman, I just want to point out that 
one of our concerns is also in the area of economic espionage 
and obviously foreign governments often target our trade 
secrets, and if they are in charge of the telecommunications 
system, any portion of that system in the United States, we are 
vulnerable.
    Let me close. I will submit, obviously, the final statement 
for the record.
    Since the business plans, system infrastructures, and 
involved technologies in proposed transactions vary 
significantly in innumerable ways, identifying a precise and 
fixed set of criteria that each venture must satisfy in order 
to adequately protect the interests that I have described is 
impractical. Instead, we have to analyze a large number of 
factors in each case to determine how the proposal will impact 
the government's ability to satisfy its public 
responsibilities, and we use the tools that Mr. Di Gregory 
described in order to do that.
    With that, I will close and I am delighted to be here and 
happy to answer any questions.
    [The prepared statement of Larry R. Parkinson follows:]
  Prepared Statement of Larry R. Parkinson, General Counsel, Federal 
                        Bureau of Investigation
                                summary:
    The increasing globalization of the telecommunications marketplace, 
while promoting competition and stimulating innovative service 
offerings, increases the risk that our national security and law 
enforcement interests will be hampered by control of U.S. 
communications networks by foreign entities. In anticipation of these 
risks, the Department of Justice (DOJ) and the Federal Bureau of 
Investigation (FBI) have used the existing statutory/regulatory review 
processes to negotiate arrangements with foreign owned companies which 
preserve the government's ability to protect the safety and privacy of 
the American public.
    When control of U.S. communications and data is located outside the 
jurisdiction of the United States, it becomes increasingly difficult to 
assert U.S. legal authority. In some cases, there may be no practical 
way to conduct lawful surveillance effectively and securely if the 
facilities that process U.S. communications are located outside of the 
United States. It is ultimately the safety of the American public that 
suffers the consequences of an inability to conduct national security 
investigations and prevent and detect criminal activity through 
effective investigative tools such as court authorized electronic 
surveillance and obtaining transactional information pursuant to lawful 
process. If these means are rendered useless, either due to the 
assertion of foreign jurisdiction, or because there is no assurance 
that confidential U.S. information will be secured, the safety and 
privacy of the American people become more vulnerable to exploitation. 
These concerns exist regardless of whether the controlling entity is 
foreign government owned. Even when the foreign entity controlling a 
U.S. communications network is privately held, there is cause for 
concern that the foreign-affiliated carrier may be subject to the 
influence and directives of the foreign government or others to 
compromise U.S. investigations and carry out or assist in carrying out 
intelligence efforts against the U.S. Government or U.S. companies. On 
a continuum of risk, however, a service provider that is directly or 
indirectly owned or controlled by a foreign government or its 
representatives falls on the higher risk end of the spectrum.
    Many foreign nations dedicate significant resources to gathering 
intelligence about other governments or elements thereof and to 
gathering counterintelligence information to protect against other 
nation's intelligence activities. Ownership and control of U.S. 
communications networks gives a foreign government the capacity to gain 
relatively easy access to confidential information about the targets of 
U.S. national security and law enforcement investigations, the nature 
of those investigations, and the sources and methods used, as well as 
information about the extent to which the U.S. Government is aware of a 
foreign government's intelligence activities. Ownership and control of 
U.S. communications networks could also provide a foreign government 
with the ability to direct key employees to utilize routine monitoring 
capability to access confidential private communications and data of 
U.S. corporations and citizens communicating over the network. Although 
U.S. law prohibits unauthorized monitoring and disclosure of data, such 
monitoring by the service provider is difficult to detect. While the 
risks and likelihood of such problems depend on the particular 
situation involved, if a foreign government were to have unrestricted 
control of U.S. communications networks, the risk increases that it 
could exploit such access for its own gain to the detriment of U.S. 
security.
    To address these concerns, the DOJ/FBI have, over the past few 
years, engaged in a series of discussions with various companies 
seeking to deploy global telecommunication systems or to consolidate 
existing domestic and foreign telecommunication systems. We have 
carried out these discussions within the existing statutory and 
regulatory processes for protecting law enforcement and national 
security. Please refer to Kevin Di Gregory's testimony for a further 
description of these processes. In each instance, the leverage provided 
by these processes has allowed us to reach an agreement that preserves 
law enforcement's ability to protect privacy through enforcing the laws 
and to protect the national security of the United States, while 
facilitating approval of the transaction by the appropriate reviewing 
body.
    Given the wide variety of business plans, technology, and 
infrastructure that these various ventures involve, the agreements 
have, of necessity, been company-specific. Nonetheless, the interests 
of the United States in these matters remain constant. These constants 
have served to help guide DOJ/FBI decision making, as well as to serve 
as a platform for guidance to the telecommunications industry and other 
interested parties.
    I appreciate the opportunity to appear before your subcommittee to 
discuss H.R. 4903. My comments today will focus on our vital national 
security and law enforcement interests that can be adversely impacted 
by foreign ownership of U.S. telecommunication carriers. These vital 
interests range from protecting the privacy of personal communications 
to preserving public safety. I also note that existing processes are 
utilized so that foreign ownership can occur without jeopardizing our 
security and privacy interests.
    Telecommunications networks are a critical part of the Nation's 
information infrastructure. They provide the central means for 
transacting, through voice, data, and video, a vast amount of personal 
communications, private commerce, and government business. Changes in 
telecommunications technology, infrastructure, and business alignment 
have transformed the nature of the industry at an ever-accelerating 
pace. The traditional telecommunications model in which domestic 
companies provide domestic services to domestic customers has 
increasingly been replaced by systems and organizations intended to 
provide services on an international, if not global, scale. These 
systems attempt to serve the largest possible number of customers from 
centralized communication and data facilities without regard to where 
the customer being served is located or to national boundaries. 
Business ventures in this industry often involve technological and 
contractual arrangement with, or control or ownership by, foreign 
entities, or both.
    The transnational nature of these ventures poses substantial legal, 
technical, and practical challenges to U.S. agencies charged with 
enforcing the law or protecting the national security. These challenges 
range from protecting U.S. communications and data from unauthorized 
access to preserving the Government's ability to intercept lawfully 
communications routed by satellite to gateways outside the United 
States, without significantly impeding the introduction of new 
technologies, features, or services. Notwithstanding the wide variety 
of business plans, technology, and infrastructure that these various 
ventures involve, certain common characteristics exist and more 
importantly, the interests of the United States in these matters remain 
constant.
                               ii. risks
    A primary FBI interest and the most technologically challenging 
issue is the preservation of our ability to intercept communications 
and obtain communications transaction data pursuant to existing legal 
authorities 1 despite infrastructure and technological 
changes. To enforce the law, protect public safety, and preserve the 
national security, law enforcement and national security agencies must 
be able to intercept communications and obtain the associated 
identifying data in a secure, unobtrusive, and timely fashion pursuant 
to and in accordance with the relevant constitutional and statutory 
safeguards. The Government must also be able to obtain basic subscriber 
information and other transactional records relevant to the target 
communications. Actions taken to preserve this interest do not expand 
existing authorities; rather, they are designed to ensure that existing 
lawful investigative tools are not rendered inoperative by the 
transnational nature and technological complexity of a new venture. 
This will become increasingly important as the highly regulated 
telecommunication sector converges with the largely unregulated 
Internet communications industry.
---------------------------------------------------------------------------
    \1\ The primary legal authorities governing electronic surveillance 
of communications content and associated data include:
    1. Interception of real time communications content: 50 U.S.C. 1801 
et seq. (Foreign Intelligence Surveillance Act); & 18 U.S.C. 2510 et 
seq. (``Title III'').
    2. Pen Register and Trap and Trace Devices (to acquire in real time 
certain traffic data) 18 U.S.C. 3121; 50 U.S.C. 1841.
    3. Court Orders/Search Warrants (to obtain stored content, 
transactional data, and subscriber information) 18 U.S.C. 2703 and 
2709.
    4. Subpoenas (to obtain basic subscriber information) FRCP Rule 17.
    5. Preservation of information (all data) 18 U.S.C. 2703(f).
    7. CALEA, 47 U.S.C. Sec. Sec. 1001-1021.
---------------------------------------------------------------------------
    Traditionally, the FBI as well as other Federal, State, and local 
law enforcement agencies have principally conducted electronic 
surveillance efforts (and obtained interception access and access to 
stored communications and subscriber records) through those U.S. 
carriers which offer local exchange-type service, and provide service 
connections, directly to the public. It is vital therefore that a 
foreign owned and controlled company (through its carrier subsidiaries) 
maintain within the United States interception access, access to the 
stored wire and electronic communications of their U.S. customers and 
subscribers, and any records and subscriber information relating to 
such U.S. customers or subscribers. If such information is unavailable 
because it is stored beyond the United States border, subject to 
restrictive disclosure laws of foreign countries, or technologically 
inaccessible, the national security, law enforcement, and public safety 
interests of the United States are degraded proportionally. These 
requirements are essential to ensure effective, efficient, and secure 
service of lawful U.S. process; effective, efficient, and secure 
execution of such process; and to protect against any unauthorized 
disclosure of classified national security and sensitive law 
enforcement information related to such process, to foreign powers and 
companies licensed and regulated by foreign powers. For this reason, 
the agreements the DOJ/FBI have negotiated with foreign owned companies 
contain provisions which address these requirements.
    Another area of significant concern is the security of U.S. 
intercept and data acquisition activity. The implementation of lawfully 
authorized national security and law enforcement interception and data 
acquisitions increasingly requires the cooperation of the 
communications service provider. In these cases, the U.S. Government is 
required to disclose sensitive target information and investigative 
techniques to the service provider in order for it to provide the 
assistance required under the order. Such targets could be foreign 
intelligence officers or agents, or could be associated with criminal 
enterprises (e.g., international drug-trafficking). Without adequate 
safeguards, the damage to an investigation would be done the moment the 
U.S. serves process on the foreign-affiliated carrier. The foreign-
affiliated carrier would also immediately become knowledgeable about 
the current technological intercept capabilities and limitations of 
U.S. law enforcement and national security agencies. The disclosure of 
such information to a foreign government and its operatives could serve 
as a guide to how to evade lawful U.S. surveillance.
    Risks associated with the potential for compromise of the 
interception, unauthorized identification of interception targets, and 
disclosure of interception sources and methods, correspond with the 
level of foreign involvement in or control of the entity through which 
the intercept is to be executed. Also law enforcement's ability to 
prevent, detect and respond to breaches of wire tap security are 
greatly inhibited if the equipment and personnel responsible for the 
intercept are located outside the United States.
    If the U.S. Government cannot satisfy itself that the 
confidentiality of its national security and law enforcement 
interceptions will be maintained, then it may be denied the use of 
these investigative tools, degrading of our ability to protect national 
security and public safety, even though the interception is clearly 
authorized by law. Moreover, once a communications system is considered 
``intercept-free,'' it has the potential to become a haven for all 
sorts of unlawful activity. Our agreements with the foreign owned 
companies therefore require increased security of lawfully authorized 
electronic surveillance activities in situations where information 
about such activities could be accessible from outside the United 
States, or otherwise readily acquired by a foreign power.
    The FBI together with the Department of Justice is charged with 
preventing, investigating, and prosecuting, when appropriate, instances 
in which U.S. communications and data have been acquired or disclosed 
in violation of our Nation's laws.2 Our ability to detect, 
investigate, and assert jurisdiction, criminally or civilly, is 
impeded, if not eliminated, when entire or significant components of 
communication systems operating in the U.S. are located or accessible 
through means located outside U.S. borders. Even within the United 
States, unauthorized interceptions and disclosures by a service 
provider are, as a practical matter, undetectable. But the risk that a 
service provider might carry out, or assist in carrying out, covert 
interceptions increases when the entity with ownership, control and 
influence over company practices and employees owes its allegiance to a 
foreign government.
---------------------------------------------------------------------------
    \2\ E.g., 18 U.S.C. Sec. 2511.
---------------------------------------------------------------------------
    Related to protecting the security of private communications, is 
our interest in preventing economic espionage. The theft of trade 
secrets on behalf of foreign governments, instrumentalities, or agents 
is prohibited by 18 U.S.C. Sec. 1831; theft of trade secrets in other 
instances is proscribed by 18 U.S.C. Sec. 1832. Notwithstanding that an 
owner may have taken all measures that a reasonably prudent person in 
the same or similar circumstances may have taken to safeguard his trade 
secrets, foreign control of or significant involvement in U.S. 
communications systems over which those trade secrets are sent 
increases their vulnerability to unobtrusive, illegal exploitation.
    The operation of or access to telecommunications facilities and 
services which originate and/or terminate in the U.S. creates the 
opportunity for foreign-owned and controlled carriers and their 
personnel to engage in or allow espionage and economic espionage. To 
the extent that the operation of transnational or global communications 
systems increase this risk by virtue of their infrastructure, 
technology, or business plan, law enforcement's ability to prevent 
trade secret theft is proportionately decreased. Perhaps more 
importantly, if we cannot intercept lawfully the communications of 
foreign government agents, then we will be at a disadvantage in 
learning how and when economic espionage is committed. In other words, 
to combat this form of espionage effectively, we need to preserve our 
ability to learn who, when, and how it is being committed. This is very 
difficult to do when the government whose agent may be the subject of 
the intercept order owns or controls the network.
    Finally, the globalization of the communications industry has the 
inherent potential for threats to the stability of our National 
communications infrastructure. We have a responsibility, under 
Presidential Decision Directive 63, to take reasonable measures to 
protect our national infrastructure. To ensure that critical 
infrastructure protection is achieved and maintained, the Directive 
provides that ``[t]he full authorities, capabilities and resources of 
the government, including law enforcement, regulation, foreign 
intelligence and defense preparedness shall be available, as 
appropriate.'' (Presidential Decision Directive/NSC-63 on Critical 
Infrastructure Protection (May 22, 1998)). Related to this effort, 
telecommunications carriers are required to comply in an effective, 
efficient, and unimpeded fashion with applicable provisions of (i) all 
National Security and Emergency Preparedness rules, regulations, and 
orders issued by the FCC under the Communications Act of 1934, as 
amended (47 U.S.C. Sec. 151 et seq.); (ii) the orders of the President 
in the exercise of his or her authority under section 706 of the 
Communications Act of 1934, as amended (47 U.S.C. Sec. 606), and under 
section 302(e) of the Aviation Act of 1958 (49 U.S.C. Sec. 40107(b)); 
and (iii) Executive Order 11161 (as amended by Executive Order 11382). 
These provisions are designed to ensure an immediate response to U.S. 
Government telecommunications requirements in the event of a national 
emergency. If a carrier's facilities that process U.S. communications 
are located outside of the United States or if the carrier is foreign 
owned or controlled, there could be a risk that it could not or would 
not immediately respond to the U.S. Government's telecommunication 
needs in an emergency. The agreements I have previously noted address 
such concerns by requiring that carrier facilities that are part of, or 
are used to direct, control, supervise or manage all or any part of the 
transmission of domestic U.S. communications, as well as that end of a 
call that originates or terminates in the United States, be located at 
all times within the United States.
                       iii. addressing the risks
    Since the business plans, system infrastructures, and involved 
technologies in proposed telecommunication transactions vary 
significantly in innumerable ways, identifying a precise and fixed set 
of criteria that each venture must satisfy in order to protect 
adequately the interests identified above is impractical. Instead, we 
must analyze a large number of factors in each case to determine how 
the proposal will impact the government's ability to satisfy its public 
responsibilities: System size, technology and infrastructure; location 
of tangible and intangible assets; business plan and proposed 
practices; organizational structure; expected evolution of the 
communications market and technology; degree and nature of foreign 
control; national and international controls over the system's 
operations; political risks/reciprocity; and relevant historical 
intercept activity. Based on that evaluation, we begin to negotiate 
with the involved companies to devise and evaluate possible solutions.
    In conducting this review, we recognize that every transaction 
presents some risk and do not aspire to eliminate every conceivable 
risk. Rather, we view all transactions as falling somewhere on a 
spectrum of risk. Some transactions, in short, present greater risks to 
law enforcement and national security than do others. At one end of 
this spectrum fall ventures involving small communications service 
providers seeking authority only to resell international service; at 
the other fall transactions involving the acquisition of large domestic 
service providers by, or the merger of a domestic service provider's 
network into, a global or transnational network owned or controlled by 
a hostile foreign government. Most transactions fall somewhere in 
between. We attempt to husband our limited resources by addressing 
those ventures that present a high level of risk to the American 
public.
    To this end we are vigilant in requiring only that which is 
necessary to protect national security, privacy and public safety. 
While there are certain common characteristics in the measures that are 
critical to preserving national security, privacy and public safety, 
the commitments needed to mitigate our concerns vary depending on the 
company's network and structure. Nonetheless, we strive for consistency 
in protecting our ability to enforce the laws of the United States and 
to protect our national security. This consistency has served to help 
guide DOJ/FBI decision making, as well as to serve as a platform for 
guidance to the telecommunications industry and other interested 
parties in resolving national security concerns in foreign ownership 
cases.
    I wish to stress that we have taken a number of positive steps to 
address the concerns discussed in this testimony. As Mr. Di Gregory 
describes in detail in his statement, in each case we use available 
legal tools to seek a tailored solution to the specific concerns 
presented. In that regard, the FBI and the Department of Justice have 
relied on two existing fora in evaluating proposed transactions in 
making our concerns about such transactions known: the Federal 
Communications Commission and the Committee on Foreign Investment in 
the United States. While I will not reiterate Mr. Di Gregory's remarks 
in any detail, I would, however like to echo his concern about changes 
to the current processes.
    To date we have been able to use the existing legal framework and 
process to reach agreements which appropriately address our concerns. I 
believe we currently have a good balance between the need to ensure 
basic security and the virtues of supporting a vibrant communications 
sector. We will continue to utilize existing processes to protect our 
national security and law enforcement interests in a consistent and 
systematic manner.

    Mr. Tauzin. Thank you, Mr. Parkinson. Let me make a general 
unanimous consent, we always do, that your written statement, 
as all written statements, are a part of our record, without 
objection.
    Let me ask for order in the committee. Our witnesses are 
entitled to our attention. We ask for everyone to please quiet 
the hum in the room. We thank you very much.
    We are pleased to welcome now Ambassador Richard Fisher, 
the Deputy U.S. Trade Representative to the USTR. Indeed, 
Ambassador Fisher, your statement is welcome, sir.

             STATEMENT OF AMBASSADOR RICHARD FISHER

    Mr. Fisher. Thank you, Mr. Chairman, and Ranking Member 
Dingell. I appreciate being here. Behind me is seated my son, 
by the way, whose grandfather was a member of this committee 
and indeed, when he was in the minority as a Republican, was 
the ranking member of the minority side of this committee, and 
I know served with you, Mr. Markey. I am sure my son is 
delighted to find out that his father is the least popular man 
in this room as Deputy USTR.
    Mr. Chairman----
    Mr. Tauzin. Just like at home, we should suggest.
    Mr. Fisher. Mr. Chairman, an open and competitive 
telecommunications market promotes innovation and technological 
progress. It rewards the most efficient and well-run 
businesses. It reduces the price of services for families and 
other consumers. This is what we have experienced here in the 
United States, as many of you have eloquently pointed out, and 
it is what we seek to foster through our trade policy abroad.
    As mentioned by Congressman Dingell, the deregulation of 
our telecommunications markets has fostered competition and 
innovation worldwide, certainly here in the United States, 
because once dominated by monopolies, we now have over 300 new 
competitive local providers who are bringing advanced services 
to millions of Americans, from cell phones and satellite 
services to high speed Internet access. The direct value of 
this to our economy is vast and the associated benefits of 
reduced costs for our businesses, for our consumers, our 
greater convenience in daily life and national competitiveness, 
is still greater.
    However, as the U.S. pioneered deregulation in the telecom 
sector, as many of you have pointed out, many of the world's 
major markets remained dominated by traditional monopolies and 
so we went to work, Mr. Chairman, in your words, to push and 
pressure and prod our trading partners to open up 
telecommunications to competition from the rest of the world. 
We have used a variety of tools to do so: Our domestic laws, 
our bilateral negotiations, and negotiations at the WTO.
    Central to the advances of the past years was the 
conclusion of the WTO Basic Telecom Agreement. This agreement, 
in our humble opinion, is one of the major trade policy 
accomplishments of the past decade. Before it went into force, 
only 17 percent of the world's top 20 global markets were open 
to U.S. firms, and with it U.S. companies have now gained 
access to over 95 percent of global telecommunications markets, 
as mentioned by Congressman Oxley.
    Since 1998, we have made still more progress. Singapore, 
Canada, Korea, Japan and India have all unilaterally improved 
market access. And China, Taiwan and other economies entering 
the WTO have each committed to opening their telecommunications 
markets.
    We have also used Section 1377 to identify and eliminate 
violations of the agreement and address other telecom 
priorities in such markets as Canada, Mexico, the European 
Union and Japan. Most recently, Mr. Chairman, in our bilateral 
trade agreement with Hanoi we agreed on a substantial opening 
of the Vietnamese telecommunications market.
    A by-product has been the privatization of many of these 
government monopolies. I know this is a subject that you, 
Congressman Markey, care a great deal about and that 
Congressman Hollings is intense about. From the beginning of 
1997 to the end of July 1999, $104 billion worth of 
privatizations were completed. As of 1999, of the 189 members 
of the International Telecom Union, 90 have wholly or partially 
privatized their incumbent telecom operators and 18 of these 
were privatized completely. Of the nonprivatized operators that 
are remaining, over 30 are currently planning to privatize, 
including those in Finland and Egypt and Austria and Algeria, 
the Chech Republic, Kenya, Kuwait, Morocco, Norway and Turkey. 
All this has led to lower costs to consumers and businesses 
worldwide and to massive new business opportunities for U.S. 
telecommunications companies and their workers and 
shareholders.
    What American consumers pay for international calls has 
fallen sharply. Retail calls across the Atlantic now cost 
little more than a domestic long distance telephone call, and 
even calls to Japan, recently as high as $1 a minute, are now 
available from major carriers for as little as 15 cents a 
minute. Overall, the price of wholesale international 
connectivity has plummeted by as much as 80 percent over the 
past 4 years. This is a key factor that is feeding the growth 
of the global Internet.
    U.S. telecommunications firms, with the market access 
promoted by the agreement, are now leaders around the world. 
American companies hold substantial investments and operate in 
nearly 40 countries. They operate the most extensive pan-
European networks. They lead the world in deploying 
technologies such as cable and Internet telephony. American 
firms are now the largest investors in almost every 
international submarine cable consortium and global satellite 
system. They have invested heavily in overseas wireless 
operations and they are taking the lead in moving globally into 
value added and Internet services.
    Let me just give you some specific examples, Mr. Chairman, 
to illustrate the breadth and depth of what we have 
accomplished abroad. SBC now has stakes in 22 countries. It 
holds 50 percent of AUREC in Israel, 42 percent of Tele 
Danmark, 20 percent of Bell Canada, 19 percent of TransAsia in 
Taiwan, 18 percent of Belgacom, 18 percent of Telekom South 
Africa and 15 percent of Cegetel in France. Through Tele 
Danmark, SBC holds a 42 percent stake in Talkline, the German 
cellular service provider and reseller.
    MCI-Worldcom now has facilities based in over 20 countries 
throughout Asia, Europe and Latin America.
    Bellsouth, through various alliances, holds wireless 
licenses in Argentina, Brazil, Chile, Denmark, Ecuador, 
Germany, Guatemala, India, Israel, Nicaragua, Panama, Peru, 
Uruguay and Venezuela. By the way through an alliance with KPN 
of the Netherlands, Bellsouth holds 100 percent of E-Plus, a 
German mobile operator.
    Verizon, which was mentioned earlier, has substantial 
wireless interests in Mexico and Italy and Greece and the Chech 
Republic, Slovakia, Indonesia, New Zealand, the United Kingdom, 
Thailand, and the Philippines.
    AT&T is involved in joint ventures and alliances in several 
places, Canada, Britain, Japan, Mexico, India, and Latin 
America.
    But it is not just the big guys. It is not just the Baby 
Bells that have benefited from liberalization. And it is not 
just companies that existed before the WTO agreement. Viatel, a 
company that is less than 5 years old, has a fiber-optic 
network of 4,700 kilometers that links 59 cities and is 
currently licensed in Austria, Belgium, Canada, France, 
Germany, Italy, the Netherlands, Spain, Switzerland, and the 
United Kingdom.
    Level 3, a company that was founded in 1998 and has raised 
$14 billion in capital during that short time period, is 
building submarine links to Asia and Europe and is building an 
intercity network in Europe linking at least 13 European 
cities. And I could walk you through Global Crossing and Prime 
Mass and Global Telesystems and PSINet. These are companies 
that are new and active and exploiting in the most positive way 
what we have been able to accomplish.
    It is true that, as Senator Hollings pointed out, U.S. 
firms may have had significant pre-WTO holdings. In addition to 
50 percent additional holdings post WTO, previous holdings are 
now subject, and this is very important, to WTO dispute 
settlement if U.S. carriers encounter problems in foreign 
markets.
    This is not to say, Mr. Chairman, that our work is done. 
Much remains to be done, particularly in fast growing, 
developing and newly industrialized countries such as India, 
South Africa, Korea, Malaysia, and Mexico. And moreover, 
broader liberalization of the service industries, many of which 
use telecommunications networks as a principal vehicle for 
exports, is needed to spur growth in the telecom sector. And 
this work, by the way, has already begun. The WTO has agreed on 
opening a new set of services negotiations and we are hard at 
it.
    The purpose is to create a virtuous cycle of innovation and 
growth in our telecom industry and easy delivery of our 
services to countries and markets abroad.
    The point is this, Mr. Chairman, we have accomplished much. 
We have a great deal more to do. I ask you to bear in mind all 
this as you contemplate this very important matter, especially 
given, as Congresswoman Dunn and Chairman Kennard pointed out, 
that we have now in place the apparatus to protect competition 
and our national security through the FCC approval process and 
the Exon-Florio national security review process, as well as 
Section 7 of the Clayton Act. These laws and review standards 
provide us with strong protection against threats to national 
security and anticompetitive behavior and, very importantly, 
they are fully in accord with our commitments under the Basic 
Telecom Agreement and our other WTO commitments, and they 
enable us to continue the leadership that Congressman Eshoo 
spoke of in pushing the envelope, Congresswoman Eshoo should 
say, excuse me, in pushing the envelope on opening the global 
telecom market to our advantage.
    A perception that the United States is turning its back on 
our current operating procedure risks halting or reversing the 
momentum toward liberalization. We have already received strong 
expressions of concern from the European Union and other 
trading partners regarding the compatibility of these 
legislative proposals with our international obligations in the 
WTO. If the United States enters the new services negotiations, 
having instituted measures countries may perceive as 
protectionist, some will be tempted to restrict existing 
opportunities offered to U.S. carriers and resist future 
liberalization. This could affect billions of dollars in 
current U.S. investment abroad and even more further 
investment. In short, a shift to restricting our market now 
could threaten the hard fought liberalization and growth that 
we have experienced in telecom markets around the world and 
diminish our leadership. Why would we take that risk?
    Thank you.
    [The prepared statement of Ambassador Richard W. Fisher 
follows:]
   Prepared Statement of Ambassador Richard W. Fisher, Deputy United 
                      States Trade Representative
    Mr. Chairman, Members of the Subcommittee, thank you for inviting 
me to testify on our international telecommunications policy.
    With the dramatic changes the telecommunications industry is 
undergoing domestically and abroad, this is a timely topic. Given the 
time that has elapsed since the passage of 1996 Telecom Act and the WTO 
Basic Telecommunications Agreement, which went into effect in February 
1998, this is a useful opportunity to reflect on the policy choices the 
United States has made and how they have affected U.S. interests.
               wto agreement on basic telecommunications
    American telecommunications trade policy rests on simple and 
familiar principles. An open and competitive telecommunications market 
promotes innovation and technological progress; rewards the most 
efficient and well-run business; and reduces the price of services for 
families and other consumers. The telecommunications sector is a 
dynamic example of the value of our open investment policy and our 
leadership in liberalizing markets. This is the type of world market we 
seek to foster through trade policy, and the reason is very clear in 
America's experience at home.
    Once dominated by monopolies, the deregulation of our local 
telecommunications markets has fostered competition and innovation. We 
now host over 300 new competitive local providers, who have attracted 
tens of billions of dollars in new capital and are bringing advanced 
services to millions of Americans, from cell phones and satellite 
service to video-conferencing, high-speed Internet access, and much 
more. The direct value of this to our economy is vast; and the 
associated benefits of reduced costs for businesses, greater 
convenience in daily life, and national competitiveness still greater.
    However, as the United States pioneered deregulation in the telecom 
sector, in the 1980s and through the 1996 Telecom Act, many of the 
world's major markets remained dominated by traditional monopolies. 
This not only posed an obstacle to their technological development, but 
was a significant barrier to exports of some of America's most 
competitive businesses, whether across borders or through investment by 
American firms. Our trade initiatives have thus sought to open world 
telecommunications markets to competition. In this we have used a 
variety of policy tools, including bilateral negotiations, Section 1377 
of our domestic trade law, and negotiations at the WTO. And central to 
the advances of the past years was conclusion of the WTO's Basic 
Telecom Agreement in 1998.
    This agreement, joining most of the world's major 
telecommunications markets in binding commitments to market access and 
pro-competitive regulatory policies, is one of the major trade policy 
accomplishments of the past decade. Before it went into force, only 17% 
of the world's top 20 global markets were open to U.S. firms; with it, 
measured by annual sales, U.S. companies gained access to over 95% of 
global telecommunications markets.
    Since 1998, we have made still more progress. Singapore, Canada, 
Korea, Japan, and India have all unilaterally improved market access. 
As China, Taiwan and other economies enter the WTO, each of them will 
implement market-opening commitments in telecommunications. Given the 
momentum we have established, we have been able to replicate this 
standard even outside the WTO--for example, in our recent bilateral 
trade agreement with Vietnam.
    The value of these market-opening commitments is growing in step 
with the growth of global markets, stimulated in great part by the 
emerging competition the agreement unleashed. With sales at $650 
billion in 1997, the global telecommunications market is now rapidly 
approaching one trillion dollars in annual sales.
    As expected, U.S. firms have taken full advantage of these 
opportunities. U.S. firms hold substantial investments in operators in 
over three dozen countries and on every inhabited continent (e.g., SBC 
alone has stakes in 22 countries, and MCI Worldcom has facilities-based 
operations in over 20 countries as well (Source: Hoovers Online)). U.S. 
operators (such as Qwest, Viatel, GTS, and MCI Worldcom) now operate 
the most extensive pan-European networks and are global leaders in 
deploying technologies such as cable telephony and internet telephony. 
U.S. firms are the largest investors in almost every international 
submarine cable consortium and global satellite system (e.g., U.S. 
firms have ownership interest in over 70% of the capacity on the 
recently-laid U.S.-Japan cable, which will provide a quantum increase 
in trans-Pacific connectivity) and have invested heavily in overseas 
wireless operations (e.g., Bellsouth has over 6 million cellular 
customers in ten Latin American countries, and its international 
operations account for almost 10% of its revenues (Source: Forbes, 
March 2000)). Following in the wake of telecom liberalization, U.S. 
firms are also taking the lead in moving globally into value-added and 
Internet services (e.g., PSINet provides facilities-based Internet 
access in 29 countries on five continents).
    The benefits of the WTO agreements extend far beyond U.S. 
telecommunications firms. U.S. and foreign consumers and businesses are 
major beneficiaries of the dramatic competition that has resulted from 
increased market opening: some retail calls across the Atlantic now can 
cost little more than a domestic long-distance phone call, and even 
calls to Japan, recently as high as one dollar a minute, are now 
available from major carriers for at little as 15 cents a minute. With 
end-to-end investment in submarine cables now possible, and massive 
investment led by U.S. firms now underway, the price of international 
connectivity has plummeted by as much as 80% over the past 4 years 
(source: ING Barings)--a key factor that is fueling the growth of the 
global Internet.
    In addition to securing investment opportunities, the WTO Basic 
Telecom Agreement put into place binding regulatory principles to 
ensure that regulators enforce pro-competitive rules. These 
commitments--ranging from cost-oriented interconnection rates to 
transparent licensing procedures--are an essential framework for 
effective regulation and have provided a basis for addressing problems 
faced by U.S. carriers in Canada, Mexico, Japan, Peru, Israel, the 
United Kingdom, and Germany, affecting investments worth billions of 
dollars. Most recently, we have taken advantage of these commitments to 
reach an agreement with Japan that will lower interconnection payments 
for U.S. and other competitive carriers by over one billion dollars; 
and we have initiated proceedings in the WTO to enforce rights of U.S. 
telecom service providers relating to over one billion dollars of U.S. 
investments in Mexico and affecting the second largest international 
services market for the U.S. service providers and consumers.
    Despite this progress, barriers continue to exist in these and 
other markets, and competition has not yet fully developed in all WTO 
markets, just as it has not yet fully developed in the United States. 
But as we make the global transition from monopoly to competitive 
markets, the WTO commitments provide one of the most important sets of 
competitive safeguards on which we can now rely to open foreign markets 
and ensure that our trading partners abide by their commitments. 
Furthermore, the impact of WTO commitments extends far beyond the WTO 
members which have undertaken them. These commitments are widely seen 
as goals for a much broader range of countries and are a major focus of 
attention in the International Telecommunications Union (ITU), the 
Asia-Pacific Economic Cooperation (APEC), and the World Bank.
    To date, success has bred more success. Peer pressure by 
liberalizing countries has created a virtuous circle where countries 
now compete for global investment by offering more attractive 
investment opportunities and more effective regulatory regimes. For 
example, even after entry into force of the WTO Basic Telecom 
Agreement, Singapore, Korea, Japan and India have unilaterally decided 
to improve foreign investment and telecom regimes, and many EU and 
Latin American countries are substantially reducing interconnection 
rates. Preserving this momentum is essential if the WTO is to provide a 
forum for further progress--through implementation of existing 
commitments and expansion of new commitments.
             current proposals can undermine these benefits
    New proposals are under consideration to limit foreign investment 
in the U.S. telecom markets by preventing the Federal Communications 
Commission (FCC) from licensing certain telecom carriers based on their 
level of government ownership. Currently, foreign investment in the 
telecommunications sector is governed by Section 310 of the 
Communications Act of 1934. This statute (section 310(a)) prohibits 
direct ownership of certain categories of telecom licenses by a foreign 
government or its representative; however, section 310(b)(4) authorizes 
indirect ownership of certain telecom licenses by a foreign person, a 
foreign corporation, or a foreign government to exceed 25 percent 
unless the FCC finds that the public interest will be served by the 
refusal or revocation of such license. By placing an absolute bar on 
certain types of licenses, the legislative proposals seek to remove the 
discretion that this statute currently provides the FCC to determine 
whether an award of a particular license or authorization is in the 
public interest.
    Competition and national security concerns have been cited as 
justification for imposing an absolute bar on the participation of such 
foreign government-owned carriers in the U.S. market. For instance, 
there have been assertions that foreign government-owned competitors 
have special privileges in their home market which can be exploited to 
distort competition in our market. Questions have also been raised 
concerning the desirability of allowing foreign government ownership of 
U.S. telecommunications assets, which are vital to U.S. national 
security.
    These arguments merit careful review and analysis. The FCC and 
other Executive Branch agencies must carefully scrutinize all 
transactions involving government-owned carriers to ensure that they do 
not distort competition in the U.S. market or undermine critical U.S. 
national security, law enforcement, and related interests.
    However, the Administration does not believe that these concerns 
justify changing existing law to prevent a telecom company from 
participating in the U.S. market purely based on its level of 
government ownership. We believe that such proposals risk undermining 
the benefits the United States has reaped in the past few years in the 
international telecom market. Moreover, the evidence casts doubt on the 
assumptions underlying proposals to ban government-owned carriers, 
particularly assumptions that government-owned carriers enjoy special 
advantages.
    Finally and most importantly, the U.S. Government already possesses 
effective tools to address the competition and national security 
concerns raised by any foreign government-owned carrier wishing to 
participate in the U.S. telecom market. These tools are more than 
adequate to address the concerns that have been raised and do not 
create the risks that the proposed initiatives are certain to engender. 
We will continue to use these tools to address competition, national 
security, and other concerns that foreign investment in our market may 
raise.
              backtrack from international liberalization
    The United States has been the leader in worldwide liberalization 
of telecom markets, producing tangible benefits for both us and our 
trading partners. Proposals to ban government-owned telecom firms from 
our market would likely diminish our leadership role in this effort and 
could cause other countries to believe they could limit foreign 
investment in the telecom and possibly other sectors, either in 
retaliation or for protectionist goals. We would, therefore, be putting 
at risk the significant benefits we have derived from years of hard 
work in opening up these markets.
    We are facing many of the same questions that framed policy 
discussions in the lead-up to telecommunications negotiations in the 
WTO in the mid-1990s. At that time, there was considerable debate over 
whether the United States could better affect foreign market opening 
through a unilateral, reciprocity-based approach or through a 
multilateral framework in the WTO. The stakes for the United States 
were enormous. With approximately one third of the value of the entire 
global telecommunications market at the time, the United States needed 
to ensure major concessions from its trading partners in return for 
offering access to the biggest domestic market in the world.
    In the end, the calculus was clear: any broad-based agreement that 
rapidly opened up global markets to U.S. firms clearly played to our 
advantages. While we were offering other countries access to a market 
no other country individually could match, a critical mass of market 
opening offers would provide opportunities that U.S. firms were 
uniquely positioned to exploit, given our broad-based experience with 
competition.
    As I already discussed, we have fared extremely well. So far, we 
have led the world trend in market liberalization and a commitment to 
competition. Others have followed, particularly in light of the 
increased productivity, investment, growth and consumer welfare that 
deregulation and competition have produced in the United States. But 
any perception that the United States is turning back on that approach 
risks reversing the incentives of our trading partners to compete in 
liberalizing their own markets, and possibly bolstering pressure to 
protect vested telecommunications interests. We have already received 
strong expressions of concern from the European Union (EU) and other 
trading partners regarding the compatibility of these proposals with 
our international obligations in the WTO.
    We expect the telecommunications sector to be a major focus of 
recently launched WTO services negotiations, and, as in the last round, 
we can best take advantage of these negotiations by demonstrating 
leadership. Much work remains to be done to liberalize further global 
markets, particularly in fast-growing developing and newly-
industrialized country markets such as India, South Africa, Korea, 
Malaysia, and Mexico.
     If the United States enters these negotiations having instituted 
measures most countries will perceive as protectionist, it is possible 
that many countries will be tempted to restrict existing opportunities 
offered to U.S. carriers and resist any further opening in the WTO 
process. This could affect billions of dollars in current U.S. 
investment abroad, and even more future investment. In short, efforts 
to restrict our market now could curtail the virtuous cycle of 
liberalization and growth that we have experienced in telecom markets 
around the world.
          assumptions regarding government-owned telecom firms
    Much of the concern with foreign government-owned telecom firms 
stems from the belief that a government-owned company would enjoy 
significant advantages in competing with U.S. rivals in the U.S. 
market. At first blush, this appears to be a compelling concern. 
However, there is evidence that casts doubt on the assumptions 
underlying this belief.
Assumption 1: Government-owned firms are able to raise capital more 
        easily than private firms.
    Market data do not demonstrate a conclusive link between government 
ownership and access to capital. Although some government-owned firms 
have accumulated large cash reserves, presumably to finance 
acquisitions, any large firm can accumulate cash. What matters is not 
cash holdings per se, but the ability to finance acquisitions.
    Companies raise capital primarily by issuing equity and debt. Most 
of the major players in telecom use close to an even split between 
equity and debt financing. A review of corporate bond ratings for large 
telecom firms (privately and government owned) demonstrates that there 
is no systematic relationship between bond rating and the extent of 
government ownership in a firm.1 In addition, the bonds of 
all government-owned telecom firms are rated lower than the bonds of 
the firm's respective governments.2
---------------------------------------------------------------------------
    \1\ Bond ratings--which are determined by independent, private 
agencies (such as Moody's and Standard and Poor's)--classify firms by 
the risk level of their debt. As a firm's debt becomes more risky, its 
bond rating falls, and it must pay more to convince investors to hold 
its debt. According to Standard & Poor's bond ratings, British Telecom 
(BT) (which has no government ownership) has a higher credit rating 
than government-owned Deutsche Telekom (DT) and France Telecom (FT); 
similarly, privately-owned Bellsouth has a higher credit rating that 
Korea Telecom or Telekom Malaysia (both of which have substantial 
government ownership). Moreover, DT's rating is no better than those of 
SBC, Bellsouth, and AT&T. Similarly, a review of Moody's recent ratings 
of major government-owned operators (France Telecom, Deutsche Telekom, 
KPN, Telstra, Korea Telecom, Telekom Malaysia) does not cite government 
ownership as a factor in its ratings. In fact, Moody's review of Korea 
Telecom specifically cites as ``neutral'' the impact of the impending 
reduction of government ownership from 59% to 33% and gives NTT (with 
53% government ownership) the same credit rating (Aa1) as NTT DoCoMo 
(which is only 35% government owned).
    \2\ Standard & Poor's gives an AAA rating to the government bonds 
of France, Germany, Japan, and the Netherlands, but gives the bonds of 
FT, DT, Nippon Telegraph and Telephone (NTT), and Royal KPN a rating of 
A, AA-, AA+, and A- respectively. An analysis of recently issued bonds 
of these firms shows that their trading values imply yields of between 
25 and 125 basis points above the government bonds in their respective 
countries. On average, they trade with yields 50 basis points higher 
than government bonds with comparable maturities.
---------------------------------------------------------------------------
    Telecom companies--including DT--have recently issued unprecedented 
levels of corporate bonds to finance acquisitions and expansions. Given 
these high levels of debt, investors have become cautious, demanding 
higher yields that have translated into higher financing costs for 
companies, both government and privately owned. At the same time, many 
of these telecom companies are under threat of credit rating 
downgrades. For instance, Moody's has placed DT under review for a 
possible downgrade to its credit rating, growing out of its $7 billion 
pledge for a third-generation wireless license in Germany, and its $50 
billion offer for Voice Stream.3 Such downgrades could have 
a major impact on certain companies. For example, to secure financing, 
DT agreed that it would add an extra one-half percentage point to the 
coupon of its recent $14.6 billion bond issue if its credit rating were 
downgraded to below single A. If the interest rate adjustment were 
triggered, it would cost DT an additional $73 million a year. As this 
example suggests, the market is focusing on the business risks 
associated with DT's actions, not its government ownership, as it 
determines DT's cost of capital.
---------------------------------------------------------------------------
    \3\ NTT was subject to a similar review arising out of its 
acquisition of Verio, as were many other European government-owned 
carriers, relating to their third-generation wireless bids. Telenor 
(100% owned by Government of Norway) is subject to a possible downgrade 
arising out of its investments in Thai carriers.
---------------------------------------------------------------------------
    This is not meant to suggest that these government-owned telecom 
operators do not enjoy high credit ratings and ready access to debt 
capital. But, as discussed above, the reasons do not appear to have a 
direct relationship to government ownership. Rather, while government 
involvement may be a factor in credit analysis, so are other factors, 
including the competitive environment, the regulatory environment, 
management strength, management strategy, diversification strategy, 
funding strategy, network quality, foreign acquisitions, and a range of 
financial measures. In some instances, government ownership is 
specifically cited by credit rating agencies as a negative 
factor.4 Moreover, in the context of diversification 
strategy, foreign acquisitions may also be a negative factor in a 
credit rating due to political, currency, or other risks. Accordingly, 
one could argue that the high credit rating for firms like NTT derives 
principally from the dominant position in the domestic market combined 
with the fact that it has not ventured aggressively outside its home 
market.
---------------------------------------------------------------------------
    \4\ For example, Moody's recent rating of the Australian 
government-owned carrier Telstra bases its ratings, in part, on 
limitations associated with being 50.1% government-owned including 
inability to access equity markets and intense public scrutiny of cost 
initiatives.
---------------------------------------------------------------------------
    On the equity side of the balance sheet, companies that earn 
superior returns on equity are usually assigned higher price and 
earnings multiples than are less efficient companies, thus lowering the 
cost of stock issuance. Looking at the cost of equity alone, Bellsouth, 
SBC, Verizon, and AT&T (with a cost of equity of 6.82%, 7.42%, 7.10%, 
and 7.67% respectively) enjoy a lower cost of capital than DT and FT 
(with a cost of equity of 7.78% and 7.70% respectively) (source: 
Bloomberg).
    There are other reasons why government ownership might put foreign 
government-owned companies at a competitive disadvantage in the eyes of 
equity investors. Government-owned firms are typically less efficient 
and less profitable than private firms.5 Government-owned 
firms are often burdened with high labor costs, extensive universal 
service requirements, and poor management. Management is often less 
prepared to operate in a market-oriented environment, putting such 
firms at a disadvantage in responding quickly to growth areas such as 
data services.
---------------------------------------------------------------------------
    \5\ For extensive reviews, see, Boardman, Anthony, and Aidan R. 
Vining, ``Ownership and Performance in Competitive Environments: A 
Comparison of the Performance of Private, Mixed, and State-Owned 
Enterprises,'' Journal of Law and Economics 32: 1B33 (1989); Vining, 
Aidan R., and Anthony E. Boardman, ``Ownership versus Competition: 
Efficiency in Public Enterprise,'' Public Choice 73: 205B39 (1992); and 
Dewenter, Kathrin, and Paul H. Malatesta, ``State-Owned and Privately-
Owned Firms: An Empirical Analysis of Profitability, Leverage, and 
Labor Intensity.'' American Economic Review, forthcoming.
---------------------------------------------------------------------------
    Governments may also have found it easier, as owner of the 
operator, to use the operator as an instrument of flawed industrial 
policy, imposing long-term burdens on these firms (e.g., NTT remains 
burdened with a cost structure in its local exchange markets that is 
three times higher than that of a typical U.S. Regional Bell Operating 
Company, while carrying far less traffic). These inefficiencies can be 
absorbed where a company is dominant in its domestic market, and that 
market remains its focus; but such a legacy is likely to be a 
comparative disadvantage for a firm looking to expand abroad into 
competitive markets like the U.S., where efficiency is such a key 
determinant of success.
    Combining the cost of debt and the cost of equity to determine the 
overall cost of capital, it is not clear that companies with 
significant government investment have a comparative advantage. The 
evidence is mixed: DT has one of the lowest weighted average costs of 
capital (5.32%), but DT's rate is not significantly lower than that of 
Verizon, (5.46%) or Bellsouth (5.55%). Furthermore, these U.S. firms, 
along with SBC, have a lower weighted average cost of capital than 
France Telecom (which is 54% government owned) (source: Bloomberg).
    In sum, the assumption that government-owned firms have privileged 
access to capital may initially seem compelling. However, as discussed 
above, the relationship between government ownership and access to 
capital is inconclusive, and government ownership can impose 
significant costs on a firm.
Assumption 2: Government-owned firms are more likely to have monopoly 
        privileges in domestic markets and can subsidize their U.S. 
        operations with revenues generated at home to engage more 
        easily in anti-competitive behavior.
    Allegations of monopoly privileges and anti-competitive cross-
subsidization are common in markets with dominant telecom providers. 
However, just as there is no systematic relationship between government 
ownership and access to external finance, there is no certain 
connection between government ownership and monopoly privilege and 
anti-competitive cross-subsidization. The problem that U.S. carriers 
face in foreign markets involving issues stems less from government 
ownership than from monopoly legacy, and allegations of anti-
competitive abuses arise in foreign markets dominated by a government-
owned entity (such as DT in Germany or NTT in Japan) or a completely 
privately-owned company (such as Telmex in Mexico). One could argue 
that Germany (which owns a substantial stake in Deutsche Telekom) has a 
more independent and effective regulator than Mexico (which has no 
government stake in the dominant operator).
    As a result, the relevant question may not be present levels of 
government ownership but whether the foreign market is more or less 
open to competition. We have made tremendous progress in this regard 
over the past few years, particularly since the entry into force of the 
WTO Basic Telecom Agreement. Where this is not the case and our 
carriers still face anti-competitive barriers in foreign markets, we 
have been vigilant in using our remedies in the WTO and under U.S. 
trade law (such as under Section 1377 of the 1988 Omnibus Trade and 
Competitiveness Act) to encourage our trading partners to open their 
markets to meaningful competition. Our recently initiated WTO case 
against Mexico and our actions under Section 1377 with respect to 
Germany, Israel, South Africa, and other countries underscore this 
resolve.
    Finally, U.S. telecommunications firms are already operating--in 
many cases, quite successfully--in overseas markets. For example:

 SBC holds 50 percent of AUREC (Israel), 42 percent of Tele 
        Danmark (Denmark), 20 percent of Bell Canada, 19 percent of 
        TransAsia (Taiwan), 18 percent of Belgacom (Belgium), 18 
        percent of Telkom South Africa, and 15 percent of Cegetel 
        (France). Through Tele Danmark, SBC holds a 42 percent stake in 
        Talkline, a German cellular service provider and reseller.
 Bellsouth, through various alliances, holds wireless licenses 
        in Argentina, Brazil, Chile, Denmark, Ecuador, Germany, 
        Guatemala, India, Israel, Nicaragua, Panama, Peru, Uruguay and 
        Venezuela. Through an alliance with KPN (Netherlands), 
        Bellsouth holds 100 percent of E-Plus, a German mobile 
        operator.
 Verizon has substantial wireless interests in Mexico, Italy, 
        Greece, the Czech Republic, Slovakia, Indonesia, New Zealand, 
        the United Kingdom, Thailand, and the Philippines.
 AT&T is involved in joint ventures and alliances in, among 
        other places, Canada, Britain, Mexico, India, Japan, Taiwan, 
        and Latin America.
 MCI-Worldcom has facilities-based operations throughout Asia, 
        Europe, and Latin America.
 Viatel has a fiber-optic network of 4,700 kilometers designed 
        to link 59 cities and is currently licensed in Austria, 
        Belgium, Canada, France, Germany, Italy, the Netherlands, 
        Spain, Switzerland, and the United Kingdom.
 Qwest, in alliance with KPN, is building a European network 
        designed to extend 11,800 miles and reach 46 European cities.
 Level 3 is building submarine links to Asia and Europe, and is 
        building an inter-city network in Europe linking at least 13 
        European cities.
 Global Crossing has submarine cables to Europe and Asia and is 
        building gateways for data operations.
 Primus has operations in Japan and Germany.
 Global Telesystems operates the largest European Internet 
        backbone.
 PSINet owns Internet service providers in 29 countries and 
        five continents.
Assumption 3: Competition in the U.S. market has weakened the U.S. 
        industry, making U.S. firms vulnerable to foreign takeover.
    The evolution of the U.S. telecom market over the past several 
years has contributed to an environment that has allowed U.S. telecom 
companies to flourish. For example, new Competitive Local Exchange 
Carriers (``CLECs'') have thrived due to competition and deregulation. 
Their market capitalization of about $85 billion at the end of 1999 was 
up from $3.1 billion in 1996. Between 1993 and 1998, overall market 
capitalization of U.S. telecom firms increased by $800 billion, 
doubling in value (source: CEA). Furthermore, stocks of U.S. telecom 
firms are generally trading today at earnings multiples similar to 
those of their European counterparts. As of September 1, the average 
ratio of stock price to EBITDA (i.e., Earnings Before Interest, Taxes, 
Depreciation, and Amortization) (the most commonly used valuation 
measure in telecom to measure cash flow) for all U.S. 
telecommunications firms with market values exceeding $20 billion was 
10.5. The average of the same ratio for BT, FT, DT, and Telecom Italia 
was the identical 10.5. Thus it does not appear that U.S. firms are 
undervalued relative to their European counterparts.
Assumption 4: Government ownership provides a competitive advantage, 
        particularly given the favorable regulatory treatment they 
        receive.
    The evidence suggests that government-owned firms view 
privatization as providing the competitive advantage that they 
currently may lack. For instance, one of the many incentives to 
privatize is to better tap global capital markets given large-scale 
investment needs that the government cannot meet. This is supported by 
evidence that firms are able to increase their capital expenditures 
significantly following privatization (Source: D'Souza, 2000).
    The evidence also does not demonstrate a conclusive link between 
government ownership and regulatory favoritism. Rather, regulatory 
favoritism can exist wherever an incumbent telecom company wields 
considerable power and influence. In fact, we are currently 
investigating allegations of biased regulation in Mexico of Mexico's 
dominant carrier, Telmex, which is 100% privately-owned. Mexico, like 
many of our WTO trading partners, has undertaken obligations in the WTO 
to ensure impartial regulation. We continue to be vigilant in ensuring 
that countries live by these and related obligations regardless of 
whether their incumbent telecom supplier is government or privately-
owned.
    If companies truly saw government ownership as a competitive 
advantage for regulatory or other reasons, there would be significant 
resistance to privatization by operators. NTT management's current 
campaign to eliminate Japanese government ownership from its company 
reinforces this point, as do current privatization efforts in Finland, 
Egypt, Austria, Algeria, the Czech Republic, Kenya, Kuwait, Morocco, 
Norway, Turkey, etc. Between 1984 and 1996, over $140 billion worth of 
privatizations occurred, some of which resulted in firms which are 100% 
privately-owned (such as BT). From the beginning of 1997 to the end of 
July in 1999, an additional $104 billion worth of privatizations were 
completed. As of 1999, of the 189 members of the ITU, 90 had wholly or 
partially privatized their incumbent telecom operators; and 18 of these 
were privatized completely. Of non-privatized operators, over 30 are 
currently planning to privatize.
    However, it is unrealistic to expect firms to privatize overnight. 
At the beginning of most privatization programs, national telecom firms 
in smaller countries have a potential market capitalization larger than 
the entire stock market, so it is impractical to sell shares all at 
once. Even in larger countries, the relative scale of privatization is 
enormous. For example, three NTT offerings in 1987-88 raised about $80 
billion, yet this represented less than 25 percent of NTT's total 
equity. Likewise, DT's initial first round of privatization occurred in 
November 1996 with an initial share offering of about $13 billion, and 
reduced the government's ownership stake from 100 percent to 76 
percent. A subsequent offering reduced this stake to the present 58 
percent. For NTT and DT to suddenly meet the levels specified by 
current legislative proposals to be able to participate in the U.S. 
market, they would be required to sell $54 billion and $39 billion 
worth of stock, respectively, based on current market capitalization. 
To put these amounts in perspective, the U.S. market last year absorbed 
$51.2 billion in Initial Public Offerings.
 tools available to address competition and national security concerns 
                 posed by foreign government ownership
    Proposals to bar telecom companies owned in excess of 25 percent by 
a foreign government from the U.S. market seek to address the 
competition and national security concerns presented by transactions 
involving such companies. However, current law already provides 
powerful tools that enable the FCC and other Executive Branch agencies 
to scrutinize proposed foreign investment to ensure that it in no way 
undermines national security or competition in the U.S. market. 
Although my colleagues will go into more detail on the role of their 
agencies in this review process, let me give you a brief overview of 
these tools and then focus on the activity of USTR in ensuring that 
U.S. companies can compete in foreign markets on meaningful terms.
                        1. Public Interest Test
    The FCC's public interest test allows the FCC--with input from 
other Executive Branch agencies--to scrutinize carefully the 
competition, national security, and other concerns posed by foreign 
investment in the U.S. telecom market. The Communications Act of 1934 
requires the FCC to conduct this analysis in several contexts related 
to foreign entry. For instance, section 310(b)(4) of the Act permits a 
foreign firm or government to acquire or maintain a greater than a 25 
percent indirect ownership of certain telecom licenses unless the FCC 
finds that the public interest will be served by the refusal or 
revocation of such license. The FCC applies its public interest test by 
examining, through public proceedings, whether a particular transaction 
threatens competition in the U.S. market or implicates national 
security, law enforcement, foreign policy, or trade policy concerns.
    With respect to competition issues, the public interest test 
establishes a presumption in favor of entry into the U.S. market by an 
applicant affiliated with a foreign telecommunications carrier from a 
WTO member country. However, contrary to certain claims, this 
presumption is not automatic; it is rebuttable. As part of its public 
interest test, the FCC is empowered to ensure, among other things, that 
a foreign carrier does not undermine competition in the U.S. market by 
virtue of its ability to exercise dominant power in its home or other 
third-country markets.
    In fact, the FCC has put in place a series of competitive 
safeguards designed to curb anti-competitive behavior that could result 
in harm to the U.S. telecom market. For example, the FCC prohibits any 
U.S. international carrier from accepting ``special concessions'' (such 
as exclusive arrangements) from a foreign dominant carrier. The FCC 
also requires certain operators to produce quarterly reports on traffic 
and revenues and maintenance of basic service and facilities. The FCC 
can also require the U.S. carrier and its dominant foreign affiliate to 
maintain structural separation in order to prevent foreign-affiliates 
from miallocating costs.
    In instances where these safeguards would be insufficient to 
prevent anticompetitive conduct in the U.S. market, the FCC has the 
authority to impose additional conditions on the grant of authority 
tailored to the competitive concerns raised in a particular 
transaction, such as applying the ``no special concessions rule'' or 
dominant carrier safeguards where the foreign carrier is not dominant 
in its home market. And where an application poses a very high risk to 
competition in the U.S. market, and where the FCC's competitive 
safeguards or other conditions would be ineffective, the FCC can deny 
the application.
    The FCC's public interest test also addresses the national security 
and law enforcement concerns raised by the entry of a particular 
foreign carrier into the U.S. market. The FCC specifically accords 
deference to other Executive Branch agencies in this and other areas to 
ensure that national security and law enforcement concerns are 
adequately addressed. Agencies charged with law enforcement and 
national security responsibilities will better explain how they have 
raised these issues with the FCC and how those issues have been 
resolved.
    Accordingly, the Administration believes that the FCC's public 
interest test can address the concerns raised by an application by a 
foreign government-owned carrier to participate in the U.S. market. The 
public interest test ensures that foreign entry into the U.S. market 
does not harm competition in the U.S. market and addresses concerns 
that may arise in foreign markets--such as those relating to unfair 
cross-subsidies or unfair home-market advantages--to the extent that 
they give a foreign carrier an anti-competitive advantage in the U.S. 
market. In addition, the public interest test--as well as the Exon-
Florio review discussed in the following section--ensures that entry of 
a foreign carrier into the U.S. market will not compromise our national 
security.
     2. Exon-Florio National Security Review of Foreign Investment
    The Exon-Florio provision (Section 721 of the Defense Production 
Act of 1950) provides for a national security review of foreign 
acquisitions of U.S. companies. Under the statute, the President may 
suspend or prohibit an acquisition if he finds that:

a) there is credible evidence to believe that the foreign investor 
        might take action that threatens to impair the national 
        security; and
b) existing laws, other than the International Emergency Economic 
        Powers Act and the Exon-Florio provision itself, do not provide 
        adequate and appropriate authority to protect the national 
        security.
    The President alone retains the power to suspend or prohibit a 
foreign acquisition of a U.S. company, but the President delegated the 
review and investigation aspects of the Exon-Florio provision to the 
Committee on Foreign Investment in the United States (CFIUS). CFIUS was 
established by Executive Order in 1975 to monitor the impact of foreign 
investment in the United States and to coordinate the implementation of 
U.S. policy on such investment. CFIUS is an interagency committee 
chaired by the Secretary of the Treasury with ten other agencies 
including Defense, State, Justice, Commerce, USTR, the NSC and the NEC. 
In addition, when CFIUS reviews a foreign acquisition of a U.S. company 
with businesses of interest to a non-CFIUS member agency, such as 
Energy or NASA, CFIUS invites that agency to participate in the 
particular review.
    Over the last twelve years, CFIUS has established a record of 
implementing Exon-Florio to protect the national security. The 
prevailing judgment is that Exon-Florio has raised the awareness of 
foreign investors contemplating acquisitions of U.S. companies of the 
importance of national security considerations and has helped to ensure 
that foreign investments, including in the telecommunications sector, 
are structured in ways to address any of the government's national 
security concerns. In fact, a number of transactions have been 
restructured precisely to respond to national security concerns that 
CFIUS has raised.
                          3. Antitrust Review
    Telecommunications mergers are subject to antitrust review by the 
Department of Justice under section 7 of the Clayton Act, which 
prohibits any merger that is likely to substantially lessen competition 
in any market in the United States. The standards for review are the 
same for all mergers, including those involving foreign firms or firms 
owned in whole or in part by foreign governments.
    As in a merger of domestic firms, whether a firm involved in a 
merger has market power in any given market can be a relevant antitrust 
issue, and could, depending on the facts, raise antitrust concerns. If 
a foreign firm involved in a merger with a U.S. firm has market power 
in its home market, and if that market power could have an effect on a 
U.S. market as a result of the merger, then that market power in the 
home market could raise antitrust issues. It is the existence of the 
market power, and the effect on competition in a given market, not 
necessarily the source of the market power, that gives rise to the 
antitrust problem. The source of the market power could flow from any 
number of factors, such as historical developments, local regulations, 
intellectual property rights, government mandates, scale economies, 
first-mover advantages, or the like. Foreign government ownership of a 
firm that is a party to a U.S. telecom merger could be relevant if it 
implicates the nature or durability of any market power that creates an 
antitrust concern. Exactly how or whether market power in the foreign 
firm's home market creates an antitrust problem in the United States 
depends on the facts of any particular case.
    If the Justice Department concludes that a merger would cause 
competitive problems in the United States because of market power in a 
foreign market, antitrust law provides for a range of possible 
remedies. These can include blocking the merger, or imposing 
alterations, restrictions, or other safeguards that enable U.S. markets 
to realize the benefits offered by the merger while guarding against 
possible competitive harms. Determination of an appropriate remedy 
depends on the facts of the particular case.
    For example, in British Telecom/MCI, the parties entered into a 
consent decree that tied approval of the merger to opening the British 
market to International Simple Resale on transatlantic calls, including 
interconnection in the United Kingdom for ISR carriers, and also 
imposed a number of disclosure requirements and restrictions on the 
sharing of competitively sensitive information to ensure that British 
Telecom would not use its market power abroad to injure competition in 
U.S. or international markets by discriminating against other 
competitors. In Sprint/France Telecom/Deutsche Telekom, the parties 
entered into a two-phase consent decree, in which a Phase II similar to 
BT/MCI was preceded by a Phase I with even more extensive oversight to 
address discrimination and cross-subsidy concerns until all legal 
prohibitions on competitive entry were removed in France and Germany, 
and competitors were licensed to compete in those markets.
                  4. U.S. and International Trade Laws
    One of the primary missions of USTR is to ensure--by enforcing our 
domestic laws and our rights in the WTO--that U.S. services and service 
suppliers can compete robustly in foreign telecom markets. At the heart 
of the trade policy of this Administration has been a firm 
determination to enforce U.S. trade laws and ensure that other 
governments implement the commitments they made to us under 
international trade agreements. Vigorous enforcement enhances our 
ability to get the maximum benefit from our trade agreements, ensures 
that we can continue to open markets, and builds confidence in the 
trading system.
    Under Section 1377 of the Omnibus Trade and Competitiveness Act of 
1988, USTR solicits public comment as part of its annual review of the 
operation and effectiveness of U.S. telecommunications trade agreements 
and takes action where U.S. trading partners are not in compliance with 
their international obligations. In the past three years alone, USTR 
has undertaken major initiatives to encourage our trading partners to 
implement their telecom trade commitments and open their markets to 
competition from U.S. carriers. The annual Section 1377 review process 
has led foreign governments in most cases to quickly address complains 
we have had regarding implementation of the WTO Basic Telecom 
Agreement. Some recent highlights include:

 Canada: During the 1998 Section 1377 review, Canada eliminated 
        restrictions that prevented U.S.-based carriers from enjoying 
        the same opportunities for transmitting Canadian international 
        long distance traffic as enjoyed by carriers based in third 
        countries.
 European Union: U.S. government advocacy, including during the 
        1999 review, prevented unnecessary and potentially 
        discriminatory standards-setting and licensing activities by 
        the European Union and its Member States with regard to third-
        generation mobile telecommunications services, allowing U.S. 
        suppliers of competing technologies greater access to European 
        and global markets.
 Germany: During the 1999 and 2000 reviews, the Administration 
        maintained an intense focus on action by the German regulator 
        (Reg-TP) to ensure that Deutsche Telekom provide non-
        discriminatory and cost-oriented interconnection rates to 
        competitive carriers. Certain Reg-TP decisions in 1999 helped 
        to curb anticompetitive abuses by the Deutsche Telekom. 
        However, we continue to monitor issues identified in the 2000 
        review related to a backlog of interconnection requests and 
        concerns about excessive license fees and insufficient 
        regulatory transparency.
 Israel: During this year's section 1377 review, Israel 
        committed to remove its discriminatory access fee on calls to 
        and from the United States and Canada by December 31, 2001.
 Japan: The Administration has successfully ensured more timely 
        and effective implementation of Japan's WTO telecom commitments 
        in three reviews since those commitments came into force. In 
        1998, we worked to ensure that new Japanese rules for 
        international service resulted in lower retail prices on the 
        bilateral route of 50 percent or more. In 1999, Japan 
        eliminated restrictions on the use of leased lines by new 
        entrants, lowering costs dramatically for NTT's competitors in 
        the Japanese domestic and international long-distance and 
        business-services markets, and agreed to eliminate a premium 
        that NTT charged to competitors for calls to NTT's ISDN 
        customers that was distorting competition. And most 
        significantly, in July 2000, Japan agreed to slash its 
        interconnection rates up to 50% over two years, saving 
        competitive carriers over one billion dollars in above-cost 
        interconnection fees; and to make its local network accessible 
        for ensure competition in the provision of high-speed Internet 
        services.
 Mexico: Last month, the United States initiated WTO dispute 
        settlement proceedings against Mexico regarding barriers to 
        competition in Mexico's $12 billion telecommunications market 
        including: (1) a lack of effective disciplines on Telmex, which 
        is able to use its dominant position in the market to thwart 
        competition; (2) the failure to ensure timely, cost-oriented 
        interconnection that would permit competing carriers to provide 
        local, long-distance, and international service; and (3) the 
        failure to permit alternatives to an outmoded system of 
        charging U.S. carriers above-cost rates for completing 
        international calls into Mexico. Mexican officials have 
        recently been quoted as stating that they intend to cut 
        interconnection rates substantially and issue dominant carrier 
        regulations. The Administration will examine any concrete steps 
        taken in Mexico to ensure satisfactory resolution of the 
        problems our firms have encountered.
 Peru: During the 2000 review, the Administration identified 
        high interconnection charges in Peru as a barrier to market 
        access. The Peruvian telecom regulator (Osiptel) is currently 
        taking steps to ensure that these charges are cost-oriented, 
        consistent with WTO regulatory principles.
 South Africa: This year, the Administration successfully 
        encouraged South Africa's dominant carrier, Telkom, to restore 
        access to facilities that competitive U.S. value-added 
        telecommunications services need to compete with Telkom in the 
        South African market.
 Taiwan: During the 1998 review, the United States and Taiwan 
        reached an agreement mandating a three-year transition to cost-
        based interconnection rates for wireless service suppliers, 
        strengthening implementation of a 1996 agreement. In 
        discussions under the 2000 Section 1377 review, Taiwan 
        eliminated certain exclusivity rights from three licenses 
        eventually issued to new entrants for fixed-network services.
 United Kingdom: As part of the 2000 review, the Administration 
        urged the United Kingdom to open its telecommunications market 
        to competition in advanced data services that make high-speed 
        Internet access possible. We continue to monitor the UK's 
        progress in introducing competition in the advanced data 
        services market.
    These examples highlight our continuing commitment to vigorously 
utilize our trade tools--including in the WTO and through domestic 
trade law--to open foreign telecommunications markets and ensure that 
our trading partners abide by their commitments in this vital and 
rapidly expanding services sector.
                               conclusion
    In summary, we are now enjoying the benefits of a remarkable era of 
innovation and growth in the telecommunications revolution. The United 
States is the leader in this field; and we have every reason to believe 
that by sustaining and deepening our commitment to an open and 
competitive world market, American families and businesses can draw 
still greater benefits from the telecommunications revolution than we 
have to date.
    We do not need new legislation to deal with concerns raised by 
foreign investment in our telecom market--whether by government-owned 
privately-owned firms. Our laws and review standards provide us with 
strong protection against threats to national security or anti-
competitive behavior. At the same time, they ensure that we remain 
fully in accord with our own commitments under the Basic Telecom 
Agreement, enabling us to maintain our leadership in developing a more 
open international market.
    Thank you again for this opportunity to testify.

    Mr. Tauzin. Thank you, Mr. Ambassador. We are about out of 
time before this vote. What we will do is we will recess and 
come back and question this panel at 2. So it will give 
everybody a good lunch break and we will come back at 2. The 
committee stands in recess until 2 p.m.
    [Whereupon, the subcommittee was recessed, to reconvene at 
2 p.m.]
    Mr. Tauzin. The committee will please come to order. Let me 
ask guests to take seats and catch the doors.
    Thank you. When we recessed, we had just completed the 
testimony of this panel and the Chair now recognizes himself 
for a round of questions and members in order.
    First of all, Mr. Di Gregory, did your office, you 
personally or anyone from your office, interact with, 
participate in the antitrust sections, consideration of this 
merger which resulted in allowing the time to lapse as of 
yesterday?
    Mr. Di Gregory. From the criminal division, it is my 
understanding, no.
    Mr. Tauzin. So you didn't participate nor contribute in the 
considerations of the antitrust division?
    Mr. Di Gregory. We did not.
    Mr. Tauzin. I would initiate a letter requesting that 
division of the DOJ give us some indications why they allowed 
the time to lapse for that action and what was behind their 
reasoning to do so. If you would kindly allow them some notice. 
We will be sending it today with a timetable. We would like to 
get it in a week from now, next Thursday.
    Mr. Di Gregory. I will be happy to do that.
    Mr. Tauzin. Thank you.
    Let me turn to Chairman Kennard. The question I have is 
relative to the testimony we heard this morning, very colorful 
and interesting testimony from the Senator whose interpretation 
of the statute is that section 310(a) is fairly absolute unless 
and until section 4 is complied with, that is, a company has 
divested enough stock so that it is less than 25 percent 
government owned.
    Do you have a different interpretation at the FCC of the 
statute?
    Mr. Kennard. Mr. Chairman, as you know, statutes are 
subject to varying interpretations.
    Mr. Tauzin. We didn't know that.
    Mr. Kennard. That was just more to remind myself, Mr. 
Chairman, more than anything.
    I think that there are varying reasonable interpretations 
of this statute. Clearly when I look at section 310(b)(4), it 
speaks to government ownership, and it also clearly gives the 
FCC some discretion in the public interest to grant 
applications that may exceed the 25 percent ownership 
benchmark.
    I will note, though, that these questions would be 
determined based upon a full and open record before the FCC. 
These questions of statutory interpretation would be matters of 
first impression in the context of a transaction involving 
significant foreign government ownership.
    Mr. Tauzin. This particular acquisition is the first time, 
and it will be de novo before the full commission?
    Mr. Kennard. Before the full commission. There have been 
some decisions at the commission staff level which are similar, 
but this would be a case of first impression and everyone who 
is interested would have an opportunity to put their views on 
the record.
    Mr. Tauzin. What are the precedents at the staff level on 
this question?
    Mr. Kennard. I am aware of one situation involving some 
wireless licenses which were owned by a subsidiary of the 
Finnish Government which were granted on delegated authority by 
the FCC staff that involved a similar question. That is the 
closest precedent I have been able to find.
    Mr. Tauzin. And what was the basis? Give us some idea how 
did that come about.
    Mr. Kennard. The FCC staff looked at the transaction and 
determined that it involved indirect ownership, that is, the 
licenses were held by a subsidiary. The parent company was 
controlled by the Finnish Government and invoking our 
discretion under 310(b)(4) of the act, the FCC staff approved 
that transaction.
    Mr. Tauzin. Now, I take it from your testimony that if I 
heard you correctly--and please correct me if I'm wrong--did 
you say that mere membership in WTO will not give any 
government a pass on this question of government ownership in 
the interpretation and judicious decisions that the FCC faces 
on this merger?
    Mr. Kennard. That is essentially correct, Mr. Chairman. In 
order to more fully answer your question, I think we have to 
look at the history of the way that the FCC has dealt with 
these issues of foreign participation in FCC licenses.
    In 1995, the FCC established a framework for determining 
how to deal with these applications, and that framework looked 
at reciprocity issues. That is we determined whether a foreign 
entrant would allow participation by U.S. companies in the 
foreign market. It was a test known as the ECO test. It was 
essentially a reciprocity test. When the U.S. Government 
entered into the WTO agreement, we were able to streamline that 
test because instead of looking at the situation in all of the 
home markets, we were able to establish this rebuttable 
presumption in our 1997 Foreign Participation Order.
    Now it is very important for me to state, however, that the 
rebuttable presumption is just that: it is a presumption and it 
is rebuttable. So anyone who has information that a transaction 
would undermine competition, threaten national security 
interests has an opportunity to present those concerns to the 
FCC.
    Mr. Tauzin. Let's talk about that in regard to Mr. 
Parkinson and Mr. Di Gregory's testimony. How does that process 
come about? I have just looked at your written testimony, Mr. 
Parkinson; and I notice that it got changed a little bit. The 
original language said these risks must be addressed to the 
government to fulfill its responsibilities. Those words are 
gone, and we have in anticipation of these risks, the 
Department of Justice and the FBI have used existing authority 
to negotiate. Who made those changes?
    Mr. Parkinson. We went through an ordinary process of 
editing. I didn't personally----
    Mr. Tauzin. Nobody told you to make those changes?
    Mr. Parkinson. I didn't personally put in the original 
language or amended language. We had discussions within the 
Department.
    Mr. Tauzin. You didn't receive instructions from somebody 
higher up to make editorial changes?
    Mr. Parkinson. No, I did not.
    Mr. Tauzin. Obviously, the language as it now appears 
indicates that what you are saying is that in the context of 
what Mr. Kennard has to now do at the commission, you are 
prepared to negotiate to protect these interests. How is that 
going to work among your agencies?
    Mr. Parkinson. Just briefly, I think not only are we 
prepared to, we have done that. We have had now roughly about a 
4-year history of this since we have been involved in these 
kinds of transactions. We have done it nine to 10 times.
    Mr. Tauzin. But are you going to negotiate directly with 
the parties or through the FCC? How does this work?
    Mr. Parkinson. Normally, we negotiate directly with the 
parties and keep the FCC informed along the way, but it is 
usually a direct negotiation where we sit down with the parties 
and their counsel, and we describe to them what conditions and 
arrangements we think are necessary to protect our law 
enforcement national security interests, and then we negotiate.
    Mr. Tauzin. So if I got your testimony correct, Mr. Di 
Gregory, you had some comments about some other legislation we 
have, setting some timetables on the FCC. It seems to me that 
you like to use the FCC authority to hold up something until 
you get stuff negotiated the way that you want it; is that 
right?
    Mr. Di Gregory. We believe that the FCC's statutes do give 
us the authority to let the FCC know when someone applies for a 
license that we have concerns, and we have asked the FCC 
through----
    Mr. Tauzin. But your objections to the timetable seem to 
say we want to hold people up until we get the FCC to give us 
what we want. Is that what goes on?
    Mr. Di Gregory. I don't think that is an appropriate 
characterization.
    Mr. Tauzin. Characterize it for me.
    Mr. Di Gregory. This is a negotiation, and there is give 
and take. We try to tailor the agreements based upon the 
circumstances of the business transaction and the circumstances 
of the operation of the telecommunications companies.
    Mr. Tauzin. But the commission gives you leverage if it 
wants to? Doesn't it, Mr. Kennard?
    Mr. Kennard. I would be happy to answer that question.
    We recognize at the FCC we are not expert on issues of 
national security, so we defer to the Justice Department on 
these questions.
    Mr. Tauzin. As long as you are not on the clock and the 
parties know you can just wait forever to give them a decision, 
that is leverage for these other agencies to get what they want 
negotiated; is that right?
    Mr. Kennard. I would not use the term ``leverage.'' I would 
say that we are exercising our responsibility to the American 
public to protect the national security.
    Mr. Tauzin. You may be using your leverage for good 
purposes, but it is leverage.
    Mr. Kennard. It is good leverage, Mr. Chairman.
    Mr. Tauzin. We will talk about that later.
    Let me turn to Ambassador Fisher quickly. You have seen the 
two pieces of legislation, Mr. Ambassador. Do you or the 
tradeoffice have an opinion as to whether or not either one of 
these two bills would violate our trade agreements?
    Mr. Fisher. Mr. Chairman, I would have to see what the 
final formulation of those bills are.
    Mr. Tauzin. The way that they are written now. Assume that 
they pass just like they are, would they cause us problems in 
terms of violating any agreements our country signed?
    Mr. Fisher. We have received notice from Mr. Lamin, who 
represents the European Union, that it is their opinion that--
--
    Mr. Tauzin. Let's not concern ourselves what somebody else 
thinks. What does your agency think or what is your opinion as 
to whether either one of these two bills as currently drafted 
would offend our trade agreements?
    Mr. Fisher. First, Congressman, as I testified, I don't 
think that they are necessary.
    Second, I think they would certainly precipitate a suit, as 
we have so been notified.
    Mr. Tauzin. That is not what I asked you.
    Mr. Fisher. I understand that.
    Mr. Tauzin. Answer the question that I asked you.
    Mr. Fisher. As they are presently presented, I would want 
to see them in their final form.
    Mr. Tauzin. But as they are presently presented, would 
they, in your opinion, or agency opinion, violate a trade 
agreement that we have signed?
    Mr. Fisher. I believe that they would undoubtedly lead us 
to a suit which we would have to defend.
    Mr. Tauzin. What is your opinion?
    Mr. Fisher. It would present problems.
    Mr. Tauzin. Does it violate a trade agreement in your 
opinion?
    Mr. Fisher. My personal opinion, Mr. Chairman, is that this 
would run counter to the commitments to the WTO in the basic 
telecom agreement.
    Mr. Tauzin. Do they speak to government ownership at all?
    Mr. Fisher. No.
    Mr. Tauzin. How can it violate the agreement then?
    Mr. Fisher. At the time we entered into the agreement, 
almost all franchises were government owned, some 100 percent.
    Mr. Tauzin. My time is up, but I want to make one point. A 
number of you quoted words that I used: push, prod, cajole. But 
the more you did that, the more your office worked to ensure 
that we didn't have this problem before us, the less likely it 
would be that Congress would make a decision that would cause 
you those problems. Is government ownership trouble?
    Mr. Fisher. In some cases yes and in other cases no. If I 
may take a second on that----
    Mr. Tauzin. Is it in this case?
    Mr. Fisher. There are some assumptions being made that 
government ownership is an asset and not a liability. For 
example, with the cost of money, if you look at the cost of 
debt, British Telecom, which has become 100 percent privatized, 
has a higher credit rating that Deutsche Telekom or France 
Telekom. If you look at Korean Telecom or Malaysia Telecom, 
Bell South and SPC have the same credit rating as France 
Telecom.
    If you look at the cost of equity which is very important 
and very few people have discussed here--and I notice by the 
way, with all due respect to Senator Hollings, he talked about 
these people able to print money--Bell South, SPC, AT&T, have a 
lower cost of equity; that means a higher price earnings 
multiple than Deutsche Telekom.
    Mr. Tauzin. Is it a priority of your office to push, 
cajole, convince, any way you can, pressure, to bring to bear 
the weight of the spirit of those agreements toward as much 
privatization of those government-owned entities who wish to 
participate in a competitive marketplace globally and here in 
the United States as possible?
    Mr. Fisher. Yes, sir. We agree that is the objective, and 
we believe that we have made progress on that front. We will 
continue to push, prod, and pressure.
    Mr. Tauzin. I need to move on, but I would ask you to 
submit for the record evidence of what you have done in that 
regard because we would like to test it.
    Mr. Fisher. I have tried to do that in my statement, but I 
will do it better.
    Mr. Tauzin. Indeed. Thank you, Mr. Ambassador. Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Mr. Fisher, I think what I heard you say is that sometimes 
the government owning private sector company is a good thing 
and sometimes it is a bad thing; it all depends upon the 
circumstances.
    One of the things that your father-in-law taught me, Jimmy 
Collins, who was a great Congressman on this committee, a 
Harvard Business School graduate, although he hid it when 
running for election from Texas, he told me and everyone else 
on the committee that government in the private sector is bad.
    I tried to learn from this great man, and I admit I arrived 
here as a full blown regulator in 1976 when I got elected, but 
over the years I came to believe that to the extent that the 
government had a role, it was to ensure that the government 
wasn't protecting industries from competition. And in that way 
you didn't really need the government because obviously it was 
a free market.
    My question I guess is this: Back in 1997 or so, whenever 
you were negotiating this basic telecom agreement, did you not 
as a negotiating point distinguish between government ownership 
and nongovernment ownership coming from these other countries? 
Or did you try to make that point and then lose and allow 
Germany and others to maintain this government ownership 
position? Which was the position that the American Government 
took in the negotiations?
    Mr. Fisher. Again, Congressman, first I wasn't part of that 
negotiation; but if my memory serves correctly, first of all 
the vast majority of telecommunications franchises outside of 
this country as I referred to in my testimony were government 
owned. That is what we were dealing with at the time.
    Second, the effect of what we have done, as I testified, 
has led to significant privatization worldwide; and I think the 
realities of competition that they face from those and those 
that are privatized like British Telecom and others is that 
very few governments seek to maintain their government 
franchise.
    Mr. Markey. Our position was not to try to set firm 
timetables or deadlines for privatization; we allowed other 
countries to set those timetables for themselves. Is that 
correct?
    Mr. Fisher. We did not deliberately set those timetables. 
We did not.
    Mr. Markey. That is important to understand.
    Now, let me go to this Italy case: Italy blocking the 
German telephone company from moving in and in Spain them 
blocking the Dutch company from coming in because they contend 
that the takeover companies were government owned. Was Italy in 
violation of the WTO when they blocked that deal, and was Spain 
in violation of the WTO when they blocked that deal?
    Mr. Fisher. First of all, some countries do have 
reservations and also----
    Mr. Markey. See, we are kind of ignorant in terms of the 
language that is used to deal in international forum. Do they 
have the right to say no or not to say no and not be in 
violation of the WTO?
    Mr. Fisher. If I may walk you through both cases quickly, 
in Spain you are right, Telephonica rejected a bid by KPN, 
which is the Dutch carrier. Similarly, in Italy Telekom Italia 
rejected a bid by Deutsche Telekom. Both governments used what 
they call their golden shares. These are----
    Mr. Markey. Do we have a golden share in the United States?
    Mr. Fisher. No. This golden shared allowed those 
governments to veto strategic operations for certain public 
services like telecom and were at the time scheduled into their 
WTO agreement.
    Now, here is what has happened since. The European 
Commission announced on July 5 that it will take Spain to the 
European Court of Justice regarding the compatibility of that 
golden share with EU law. In a related action against Italy, 
the Court of Justice ruled on May 23 that Italy was unjustified 
in its ability to block such transactions. The European 
Commission has similar actions pending against other member 
states.
    I noticed also that Senator Hollings mentioned Hong Kong 
and the Singapore telephone attempt which failed. The reason 
that it failed is that they were out-bid by somebody else.
    Mr. Markey. I don't want to know about Hong Kong. I want to 
know about Italy and Spain. Who will win that case? Is there a 
good case that can be made that they can't block the takeover 
of the telephone companies within those countries, in your 
opinion?
    Mr. Fisher. First, in terms of Italy, that reservation that 
I referred to expired on January 1, 2000. Second, I don't know 
how the European court will run this all of the way through, 
but the point is that the European Court of Justice has taken 
them to task for this as a violation of the EU law, and I can't 
predict the outcome of that case.
    Mr. Markey. I can predict the outcome of the case, which 
will be that regardless of how the court rules the Italians 
will not allow their telephone company to be taken over by the 
German Government; and I think the same thing I can say with 
great certitude by the Spanish telephone system. I don't think 
that anyone is going to give up their sovereignty.
    Interestingly, in the SEC filing that Deutsche Telekom has 
to make, they actually have to waive their sovereign immunity 
in the SEC filing that they have made as part of this merger. 
Now, doesn't that, Mr. Parkinson, indicate quite clearly that 
the government controls this company and that the German 
Government ultimately has the ability to make the decisions 
with regard to this telephone company and all of its activities 
around the globe?
    Mr. Parkinson. Certainly I think it reflects the fact that 
they are starting from majority government ownership or they 
wouldn't have to waive sovereign immunity.
    Mr. Markey. So the issue is clear in your mind that the 
German Government owns this company. And I think the issue for 
us, Ambassador Fisher, is one that goes back to 1997. I was 
assured personally by our trade representative at the time that 
I wouldn't have to worry, that no government-owned 
telecommunications company would be taking over American 
companies. Other Members of Congress were given the same 
assurance.
    Now we are at a point in time where there is a merger 
pending. We are not being given assurances that the German 
telephone company will have to have its government share 
reduced down to 25 percent or 20 percent ownership by the 
German Government, notwithstanding the promises that were made 
to us back in 1997.
    So I feel a little bit like Charlie Brown with Lucy holding 
the football for me--and there is a legal term for it, 
detrimental reliance--but I think Charlie Brown understood it 
quite well when he wound up on his behind. This committee feels 
like we are on our behind. We were given promises. We don't see 
the strong actions that are being taken in Italy and Spain to 
paradox the Germans and to let them know how much they are 
interested in cross-country competition but not with 
governments leading the charge.
    I don't understand why our own government, which is the 
leader in opening up its markets, isn't trying to paradox the 
Germans into giving up its government control at this critical 
juncture and allowing them to take advantage of this enormous 
economic opportunity which VoiceStream offers to them and other 
companies of the United States but only if their government is 
not part and parcel of it.
    The real nub of this issue is identified by the FBI and the 
Justice Department having to sit here. They don't want this 
deal approved until they are happy. They wouldn't be quite 
comfortable if this deal were already approved and now they 
have to get the concessions from the German Government. We have 
to make sure that we get our marketplace, our competition 
concessions before the deal is okayed, and we don't see that as 
part of our government strategy at this point in time.
    Mr. Tauzin. The gentleman's time has expired. The gentleman 
may respond, Ambassador Fisher.
    Mr. Fisher. The point that I was making in my testimony was 
that we have the tools available to us presently to make sure 
that our national security and competition interests are met. I 
cannot tell you whether this transaction will be approved or 
not from my perspective. Again, I think Chairman Kennard made a 
similar point. The point that I was simply trying to make was 
that we have in place procedures here that obviously reflect 
our interest in, a, preserving national security; and, b, 
enhancing or ensuring and encouraging competition. And I cannot 
draw the conclusion that the tools that we have are adequate to 
the task.
    Mr. Tauzin. An even more ominous Charlie Brown story is 
Charlie sitting on the curb with his face in his hands feeling 
very gloomy after losing a game, and Lucy walks by and says, 
``Cheer up, Charlie Brown. You lose some, you win some.''
    And he looked up and he said, ``That would be nice.''
    Mr. Oxley.
    Mr. Oxley. Thank you, Mr. Chairman. I assume from all of 
your testimony that you all agree, a, the current system is 
working and, b, that the Hollings bill is unnecessary? Can I 
assume that from your testimony? Okay. Let's go on then.
    Chairman Kennard, I want to ask you about testimony from 
Senator Hollings in which he indicated that the threshold issue 
here dealt with section 310(a) and that 310(a) should be the 
controlling statute. As I read 310(a), it appears to me that it 
deals with broadcast licenses, not common carriers. It says the 
station license required under this act shall not be granted or 
held by any foreign government or representative thereof. Then 
we go to 310(b), no broadcast or common carrier, et cetera, et 
cetera. So it is clear from the use of the language here and 
the legislative intent--in the case of 310(b) we are talking 
common carrier, but in (a) we are talking about broadcast 
license. Is that a fair reading of that statute?
    Mr. Kennard. Well, I think an interpretation that many 
people talk about and have written about is that section 310(a) 
deals with direct ownership. That is if a foreign government or 
the representative of a foreign government were to come to the 
FCC and apply to own a license directly, 310(a) would be 
invoked.
    310(b) on the other hand, and (b)(4) in particular, deals 
with indirect ownership, that is ownership of the license 
through a subsidiary. So we have not drawn the distinction in 
the word ``station license.'' In fact, many people read station 
license to mean under 310(a) to include things broader than a 
broadcast license.
    Mr. Oxley. But that is not what it says. I think I took 
this is in law school in terms of understanding legislative 
intent. Why would the Congress and this subcommittee use the 
term station license in (a) and then talk about broadcast or 
common carrier in (b)? Had we been referring specifically to 
common carrier, why would it not appear in (a) and I think I 
would feel very comfortable arguing that before a court of 
appeals or any other appeals process in the land.
    Mr. Kennard. Well, that is certainly one interpretation. I 
want to underscore that this statute has been interpreted 
variously by many people over the years, and if we were to make 
a definitive determination in the context of a transaction, we 
would do it based on a written record where we would have 
briefs filed.
    I would only note that under 310(a), I think it can be read 
fairly broadly because it says that the station license 
required under this act. Licenses required under the act even 
in 1934 when this was written included not only broadcast 
licenses but also other wireless licenses that could be deemed 
nonbroadcast licenses.
    Mr. Oxley. If that is the case and we are to believe 
Senator Hollings, it is over. This whole thing is over because 
all you have to do is read (a) and it says a license required 
under this act shall not be granted or held by any foreign 
government, in this case more than 50 percent is being held by 
a foreign government, and it is over. So I would suggest that 
this interpretation--dangerous interpretation in my estimation, 
and totally wrong--ought to be wiped out and that we ought to 
be talking about 310(b) because that is the issue that we had 
in the 1996 act, that is the issue that we took to the 
conference committee. We thought we had an agreement dealing 
with reciprocity, and it fell apart at the end and was taken 
out of the conference report to my never-ending frustration; 
but I have to tell you that because the FCC and USTR I think 
have adequately and fairly interpreted this provision, we 
haven't had any train wrecks, we haven't had any problems.
    Mr. Markey. Would the gentleman yield?
    Mr. Oxley. Yes.
    Mr. Markey. In the telecommunications act they begin under 
general provisions and definitions, definition number 42 is 
station license and it reads thusly: ``the terms station 
license, radio station license or license means that instrument 
of authorization required by this act or the rules and 
regulations of the commission made pursuant to this act for the 
use or operation of apparatus for transmission of energy or 
communications or signals by radio, by whatever name the 
instrument may be designated by the commission.''
    I think Senator Hollings correctly has interpreted it as a 
very broad interpretation and reiterated by the chairman of the 
commission today.
    Mr. Oxley. I am fortunate Ed Markey is not on the Court of 
Appeals. I still will argue that there is a reason why common 
carrier was used in (b) and not (a), but let's not quibble over 
that any more.
    I asked the question to Senator Hollings would the 
VoiceStream/Deutsche Telekom merger bring more competition and 
he answered no. What is your opinion on that?
    Mr. Fisher. The effect--would it bring more competition. 
This is an extremely dynamic market. I don't draw the 
conclusion that it would lessen competition.
    Mr. Oxley. I will take that, okay.
    More capital. More foreign investment capital, yes or no?
    Mr. Fisher. As I tried to show in my testimony, this is a 
dramatically expanding marketplace. Companies that didn't exist 
3 years ago are active and are pursuing economic activity, 
which is to the benefit of their shareholders and the benefit 
of the countries that they represent as well.
    Mr. Oxley. So the answer is yes?
    Mr. Stearns [presiding]. The gentleman's time has expired.
    Mr. Oxley. And benefits consumers----
    Mr. Fisher. The more competition there is, the better.
    Mr. Stearns. The gentleman from Michigan, Mr. Dingell, is 
recognized for 5 minutes.
    Mr. Dingell. Mr. Kennard, I am told Deutsche Telekom has a 
monopoly in radio, television distribution, telephone and cable 
and that they are the second biggest in Internet; is that true?
    Mr.  Kennard. I don't know. I have not studied the German 
market.
    Mr. Dingell. Did you ever consider those questions when you 
made the presumptive finding that this was a regular 
acquisition?
    Mr. Kennard. I have not made any finding, presumptive or 
other, with respect to Deutsche Telekom because there is 
nothing before us.
    Mr. Dingell. You are going to presume this to be an 
appropriate acquisition by Deutsche Telekom over this 
VoiceStream company; is that right?
    Mr. Kennard. No, it is not. I tried to make clear in my 
testimony, Mr. Dingell, that there is no application before us 
involving Deutsche Telekom. If and when one is filed, we will 
carefully consider all of these issues.
    Mr. Dingell. You will consider it.
    Do you concede that Deutsche Telekom has monopoly on radio, 
TV, telephone and cable and they are the second biggest in the 
handling in Internet inside Germany?
    Mr. Kennard. I won't concede that because I haven't looked 
at the figures.
    Mr. Dingell. Section 310 does not apply according to you on 
the Deutsche Telekom/VoiceStream deal. And that is because the 
government is not to be the license holder. The license will be 
held by a wholly owned American subsidiary, a shell company; is 
that right?
    Mr. Kennard. What I am saying is that we would have to 
evaluate this under section 310. It deals with all transfers, 
and what I was saying earlier is that section 310(b) is what we 
look to when we look at indirect ownership through a 
subsidiary.
    Mr. Dingell. Does 310(a) apply?
    Mr. Kennard. We don't have a transaction before us. I don't 
know exactly how it would be structured.
    Mr. Dingell. Let's look here. In DT's merger documents, 
which were filed with the SEC, Deutsche Telekom agreed to waive 
sovereign immunity with regard to the transaction. I note that 
applies only to government. Apparently VoiceStream at least 
believes that DT is either government or a representative 
thereof. What are your feelings on that?
    Mr. Kennard. I am not going to prejudge a transaction which 
has not been filed. I assume that these issues will be 
presented and debated.
    Mr. Dingell. DT's pre-1995 liabilities are guaranteed by 
the government. Over 40 percent of Deutsche Telekom employees 
are statutory civil servants, and DT said in its SEC form 20(f) 
filing, ``As long as the Federal republic directly or 
indirectly controls the majority of DT's shares, it will, like 
any other majority shareholder in a German stock corporation 
have the power to control most decisions taken at shareholders' 
meetings, including appointment of all members of the 
supervisory board elected by the shareholders and the approval 
of proposed dividend payments.''
    What does that tell you about Deutsche Telekom here? Does 
it tell you that they are a government entity? The government 
owns 58 percent of the stock.
    Mr. Kennard. What it tells me is that there will be factual 
allegations like this presented to the FCC.
    Mr. Dingell. You are going to pass on the question of 
whether or not this takes place. What steps are you going to be 
able to take to assure yourself that there will be any 
independence in the license holder, the license holder will 
have all of its officers appointed by the shareholders, 
principal shareholder and total control will be in Deutsche 
Telekom? How are you going to know that you will have any 
control over the affairs of that corporation and in ensuring 
that its licenses and any conditions which are attached thereto 
will be carried out and that you will have access to 
information and documents which will be important to you in 
your decisionmaking?
    Mr. Kennard. Well, the first thing we will do is determine 
what the facts are related to the ownership of this company. I 
will say that, as I have said before publicly, that we would be 
very concerned about a relationship between Deutsche Telekom or 
any other company proposing to come into the U.S. market and 
their relationship with the government. This is something that 
we would be sensitive to.
    Mr. Dingell. Fifty-eight percent is owned by the government 
and you have a company which is going to have total control 
over all of the actions of the license holder through the 
annual meeting process and through the power to appoint all of 
the officers and directors and so forth of the company.
    How will you either know what is going on inside that 
company? How will you require the production of books, papers, 
and records? How, if you find that they have done something 
which is inappropriate either under antitrust laws or relative 
to national security, how will you take steps to compel 
Deutsche Telekom to produce the information that you need to 
make the necessary judgment?
    Mr. Kennard. We will use the tools that we use in every 
merger transaction, Mr. Dingell, which involves developing a 
record, determining what the facts are.
    Mr. Dingell. Suppose they say--tell you to go to the devil. 
What are you going to do about that?
    Mr. Kennard. Then they would not get through the FCC. That 
is not an appropriate response.
    Mr. Dingell. They would already have the licenses approved 
and the mergers approved. How will you unscramble the egg?
    Mr. Kennard. That is an interesting question. When we 
impose conditions on any licensee, whether it has foreign 
ownership or not, the company is on notice that they have an 
ongoing obligation to ensure that the conditions are enforced. 
In many cases we have gone back and----
    Mr. Dingell. But that goes to U.S. corporations, not 
Deutsche Telekom.
    Mr. Kennard. It goes to the company that we have 
jurisdiction over, which is the U.S. corporation.
    Mr. Dingell. It goes to the U.S. company.
    Mr. Kennard. We have jurisdiction over the U.S. licenses. 
If they violate a license condition in the United States, we 
take appropriate enforcement action, just like a domestic----
    Mr. Dingell. How do you?
    Mr. Stearns. The gentleman's time has expired.
    Mr. Dingell. How do you address the merger which you have 
already approved?
    Mr. Kennard. Again, there is ongoing enforcement and 
monitoring of merger conditions.
    Mr. Dingell. Just one question. If you were to have a 
company which was like Deutsche Telekom in the United States, 
let's say one of the Baby Bells were to have this kind of 
situation, would you allow them in long distance?
    Mr. Kennard. I don't even know how to answer that question. 
The long distance requirements are so radically different than 
anything we are considering here.
    Mr. Dingell. Let's just say Ameritech had that kind of 
situation, would you allow Ameritech then into long distance?
    Mr. Kennard. I don't know what situation you are talking 
about.
    Mr. Dingell. If they had a total monopoly on radio, 
television distribution, telephone, cable and they are the 
second biggest Internet distributor?
    Mr. Kennard. Mr. Dingell, we let no Bell company into long 
distance until they have demonstrated that their market is 
open.
    Mr. Dingell. Then why are you--why are you so quick to 
take----
    Mr. Stearns. Mr. Dingell, your time has expired.
    Mr. Dingell. Thank you, Mr. Chairman.
    Mr. Kennard. May I respond?
    I want to state for the record once again that the FCC has 
not made any decisions with respect to a bid by Deutsche 
Telekom to buy any U.S. licenses. Indeed, none is before the 
FCC at this time, so we have made no determinations in that 
regard.
    Mr. Stearns. Mr. Fisher, I will recognize myself for 5 
minutes.
    In your discussions with Mr. Tauzin earlier, you indicated, 
I believe, that foreign ownership by governments--foreign 
ownership by the government is bad. In other words, the German 
Government owning a large portion that wants to buy an American 
company, you are saying today that is bad, aren't you?
    Mr. Fisher. I am saying certainly the way that the world 
has moved, it doesn't provide you with a comparative advantage. 
There are a lot of drawbacks in having government ownership in 
telecommunications companies.
    Mr. Stearns. A lot of Latin American countries, 
particularly Chile, and even Russia, sold off their 
telecommunications companies, so the world is moving toward not 
having the government have large ownership. What does USTR--
what ability do you have to make sure these foreign companies, 
foreign governments lower their ownership in these private 
companies? Do you have any kind of stick? What do you do? 
Because you seemed to indicate earlier when you talked to Mr. 
Tauzin that you were now trying to get these foreign 
governments to lower their ownership. What are you doing? It 
seemed like if you were doing your job, we wouldn't be talking 
about this legislation.
    Mr. Fisher. Again, we have had, for example in the case of 
Germany, numerous complaints against the Germans on a range of 
issues that competitive carriers have encountered in trying to 
enter the German market. We have complained about unreasonable 
interconnection rates and access to billing and collection 
services and very high licensing fees.
    Mr. Stearns. What have you done specifically to try and 
convince the German Government to reduce their stake? Or are 
you? Is that a priority for you folks?
    Mr. Fisher. It is a priority, and we are not satisfied. We 
have taken them to task interconnection----
    Mr. Stearns. You are saying in this committee that German 
ownership is a problem?
    Mr. Fisher. I am saying that our work is not done. What I 
am saying, Congressman, very respectfully, whatever my 
colleagues are handing me over my left shoulder, is that we 
have available presently the tools to effect----
    Mr. Stearns. You do have the tools to do this. What are 
these tools, and what is the German government's response--and 
give me specifics--when you use these tools?
    Mr. Fisher. Well, we have our own processes under our 1377 
review of telecommunications trade agreements. We have filed 
petitions against the Germans year after year in terms of that 
annual review.
    Mr. Stearns. Processes, you mean you file a document 
somewhere?
    Mr. Fisher. Yes.
    Mr. Stearns. What, specifically, do you do and what has the 
German response been? Can we see copies of the documents or is 
there anything that----
    Mr. Fisher. I would be happy to submit documents at your 
convenience. I would be happy to have our office----
    Mr. Stearns. So you sit down and raise this issue of 
government ownership. Can I assume that you are doing this 
recently, this year?
    Mr. Fisher. Yes. You can assume that we have taken them to 
task in terms of, again, as I mentioned earlier, their 
interconnection rates, their collection services, very high 
licensing fees.
    Mr. Stearns. Staff is telling me that is a different issue. 
How about ownership? Specifically we are talking about 
ownership.
    Mr. Fisher. Again, they have taken the steps to reduce 
government ownership of Deutsche Telekom. In terms of the 
specificity of the requirements of what we agreed to in the 
WTO----
    Mr. Stearns. I am getting just jargon. I am asking you 
dealing with ownership, what did you say to the Germans, and 
what did they say back, and what is the leverage that you have, 
and what is the possibility that they are going to do what you 
say? If you have nothing, just say nothing.
    Mr. Fisher. The point is that----
    Mr. Stearns. You are dealing with ownership now.
    Mr. Fisher. Yes, sir. We have been making progress in terms 
of the liberalization of that market, the ability of our 
operators and other operators to participate in the market. 
Germany has 350 licensed carriers. It is not just one giant 
company.
    Mr. Stearns. This specific case we are talking about, 
ownership.
    Mr. Tauzin. Would the gentleman yield?
    Mr. Stearns. I would be happy to yield to the chairman.
    Mr. Tauzin. Mr. Stearns has asked what did you tell the 
German Government in regards to ownership in this case and how 
did they respond, and what leverage, what is going on. Why 
don't you simply answer his question rather than giving him 
information about how well we are doing all over the world.
    Mr. Stearns. Reclaiming my time, have you or Ms. Barshefsky 
personally talked to the Germans and when?
    Mr. Fisher. We have constant interaction with----
    Mr. Stearns. That is too vague. When and what did you say, 
and when did you say it?
    Mr. Fisher. Sir, it might be easier for me to answer that 
in writing so I can give you specific dates. But again, within 
the context of this general process, the German market has made 
progress in liberalization. Are we satisfied? No. Do we have 
further items on our agenda? Yes.
    Mr. Stearns. We are talking about ownership, not 
generalization.
    Mr. Fisher. I would be happy to respond at length in 
writing to your question.
    Mr. Tauzin. Let me ask again, if you want to say that you 
would rather not answer that question, say so. But the question 
is very simply put. Did you discuss with the German Government 
the question of ownership? Did you ask, did you try to 
encourage them to reduce the level of government ownership in 
this case, and what was their response? If you would rather not 
answer it, say that.
    Mr. Fisher. We have not specifically addressed the matter 
of ownership with the German Government.
    Mr. Stearns. You have not talked to them. Is that your 
final answer?
    Mr. Fisher. It does not present them with a comparative 
advantage, Mr. Chairman.
    Mr. Stearns. Obviously, the question is why haven't you.
    I think my time has expired here.
    Mr. Tauzin. The gentlewoman from Missouri is recognized for 
5 minutes.
    Ms. McCarthy. Thank you very much, Mr. Chairman. I have 
been in and out with various distractions, but I feel like we 
are back in the cold war era, and I am not sure who the boogie 
men are any more. I do know this. I was sitting in Kuwait 
working on the peace process there a few months ago, and I was 
meeting with some entrepreneurs and business people at lunch on 
a different matter--how could we work together on joint 
business efforts and trade and other concerns--and we got to 
talking about high tech and I said wouldn't it be great if I 
could use my cell phone here and they said you can't and I said 
no, I can't. They said we can use our cell phones and we can 
use them when we come to your country, too. I was stunned. And 
of course that is what VoiceStream does. Kuwait is one of the 
countries where if I wanted to I could get a phone from them 
and use it in their country and mine as well.
    I guess my question to any of the panelists who want to 
address it, I thought section 310 in the telecommunications law 
covered concerns about foreign ownership, and I have listened 
as much as I could in the time that I was present to the 
questions and concerns of my colleagues, all of whom I respect 
very much; but would you please give me your thoughts on what, 
if anything, more we must do as a legislative body that perhaps 
we didn't think to do in section 310 or the original law? Or in 
short what is broken and what do we need to fix so that I can 
use my phone all over the world? Thanks.
    Mr. Kennard. Well, I would prefer not to answer the 
question of when you will be able to use your phone all over 
the world. That is a subject for another hearing, I believe.
    But on the question of the legislation, obviously it is 
Congress's prerogative to legislate whenever they need to. I 
wanted to be here today, and I appreciate this opportunity to 
be able to tell you all that the FCC has tools at its disposal 
which it has used in the past to deal with many of the concerns 
that have been raised in the wake of the spector of this 
transaction by Deutsche Telekom. And what I have attempted to 
do is outline for you the range of remedies that could be 
imposed in order to protect competition in this market.
    We have worked very, very hard at the FCC to implement the 
1996 act and to promote competition in this marketplace. And I 
feel sitting here today that I am truly a veteran of the 
telecom wars of the last 4 years, and I want to assure you that 
we will do nothing that will reverse the momentum that we have 
made to promote competition. If anybody wants to come into this 
market and threaten the progress that we have made, we will not 
permit it, and I believe we have the tools; and I think we have 
demonstrated the resolve in the past few years to use those 
tools as necessary to protect American consumers and give them 
more choice in services.
    Ms. McCarthy. If time permits, does anyone else wish to 
comment? Because I am curious. Are we going to do this to the 
Internet companies as well? Where are we going to stop if we go 
down this path?
    Mr. Fisher. Congresswoman, you had addressed me. Let me 
just say again there is no foregone conclusion here. The 
argument that we are making is that the current procedures and 
processes are adequate to the task. We are living in a world 
that is changing dramatically in terms of pushing the envelope 
on telecommunications and data communications and so on, and we 
have met with much success but our task is not done. Again, I 
think there is a tone in this room that it is a foregone 
conclusion that this has already been a pre-approved 
transaction.
    What I believe the chairman and I and the other witnesses 
have presented here is that the tools that we presently have 
are adequate to the task, and the expansion or explosion of 
what we have had so far in terms of our interests abroad, while 
not complete, has been significant, and the system works. That 
is the point, I believe, we have tried to make in summary. 
Thank you.
    Ms. McCarthy. So if it ain't broke, don't fix it. Thanks.
    Mr. Tauzin. I thank the gentlelady.
    The gentleman from Illinois, Mr. Shimkus, is recognized.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I just have a brief question that I think goes back to 
Senator Hollings and his comment, and you may or may not be 
able to comment. Is there a national security concern in the 
entrance of foreign-owned companies into the U.S. market? I 
know it probably should be directed to one person, but I am 
going to ask all of the above to see what their opinions are.
    Mr. Di Gregory. Well, the simple and direct answer is, yes, 
there is always a national security concern when you are 
talking about a foreign-owned company, a foreign- government-
owned company, coming into the American market.
    Mr. Shimkus. Explain that. And I don't come as a 
lightweight to national security, being an old Army officer, 
but with technology, competition, choice, how is the entrance 
of a competitor in a highly competitive market a national 
security concern?
    Mr. Di Gregory. It is a concern because what we need to do 
in order to assure the national security is be able to 
effectively and securely effectuate court orders that we obtain 
for intercepts, whether those intercepts are pursuant to FISAs 
that we obtain or whether those intercepts are pursuant to 
criminal process and we obtain those--whether or not we obtain 
those orders through Title III, which is the wiretap statute, 
as well as other methods of lawful electronic surveillance that 
we conduct.
    It is a national security concern because of the potential 
that foreign government-owned corporations, foreign-government-
owned telecommunications corporations, may be in a better 
position to influence the people who are managing and operating 
the--whether it is a wholly owned U.S. subsidiary or not, 
managing and operating--they may be able to influence those 
folks who are managing and operating. To the extent that data 
that American companies store with those foreign 
telecommunications concerns or those U.S. subsidiaries that are 
owned by foreign governments, that data may potentially be in 
jeopardy; and that data could be related to trade secrets and, 
therefore, be subject potentially to economic espionage.
    Mr. Shimkus. Thank you.
    Mr. Di Gregory. Those are just at least a couple of those.
    Mr. Shimkus. That is fine.
    Mr. Parkinson?
    Mr. Parkinson. I will just echo what Mr. Di Gregory said. I 
think the short answer to your question is, again, yes. We 
assume, particularly when you are talking about a foreign 
government, any foreign government control of a basic part of 
our telecommunications infrastructure is a risk, and it raises 
concerns for us, and it raises concerns on several different 
fronts, most of which Mr. Di Gregory touched upon.
    We have a role in protecting that infrastructure. There are 
still nation states out there. Nation states act in their own 
national interest, and sometimes their national interest 
involves attacking us, and I use that term--put that term in 
quotes, but you can attack somebody, another nation state, in 
lots of different ways. It may be in their interest to engage 
in economic espionage. It may be in their interest to engage in 
more traditional espionage. It may be in their interest to try 
to find out what we are doing on the counterintelligence side 
of the house. And while we don't want to seem unduly alarmist 
or paranoid about this, I think the way we approach it is there 
are legitimate concerns any time the government--a foreign 
government is involved.
    Mr. Shimkus. Okay. If I can--I think I got it, and I want 
to make sure I give Chairman Kennard a chance to answer.
    Chairman Kennard, would you in the licensing process--I 
think you have testified, but I just want you to reiterate--you 
would take into account and into consideration testimony from 
the FBI and the Attorney General's Office, would you not?
    Mr. Kennard. Absolutely. We have a process in place where 
we defer to their expertise on these areas, and we coordinate 
closely. And the last thing that I would want to do, as 
chairman of the FCC, is to vote to grant an application if 
there were significant concerns from the FBI and the Department 
of Justice. I wouldn't do it. It is not done.
    Mr. Shimkus. And just as--I don't know, Ambassador Fisher, 
if you wanted to add to this. You may. If not, I can yield back 
my time.
    Mr. Fisher. No, sir.
    Mr. Shimkus. Mr. Chairman, I yield back.
    Mr. Tauzin. I thank the gentleman.
    The Chair recognizes the gentleman from Georgia, Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman.
    I recognize, Mr. Fisher, at the outset that we are here to 
deal with telecom, but you heard in the opening statement from 
Congressman Green his concern with regard to a private 
competition issue relating to electrical utilities by his 
constituent and mine, and Congressman Bart Gordon has the same 
concern, for Southern Energy, Incorporated's ability to 
penetrate into the German electricity market. That is being 
hampered by some of their own domestic utilities.
    And I would just like to have a commitment from you that 
you would be willing to pursue that issue so that we can be 
certain that our private companies that are attempting to 
penetrate the German market are not being treated 
unfairly.Could we have such a commitment from you?
    Mr. Fisher. Sir, I will look into that and report back to 
you.
    Mr. Deal. Thank you very much.
    Let me walk through some things, because I think there is 
some confusion, at least on my part, about where we stand. I 
suppose, Mr. Fisher, I would start with you by, first of all, 
asking, is there anything in the basic telecom agreement that 
we entered into that addressed the issue of foreign government 
ownership? Or was that just silent?
    Mr. Fisher. At the time, Congressman, most of these foreign 
governments had significant ownership. There has been a move, 
as I testified, toward liberalization in many, many cases, and 
it is an increasing pace of liberalization.
    Mr. Deal. But the ITA itself, did it address that to 
require that they move toward this privatization or was it 
silent on that issue?
    Mr. Fisher. The effect has been that they have moved toward 
privatization. In terms----
    Mr. Deal. But not mandated by that agreement?
    Mr. Fisher. No, but by forcing and allowing competition 
that has been the effect.
    Mr. Deal. Is there anything in WTO rules that address the 
issue of government ownership in this area?
    Mr. Fisher. Not directly, sir. Again, what we insist upon 
in the rules is impartial regulation.
    Mr. Tauzin. If the gentleman would yield for a second?
    Mr. Deal. Certainly.
    Mr. Tauzin. Doesn't an independent, impartial regulator 
imply privatization? How can you be independent and impartial 
if you are the government that is regulating your own 
government-owned company?
    Mr. Fisher. Well, again, this is why the effect of this 
agreement has been the movement toward increasing 
privatization, as I testified earlier. On the other hand, in 
some cases where we seen 100 percent privatization we would 
argue it hasn't lived up to our expectations and indeed has not 
allowed for more competition. Let me give you a signal example.
    Mr. Tauzin. I understand. That is a different issue.
    Mr. Fisher. Telemex in Mexico. So moving to privatization, 
Congressman----
    Mr. Tauzin. That is a different issue. You are saying that 
even with impartial, independent regulatory structures you 
might not have enough competition. That may be true, but how 
can you have, under the agreement, impartial, independent 
regulatory structures unless you have privatization?
    Mr. Fisher. If the governments are interested in competing 
internationally, they are moving or should be moving their 
governments toward enhancing competition through more 
competition.
    Mr. Tauzin. So the agreement does indirectly support, in 
fact demand, privatization?
    Mr. Fisher. We believe that is the effect.
    Mr. Tauzin. I thank the gentleman for yielding.
    Mr. Deal. So therefore, I assume, that since it is either 
only implied and certainly not explicitly addressed that the 
reverse side of the coin would be true, that those who are 
arguing that we should statutorily impose a percentage 
prohibition of government ownership in an entity would not 
violate either the ITA or anything under WTO?
    Mr. Fisher. I am sorry, sir. Could you kindly repeat that?
    Mr. Deal. If ITA does not address the issue, those who are 
arguing that we should impose the 25 percent rule to do so 
would not violate the ITA nor the rules of the WTO, would it?
    Mr. Fisher. It would certainly, I think, violate the 
agreement that we have in effect right now, and I believe it 
would----
    Mr. Deal. Which agreement is that?
    Mr. Fisher. Well, when we talk about, again, the subject of 
this hearing, but the--I am not sure what your point is, 
Senator--excuse me, Congressman.
    Mr. Deal. Thank you.
    Mr. Fisher. Could you kindly repeat it for me? I apologize 
for promoting you.
    Mr. Deal. My question is, if we are talking about whether 
or not we should pass legislation that imposes a limitation of 
no more than 25 percent government ownership as a condition for 
telecommunication ownership here, then it does not--to do so 
would not violate anything under the ITA nor under the WTO 
rules?
    Mr. Fisher. Well, again, the basic premise here is that we 
agreed to open our market in return for limitations on foreign 
government ownership. That is been the trade that has taken 
place, and that has been the effect of this in the short period 
it has been in place.
    Mr. Deal. Okay. And I realize that there is some 
disagreement about the interpretation of section 310(b)(4) in 
particular.
    Mr. Fisher. Right.
    Mr. Deal. But has any foreign government raised that 
provision of the Telecommunication Act as being in violation of 
any WTO rules, or the BTA?
    Mr. Fisher. I don't believe so, but I will double-check for 
you, sir.
    Mr. Deal. Has there been any case, Mr. Kennard, where this 
section has come in to question--up to this point, has there 
been any case that has questioned the application of this 
subsection?
    Mr. Kennard. If by ``case,'' you mean any----
    Mr. Deal. Any application.
    Mr. Kennard. There have been applications, certainly, where 
we have invoked our discretion under section 310(b)(4). We have 
never been presented at the commission level--putting aside 
actions by the commission staff on delegated authority, we have 
never been presented with a transaction quite like the one that 
is being talked about today, where you have a major transaction 
by a company that has majority foreign government ownership.
    Mr. Deal. Have you had--Mr. Chairman, would you indulge me? 
I would like to ask this one question.
    Mr. Tauzin. The gentlemen is granted an additional minute, 
without objection.
    Mr. Deal. Thank you, sir.
    Have you had cases up to this point where a license has 
been granted to an entity where there was foreign government 
ownership in excess of the 25 percent, where you have made a 
finding that the public interest was served by granting that 
license, which is your discretion under subsection (b)(4)?
    Mr. Kennard. I don't believe that we have had one at the 
commission level. I know I have not considered one since I have 
been chairman of the agency.
    We had a similar situation involving a recent case 
involving Intelsat, but that is really distinguishable because 
Intelsat has--it is a unique animal, and it has multiple 
governments with ownership in that entity. So it is really--
that is really not an appropriate precedent to use here.
    Mr. Deal. Thank you very much.
    Mr. Tauzin. Before the gentleman yields back, I want to 
clarify something.
    Mr. Fisher, Ambassador Fisher, did we not have a 
reservation in the WTO for the public interest? Is that not de 
facto a reservation for section 310(b)(4)?
    Mr. Fisher. We did reflect 310 in our WTO commitments, yes, 
sir.
    Mr. Tauzin. Okay. The Chair recognizes the gentlelady from 
California, Ms. Eshoo.
    Ms. Eshoo. Thank you, Mr. Chairman, and good afternoon to 
all of the gentlemen at the table.
    I have really soaked up a lot of what you have said, 
including your opening statements, but apologize for having to 
come and go from the hearing room. So if the questions I ask 
are somewhat repetitive, please bear with me.
    Chairman Kennard, it is always good to see you here.
    Mr. Kennard. Likewise, thank you.
    Ms. Eshoo. I hope your baby is doing very well.
    Mr. Kennard. He is. Thank you.
    Ms. Eshoo. We need to bring things in. Since the Ambassador 
spoke about his son, we can mention your baby.
    Let me ask you about the following: Can the FCC require a 
foreign government to divest below the 25 percent ownership? 
Maybe that was on the tail of the conversation that you were 
just having--you know, below the 25 percent ownership level 
before it approves a merger. And under what circumstances--have 
there been circumstances that have arisen or under what 
circumstances--what would you apply in terms of a yardstick? 
And then I would like to ask Ambassador Fisher a question as 
well, and then hopefully get to the other two gentlemen. But if 
you could maybe enlighten us on that.
    Mr. Kennard. The answer is, yes, but the threshold question 
that we would have to consider is what is the harm. Really, 
imposing a condition as you have outlined is a remedy; and in 
order to get to that point we would have to establish what the 
harm is. And there we would look at a range of factors. We 
would look at the influence of government over the applicant. 
We would look at the--whether the relationship between the 
applicant and the regulator gave an advantage that would 
depress competition in our domestic market.
    We really focus principally on preservation and enhancing 
competition in the U.S., so we would have to determine whether 
there is a link between that situation and the extent of 
foreign government ownership. If there is a link, then I think 
we have a very wide range of tools, including conditions that 
we could impose to deal with it.
    Ms. Eshoo. I have seen this before on some of these really 
highly complex issues and then the remedies that we examine 
here, that this is like trying to get socks on an octopus. I 
mean, I still don't know what is broken here that we are trying 
to repair.
    It is a highly emotional issue when you present it to the 
American people. Do you want foreign interests in their 
government in your telecommunications? Well, guess what most 
people are going to say? That doesn't taste so good to them. 
But then when you say, well, what's the harm? Let's examine the 
harm. What's the solution? You really start going down a 
slippery slope.
    Would either Mr. Di Gregory or Mr. Parkinson, can you tell 
us are there situations where the flag has been raised in 
either one of your departments where national security or other 
kinds of issues in terms of our Nation are raised, where your 
eyebrows have been raised by what has happened? Are you 
alarmed? Are you worried?
    Mr. Parkinson. Let me start, Congresswoman. The answer is, 
yes. I wouldn't say that we got carried away in raising the 
flag.
    Ms. Eshoo. Oh, you have had that?
    Mr. Parkinson. We have weighed in on any number of 
occasions. It is now approximately 10 over the course of the 
last 4 years, not necessarily because a specific transaction 
posed some imminent threat of some kind, but it--it was a 
transaction that had some sort of technical arrangement or 
other kind of structure that caused us to be concerned about 
our ability to carry out our duties, particularly on the law 
enforcement side where we have to effect our intercepts in an 
appropriate fashion, our lawful intercepts. And we have weighed 
in, for instance, and said that when you are processing--you, a 
telecommunications carrier--are processing a U.S.-to-U.S. phone 
call, the phone call has to come down from the sky someplace in 
the United States so that we have the ability to access that 
and also to preserve the privacy of the phone call.
    Ms. Eshoo. But that does not really speak to the question 
of a percentage of ownership, though, does it? You just want to 
be able to intercept. You are not talking about how much they 
own.
    Mr. Parkinson. That was just one example of a particular 
condition that we have talked about.
    Ms. Eshoo. Well, usually the first one is a big one, but 
maybe Mr. Di Gregory has----
    Mr. Parkinson. Just one shorthand, and I will turn it over 
to Mr. Di Gregory.
    Ms. Eshoo. The red light is on, so you need to finish up.
    Mr. Parkinson. This is always an assessment of risk, and it 
varies depending on who the country is, depending on what their 
particular arrangement of the transaction is.
    Ms. Eshoo. I appreciate that.
    Mr. Di Gregory. I just wanted to give you what could be a 
specific example of a concern, of a national security concern, 
that might develop. If a foreign-government-owned 
telecommunications company or a foreign-owned 
telecommunications company is providing service and we are 
conducting a counterintelligence investigation and during the 
course of that counterintelligence investigation we obtain 
lawful court process to conduct an intercept and the intercept 
must be conducted over facilities owned by the foreign 
corporation or owned by the foreign government, it would give 
us pause and we may have a tremendous concern about 
effectuating that intercept even if the intercept doesn't 
involve a citizen of that particular foreign country.
    We may choose not to conduct the investigation or not to 
conduct that portion of the investigation because of our 
concern about the security of the information related to the 
investigation that we are conducting and related to that 
particular intercept that a court has permitted us to do.
    Ms. Eshoo. But to date that hasn't happened. You are 
worried about the future. You are saying that if this happened 
this is what would raise our hackles; we are concerned about 
that if it were to happen.
    Mr. Di Gregory. I am saying that we are concerned about it 
now, and we are trying to do everything we can to keep it from 
happening.
    Ms. Eshoo. But it hasn't happened, though. That is what I 
am saying.
    Mr. Di Gregory. Well, I can't say absolutely that--all I 
can tell you is that we are concerned about that now, and we 
are doing everything that we can do by virtue of these 
agreements that we have been negotiating to avoid that 
situation from occurring--to prevent that situation from 
occurring.
    Ms. Eshoo. Thank you, sir.
    Mr. Chairman, I would like to ask for a unanimous consent 
request for an additional minute.
    Mr. Tauzin. Without objection, the gentlelady has an 
additional minute.
    Ms. Eshoo. I feel good to get these for ourselves. We don't 
stand in the way of others getting them.
    Ambassador Fisher, even if the passage of this bill didn't 
violate any WTO basic agreement because it is not treaty, are 
there other considerations that should be placed on the table? 
I mean, what possible ramifications do our markets face?
    Mr. Fisher. Well, we have been--Congresswoman, we have been 
extremely active here in activity abroad. I believe it is for 
the benefit of the shareholders of the companies and a benefit 
for U.S. interests, as I tried to explain in my testimony. And 
I think we run the risk here that other countries put up 
roadblocks to our activity on behalf of U.S. shareholders and 
U.S. employees and U.S. interests elsewhere around the world. I 
am not sure it is necessary--my point, Congresswoman, it is not 
necessary to do this.
    Ms. Eshoo. Well, I have kind of quickly come to that view.
    I think that we need to examine the flip side of this, and 
that is, would other countries and companies retaliate? I mean, 
we are thinking of our own retaliation for a whole variety of 
reasons, and maybe it is not so pretty to dress it up as 
retaliation but I think it is a form of retaliation or could be 
considered one. Wouldn't there be retaliation on the part of 
others if we did this?
    Mr. Fisher. Well, I would say this: We have seen a 
significant but insufficient liberalization abroad. That is, we 
would like to see more. We want to keep it moving in the right 
direction.
    U.S. economic interests have, in our opinion, been the 
beneficiaries of this process; and I do believe that at the 
very least other countries would stop listening.
    We are--and we take the high spot, we are the preachers of 
free trade. We may be imperfect and not satisfactory to others, 
and certainly we have justifiable critics within our own 
government and elsewhere in the world, but it is very hard for 
us to take the high ground if indeed we say that basically a 
process that we negotiated, agreed to, and a very short time 
ago that we now are going to change this and shift the playing 
field. As I tried to point out in my testimony, we have made 
significant progress in terms of our economic interests around 
the world. It is not perfect. It is not done. It is not 
complete. But I do believe that we run the risk of, if not 
reversing the process, bringing it to a screeching halt.
    Mr. Tauzin. The gentlelady's time has expired.
    Ms. Eshoo. Thank you.
    Mr. Tauzin. We just don't like preachers who sin too much 
by omission.
    The Chair recognizes the gentleman from Oklahoma, Mr. 
Largent.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Di Gregory, you are the Deputy Assistant Attorney 
General of the Criminal Division?
    Mr. Di Gregory. One of five, yes.
    Mr. Largent. Okay. Is the Child Exploitation and Obscenity 
Section under your bureau?
    Mr. Di Gregory. No, I am not the supervisor of that 
section.
    Mr. Largent. But is that under your bureau?
    Mr. Di Gregory. That is in the Criminal Division. That is 
correct.
    Mr. Largent. I would just like to state real quickly that 
on May 23rd we had some questions of that particular agency 
within the Department of Justice. We are still waiting for the 
responses to those questions. If there is anything you can do 
to expedite that, we would appreciate it.
    Mr. Di Gregory. I will do my best.
    Mr. Largent. I know the chairman and I both have sent 
letters in the last 3 months to get those responses.
    Let me get back to this. I would like to ask Mr. Fisher, is 
it the goal of the German Government to eventually have zero 
percent ownership in their telecommunications company? You said 
you were in regular contact with the German Government.
    Mr. Fisher. I can't answer the specific numerical goal that 
they have, but I would imagine like, any other government, 
their goal is to be competitive and to allow their economy to 
flourish. We live in the information age.
    Mr. Largent. The German Government goal is to be 
competitive?
    Mr. Fisher. In order to allow their economy to flourish, 
yes, sir. I believe that would be their goal. That would be my 
goal if I were a member of the Bundestag or the Bundesstaat.
    Now, are they up--are they moving in that direction? The 
answer is yes. They have 350 licensed carriers in Germany. I 
could walk you through some of the data or be happy, Mr. 
Pickering, to submit data for you.
    I am sorry. Let me change that. Let me restate my 
statement.
    Mr. Largent. We all look alike.
    Mr. Fisher. Congressman, I would be happy to submit that 
for you for the record.
    Mr. Largent. Okay.
    Chairman Kennard, I would like to ask you, has the FCC ever 
denied a merger because of public interest based upon foreign 
government ownership?
    Mr. Kennard. No, I don't believe so. But to put it in 
context, the FCC has never been presented with an application 
for a foreign government ownership on a controlling basis, that 
is a large controlling interest, to my knowledge.
    Mr. Largent. Okay. All right.
    Mr. Di Gregory, I want to ask you another question. 
Legislation proposed in the House by Mr. Dingell and in the 
Senate by Mr. Hollings of South Carolina would effectively 
block all communication company transactions involving 
companies with greater than 25 percent foreign government 
ownership. In your opinion, is this legislation necessary in 
light of the existing approval process?
    Mr. Di Gregory. In my opinion, we currently have 
processes--thus far, the processes that we currently have used 
with respect to foreign-owned telecommunications companies in 
their acquisition of American firms----
    Mr. Largent. Are you making that distinction between 
foreign-owned versus foreign-government-owned?
    Mr. Di Gregory. Yes, I am making that distinction. Because 
we haven't yet dealt with a transaction where foreign 
government ownership in the telecommunications sphere, 
acquiring a U.S. telecommunications company, has occurred. But 
the only thing that I was going to say was that we believe thus 
far these processes have enabled us to satisfy our national 
security and law enforcement concerns.
    Mr. Largent. Okay. Mr. Parkinson, can you respond to that 
question? Is this legislation necessary under the current 
process?
    Mr. Parkinson. Congressman Largent, with respect to the 
specific question about specific legislation I will defer to 
Mr. Di Gregory on that. I will echo what he just said. We have 
found that the processes currently in place have been 
appropriate and useful and successful in us negotiating 
appropriate conditions on these licenses.
    Mr. Largent. Mr. Parkinson, I have another question. We 
talked about the risk of espionage with a foreign government 
owning a wireless telecommunications company. Do you have to 
own a wireless company to spy?
    Mr. Parkinson. No.
    Mr. Largent. And does owning a wireless communication 
company enable you to participate in espionage that would be 
impossible without it?
    Mr. Parkinson. It might.
    Mr. Largent. Like what?
    Mr. Parkinson. Obviously, any kind of communication system 
or communication network might be, in a particular situation, 
important to your espionage activity. If you had the ability to 
control that information or communication network, obviously 
your task would be easier.
    Mr. Largent. So controlling a wireless communication 
network would allow you to participate.
    What kind of espionage could you do with a wireless company 
that you couldn't do without it? That is what I don't 
understand. I mean, technically what could you do?
    Mr. Parkinson. Well, I think the ability to communicate is 
critical to any insidious activity, whether it is espionage or 
other kind of criminal activity. If you have the ability to 
control the network, to keep law enforcement out of that 
network, to conceal what you are doing, I think it facilitates 
your actions.
    Mr. Largent. So do you believe that a wireless company 
doing business with the United States would have the ability to 
keep the FBI out of its records?
    Mr. Parkinson. Potentially, and that is one of the 
conditions that we typically negotiate with the companies in 
these arrangements, is where are the records going to be kept, 
who are the personnel that are going to work with the system.
    Let me give you a concrete example that would cause us 
concern on the espionage side, and that is you controlled the--
you are foreign-government owned. You control the communication 
network. We had a counterintelligence investigation under way, 
and we decide--we went to the Court, the Foreign Intelligence 
Surveillance Court, and got a court order to go up on a 
particular phone, and the number that we had targeted, or the 
person that we had targeted, is in the hands of a foreign 
government. That would cause us a great deal of concern, and it 
would certainly facilitate the foreign government's espionage 
program, if it had one.
    Mr. Largent. Okay. Mr. Chairman, I yield back my time.
    Mr. Tauzin. I thank the gentleman. His time has expired.
    I want to submit one question on behalf of Mr. Dingell to 
Admiral Fisher--Ambassador. Excuse me, I keep calling you 
Admiral--Ambassador Fisher. Would you please provide an 
analysis of whether section 310(a) would apply to a transaction 
such as the one described by DT and VoiceStream through their 
FCC filing? If your analysis concludes that section 310(a) does 
not apply, please explain whether section 310(b)(3) would apply 
to the transaction.
    Mr. Fisher. May I do that in writing, Mr. Tauzin?
    Mr. Tauzin. Yes.
    Mr. Fisher. Thank you.
    Mr. Tauzin. Yes, absolutely do that in writing.
    Mr. Fisher. Thank you, sir.
    Mr. Tauzin. The Chair yields to Mr. Markey, who has another 
question.
    Mr. Markey. Thank you. And this will be my final question.
    Again, Ambassador Fisher, we are trying to get back to this 
interaction between the trade negotiator and the German 
Government on this question of ownership and how constrained 
you feel in having any conversations with the German Government 
about this issue. You are saying that you personally have not 
had any conversations about this ownership issue with the 
German Government, is that correct?
    Mr. Fisher. Yes, sir, that is correct. But that is because 
my portfolio is Asia, Latin America, Canada and Mexico. So that 
may be the reason I haven't.
    Mr. Markey. Who has that job?
    Mr. Fisher. Well, our telecommunications negotiators and 
Ambassador Esserman, who handles Europe.
    Mr. Markey. Shouldn't he be here today, I mean, honestly?
    Mr. Fisher. I have responsibility, sir, for most of these 
cutting-edge negotiations, for example, with the Mexicans, the 
Japanese and others.
    Mr. Markey. I understand, but this is a specific case that 
we are dealing with. You are saying that you don't have any 
specific responsibility for this particular case?
    Mr. Fisher. I am not sure exactly what the question is.
    Mr. Markey. The question is, do you have any decisionmaking 
power with regard to the Deutsche Telekom/VoiceStream issue? Or 
is that in another person's portfolio in the Trade 
Representative's Office?
    Mr. Fisher. Well, the overall authority is Madam 
Barshefsky, but I believe--isn't the question with regard to 
Deutsche Telekom's percentage of German Government ownership?
    Mr. Markey. Ownership, yes.
    Mr. Fisher. And the answer to the question, sir, is that 
again this level of ownership, given the fact that when we 
negotiated this agreement very few other countries had the kind 
of liberalization that we have had, in and of itself is not the 
issue in terms of the----
    Mr. Markey. I understand that. I understand that.
    Here is the problem, Ambassador Fisher. When you started 
your testimony today, you told us about all of these wonderful 
companies from the United States that have just been created in 
the last 3 or 4 years who are now descending upon the European 
market.
    Mr. Fisher. Yes.
    Mr. Markey. Now the reason those companies exist, of 
course, is that the FCC, pursuant to a law that we passed in 
1996, made it possible for them to be created because we took 
on government-protected monopolies. And so, yes, now they have 
this huge amount of capital, level 3 and other companies that 
you might have mentioned, heading across Europe. That is great. 
In fact, even VoiceStream itself is as a result of a U.S. 
Government policy to create more competition in the 
marketplace.
    The paradox here, of course, is that the Germans have 
created an analogous monopoly in terms of this Deutsche Telekom 
situation, looking at the relationship between them and their 
regulators, which is hard for us from a distance to be able to 
decipher. So we are looking for you to tell us why it is--why 
insisting on full privatization is--can it be a requirement 
that we put on the books or is it a violation simultaneously 
for us to request that? Which is it? Can we request it or is it 
a violation for us to request it?
    Mr. Fisher. My answer to you, sir, is that it is moving in 
that direction. If you will bear with me for just 1 minute, let 
me walk you through what the situation is in Germany.
    Mr. Tauzin. We don't have time for a big walk-through.
    Mr. Markey. In your comments--we are going to miss a roll 
call, Mr. Fisher. Can you ask--can your office, not you 
personally, because it is not your responsibility--but can your 
office ask the German Government to reduce its ownership? Can 
you do that without violating the WTO?
    Mr. Fisher. We have seen the effect of these efforts result 
in a reduction of Deutsche Telekom's government.
    Mr. Markey. Okay. You are not going to answer the question. 
Thank you.
    Mr. Tauzin. He won't answer the question. And let me close 
out.
    Ambassador Fisher, let me express some extreme 
disappointment with your testimony today before we close. We 
went through difficult questioning to get you to say whether or 
not you talked to the German Government, and you did not--you 
said, I did not, but you did not say but I am not the guy who 
would have talked to them anyhow. We had to find that out 
later. That is a bit disingenuous.
    Now, let me say this is a serious question. I think you got 
the flavor of that. If you think there is an uneasiness in this 
room, you have an uneasiness with what you hear in this room, 
we have an uneasiness with what we are hearing from you. And if 
you think this committee is not serious about our concerns that 
the ITA impliedly requires privatization for competition in 
this country, then rest assured we are definitely deeply 
concerned about that. We believe, while it doesn't say it in 
the kind of language sometimes we say things, that to say an 
independent and separate, impartial regulatory authority is 
necessary, clearly says these governments are supposed to be 
privatizing; and to pretend otherwise is just not right.
    Second, we will be very interested in getting some answers 
from those in your office who do have in their portfolio the 
obligation to talk to the heads of these governments to find 
out whether they are talking to them or not, and we will follow 
up with some questions in that regard. But I am deeply 
disappointed in the way in which you have avoided answering 
directly the questions of the members of this committee.
    You may respond, but I am going to have to go vote, so do 
it quickly.
    Mr. Fisher. Well, I apologize to you, Mr. Chairman, if I 
have disappointed you. I have made my best effort to answer 
your questions. I would be happy to follow up in writing to the 
questions that have been posed to me.
    I have made, I think, one basic point, and that is that we 
presently have in place the tools to deal with this 
application. And I have made my best effort, sir, to answer 
your questions; and I will do my best to answer whatever 
questions I didn't answer in writing to you. Thank you.
    Mr. Shimkus [presiding]. Let me now move to my colleague 
and friend from California, Mr. Cox, and recognize him for 5 
minutes.
    Mr. Cox. I thank the chairman.
    I would like to address myself, if I might, to Mr. Kennard 
and Mr. Di Gregory, to ask you, for starters, the degree to 
which you parse a distinction between foreign ownership on the 
one hand and foreign government ownership on the other hand. 
Because we have got two competing legislative provisions. One 
is current law, which speaks in section 310(b)(4) of a 25 
percent foreign ownership cap, and the other is our colleague 
in the other body who is using the same figure but applying it 
to foreign government ownership, and at least facially it 
strikes me that the two are dramatically different. I would be 
interested in your views.
    Mr. Kennard. Well, Mr. Cox, we are guided, first and 
foremost, by the statute itself, section 310; and section 310 
speaks in terms of ownership by aliens, by representatives of a 
foreign government, or by a foreign government. So if you look 
at the operative statute here, section 310, all of those types 
of owners are subsumed within that provision.
    Mr. Cox. And the first, aliens, includes private citizens?
    Mr. Kennard. That is right, foreign nationals.
    Mr. Cox. And I understand that. That was a premise to my 
question, so I hope I wasn't baiting my question. I think not.
    Given that, do you distinguish between foreign government 
ownership on the one hand and foreign ownership on the other 
hand in making these decisions and in formulating your policy?
    Mr. Kennard. Yes, certainly there are distinctions that can 
be drawn as a policy matter, and we heard some of those 
distinctions drawn out today at hearing. That is, when you have 
foreign government ownership, you have a unique set of 
competition challenges--the relationship between the government 
and the company, whether there are cross subsidy issues, tax 
incentives, other issues like that that could cause us to have 
concern about competition in this country.
    So, yes, we would look at those issues when they are 
presented to us in the context of a specific transaction.
    Mr. Cox. Mr. Di Gregory?
    Mr. Di Gregory. They are distinguishable for us, Mr. Cox, 
in terms of our assessment of the risk involved to national 
security and law enforcement concerns. The risk is heightened 
when it is a foreign-government-owned corporation, although 
there are risks still attendant to simply foreign corporations 
acquiring U.S. telecommunications providers.
    Mr. Cox. Now most of your testimony was directed to 
security concerns, but I wonder if I can't look through the 
other end of the telescope and see also equally valid 
competitive concerns and see those concerns even if I withdraw 
the adjective ``foreign'' from government. Because in my mind 
this is so distinguishable from the foreign ownership issue 
that we can even take the word ``foreign'' out of it altogether 
and just talk about government ownership.
    We have a policy in this country--it is Clinton 
administration policy, it has been continued since President 
Eisenhower--of discriminating against government ownership of 
commercial enterprises, and it is stated in circular A-76. And 
it is stated--in fact, I think I have some--``the government 
should not compete with its citizens.'' That is Clinton 
administration policy. That is Bush administration policy, 
Reagan administration policy. It goes a long way back. But that 
circular has been renewed as recently as 1999.
    The government should not compete with its citizens. The 
competitive enterprise system characterized by individual 
freedom initiative is the primary source of national economic 
strength.
    So if we took ``foreign'' out of this equation, we just ask 
ourselves whether we wanted to have a policy that discriminated 
against government ownership of telecommunications, we have 
answered that question in this country.
    Our view is that government ownership is not what we are 
after. We are after private ownership, and I believe for a 
couple of reasons. One is that governments are uniquely in a 
position to create their own regulatory environment, and you 
don't have an arm's-length relationship between the regulated 
entity and the regulator if you do that. Another is that 
governments, being run by politicians, oftentimes make 
decisions for other than economic reasons, for noneconomic 
reasons. Instead of supply and demand being the principal basis 
for resource allocation decisions, you have a lot of political 
decisionmaking.
    So it isn't just a question of whether the U.S. consumer 
might be getting the benefit of a stupid subsidy by some 
foreign government. It is also the question of whether or not 
we don't experience all sorts of opportunity costs because 
resource allocation decisions are being made for political 
reasons instead of economic ones.
    I wonder whether the Department of Justice has an interest 
in these things as well.
    Mr. Di Gregory. There may be another division in the 
Department of Justice that has an interest in these things.
    Mr. Cox . Well, I know there is a department.
    Mr. Di Gregory. And I don't know that I can speak to those 
concerns because of the role that I play and because of the 
focus that I have with respect to this issue on national 
security and law enforcement issues.
    Mr. Cox. Let me go back to Mr. Kennard and try and put 
myself in the shoes that I occupied 15 years ago when I was 
Reed Hundt's law partner.
    Mr. Shimkus. Is that for the record?
    Mr. Cox. For the record, I was, yes. It is even a matter of 
Federal Election Commission record that he contributed to my 
campaign.
    But when I was representing private clients and when my 
concern was the shareholders, the executives of the firms I 
represented and so on, I could easily see, were I there today, 
that their interests would be maximizing the number of 
potential buyers for their securities, giving them the greatest 
liquidity opportunities possible, the most buyers, the most 
potential angels.
    And because some of the firms here that we are talking 
about are rather large, including governments in that universe, 
it is probably a good thing, more buyers. And yet from a 
regulatory standpoint the picture is a little bit different; 
and I wonder whether you wouldn't, A, think it natural that 
most of the shareholders, officers, executives and so on of the 
firms involved here would be in favor of including government 
in the bidders on the one hand and also whether that is 
something that should be at least partially discounted as you 
do your policy analysis?
    Mr. Kennard. That is an interesting question and one that I 
am sure is--I am sure a lot of people in this room are 
calculating whether they are going to be a competitor or a 
seller, and that is going to determine which side of this issue 
they are on. But from my perspective it is not something that 
we really need to worry about because, first and foremost, our 
responsibility is to American consumers and not necessarily 
creating buying or selling opportunities for anyone as a 
primary matter.
    Going back to your initial comment about privatization, I 
just wanted to underscore that we believe fervently at the FCC 
in privatized competition. Every opportunity I have to meet and 
talk to my counterparts in independent regulatory agencies 
around the world, I always make this argument. It is our 
probably most important public policy export, if you will, 
which is promoting privatized competition.
    The question that is being raised in this hearing today is 
what is the best way to get to that point? Is the market going 
to drive companies to ultimately privatize or not? And in the 
meantime, when transactions like this arise, are there 
competitive issues that we have to deal with before companies 
are fully privatized?
    I guess my main message today is that we are prepared to 
deal with those hopefully interim market issues until we get 
to, hopefully soon, a world where all competitors are fully 
privatized.
    Mr. Cox. Well, let me, since I am here without competition 
myself, nonetheless yield because the panel has been very 
indulgent with all the members here.
    I would just like to conclude by saying that in my view, 
for what it is worth, allowing private citizens and both 
privately and publicly held commercial entities to invest in 
U.S. telecom markets, even assuming these are foreign private 
investors, foreign private companies and so on, is indisputably 
beneficial. It is a good thing for our economy to inject new 
competition. It reduces prices.
    But I do think that there are fundamentally different 
issues; and we haven't had a chance to get in a lot of them--
sovereign immunity, for example, which, having read through the 
SEC filings of Deutsche Telekom, are, you know, front and 
center. They have done their level best, it appears, to waive 
them in the context of their filings, but, you know, whether or 
not in the clinch that satisfies everyone is something else. It 
is just a different beast altogether if you are talking about a 
foreign government compared to talking about foreign 
competition.
    I am just sorry that much of the debate here, such as it 
was today, seemed not to focus on that distinction so much as 
foreign versus not. I don't think that there is any xenophobia 
or protectionism or anything that is latent on either side of 
the aisle here. I think we are all fairly enlightened that way, 
but I do think that you are wise to be very chary about the 
distinction between governments coming in and buying whatever 
the heck it is.
    We happen to be doing telecommunications today on the one 
hand and private firms and individuals on the other.
    I thank the chairman.
    Mr. Shimkus. Thank you. And the Chair will note that there 
has been strong debate on government intervention and I would 
suggest some xenophobia discussed in the hearing about this 
issue raised by really members on both sides of the aisle. So 
it is probably another issue to address.
    Mr. Cox. You can say that now since they are gone, right?
    Mr. Shimkus. I have been here the whole time.
    Mr. Cox. The xenophobes are at least gone.
    Mr. Shimkus. I want to thank the panel, too, for being 
patient. And hearing no other questions, no other members being 
present, I would like to dismiss this panel, again thank them 
and call the third panel.
    Panel three will consist of Mr. John Stanton, CEO and 
President of VoiceStream; Mr. Morton Bahr, President of 
Communications Workers of America; Mr. Gregory Sidak, 
Weyerhaeuser Fellow in Law and Economics; Mr. Andrew Lipman, 
Vice Chairman of Swidler Berlin Shereef Friedman; Dr. Michael 
Noll, Annenberg School for Communication; and Mr. Thomas 
Donohue, President and CEO, U.S. Chamber of Commerce.
    If I can get our guests in the gallery to expedite their 
process out of the hearing room and take seats and close the 
doors, we would like to begin as soon as possible.
    I have been informed that Mr. Donohue will not be able to 
testify.
    Before I go to the opening statements, I would like to 
remind the panel that their written testimony is already going 
to be submitted into the record, so this committee likes to ask 
witnesses to summarize. I am going to try to be a little bit 
stricter on the time. Give us the high points. We will move 
through the testimony and then we will have time. Members will 
be rotating back from the vote to follow up with questions.
    With that, I would like to welcome Mr. John Stanton, CEO 
and president of VoiceStream. You are recognized for 5 minutes.

 STATEMENTS OF JOHN W. STANTON, CEO AND PRESIDENT, VOICESTREAM; 
 MORTON BAHR, PRESIDENT, COMMUNICATIONS WORKERS OF AMERICA; J. 
   GREGORY SIDAK, WEYERHAEUSER FELLOW IN LAW AND ECONOMICS, 
AMERICAN ENTERPRISE INSTITUTE, PUBLIC POLICY; ANDREW D. LIPMAN, 
  VICE CHAIRMAN, SWIDLER BERLIN SHEREEF FRIEDMAN, LLP; AND A. 
        MICHAEL NOLL, ANNENBERG SCHOOL FOR COMMUNICATION

    Mr. Stanton. Thank you, Mr. Chairman.
    Mr. Chairman, members, Mr. Cox, I very much appreciate the 
opportunity to testify today. I will follow your admonition and 
be quite brief. I have entered comments for the record.
    Our message to consumers in our business, as articulated by 
our spokeswoman, Jamie Lee Curtis, is to get more. What we mean 
by that is we give our consumers the opportunity to get more 
from our product, and we give our employees an opportunity to 
get more employment opportunities.
    I would like to speak briefly to the message that I have 
articulated in the statement and briefly introduce the 
business.
    Our message today really is threefold. Our agreement with 
Deutsche Telekom benefits our consumers, benefits our employees 
and benefits our business as a whole.
    The approval process that we must go through, in our 
opinion, works today. The proposed legislation is a categorical 
ban on our transaction and, as a consequence, will deprive our 
employees and our customers the benefits of the deal.
    Let me briefly introduce the business. In 
telecommunications terms, we are a veritable new kid on the 
block. The business was founded by my wife Theresa and I, 6 
years ago. The business has had the opportunity to compete, but 
we had to compete in a very different way in order to succeed. 
We built an all-digital network using licenses that we 
purchased through the FCC auction process for new personal 
communications auctions. We have competed very aggressively by 
offering what we call the best value in wireless, and frankly 
what that generally means is we are the lowest price in the 
marketplace.
    Since we have launched our services, we, as well as other 
new competitors, have seen the average price per minute of 
wireless services drop by approximately 57 percent in under 5 
years. That is down to an average price per minute, according 
to FCC records, of 24 cents. Our average price per minute is 
approximately 12 cents, or half the industry average, and our 
customers used an average, as of last quarter, of over 450 
minutes of use per month, which is twice the national average.
    We have built our business by raising money, both 
domestically and internationally. Today, approximately one-
third of our equity is held by foreign companies and 
approximately two-thirds is held by American individuals and 
companies.
    In 5 years, we have managed to build a business adding 2.5 
million customers and adding 8,300 employees all over the 
country. So why do we need more money? Why do we need the deal 
with DT? We are now licensed to provide services in about 90 
percent of the United States. We have to get the last 10 
percent of those licenses. We only serve, however, about 45 
percent of the licenses in the United States. In other words, 
we are still in the process of building out the licenses that 
we have acquired.
    In the meantime, we have seen our competitors get much 
larger, particularly companies like Verizon that have grown by 
acquiring many other businesses. We need additional capital 
with which to compete. It is imperative for us to build out 
that national footprint in order for us to succeed. In order to 
do that, we need to raise capital. We went through a prolonged 
process to find that capital and we identified what we believed 
to be the best possible transaction, that which we have signed 
with Deutsche Telekom, which we believe benefits both consumers 
and our employees.
    I can tell you, having raised money both domestically and 
from foreign companies and having merged or acquired a number 
of companies over the last nearly 20 years, that the review 
process, which in this case includes the Securities and 
Exchange Commission, the Department of Justice, the Committee 
for Foreign Investment in the United States as well as the 
Federal Communications Commission, works and works well.
    We will be thoroughly scrutinized in a process that will be 
very time consuming. But the reviews are done on a case-by-case 
basis, and the conclusion will be reached based on the merits 
of our applications.
    The proposed legislation is simply a categorical ban on our 
transaction and as such would deprive our consumers and, 
frankly, the consumers that utilize our competitor's services 
of the benefits of other prices and our employees and our 
future employees the benefits of the capital and the additional 
jobs we would create.
    As a consequence, I ask you and urge you to reject the 
proposed legislation.
    [The prepared statement of John W. Stanton follows:]
  Prepared Statement of John W. Stanton, Chairman, Director, and CEO, 
                              VoiceStream
    I appreciate this opportunity to testify about VoiceStream's 
experience with foreign investment in U.S. telecommunications 
companies. In our view, current U.S. policies on foreign investment in 
telecommunications companies like VoiceStream--including investment by 
companies with government ownership--are sound. American consumers, 
American companies, and American jobs would suffer if Congress were to 
categorically shut off investment in American companies by companies 
with more than 25% foreign government ownership.
    Our current system for regulating foreign and foreign government 
investment strikes the right balance for American consumers and 
American workers and gives the United States government full authority 
to protect our country's legitimate interests in national security, 
trade, and fair competition. By contrast, pending legislation that 
would change the current system, including Senator Hollings' amendment 
to the Senate Commerce-State-Justice appropriations bill and the 
freestanding bills (S. 2793 and H.R. 4960), strikes the wrong balance. 
This legislation would unnecessarily and harmfully prohibit investment 
in U.S. companies that boosts competition, job growth, and consumer 
welfare.
    There are five points that I want to emphasize in my testimony 
today.
    First, VoiceStream is a foreign investment success story. We 
demonstrate the tremendous benefits that foreign investment can bring 
to American consumers and workers. VoiceStream is the fastest growing 
wireless company in the country, and it is the newest nationwide 
wireless company. But VoiceStream would not be a nationwide wireless 
carrier today and an aggressive new market entrant if we had been 
barred from raising significant investment capital from abroad.
    Second, VoiceStream's merger with Deutsche Telekom, which we 
announced on July 24, 2000, will permit us to become an even more 
vigorous U.S. wireless competitor by accelerating our nationwide 
buildout, and by allowing us to bring improved service to consumers. DT 
will give us the financial backing we need to become a leader in 
delivering next-generation, broadband wireless to American consumers.
    Third, the big winners from our merger with Deutsche Telekom will 
be American consumers and American workers. Our customers will benefit 
directly, but all consumers win when there are numerous strong 
competitors. As this merger strengthens VoiceStream, it will force the 
five larger nationwide wireless carriers to work harder, too. And 
unlike many mergers, this merger will create American jobs--good, high-
skill, high-paying jobs.
    Fourth, legislation to prohibit companies with more than 25% 
foreign government ownership from indirectly owning a U.S. wireless 
telecommunications company simply isn't needed to protect U.S. national 
security and competition interests. We know from recent first-hand 
experience that our existing process is thorough and complete. The 
mergers of VoiceStream, Omnipoint, and Aerial were scrutinized by 
competition authorities at the Department of Justice and the FCC, and 
by national security agencies, because of the significant investment by 
Hutchison Whampoa, a Hong Kong company. We know that these agencies' 
review of our merger with Deutsche Telekom will be equally rigorous.
    Fifth, the proposed legislation's inflexible ban on investment by 
companies with more than 25% foreign government ownership would 
needlessly jeopardize American trading and investment interests.
    Let us review each of these points in more detail.
    First, VoiceStream's story shows how foreign investment benefits 
American consumers and workers. I founded VoiceStream as a subsidiary 
of Western Wireless in 1994. And since that time, we have enjoyed 
phenomenal success as a result of our hard work. Western Wireless spun 
off VoiceStream as an independent company just last year.
    VoiceStream is today the fastest growing, most dynamic nationwide 
competitor in the wireless marketplace. As of the end of June, we serve 
2.5 million subscribers and employ over 8,300 people nationwide. Our 
phenomenal subscriber growth promises even more job growth in the 
months ahead as we build out and expand our service areas. Moreover, 
VoiceStream recently reached an agreement to acquire PowerTel, Inc., 
which operates a wireless network spanning 12 states in the 
southeastern U.S., in areas where VoiceStream currently does not market 
wireless services. As a result of the PowerTel acquisition, VoiceStream 
or its affiliates will hold licenses reaching 90% of the population of 
the United States, including 24 of the top 25 U.S. cities.
    We have received industry awards and have been recognized for our 
innovation. Our e-notes service allows customers to send and receive 
short e-mails directly from wireless phones. Our InfoStream product 
allows subscribers to receive customized messages, such as sports 
scores, stock alerts, news headlines, and weather updates, all through 
wireless phones. Our customers are able to tailor the information they 
receive, based on their own needs and interests.
    VoiceStream did not become the country's fastest-growing wireless 
company through government largess. Nor did we rely on local telephone, 
long distance or cable services communications businesses to generate 
large cash flows that could finance our growth. In 1994, we convinced 
private investors to risk their capital by investing in VoiceStream so 
that we could acquire licenses in FCC-conducted auctions. In the last 
year, we combined with smaller wireless companies including Omnipoint, 
Aerial Communications, and now PowerTel. Over the past five years, we 
had to raise capital to build out and operate these licenses. We raised 
money in the public and private, debt and equity markets in the United 
States but we could not meet all of our capital needs in the U.S. We 
also raised foreign capital from those willing to invest in our new 
network and assume these risks. Sonera, the Finnish telecommunications 
company that is majority owned by the Finnish government, invested 
nearly $1 billion, and Hutchison Whampoa, a Hong Kong-based 
telecommunications company, invested $1.2 billion.
    Quite simply, without these foreign investments, VoiceStream would 
not be the substantial innovative, competitive presence in the U.S. 
wireless markets that it is today. VoiceStream's history demonstrates 
that foreign investment in the United States creates jobs and benefits 
American consumers.
    Although we are proud of our successes, we never lose sight of the 
fact that we are a relative newcomer entering a brutal marketplace. 
More often than not, we are the sixth or seventh competitor entering 
markets to battle established carriers with significant brand 
identification and financial backing: Verizon Wireless, SBC/BellSouth, 
AT&T, Sprint, and Nextel. We succeed in signing up new customers every 
day. To stay competitive, we must constantly innovate, expand our 
service areas, and roll out more features at prices consumers demand, 
which requires more capital to expand our services areas and service 
offerings.
    As a consequence, we arrive at my second point--the VoiceStream/DT 
merger makes sense for both VoiceStream and DT. First and foremost, 
VoiceStream and DT have a unique synergy. GSM technology has become the 
global wireless standard, but VoiceStream is the only nationwide U.S. 
carrier to use GSM. The merged company will be the first to offer 
state-of-the-art GSM technology in a seamless, worldwide network. One 
phone, one number, with worldwide service.
    Despite our potential, VoiceStream is today an adolescent among 
adults--we have to raise money to buy more licenses, build more 
systems, and market our services. To be competitive, we need to own and 
operate a national wireless network. When completed, the PowerTel 
acquisition will fill one significant hole in the Southeast after which 
VoiceStream will be licensed to serve nearly 90% of the American 
people. We still need to purchase licenses to serve the remaining 10%, 
primarily in California and the Carolinas. With DT's backing we can 
compete effectively to acquire the licenses that will allow us to 
achieve nationwide coverage.
    Over the past 5 years we have built nearly 10,000 cell sites and 
today offer service in about half of our licensed markets (including 
PowerTel). We need to continue to build and finish our build-out. DT's 
capital will enable us to complete our national build-out. To be 
competitive, we also must be a major player in the rollout of next 
generation, broadband wireless systems. Standing alone, we simply did 
not have the financial resources and scale of our competitors--who are 
this country's largest providers of local and long distance telephone 
service and cable service. Our merger with DT now gives us the 
resources to compete with these carriers.
    DT's worldwide scale will give us the resources needed to introduce 
next generation broadband wireless services and will make us a stronger 
competitor in the U.S. We will not be alone in our ability to draw upon 
the lessons of Europe--Verizon undoubtedly will benefit from Vodafone's 
European experience and the BellSouth/SBC wireless venture will benefit 
from their extensive international investments.
    In turn, this transaction allows DT to fill a hole in their 
worldwide network. Without us as its partner in the U.S., DT would be 
at a competitive disadvantage in Europe, where Mannesmann/Vodafone/
AirTouch--which serves the U.S. market through Verizon Wireless--is one 
of DT's biggest competitors.
    Third, the big winners from the VoiceStream/DT merger will be 
American consumers and American workers. American consumers will enjoy 
the benefits, as VoiceStream becomes a stronger, quicker, more 
efficient competitor. The merger will speed our buildout and accelerate 
the introduction of new mobile data applications, forcing our 
competitors to respond with better services of their own. Consumers 
will also benefit from global roaming, unified billing, and worldwide 
customer service, which we now will be able to offer them. VoiceStream 
is today the best value in wireless. The more we expand, the more 
Americans can benefit from the lower prices we offer.
    Additionally, consumers will benefit from a new source of broadband 
Internet access as we introduce next-generation services. Today 
consumers have only two choices for broadband Internet access in their 
homes--monopoly telephone lines and cable modem service. Next-
generation wireless will be the third high-speed Internet access 
alternative, which will expand the choices, and we would expect lower 
prices to consumers for high-speed Internet data service. This merger 
will accelerate the deployment of the broadband Wireless Internet and 
give consumers a true choice among providers of high-speed data.
    Our accelerated network buildout and introduction of new services 
will spur job growth among American workers. The 8,300 jobs at 
VoiceStream today (which will rise to 10,900 after the PowerTel 
acquisition closes) are jobs that did not exist before VoiceStream and 
its predecessor companies built this new wireless network. We estimate 
that we will hire 2,000-3,000 more workers to expand our networks and 
increase our sales, marketing and customer-service support facilities 
to keep pace with this expansion. And these jobs will be in the U.S. 
Unlike automobile or textile manufacturing jobs, wireless operations 
are inherently local. Leadership, marketing, sales, network operations, 
and customer service staff all must be locally knowledgeable and 
available.
    Fourth, the proposed legislation to change U.S. foreign ownership 
law is a solution in search of a problem. National security and 
competition are well protected under current laws, and there is no need 
to enact a categorical ban on investment by companies with foreign 
government ownership.
    I know from personal experience that we have national security 
safeguards in place. VoiceStream has been through this process before, 
and has entered agreements with various national security agencies to 
preserve U.S. interests. The Exon-Florio Amendment to the 1988 Trade 
Act is the centerpiece of our current process for protecting our 
national security in the case of mergers involving foreign companies, 
whether or not foreign government ownership is involved. Under this 
law, the Committee on Foreign Investment in the U.S. (``CFIUS'') 
reviews foreign mergers, and mergers that raise national security 
concerns can be blocked or conditioned. Agencies involved in the CFIUS 
review process include the Departments of Commerce, Defense, Justice 
(including the FBI), State, Treasury and the National Security Council.
    In the past year, VoiceStream negotiated a national-security 
agreement. That agreement also was made a condition of our licenses 
under the FCC's review and approval process. As a consequence, our 
failure to abide by those agreements would subject us to FCC fines or 
even license revocation. Since we cannot operate our business without 
these licenses, we have this additional strong incentive to comply with 
our national security commitments.
    Other safeguards are in place today to address competition 
concerns. The Clayton Act requires the Department of Justice's 
Antitrust Division to review a merger such as VoiceStream/DT, to 
negotiate consent decrees to resolve anti-competitive problems, and to 
block the merger if any problems with the transaction cannot be 
remedied. The FCC must also approve the transfer of control of 
VoiceStream's wireless licenses, and reject it if it finds that the 
merger is not in the public interest.
    Our previous mergers were thoroughly reviewed by both agencies, and 
VoiceStream will soon file for FCC approval of the PowerTel acquisition 
and the DT merger. As was the case with our previous mergers, the FCC 
will provide interested members of the public with the opportunity to 
express their views. The FCC will examine these comments, and will 
review our proposal for its effects on consumer welfare, national 
security, law enforcement, foreign policy, and trade. The FCC can deny 
or condition mergers that do not meet its public interest test.
    Based on past experience, the government's review of the 
VoiceStream-DT merger will be detailed and rigorous, and will focus on 
the facts of this case. I am confident that these agencies will uncover 
no substantial issues of national security that have not already been 
substantially addressed by our existing agreements, and that they will 
conclude that this merger is overwhelmingly pro-competitive. In my 
opinion, a case-by-case review is the appropriate approach. The 
proposed legislation, on the other hand, would create a rigid, 
categorical percentage threshold that would tie the hands of U.S. 
governmental officials. They would be left with no discretion to 
approve a specific transaction even if the facts showed it to be a good 
deal for the American people.
    With that background, I will address some of the facts concerning 
the VoiceStream/DT merger. The VoiceStream/DT merger is pro-
competitive. It will strengthen the smallest nationwide wireless 
carrier and allow VoiceStream to enter new markets and provide new 
services. The merger will not concentrate market share among existing 
operators in the same local markets, as DT and VoiceStream have no 
overlapping service areas. It will not reduce service offerings in the 
U.S., in Europe, or anywhere else--in fact, it will increase them. The 
VoiceStream/DT merger simply makes VoiceStream a stronger competitor in 
the U.S. wireless marketplace.
    Even though the German government will have a significant ownership 
stake in the combined company, it will not exercise de jure or de facto 
control over VoiceStream. DT is a private corporation organized under 
German law, not an agency of the German government. The German 
government does not manage DT, and, in fact, holds only one of twenty 
seats on DT's board of directors.1 The German government has 
consistently voted with DT's management and other board members, and 
holds no special right to veto corporate decisions. The German 
government's directly-held share of DT has fallen from 100% in 1995, to 
75% in 1996, to 43.2% today (with another 15% held in trust by a German 
public bank for sale as market conditions permit). If this merger 
closes, the German government will directly hold only 32.7% of the new 
company, with another 11.3% indirectly held by the bank. In fact, this 
type of merger is the quickest way for the government to reduce its 
ownership share of DT. To reduce the German government's stake to 25% 
via stock sales would require an IPO four times larger than AT&T's 
record-setting wireless IPO last spring.
---------------------------------------------------------------------------
    \1\ Kreditanstalt fur Wiederaufbau (``KfW''), a public bank that is 
a private corporation under German law, also has a single seat on the 
board.
---------------------------------------------------------------------------
    DT is not backed by government credit, government subsidies, 
government guarantees, or government tax preferences. There is also no 
objective marketplace evidence of any implicit credit guarantee. 
According to Standard & Poor's, DT's credit rating is identical to 
BellSouth's, SBC's and AT&T's, and lower than British Telecom's. Based 
on work undertaken for VoiceStream by Goldman Sachs, DT's cost of 
borrowing is greater than that of AT&T, Worldcom and BellSouth--all of 
which are smaller than DT. As a publicly traded corporation, DT is 
audited regularly and subject to all EU and German corporate laws. 
Indeed, the receipt of favorable government treatment would violate 
DT's corporate charter, as well as EU and German laws.
    Even if DT were somehow aided by the German government--which it is 
not--it would be impossible for DT to harm competition in the U.S. by 
cross-subsidizing VoiceStream. The U.S. wireless market is highly 
competitive and VoiceStream is tiny when compared with the other 
nationwide wireless networks--all of which have very significant 
financial backing and resources. Even if it were somehow possible to 
engage in cross-subsidization in the U.S. (which it is not), German 
market conditions and German regulations preclude DT from charging 
monopoly prices to generate money for such efforts.
    DT faces substantial competition in German wireless markets, where 
DT is not even the largest wireless provider (Mannesmann/Vodafone is 
larger). BellSouth is another major wireless competitor in Germany 
through its investment in E-Plus. In the long distance market, in which 
many U.S. companies actively compete today, DT has lost 40% of its 
market share. In local telephone services, DT is subject to stringent 
regulation, both by the German government and by the European Union. T-
Mobile International (``TMO''), the DT subsidiary that VoiceStream 
would join after the merger, is a structurally separate entity from 
DT's wireline local telephone operation. Under German law, TMO must 
maintain a separate set of accounts from the wireline operations. 
Moreover, TMO is subject to rules that require arm's length 
transactions and structural separation which creates transparency of 
financial relations and enables German and European Union regulators to 
detect cross-subsidies easily.
    In sum, there are simply no unfair competitive advantages created 
by the DT/VoiceStream merger. This merger is overwhelmingly pro-
competitive and pro-consumer.
    Fifth, the Hollings Amendment would needlessly jeopardize American 
interests abroad. Under the WTO Basic Telecom Agreement, the U.S. made 
a commitment to open international investment and competition. 
VoiceStream has relied on those commitments as it has sought to raise 
the financing necessary to fill in gaps in its national service areas, 
to complete its U.S. build-out, and to make the investments necessary 
to bring next- generation broadband wireless services to market. 
Changing the rules of the road after the race has started is simply 
unfair.
    More broadly, this legislation endangers all U.S. companies' 
foreign investment opportunities, because we believe that the proposed 
law would violate U.S. WTO commitments. The U.S.' WTO commitment was 
explicit and unequivocal: when addressing whether there would be 
limitations on indirect foreign ownership of common carrier wireless 
licenses, the U.S. stated simply ``None.'' The Congressional Research 
Service has concluded that the proposed legislation is likely to 
violate U.S. market-opening commitments under the WTO and will subject 
us to a challenge under WTO rules. This legislation would undoubtedly 
undercut efforts by U.S. trade negotiators to encourage other countries 
to liberalize their foreign investment and trade laws.
    VoiceStream is not alone among American interests in opposing this 
unnecessary and unwise legislation. Other opponents include groups as 
disparate as the U.S. Chamber of Commerce and the Communications 
Workers of America. Harris Miller, President of the Information 
Technology Association of America put it succinctly: ``[The 
legislation] is a protectionist measure, which could hamstring the 
robustness of our digital economy. The idea just doesn't connect with 
the reality of the global marketplace . . .''
    Conclusion. The VoiceStream/DT transaction will benefit American 
consumers by offering them lower prices and better services, and will 
create new American jobs. Categorically banning investment in the U.S. 
telecommunications sector by companies with more than 25% foreign 
government ownership will hurt American consumers, American workers, 
and American companies at home and abroad. The current process by which 
mergers of this type are reviewed by CFIUS, DOJ, and the FCC provides 
ample means to protect fundamental U.S. interests in national security 
and fair competition. We look forward to working closely with these 
agencies during this review process, and we look forward to fulfilling 
our potential as a strong new competitor in the marketplace.
    Thank you for this opportunity to testify on such an important 
public policy issue.

    Mr. Shimkus. Thank you very much.
    I will now turn to Mr. Bahr, president of the workers 
communications of America. Again, welcome; and you have 5 
minutes.

                    STATEMENT OF MORTON BAHR

    Mr. Bahr. Thank you, Mr. Chairman.
    I really appreciate this opportunity to address this issue, 
perhaps from a different perspective than what we have heard 
during the day. We believe there is ample room in the U.S. 
telecommunications market for competition from foreign-owned 
firms, including firms partially owned by foreign governments 
without jeopardizing U.S. jobs or our national security.
    This conclusion is based on three factors: First, 
telecommunications is already a global market. Foreign firms 
have competed in the U.S. market since the break-up of the Bell 
system in 1984, and U.S. firms are entering foreign markets at 
an astonishing rate. Our policy should support these trends.
    Second, the European Commission has demanded that European 
Union countries open up their local phone networks by the end 
of this year. Germany has already done so. France, Italy, Spain 
and Sweden plan to do so by the end of the year.
    This proposed legislation could well invite retaliatory 
reaction from the EU just at a time when we are on the 
threshold of making a major breakthrough in Europe.
    Third, the national security implications of foreign 
ownership are given sufficient scrutiny and protection under 
already existing regulations, as has already been testified to.
    Finally, Mr. Chairman, the principles which should guide 
decisions about whether a firm should be permitted to do 
business in our country must be whether that firm meets high 
standards for the delivery of quality universal service, 
whether it will contribute to building the Nation's 
communications network through investment and job growth, and 
whether its employment practices reflect respect for workers' 
rights.
    These standards should be applied in all merger and take-
over situations, regardless of the firm's ownership status.
    Mr. Chairman, in a competitive telecommunications market 
telecommunications policy should support success in the new 
competitive global market that is based on superior technology 
and excellent service. Achieving these goals does not depend on 
whether a competitor is partially government-owned or not. 
Indeed, we have much to learn from foreign corporations.
    For example, the German system of co-determination creates 
a corporate culture that protects the interests not only of 
shareholders but also of workers in their communities. It is a 
far more democratic culture than ours, one that has created 
restrained and reasonable compensation packages for top 
executives and one which provides for worker participation at 
the highest levels of the corporation's supervisory structure.
    In the telecommunications industry, the presence of 
Deutsche Telekom in our marketplace would yield substantial 
benefits for workers and consumers. DT is a good employer and 
good corporate citizen, serving the public interest while 
providing outstanding service and quality products. DT 
recognizes the rights of workers to form and join labor unions 
and honors its collective bargaining agreements and enjoys a 
positive relationship with a union that represents its workers. 
Our union welcomes DT to the U.S. and believes it will create a 
positive, competitive dynamic in our market.
    I also want to point out that the German Government's share 
of DT will decrease over time by design. Deutsche Telekom, as 
we understand it, is undergoing a transformation to a 100 
percent privately held stock corporation. And if the concern of 
the proposed legislation is primarily with corporate governance 
as opposed to ownership, then there is even less cause for 
concern.
    Representatives of the German Government hold only two 
seats on DT's 20-member supervisory board and none on the 
management board. The union holds 10 of the 20 seats. They, in 
turn, appoint the management committee. The shareholders play 
no role in the selection of the supervisory board or the 
management committee.
    So, in conclusion, I believe the U.S. telecommunications 
market has much to learn and much to gain from foreign 
competition, regardless of ownership. Business and consumers 
will benefit from expanded choice and access to the global 
market. Workers will benefit from the fusion of U.S. 
technology, outside capital and respect for workers' rights 
evident in many foreign corporations. Policymakers should take 
care not to exclude from our market foreign corporations who 
provide excellent models for future progress solely because 
they happen to be partially owned by a government.
    Thank you, Mr. Chairman.
    [The prepared statement of Morton Bahr follows:]
Prepared Statement of Morton Bahr, President, Communications Workers of 
                                America
    Good afternoon, Mr. Chairman. I am Morton Bahr, President of the 
Communications Workers of America, AFL-CIO. Our union represents 
650,000 workers in a variety of communications jobs, including 
telephone, wireless, broadcast and print. We also represent tens of 
thousands of public sector, health care and airline workers. Thank you 
for inviting me to speak today on the issue of foreign investment in 
U.S. telecommunications companies.
    We hold that there is room in the U.S. telecommunications market 
for competition from foreign-owned firms, even firms owned by foreign 
governments. This conclusion is based on three factors. First, 
telecommunications is already a global marketplace; foreign firms have 
already landed on U.S. soil and in our airwaves, and U.S. firms have 
entered foreign markets at an astonishing rate. Second, protectionist 
legislation at home could provoke retaliatory measures that would 
impede our progress in the global market. Third, the national security 
implications of foreign ownership are given sufficient scrutiny and 
protection under already-existing regulations.
    Finally, the principles which should guide decisions about whether 
a firm should be permitted to do business in our country must be 
whether the firm meets high standards for the delivery of quality, 
universal service, whether it will contribute to building the nation's 
communications network through investment and job growth, and whether 
its employment practices reflect respect for workers rights. These 
standards should be applied in all merger and takeover situations, and 
should be met, regardless of the ownership status of the owner, foreign 
or otherwise.
    Mr. Chairman, I'd like to say a few words about each of these 
points.
    As I mentioned before, today, telecommunications is a global 
marketplace. Foreign firms have acquired large US communications 
companies with US government cooperation. The IRS waived US tax rules 
to facilitate the acquisition of AirTouch by UK-based Vodafone. 
Frontier Communications was acquired by Global Crossing of Bermuda. 
Teleglobe of Canada acquired Excel Communications. Telmex, which was 
previously government owned, acquired Comm South Companies based in 
Dallas, Texas, and Topp Telecom Inc. based in Miami. All these foreign 
acquisitions of American companies occurred in 1999. Deutsche Telekom 
and France Telecom have long owned 20% of Sprint Corporation and each 
company has a member on the Sprint Board of Directors.
    Not only have foreign firms come to the U.S., but virtually all 
major U.S. telecommunications companies have expanded abroad. For 
example, AT&T has operations in Britain, Canada, China, Japan, 
Luxembourg, Spain, and Germany, to name a few. In addition, most 
companies have direct investments in foreign government controlled or 
previously foreign government owned communications companies. For 
example, SBC and government-controlled France Telecom have a joint 
investment in Telmex. Verizon has ownership interests in dominant 
telecom companies and cellular properties in Mexico, Italy, Greece, 
Czech Republic, Slovakia, Indonesia and New Zealand, properties that 
previously had been government-owned.
    The transformation of telecommunications into a borderless, global 
market has accelerated in the last few years. A 1997 World Trade 
Organization accord, to which the U.S. is a signatory, helped spur the 
evolution. We, along with the other signatory nations, agreed to open 
our telecommunications markets to foreign companies, including 
government-owned companies. FCC rules which had restricted transfer of 
broadcast and common carrier licenses to foreign-owned entities were 
relaxed to allow foreign investments when the transaction is in the 
public interest.
    Proposals to prevent foreign government-owned companies from 
investing in U.S. telecom companies fly in the face of this agreement. 
The European Commission has already made clear that our failure to 
honor the accord could result in retaliatory moves by other countries 
and the World Trade Organization to block US companies from entering 
foreign markets. Such restrictions imposed against U.S. companies could 
limit their ability to gain a foothold in the global marketplace, and 
curtail their ability to gain the scope and size necessary to compete 
globally.
    The concerns about national security that underlie the proposed 
legislation are honorable, but there are sufficient safeguards in place 
already to protect national security and assure a level playing field 
for competitive telecommunications. The Department of Justice and FBI 
are required to review the purchase of US telecommunications firms by 
foreign entities to determine whether the purchase agreement would 
affect national security or law enforcement concerns. They can make 
modifications to such agreements, if it is deemed necessary to protect 
the national interest. The Department of Defense may also participate 
in the process. The FCC is required to give special scrutiny to any 
telecommunications purchases by foreign countries to determine if they 
pose a risk to competition or to public interest.
    In addition, the Committee on Foreign Investment in the United 
States (CFIUS) is required to conduct a separate national security 
review of US acquisitions by foreign companies. CFIUS includes 
representatives from the Treasury Department, The Departments of State, 
Commerce, Defense, and Justice as well as other governmental agencies.
    Just two weeks ago, CFIUS cleared Japan's Nippon Telegraph and 
Telephone Corporation (NTT) bid to take over Verio, Inc., an internet 
company. Japan's federal government owns more about 53 percent of NTT. 
As part of the CFIUS review, NTT agreed to strengthen Verio's handling 
of law enforcement requests for access to its networks. In addition, in 
accordance with world trade agreements, the Japanese Ministry of 
Finance will offer up to 1 million NTT shares to reduce its stake to 
about 46.7 percent. This recent experience demonstrates that current 
procedures are sufficient for assuring national security and for 
accommodating the needs of competitors in the global marketplace.
    Our experience convinces us that the telecommunications market is 
already global, and recent developments demonstrate that procedures are 
in place to assure national security. Therefore, policy makers and law 
makers should focus their attentions on the key remaining issues 
relevant to an advancing telecommunications market--service and product 
quality and worker rights.
    In a competitive telecommunications market, public policy should 
require that competitors within the market operate in ways that advance 
the nationwide telecommunications system and enhance employment 
opportunities within it. This is what CWA has long espoused. 
Telecommunications policy should promote quality, universal service, 
encourage network investment, assure competitive neutrality and provide 
for the growth of good union jobs. Policy should support the notion 
that success in the new competitive global market should be based on 
superior technology and service, not on depressed labor costs or 
neglect of service quality. The achievement of these goals is not 
dependent upon whether a telecommunications competitor is government-
owned.
    As a matter of fact, preventing foreign government-owned companies 
from entering the U.S. market could deny U.S. consumers the benefits of 
quality competitors. U.S. consumers, workers and shareholders could 
gain from the cross-pollinization of some characteristics of foreign 
markets.
    For example, while U.S. corporations generally have a single board 
of directors responsible for managing the affairs of the corporation, 
German law governing corporate legal structures requires corporations 
to have a two-tier system of governance. There is a supervisory board 
and a management board. The supervisory board is the larger of the two. 
Under German law, one half of the supervisory board members are elected 
by employees to be worker representatives and one-half are elected by 
shareholders to represent those interests. The management board has 
responsibilities for all management decisions and negotiations with 
third parties. The supervisory board, including the worker 
representatives, appoints members of the management board and has the 
authority to remove them. The supervisory board monitors the management 
board's activities, receives regular reports from the management board, 
and can require prior approval of some business decisions.
    The German system of co-determination has given rise to a corporate 
culture that protects the interests not only of shareholders, as is the 
case in the U.S. business environment, but also of workers and their 
communities. It is a more democratic culture than ours. For example, 
among the differences between U.S. firms and foreign firms is the level 
of executive compensation. According to Business Week's annual survey, 
the average CEO of a major corporation made $12.4 million in 1999, up 
17 percent from the previous year. That's 475 times more than an 
average blue-collar worker. According to another executive compensation 
report conducted by the consulting firm of Towers Perrin, German CEOs 
make 13 times what the average manufacturing employee makes. In Japan, 
the CEO-to-worker pay ratio is just 11-to-one. There is no doubt in my 
mind that the egalitarian culture of foreign corporations, with the 
oversight by worker participation on supervisory boards and through 
works councils, has resulted in more restrained and reasonable 
compensation packages for executives.I believe the U.S. corporate 
culture could be vastly improved by borrowing some of these 
characteristics of markets from abroad. The recent merger of Daimler-
Chrysler will provide a first hand look at the marriage of different 
cultures. The 10 labor members of that company's 20-member supervisory 
board will include one representative from the United Auto Workers.
    In the telecommunications industry, the presence of Deutsche 
Telekom (DT) in our market place could yield some substantial benefits 
for workers and consumers. Deutsche Telekom is a good employer and good 
corporate citizen, offering corporate strategies and programs that 
serve the public interest in Germany. If Deutsche Telekom successfully 
enters the U.S. market, it will create a positive competitive dynamic 
in the US telecommunications industry.
    DT has spear-headed a very low fee structure for educational 
institutions in Germany, and has enabled every school there to be wired 
for internet access. DT is committed to making new technology available 
to everyone. Thus, DT is committed through action and practice to 
principles of universal service and to closing the digital divide. The 
worker voice on the DT supervisory board helped to set the corporate 
compass in this positive direction.
    DT recognizes the rights of workers to form and join labor unions 
and honors its collective bargaining agreements. As a result, the 
company enjoys a very positive relationship with the union that 
represents its workers. This is in stark contrast to major 
telecommunications carriers like AT&T, WorldCom and Sprint, each of 
which has an active program to fight worker attempts to organize. If 
the boards of U.S. telecommunications companies were structured along 
the lines of Deutsche Telekom, I believe we would spend less time 
fighting for the rights of union workers to jobs in emerging 
technologies and more time building a cutting edge telecommunications 
infrastructure.
    However, U.S. consumers and workers would be denied the benefits 
offered by such a desirable firm if recent legislative proposals are 
enacted. These proposals would prohibit a foreign-company with more 
than 25 percent government ownership from merging with or purchasing a 
U.S. telecommunications company. Currently the federal government owns 
about 60 percent of the share capital of Deutsche Telekom. Thus, under 
proposed legislation, it would be blocked from purchasing any U.S. 
telecommunications firm. Since Deutsche Telekom has recently made an 
offer to buy Voicestream, this is a very relevant issue for workers and 
consumers in the U.S.
    In fact, though, the German Government's share of DT will decrease 
over time by design. Formerly 100 percent government-owned, Deutsche 
Telekom is undergoing a transformation to a totally private stock 
corporation. If the concern of the proposed legislation is primarily 
with corporate governance, as opposed to ownership, then there is even 
less cause for concern. Representatives of the German Government hold 
only two seats on DT's 24 member Supervisory Board, and none on the 
management board. Their votes and voice count no more than the worker 
representatives on the board.
    In conclusion, I believe the U.S. telecommunications market has a 
lot to learn and a lot to gain from inclusion of foreign-owned 
companies. Consumers could benefit from the expanded choice and access 
to the global market. Workers could benefit from the fusion of U.S. 
technology and resources with the truly democratic governing structures 
and respect for workers rights evident in foreign corporations. Policy 
makers should take care not to exclude from our midst firms who may 
actually provide excellent models for progress.

    Mr. Shimkus. Thank you, Mr. Bahr.
    We will next move to Mr. Sidak----
    Mr. Sidak. Sidak.
    Mr. Shimkus. [continuing] Weyerhaeuser Fellow in Law and 
Economics. Again, your written statement is already in the 
record, and you are recognized for 5 minutes.

                  STATEMENT OF J. GREGORY SIDAK

    Mr. Sidak. Thank you.
    I would like to tailor my remarks to some of the points 
that Mr. Cox and others were making a few minutes ago about the 
need for some kind of framework for analyzing the effects of 
investment by firms that are partially government-owned on 
producers and consumers in the United States and to talk about 
how the government ownership issue affects that.
    The first and I think biggest question to ask is, does the 
consumer benefit of direct foreign investment in 
telecommunications not obtain when the investing company is 
partly owned by a government? We have heard from Mr. Stanton 
what some of the benefits would be. I would add that when you 
have a company the size of Deutsche Telekom coming in and 
competing against incumbent American wireless companies through 
its investment in VoiceStream there will be a substantial 
impact in terms of price competition and quality competition.
    Does the ownership stake of the German Government and the 
German reconstruction bank in Deutsche Telekom negate any of 
those consumer benefits? Obviously, they do not.
    So then we move on to the next question. Does that 
investment in some way have an effect on U.S. producers? Yes, 
it does. It clearly benefits some interests of American 
producers. So even if our concern is not consumers but rather, 
then, producers, we need to ask what are the effects on those 
different producer constituencies.
    Well, certainly for VoiceStream and its shareholders it is 
a clear benefit; and I would argue so is the case for other 
carriers that look like VoiceStream that might be potential 
candidates to fill out the footprint of GSM service in the 
United States so that it can be matched with the footprint in 
Europe and elsewhere.
    A second constituency are large business users of 
telecommunications services. If there is the downward price 
effect on services, then I would predict clearly big users of 
telecommunications services like banks, insurance companies and 
so forth would benefit.
    A third group is U.S. manufacturers of wireless 
telecommunications equipment. They are a very good proxy for 
consumer welfare. When prices go down and output expands, you 
need to sell more handsets, more switches, more base stations; 
and that means more sales, more profits, more employment for 
those equipment manufacturers.
    Finally, the fourth category of producers in the U.S. that 
would be affected are incumbent wireless carriers. Clearly, 
they are not going to benefit from a large new competitor 
coming into the market. Is that something to complain about? 
Well, not under the American ethic of free enterprise. We 
revere competition, and the reduction in the profits of 
incumbent wireless carriers because they would face greater 
competition is not something that they have good standing to 
complain about.
    There is another issue involved here, and that is there 
will be upcoming auctions for additional spectrum, for third-
generation and other spectrum. The entry of Deutsche Telekom 
through the investment in VoiceStream will make it a more 
robust bidder for the spectrum that the FCC will sell, and that 
means more revenues for the U.S. Treasury. If you are an 
incumbent wireless carrier in the United States, you would wish 
not to bid as much for your new spectrum. That is clearly a 
benefit of this kind of investment.
    Now, is there any potential negative effect on incumbent 
wireless providers on their profits as a result of this kind of 
foreign investment, something that would be anticompetitive? We 
have heard about possible theories today. They have not been 
too specific, and I would like to address a couple and set to 
rest certain misconceptions. One, is there some kind of 
strategy that VoiceStream through the investment that Deutsche 
Telekom will bring to it could engage in that would rely on its 
having subsidized capital? Here the facts clearly say no.
    In my prepared remarks in table 1 on page 12, I list the 
credit ratings for various global telecom companies as well as 
the credit rating of the German Government. The German 
Government gets a triple A rating from Standard & Poor's. 
Deutsche Telekom gets an AA minus, a considerably lower credit 
rating, one that is identical to Verizon, for example. That is 
evidence that there is not a credit subsidy.
    A second piece of evidence that confirms that there is no 
credit subsidy is on page 14, table 2 of my prepared testimony. 
Here I have calculated the weighted average cost of capital for 
various major telecom companies and they are in descending 
order, and I also include the percentage government ownership 
as of September 2000 for all of those companies. Two things 
should be drawn from the table. No. 1, Deutsche Telekom at a 
weighted average cost of capital at 12.8 percent is higher than 
Sprint, SPC, AT&T, Bell South and Verizon. It is not lower; it 
is higher.
    Second, if you look at the column of government ownership, 
there is absolutely no correlation between the cost of capital 
and the percentage of government ownership. So if there is a 
theory there, it is not borne out in this evidence.
    So I think we can set to on side any theory of 
anticompetitive behavior that is predicated on subsidies to 
capital.
    We have also heard that because Deutsche Telekom is 
currently in the process of privatization, that its regulator 
may not be as aggressive as it should be. I have summarized on 
page 20 and 21 in table 3 of my testimony key elements of the 
market entry conditions and the regulatory conditions in both 
the United States and Germany so they can be compared side by 
side. I won't go into them now--they are far too detailed--but 
every picture is worth a thousand words, and so I ask you to 
look on page 22 at figure 1.
    Mr. Shimkus. We need to summarize.
    Mr. Sidak. It shows the decline in the marketshare which 
Deutsche Telekom has experienced since 1997 compared with the 
decline in the long distant market share that AT&T experienced 
between 1984 and 1997. It took AT&T 3\1/2\ years to get to a 70 
percent market share. It took Deutsche Telekom 1 year in terms 
of the opening of the market. It took 9 years for AT&T to get 
to 60 percent and 2 years for Deutsche Telekom.
    These are anecdotal pieces of evidence that tend to 
elaborate on this question of how open the German market is. I 
will stop at that point and invite questions. Thank you.
    [The prepared statement of J. Gregory Sidak follows:]
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    Mr. Shimkus. Thank you very much.
    Next is Mr. Andrew Lipman, vice chairman of Swidler Berlin 
Shereff Friedman.

                  STATEMENT OF ANDREW D. LIPMAN

    Mr. Lipman. Thank you, Mr. Chairman.
    I have had the benefit of extensive experience in assisting 
competitive telecom clients enter previously closed local long 
distant markets in both the U.S. and abroad.
    As the former senior vice president of legal and regulatory 
affairs for MFS Communication, at the time the country's 
largest competitive local exchange carrier, I obtained on 
behalf of MFS's Frankfurt network the first competitive carrier 
authorization ever issued in Germany.
    Mr. Cox. Could the gentleman put the mike closer. Thank 
you.
    Mr. Lipman. After, incidentally, several years and many 
frequent flyer awards. Last year Germany generated over $45 
billion in telecommunications services and represents the 
largest and the most attractive market opportunity for 
competitive carriers operating in Europe. Indeed, there are 
several dozen carriers owned, controlled, financed, and 
operated by U.S. firms which are seeking to compete in Germany 
against the incumbent government-controlled carrier Deutsche 
Telekom or DTAG.
    I am here today on behalf of the leading German competitive 
carrier association, VATM, which is comprised of more than 50 
companies, many of whom are American who have experienced 
firsthand the trials and tribulations of trying to establish a 
competitive foothold with DTAG. Our simply stated message is 
that DTAG should be allowed to invest in the U.S. telecom 
market if it satisfies two preconditions which will help serve 
to pry open the German market to competition and in turn 
eliminate the unfair advantages that DTAG would have if allowed 
to compete in the U.S. market.
    First, DTAG must make specific binding commitments to cease 
immediately its anticompetitive practices such as artificially 
creating bottlenecks for interconnections, forcing competitors 
to accept burdensome interconnection roles, chronically 
exceeding provisioning intervals for collocation space, 
impeding billing and collection services, and pursuing 
predatory pricing.
    Second, DTAG's regulators and the relevant ministries must 
commit to enforce these commitments in a manner which no longer 
displays favoritism toward DTAG. As recently as 1998, the U.S. 
telecom industry was enthusiastic about the prospects of 
entering Germany as a result of the WTO basic 
telecommunications agreement. After some initial inroads in the 
form of a monopolistic German telecom sector, U.S.-backed 
competitive carriers have faced increasingly onerous barriers 
that prevent them from achieving competitive traction in 
Germany. In an effort to prop up the value of its investment, 
the German Government is highly protectionist of the state-
owned and -controlled incumbent DTAG and seeks in many ways to 
micromanage and suppress competition.
    In the face of announced acquisitions of U.S. telecom 
carriers by DTAG, these developments in Germany have rightfully 
caught the attention of key Members of Congress as well as 
others. In this regard we particularly want to compliment 
Senator Hollings as well as members of this subcommittee for 
leadership in this area and for shining a spotlight on these 
practices in Germany. While problems of anticompetitive 
practices may exist elsewhere, my testimony today focuses only 
on particular experiences in Germany.
    DTAG's anticompetitive practices are well documented, in 
particular, its predatory pricing tactics and its refusal to 
provide reasonable and timely interconnection. The USTR has 
been unsuccessfully seeking redress from the German Government 
for these kinds of practices for more than a year. In the 
meantime these anticompetitive practices have actually 
accelerated. The German ministry and the regulatory authority 
RegTP have been passive and accommodating on these issues, such 
as matters involving DTAG's predatory pricing and price squeeze 
tactics.
    While the government should instead be aggressively seeking 
to eliminate these barriers and where appropriate impose stiff 
penalties on DTAG, the ministry has recently announced that it 
intends to roll back several competitive safeguards previously 
implemented by the regulator, including price control. DTAG and 
its government-sponsored directors have calculatedly and 
deliberately made it oppressive and unduly expensive for U.S.-
based carriers to invest in the German market. It is difficult 
enough to compete against a muscle-bound DTAG with all of the 
advantages of a former monopoly; it is especially unfair when 
the German Government not only dominates DTAG's side of the 
playing field, but is also the referee, umpire, and official 
scorer. They should shake off their bodyguard of German 
Government investors, managers, and overly sympathetic 
regulators and compete fairly in the marketplace with privately 
owned competitors.
    In conclusion, DTAG, we would submit, must make the 
following commitments to U.S. policymakers necessary for 
competition both in the German and U.S. telecom markets: timely 
publish and monitor provisioning intervals, accept state-of-
the-art ordering and benchmark systems for electronic bonding, 
contractual penalties for provisioning and service 
deficiencies, make available planning data for new 
provisioning, and significantly reduce the inflated fees for 
bundle loops.
    If DTAG is prepared to make these commitments and if the 
German regulators and ministry represent to the U.S. 
policymakers that they will enforce them, then DTAG should be 
allowed to invest in the U.S. telecom market. Thank you.
    [The prepared statement of Andrew D. Lipman follows:]
    Prepared Statement of Andrew D. Lipman, Swidler Berlin Shereff 
                             Friedman, LLP
    Thank you Mr. Chairman and Members of the Subcommittee for inviting 
me to testify on this timely topic. As Vice Chairman of the Washington 
D.C. law firm Swidler Berlin Shereff Friedman, LLP, and head of the 
Firm's Telecommunications Practice Group, I have had extensive 
experience over the past two decades in assisting our competitive 
telecommunications clients enter previously foreclosed local and long 
distance markets in both the United States and abroad. In addition, as 
the former Senior Vice-President of Legal and Regulatory Affairs for 
MFS Communications, (at the time, the country's largest competitive 
local exchange carrier), I and my team obtained on behalf of MFSI 
Frankfurt Fiber Optic Network GmBH the first competitive carrier 
authorization ever issued in Germany.
                            i. introduction
    Last year, Germany generated over $45 billion in telecommunications 
services and represents the largest and most attractive market 
opportunity for competitive telecommunications carriers operating in 
Europe. Indeed, there are now several dozen telecommunications 
carriers--owned, controlled, financed and operated by U.S. firms--which 
are seeking to compete in Germany against the incumbent government-
controlled carrier Deutsche Telekom AG (``DTAG''). I am here today on 
behalf of the German competitive carrier association: Verband der 
Anbieter von Telekommunikations-und Mehrwertdiensten e.V. (``VATM''), 
which is comprised of a large number of these firms 1 who 
have experienced first hand the trials and tribulations faced when 
trying to establish a competitive foothold against DTAG. VATM is 
Germany's most significant competitive carriers' association, 
representing more than 50 telecommunications and multimedia companies 
which have entered the German market in competition with DTAG. Many of 
VATM's members are financed, operated or controlled by U.S. interests.
---------------------------------------------------------------------------
    \1\ See Appendix 1 (VATM List of Members) attached hereto.
---------------------------------------------------------------------------
    Our simply-stated message is that DTAG should be allowed to invest 
in the U.S. telecom market if it satisfies two preconditions which will 
serve to help pry open the German market to competition. First, DTAG 
must make specific binding commitments to cease immediately its anti-
competitive activities such as artificially creating bottlenecks for 
interconnection; forcing competitors to accept burdensome 
interconnection rules; chronically exceeding provisioning intervals for 
collocation space; impeding billing and collection services; and 
pursuing a strategy of predatory pricing in emerging telecom markets. 
Second, DTAG's regulators and the relevant Ministries must commit to 
enforce these commitments vigorously, promptly and in a manner which 
displays no favoritism toward DTAG.
    As recently as 1998, the U.S. telecommunications industry was 
enthusiastic about the prospects of entering the German market as a 
result of the WTO Basic Telecommunications Agreement. After a period of 
initial inroads into the former monopolistic German telecom sector, 
U.S.-backed competitive carriers have faced and continue to face 
increasingly difficult, and in many instances singularly burdensome, 
obstacles that prevent them from achieving competitive traction in 
Germany. In an effort to prop up the value of its investment, the 
German Government is highly protectionist of the state-owned and 
controlled incumbent DTAG, and seeks in many ways to micromanage and 
suppress competition.
    In the face of announced acquisitions of U.S. telecommunications 
carriers by DTAG, these developments in Germany have rightfully caught 
the attention of key members of both the House and Senate, as well as 
the USTR and the FCC. While problems of anti-competitive practices may 
exist with government controlled telephone monopolies in certain other 
countries as well, my testimony focuses on my competitive carriers 
clients' particular experiences in Germany.
    Over the past several years, DTAG has not only striven to defend 
its traditional markets by unfair means, but also has blocked 
competitors from entering emerging markets such as DSL and advance 
wireless services. DTAG's anti-competitive actions are well-known, in 
particular its predatory pricing tactics and its refusal to provide 
reasonable and timely interconnection. The USTR has been unsuccessfully 
seeking redress from the German Government for these types of practices 
for more than a year. It is particularly troubling that these anti-
competitive practices have been accelerating over the last few months.
    The German Federal Ministry of Economics and Technology (the 
``Ministry'') and the German regulatory authority (the ``RegTP'') have 
generally adopted an overly passive and accommodating stand on issues 
such as DTAG's predatory pricing (e.g. voice telephony, DSL lines and 
Flat Rates for Online-Services) and price-squeeze tactics vis-a-vis 
competitors (in particular having extremely low retail prices while 
charging competitors high pre-product prices for the individual 
elements constituting those services in sectors such as 
interconnection, unbundled local loops and local access leased lines). 
The Ministry and the RegTP should instead be aggressively seeking to 
eliminate these barriers and, where appropriate, imposing stiff 
penalties on DTAG--powers that the German government has under the 
German Telecommunications Act. On the contrary, the Ministry has 
recently announced that it intends to roll back several competitive 
safeguards previously implemented by the RegTP. For example, the 
Ministry stated that it will partially release DTAG from the current 
price control mechanism, which was initially adopted to encourage 
competition. The Ministry also artificially redefined smaller relevant 
geographic and product markets in order to make it easier for DTAG to 
escape dominant carrier regulation. In light of DTAG's continuing 
abuses of its market power, however, now is not the time to even be 
thinking of releasing DTAG from these important dominant carrier 
safeguards.
    DTAG and their government appointed Directors have calculatedly and 
deliberately made it onerous and unduly expensive for U.S.-based 
carriers to invest in the German market. It is difficult enough to 
compete against a muscle-bound DTAG with all the advantages of a former 
monopoly. It is especially unfair when the German Government is not 
only ubiquitous on DTAG's side of the playing field, but is also the 
referee, umpire and official scorer. DTAG should shake off its 
bodyguard of Government investors, managers, and overly sympathetic 
regulators and compete fairly in the marketplace with privately owned 
competitors.
    At a minimum, DTAG should make the following binding commitments to 
U.S. policy-makers that the German telecom market is open to fair 
competition. DTAG should commit to:

 timely publish and monitor its provisioning intervals on a 
        monthly basis;
 accept a state-of-the-art ordering and benchmark system via 
        electronic bonding as well as severe contractual penalties and 
        other prompt and predictable enforcement action for 
        provisioning lapses and service deficiencies; and
 make available its internal planning data for loop 
        provisioning and significantly reduce the inflated fees for 
        unbundled local loops.
    If DTAG makes these commitments, and if the German regulators and 
Ministry represent to enforce these commitments, then DTAG should be 
allowed to invest in the U.S. telecom market.
                    ii. market situation in germany
1) Impact in Germany of the WTO Agreement on Basic Telecommunications
    Only a few short years ago, the U.S. telecommunications industry 
was ``wildly enthusiastic'' about the successful conclusion of the 
negotiations resulting in the World Trade Organization's (``WTO'') 
Fourth Protocol to the General Agreement on Trade in Services (``Basic 
Telecom Agreement'') that entered into force on February 5, 
1998.2 At that time, U.S. negotiators committed to open the 
U.S. telecommunications markets to foreign carriers from WTO member 
countries, including carriers owned by foreign governments. U.S. 
carriers were enthusiastic about the prospects of entering the 
previously closed markets, particularly in Europe. Of all the countries 
announcing market-opening commitments, none generated as much 
excitement as Germany. As the largest telecom market in Continental 
Europe, Germany has been a magnet for many multinational companies, and 
the prospects that U.S. based and financed carriers could capture a 
part of this multinational telecom business in Germany were great 
considering these carriers' vast technical, marketing, and operational 
expertise and their valuable experience gained in the emerging U.S. 
competitive telecom market. Over the last several years, however, 
competition has not flourished as expected in Germany, and the benefits 
of the WTO Agreement have not materialized for U.S. based and financed 
carriers venturing into the German telecom marketplace. A large part of 
the blame can be attributed DTAG's anti-competitive activities and the 
German Government's refusal to take the necessary steps to reign in 
DTAG and enact and enforce laws that promote competition.
---------------------------------------------------------------------------
    \2\ Shortly before the conclusion of the negotiations, the U.S. 
negotiators of the Basic Telecom Agreement were met at a briefing of 
U.S. industry with signs saying ``wildly enthusiastic''. See Laura B. 
Sherman, ``Wildly Enthusiastic'' About the First Multilateral Agreement 
on Trade in Telecommunications Services, 51 Fed. Comm. L.J. 61, 62 n. 6 
(1998).
---------------------------------------------------------------------------
    Detailed below is a snapshot of the state of competition in 
Germany, and a catalogue of problems encountered by U.S. based and 
financed carriers seeking to compete in that market. This list is not 
intended to be exhaustive, but merely sufficient to capture the essence 
of the difficulties competitive carriers face and how Germany has 
failed to live up to the commitments it made as part of the WTO Basic 
Telecom Agreement.
    As the centerpiece of its WTO commitment, Germany agreed to provide 
to carriers from other WTO Member countries non-discriminatory access 
to and use of the German public telecommunications network. Germany 
also committed to abide by the principles found in the Reference Paper 
associated with the Basic Telecom Agreement.3 Under the 
Reference Paper, Germany must provide interconnection with DTAG's 
network on an unbundled, non-discriminatory, cost-oriented and 
transparent basis, at any technically feasible point in the network. 
Germany also committed to make publicly available its licensing 
criteria and apply competitive safeguards when necessary to prevent 
anti-competitive conduct by DTAG. As demonstrated below, these 
commitments have not been fulfilled. Therefore, at the end of this 
statement is a list of specific commitments DTAG must make if Germany 
is to be truly open to competition as promised in its WTO commitments.
---------------------------------------------------------------------------
    \3\ See Fourth Protocol to the General Agreement on Trade in 
Services (WTO 1997), 36 I.L.M. 354 (1997).
---------------------------------------------------------------------------
2) DTAG's Overwhelming Market Share for Local Services Remains 
        Unchallenged.
    DTAG continues to dominate the German local services market. Given 
the current regulatory regime and lack of effective enforcement 
procedures to deter DTAG anti-competitive practices, 4 a 
customer switching to a competitive carrier encounters a complicated 
and expensive process. Therefore, it does not come as surprise that 
DTAG's market share on the local level is 97%.5 A recent 
study on the liberalization of the German telecommunications market 
published by the renowned German think tank ``Institut fur Wirtschaft'' 
/Cologne (``IWK'') finds that:

    \4\ VATM Position Paper (``VATM Report''), p. 3, The VATM Report is 
attached hereto as Appendix 2.
    \5\ Id.
---------------------------------------------------------------------------
(1) DTAG remains the de facto monopolist for local traffic.
(2) DTAG can readily cross-subsidize its local services because 
        approximately 90% of the revenues generated by competitors in 
        the long distance market flow back to DTAG in the form of 
        excessive interconnection charges and billing and collection 
        fees.
(3) For the short and medium term, competitive carriers must continue 
        to rely on DTAG's network to reach end-users because it is 
        prohibitively expensive in most cases for competitors to 
        install their own lines to end-users. Alternative access 
        technologies such as Wireless Local Loop (``WLL'') or 
        connections via television cables or energy lines, will not 
        likely soon challenge DTAG's existing local infrastructure 
        because they face high installation costs, and traffic volumes 
        on the local level are expected to be relatively 
        low.6
---------------------------------------------------------------------------
    \6\ Klaus-Werner Schatz, Liberalization in the telecommunications 
sector (in German), IWK, publication 255 (1/2000).
---------------------------------------------------------------------------
    In the emerging DSL market, DTAG is attempting to foreclose 
competition from obtaining traction by adopting a parade of anti-
competitive practices and through manipulation of its role as the 
dominant local service provider. These measures include setting self-
serving standards which favor its own services and inherently 
disadvantage competitors. These practices also include leveraging its 
dominant market position by failing to provide necessary provisioning 
and operating support services to competitive DSL providers who must 
necessarily rely on DTAG unbundled loops, provisioning and service 
coordination. Similarly, DTAG frequently exercises its dominance to 
thwart competitors' attempts to provide Value Added Services such as 
entertainment services, weather forecasts and, most importantly, 
payments for Internet shopping via the telephone, by simply refusing to 
provide competitors billing services for e-commerce and innovative 
tariffs. For instance, selling movie tickets over the phone and 
charging them through DTAG's telephone bill is not possible if an 
alternative carrier operates the service platform.
           iii. the german government unfairly protects dtag
1) Intermingling of Interests Between the German Government, RegTP and 
        DTAG
    DTAG's anti-competitive practices are buttressed and in many 
instances sanctioned by the majority ownership and control exercised by 
the German Government. In numerous overt and subtle ways, the German 
Government seeks to fashion laws and policies to protect its 
significant investment in DTAG and keep competitors at leash.
    In its annual report for 1999, DTAG candidly admits:
        ``As long as the Federal Republic directly or indirectly 
        controls the majority of Deutsche Telekom's shares, it will, 
        like any majority shareholder in a German stock corporation, 
        have the power to control most decisions taken at shareholders' 
        meetings, including the appointment of all of the members of 
        the Supervisory Board elected by the shareholders and the 
        approval of the proposed dividend payments.'' 7
---------------------------------------------------------------------------
    \7\ DTAG 20-F filing with SEC for 1999, p. 68.
---------------------------------------------------------------------------
    In addition to its undisputed control at the shareholder level, 
DTAG's corporate structure ensures that the German Government exercises 
close supervision over DTAG's business. DTAG's Board of Management 
(``Vorstand'') is controlled and directed by a Supervisory Board 
(``Aufsichtsrat'') which consists to a large extent of representatives 
of the German Government and of the German trade unions. The 
Aufsichtsrat appoints, for instance, DTAG's top managers, determines 
the long-term goals of the Company and approves DTAG's general strategy 
and major transactions. Further, a significant share of DTAG's 
personnel consists of former government civil servants, who, with the 
support of their trade unions, endorse DTAG government ownership.
    There also are a myriad of different ways for the Government to 
pave the way for DTAG indirectly. Many of the personnel in the 
regulatory authority overseeing the telecom sector, the RegTP, have 
been recruited directly from government officials of the former Federal 
Ministry of Posts and Telecommunications, whose primary mission used to 
be to supervise and protect the activities of the former Federal Post 
and Telecommunications Monopolies. The RegTP is supervised by the 
Federal Ministry of Economics and Technology (the ``Ministry'') and, 
consequently, vulnerable to political pressure. Therefore, competitive 
carriers have observed that in many instances--especially since the 
change in government in 1998--the RegTP has not been able and sometimes 
unwilling to take an aggressive stand, let alone initiate enforcement 
action, against DTAG.
2) German Ministry of Economics and Technology Interferes Directly to 
        Protect DTAG.
    In connection with its WTO commitments, Germany committed to 
establishing an independent regulatory body, the RegTP, to oversee the 
telecommunications market. Recent events, however, bring into question 
the full independence of the RegTP and consequently its ability to 
effectively regulate DTAG. So long as the German Government stands to 
gain economically from its ownership and control of DTAG, the 
incentives will remain great for the German Government to enact rules 
and policies that favor DTAG vis-a-vis its competitors. For instance, 
it is a matter of concern that the Ministry recently released a 
Position Paper in which it announced that the RegTP ``without undue 
delay'' must refrain from reviewing DTAG's prices for domestic and 
international routes before they enter into force. The Ministry also 
mandated that business decisions by DTAG should ``not more than 
necessary be restricted.'' The Ministry further reasoned that for 
business end-users, the prior approval procedure of DTAG's end-user 
prices must be abolished completely by 2002/2003 because new access 
technologies ``bear the potential'' for intensifying local competition 
on the local level.8 Although competitors maintain that 
there is no support for these propositions, several DTAG petitions to 
remove prior RegTP price control are already pending before the RegTP.
---------------------------------------------------------------------------
    \8\ Position Paper of the Federal Government on ``Competition on 
the Telecommunications and Post Markets'' (in German), August 16, 2000, 
p. 4 to 6. (download available at www.bmwi.de)
---------------------------------------------------------------------------
    This direct interference of the German Government into the day-to-
day affairs of DTAG is inconsistent with the German Telecommunications 
Act and European law, under which the RegTP was intended to be 
established as an independent body (See Sec. 66 German 
Telecommunications Act). The Position Paper is a clear sign that the 
German Government intends to steer the telecommunications market into 
another direction, while overruling the well-established rules and 
competencies of the RegTP and the German Federal Cartel Office, both of 
which are under the supervision of the German courts.
3) Recent UMTS Auction Benefits DTAG Because of German Government 
        Ownership.
    The German Government also supports DTAG financially in many ways 
that impair competitors. Well beyond the aspirations of competitive 
carriers, DTAG has access to funds and guarantees that allow it 
virtually unlimited financial freedom to expand its networks and 
operations in ways that its competitors cannot begin to even dream. 
According to DTAG's Annual Report for 1999,
        ``Pursuant to applicable law, all liabilities of Deutsche 
        Telekom outstanding as of January 2, 1995, the date of Deutsche 
        Telekom's registration in the Commercial Register 
        (Handelsregister), became guaranteed by the Federal Republic. 
        This guarantee replaced the Federal Republic's obligations with 
        respect to Deutsche Telekom's liabilities when it was a state-
        owned special asset. Liabilities incurred after January 2, 1995 
        are not guaranteed by the Federal Republic . . . As of December 
        31, 1999, EUR 31.8 billion of Deutsche Telekom's liabilities 
        were guaranteed by the Federal Republic.'' 9
---------------------------------------------------------------------------
    \9\ DTAG 20-F filing for 1999, p. 71 and 106.
---------------------------------------------------------------------------
    DTAG's government financial backing indirectly has helped DTAG to 
succeed in the recent auctions for the German universal mobile 
telecommunications service (UMTS). This auction made international news 
as six companies bid nearly $50 billion for licenses to offer a new 
generation of wireless communications in Germany. In addition, each of 
the future operators is expected to invest approximately US$ 4 billion 
to rollout its UMTS network. It is unclear when or whether at all UMTS 
will become profitable and who will survive the stiff fight for market 
share. The amounts at stake are tremendous, however, and only those 
players with vast financial resources were able to participate.
    Most privately-owned competitive companies simply could not afford 
to participate in the auctions. Government-owned companies such as 
DTAG, however, could participate because of their vast government-
backed resources. In essence, these carriers have a government created 
safety net and therefore enjoy artificially inflated credit ratings. 
DTAG, for instance, holds a Standard & Poor's Single A rating. There is 
little dispute that DTAG will be able to raise the funds for the UMTS 
world-record spectrum license fees. After the auction, the other 
consortia heavily criticized DTAG for unnecessarily inflating the 
bidding up by several billion dollars.
        iv. important market entrance issues remain unresolved.
1) Exorbitant Administrative Fees Render Competitors' Entrance 
        Difficult.
    In a number of European countries, competitors finance the 
regulatory authority through fees that are split among the licensees. 
In Germany, the license fees are exorbitant and represent a clear 
barrier to entry. A national voice license costs US$ 1.6 million and a 
national infrastructure license costs US$ 5.6 million. Moreover, these 
fees must be paid up-front. Fees for regional or city licenses are also 
exorbitantly high. Due to this high hurdle for market entrance, of the 
305 entities that hold German infrastructure or a voice licenses 
10, many of them only cover small regions or individual 
cities.
---------------------------------------------------------------------------
    \10\ RegTP Annual Report 1999, p. 12.
---------------------------------------------------------------------------
    The following chart published by the European Commission clearly 
demonstrates that German license fees are out of scale, compared to 
other EU Member States:

  Survey of the European Commission on administrative fees (numbering/
    licensing) for the first year of operation (nationwide provision)
------------------------------------------------------------------------
                                        First Year      First Year Fees
           EU Member State            Fees Voice \1\  Infrastructure \2\
                                          in Euro           in Euro
------------------------------------------------------------------------
Belgium.............................         130,000            21,000
Denmark.............................         295,000                 0
Germany.............................       2,048,000         5,419,000
Spain...............................         143,000            17,000
France..............................         366,000           800,000
Ireland.............................          51,000             6,000
Italy...............................         124,000           165,000
Luxembourg..........................         290,000            20,000
Netherlands.........................          58,000             2,000
Austria.............................               0             5,000
Portugal............................            n.a.            20,000
Finland.............................         342,000                 0
Sweden..............................             600               600
U.K.................................          18,000       64,000 max.
------------------------------------------------------------------------
\1\ Chart 38 of EU 5th Report (Fifth Report on the Implementation of the
  Telecommunications Regulatory Package, November 1999), Annex 4.3.3.1:
  Total fees for the first year of operation for nationwide provision of
  voice telephony services (numbering and licensing fees) , not
  including the operation of the network, for 1,000,000 telephone
  numbers and 1 International Signaling Point Code (ISPC), and 4
  National Signaling Point Codes (NSPC).
\2\ Chart 41 of EU 5th Report, Annex 4.3.3.2.

    Accordingly, two U.S. competitive telecommunications associations 
have already filed formal complaints concerning the German licensing 
fees as part of the USTR's annual review of telecommunications trade 
agreements under Section 1377 of the Omnibus Trade and Competitiveness 
Act. In one industry report on Foreign Trade Barriers submitted to 
USTR, Germany's fee structure was listed as one reason to place Germany 
on the list of countries that lack full or satisfactory implementation 
of commitments under the WTO Basic Telecommunications Agreement.'' 
11
---------------------------------------------------------------------------
    \11\ USTR 2000 National Trade Estimate Report on Foreign Trade 
Barriers, at p. 118.
---------------------------------------------------------------------------
2) Interconnection and Unbundled Local Loop Problems with DTAG
    Equally egregious to the licensing fee barrier to entry are the 
myriad problems competitors face in obtaining access to essential 
facilities and interconnection. In virtually all instances, competitive 
carriers must rely on interconnection by DTAG to reach end-users. 
Alternative networks, such as WLL technologies, have yet to be 
implemented to provide an alternative to DTAG's ubiquitous network.
    In its 2000 National Trade Estimate Report on Foreign Trade 
Barriers, the USTR stated:
        ``The competitors to DTAG operated in considerable contractual 
        uncertainty throughout 1999, after DTAG cancelled existing 
        interconnection agreements in December 1999. On December 23, 
        1999, the German telecommunications regulatory agency (RegTP) 
        finally approved new interconnection tariffs. These tariffs 
        will remain valid until February 28, 2001. Competitors largely 
        welcomed the rates, but noted that RegTP had still not ruled on 
        a number of other important rate-related issues. In particular, 
        DTAG has sought to impose numerous additional--and in the new 
        entrants' view arbitrary and unsubstantiated charges for 
        carrying competitor's traffic.'' 12
---------------------------------------------------------------------------
    \12\ Id. at p. 119.
---------------------------------------------------------------------------
    One of the main reasons for the continuous struggle on 
interconnection issues between DTAG and its competitors in Germany 
(with dozens of complaints filed every year with the RegTP) is the fact 
that it is DTAG which still dictates unilaterally the rules and 
conditions for interconnection, not the RegTP--as it should be under EU 
law. The RegTP has yet to develop, together with all competitors and 
with the aim of truly well balanced non-discriminatory interconnection 
conditions, its own binding and fair Reference Interconnection Offer as 
required by EU law. Competitors have developed alternative draft 
interconnection agreements in an attempt to improve this long-lasting 
unsatisfactory situation in Germany. These draft interconnection 
agreements, however, have in fact been ignored by DTAG during 
negotiations. Therefore, DTAG continues to force competitors to accept 
new interconnection rules and proposals or risk having their 
interconnection agreements terminated. The RegTP tolerates in principle 
this situation and only takes action, albeit in a modest way, if there 
are large injustices at stake.
    USTR, in its on-going investigation of Germany under Section 1377, 
noted that interconnection is a key significant barrier to entry into 
the German market by competitive U.S. companies. As USTR noted, several 
new entrants reported that DTAG was not providing interconnection in a 
timely fashion, on terms and conditions and cost-oriented rates that 
are transparent and reasonable. For many U.S. competitive carriers 
seeking to do business in Germany, the interconnection difficulties are 
reaching the boiling point. Serious backlogs remain for obtaining from 
DTAG points of interconnection for competitors, particularly in 
bottleneck metropolitan areas.
    VATM recently initiated a survey among its members that covers 
approximately 1,500 orders for collocation space under the Local Loop 
contract, placed by 15 different carriers. The results are as follows:

1) Preparing an offer

(a) In 86.3% of all cases DTAG exceeds the stipulated interval for 
        Preparing an Offer for collocation space (the interval is 
        supposed to be 20 days according to the agreement between the 
        Competitors and DTAG, approved by the RegTP)
(b) In 50.69% of the cases mentioned under (a) DTAG exceeds the 
        interval for Preparing an Offer for collocation space by 250% 
        (50 days or more).

2) Provisioning of collocation space

(a) In 77.02% of all cases, DTAG does not comply with the provisioning 
        intervals, which is 16 weeks from the receipt of the final 
        order by DTAG.
(b) In 32.77% of all cases DTAG exceeded the stipulated interval for 
        providing collocation space by 12 weeks or more (more than 75% 
        of the stipulated time). This number is expected to increase 
        because DTAG has not even processed many orders.
(c) In 171 cases, DTAG did not provide the requested collocation space 
        at all, particularly when DTAG's Central Office was located in 
        an attractive commercial area. This is happening on an 
        increasing basis.
(d) The situation of placing offers and the provision of collocation 
        space is particularly burdensome in the metropolitan bottleneck 
        areas Essen, Dusseldorf, Stuttgart, Munich, Hamburg, Cologne, 
        Karlsruhe and Freiburg. In addition, competitors observe 
        increasing serious provisioning delays with DTAG in smaller 
        cities, such as Hagen, Gelsenkirchen and Krefeld.

VATM concludes:
    ``Even after the RegTP decision rendered on June 7, 2000, DTAG 
seriously obstructs competition on the local markets as the survey 
clearly demonstrates, not only in individual cases, but systematically 
by artificially created bottlenecks. In particular, new market entrants 
in the local markets suffer from DTAG's obstruction policy.''
[GRAPHIC] [TIFF OMITTED] T7113.046


    Due to the backlog in obtaining interconnection capacity from DTAG 
and pressure from the U.S. Government, the RegTP published last year a 
ranking scheme for processing competitors' orders. However, DTAG still 
refuses to make public information on the availability of 
interconnection lines for each point of interconnection and will not 
publish the ranking of each carrier for those lines. Consequently, 
competitive carriers cannot efficiently plan when interconnection and 
the ensuing number of lines will become available at a certain point of 
interconnection. Further, additional delays result from DTAG's 
deliberate strategy to retire relevant technical personnel and to 
outsource the provisioning of interconnection services to sub-
contractors who are not familiar with DTAG's network.13 
Additional artificial obstacles, such as DTAG's refusal to let 
competitors share standard collocation space or to provide data on 
DTAG's network planning 14 exacerbate this situation.
---------------------------------------------------------------------------
    \13\ VATM Report at 3.
    \14\ Id. at 4.
---------------------------------------------------------------------------
    In the Unbundled Local Loop (``ULL'') sector, DTAG typically does 
whatever it can to delay the entrance of competitors. DTAG almost never 
delivers to new entrants within the stipulated timeframe the key 
prerequisite for establishing service, i.e. the collocation space at 
the Central Office. Consequently, competitors' network planning and 
deployment speed are significantly delayed. Problems with the delivery 
of unbundled loops also are commonplace, in particular if DTAG must 
visit the customer or transfer a customer's access number to complete 
the unbundling. For instance, DTAG's actual ULL contract does not 
contain binding provisioning intervals, so DTAG does not suffer any 
consequence for exceeding these intervals. In addition, switching of 
business customers during off-peak periods is only offered on a limited 
basis. Fortunately in one of these cases the RegTP did intervene. Last 
June, the RegTP imposed binding provisioning intervals on DTAG but 
unfortunately no penalties in case of non-fulfillment.
    Finally, with regard to the quality standards that DTAG provides to 
its competitors, DTAG does not treat its subsidiaries and competitors 
on an equal footing. For instance, DTAG refuses to make automatic 
alternative overflow/emergency routing available to its competitors, 
while at the same time offering it to its subsidiaries.15
---------------------------------------------------------------------------
    \15\ Id.
---------------------------------------------------------------------------
3) Restrictions on Billing and Collection Services by DTAG
    DTAG, with the confirmation of the RegTP in the case of innovative 
Value Added Services (in particular, e-commerce), tries to impose such 
onerous requirements on its competitors as to refuse for all intents 
and purposes to provide necessary billing and collection services. In 
its most recent offer, for instance, DTAG not only raises its charges 
for these services by up to 600%,16 but also requires each 
individual competitor to submit to DTAG written direct debit 
authorizations individually for every single customer in order to be 
eligible for billing and collection services. If the authorizations are 
not submitted, DTAG charges the competitor a penalty for each cus-
tomer. It is not only extremely burdensome to provide these written 
statements for up to 48 million German households, but also impossible 
to provide in those cases where a carrier does not have a nexus with 
their end-users, such as dial-around carriers and carriers with 
specific Value Added Services. In addition, as already mentioned, DTAG 
is not obliged, due to a recent regulatory decision, to provide billing 
and collection for innovative Value Added Services (e-commerce) of its 
competitors.
---------------------------------------------------------------------------
    \16\ Id. at 2.
---------------------------------------------------------------------------
4) DTAG's Proposed New Network Structure is Unfairly Burdensome for 
        Regional and National Competititve Carriers.
    Currently, DTAG's interconnection tariffs are based on a 4-tier 
structure: ``City'', ``Regional (50 km)'', ``Regional (200 km)'', and 
``National''. During the last year, the RegTP has studied a network 
element-based system for interconnection rates similar to the rate 
structure in other European countries (``local'', ``single transit'', 
``double transit''). Yet, DTAG has submitted a proposal that, if 
adopted, will fundamentally change the interconnection regime in 
Germany, to the distinct disadvantage of competitive carriers. In 
particular, DTAG intends to impose a requirement of 1,000 local points 
of interconnection (``POI'') on any competitive carrier that seeks 
local interconnection tariffs for the entire territory of Germany. If 
approved, this new model is expected to become effective in 2001. Due 
to the size of the ``City'' areas, a competitor is currently allowed to 
cover, for instance, the City of Berlin with only one POI and is 
eligible for ``City'' interconnection rates. Under DTAG's proposal, a 
competitor covering the same Berlin area would have to interconnect at 
46 local POIs to reach all end-users at the local rate. Consequently, 
competitors are compelled to invest heavily into network planning to 
mirror DTAG's inefficient network and may be forced to write-off parts 
of their investment in infrastructure. Once again, this measure serves 
no useful purpose and is designed simply to raise the bar (and ensuing 
costs) for competitive providers. This is especially true for the many 
U.S. companies with nationwide activities in Germany that relied on the 
RegTP's ruling last year that they only needed a minimum of 23 POIs to 
cover Germany. These companies are now faced with the burden of making 
a huge new investment in POIs if they don't want to lose considerable 
ground. Under the new network-element based structure, these 
competitors would be severely punished for their streamlined national 
network structure on the basis of 23 POIs because DTAG would charge 
them the double tandem-tariff to terminate the calls. This extremely 
unfair situation was not at all foreseeable for them previously, and 
therefore makes obsolete their existing business cases.
    In addition, the new network concept may inevitably lead to 
increasing predatory pricing by DTAG because the RegTP cannot use its 
unwritten principle that there should be a margin of at least 25 % 
between DTAG's end-user prices and the underlying costs of a 
competitive carrier (calculated by using only interconnection fees, no 
switches, no backbone, marketing, customer care, billing, etc.) 
necessary to provide the same services to its end-users.17 
The interconnection charges structured along network elements cannot be 
put into this oversimplified model anymore. A more sophisticated model 
will need to be developed.
---------------------------------------------------------------------------
    \17\ Id. at 8.
---------------------------------------------------------------------------
5) The RegTP's Regulatory Decisions Lack Transparency.
    In contrast to the United States and most other European countries, 
there is considerably less transparency in the decision-making of the 
RegTP. The RegTP's website does not generally make the text of the 
RegTP's decisions available to the public. When tariff applications and 
decisions are made available to competitors, data is often heavily 
redacted to protect alleged ``business secrets'' of DTAG. This practice 
is considerably less open than the U.S. system or that of many European 
regimes where cost information of competitors is more readily available 
in order to determine whether access and other charges made by dominant 
carriers are in fact cost-based.
6) The RegTP's Regulatory Decisions Are Not Sufficiently Enforced.
    As important as having clear industry standards and provisioning 
intervals is the ability to enforce these standards against incumbents 
swiftly and predictably. Experience in Germany with interconnection 
shows that the RegTP is extremely reticent about implementing a 
regulatory decision on this subject. Regulatory procedures are often 
long and burdensome, which lag naturally tends to benefit incumbents. 
Last June, the RegTP rendered a decision on some disputed ULL issues, 
such as splitting the costs for moving collocation space to another 
location and imposing binding provisioning intervals on DTAG for the 
delivery of ULL access. However, bowing to political pressure the RegTP 
refused a U.S. competitor's requests to impose automatic penalties on 
DTAG for violating the provisioning standards. In its decision, the 
RegTP--for the same reasons--also refused to introduce a process that 
automatically monitors DTAG's provisioning intervals, similar to the 
systems used in Texas and New York, which would automatically calculate 
damages for under-performance of DTAG. With little explanation or 
justification, the RegTP argued that implementing a benchmark system 
would be much too difficult and expensive.
    Given the market inequality between DTAG and its competitors, and 
DTAG's incentive for delay, this process will not succeed on its own 
accord. In effect, if DTAG fails to meet the binding provisioning 
intervals for collocation space and lines, each competitor is forced to 
lodge individual complaints for every line or collocation space with 
the RegTP in order to challenge each particular delay. Otherwise, the 
competitor has to sue DTAG in court for each delay. This is not only 
burdensome and expensive, but also causes additional backlog and delay 
due to an overload on the regulator's docket. So far, the RegTP has not 
yet imposed significant penalties on DTAG.
    Not content with the current regulatory situation, the Ministry 
seeks to further clip the RegTP's wings. As already mentioned the 
Ministry's Position Paper places even more restrictions on the ability 
of the RegTP to effectively regulate DTAG. The Paper determines that 
the RegTP should approve DTAG's prices ``for at least one year'' in 
order ``to avoid unnecessary bureaucracy putting a burden on the 
market, in particular on DTAG.'' 18 Sadly, the RegTP appears 
to not recognize the need for changes in any of these policies in order 
to promote competition. The RegTP recently applauded DTAG's plans to 
acquire telecommunications companies in the United States because of 
the ``background of the liberalized German telecommunications market'' 
19 in which U.S. carriers are investing. For these reasons, 
I am not sanguine that the German Government will take any action to 
increase competition in the German telecommunications market.
---------------------------------------------------------------------------
    \18\ Id. at 10.
    \19\ Handelsblatt 07/25/00, Press Conference of RegTP President 
Scheurle.
---------------------------------------------------------------------------
    v. dtag's anti-competitive behavior is not kept in check by the 
                               regulator.
    As most recently evidenced in the Ministry's Position Paper, the 
RegTP, although established under German Telecommunications Act as an 
independent body, has come under increased pressure from the German 
Government to protect DTAG's interests and financial well being. As a 
result, even though the RegTP touts the ``achievements'' of 
liberalization of the German telecommunications market, its regulatory 
practices prove increasingly otherwise.
1) DTAG Is Not Prevented from Engaging in Cross-Subsidization.
    In Germany, the Ministry has publicly declared that it wants to 
lift the long-standing ``ex ante'' price control in certain sub-
markets, meaning the RegTP will no longer review DTAG's prices before 
they enter into force. This measure will almost certainly encourage 
DTAG to engage in below cost pricing for special customer groups, which 
will lead to a customer migration from the competitors back to DTAG. 
There is no control over DTAG's prices because the Ministry and the 
RegTP are not advocating accounting separation of DTAG to the extent 
that markets (both regional and products) under price control are 
separable from markets without price control. This is particularly true 
if the German market will be divided into several regional markets, as 
suggested in the Position Paper.20 According to the Paper, 
DTAG may be released from the price control regime in several of these 
markets, even though it is within the purview of the German Cartel 
Office and the RegTP, not the Ministry, to determine the relevant 
markets. Without proper cross-subsidization control through separated 
accounts, this measure will allow DTAG to reinforce its dominant 
position in these markets. This is especially the case because DTAG has 
not been forced to compete through bifurcating its local network and 
other local and long distance services. Among other things, DTAG may be 
able to cross-subsidize its international business if it penetrates the 
U.S. market by imposing high access and local charges in Germany.
---------------------------------------------------------------------------
    \20\ VATM Report at 5.
---------------------------------------------------------------------------
    This behavior is encouraged by the RegTP's practice of determining 
price caps for DTAG's access charges. Currently, the RegTP only 
differentiates between residential and non-residential services, and 
curiously places international, national long distance, local and 
access services into the same basket. Consequently, DTAG is in the 
position to comply with the price cap by offering low rates for its 
long-distance and international services, where competition is 
emerging, and by keeping the prices for its local access services 
(where competition is embryonic) artificially high. The end customers 
using DTAG's local services, and the competitive carriers, will end up 
bearing the burden of this regulatory policy.
2) DTAG is Following a Strategy of Strategic Pricing in New Markets.
    From a traditional point of view, strategic pricing prevents 
competitors from entering into a field because a dominant company can 
artificially keep prices low until the competitors are driven from the 
market, after which point the prices for the products concerned are 
raised. Over the past several years, the RegTP has not sufficiently 
discouraged behavior that has elements of strategic or predatory 
pricing. The most recent example is the RegTP's conditioned approval of 
a DTAG flat rate (making calls and surfing the Web on Sundays). Bowing 
to Government pressure, the RegTP approved this DTAG service over the 
strenuous protests of DTAG's competitors. Most recently, the RegTP did 
not seek to suspend DTAG's offer to provide DSL services to residential 
end-users for less than $5 a month. This price, in the view of many 
competitors is clearly predatory and is much lower than in the United 
States where the DSL equipment is already significantly less expensive.
    By engaging in this strategic pricing, DTAG seriously impairs 
competitors from entering the promising DSL market. It is true that 
strategic pricing may not work if a company is required to raise the 
prices for these specific products after a certain time period to 
finally cover its costs. However, a Party may decide to raise the 
prices for related products such as content if it has a dominant 
position in the means to access these products. Therefore consumers may 
pay less for access to the content, but much more for the content than 
in a competitive market situation without strategic pricing in the 
developmental phase of the market.
    The following gives two concrete examples of DTAG's strategic 
pricing.
    (a) The RegTP has allowed DTAG to provide a rebate to a customer 
who is already an ISDN customer and subscribes to the flat rate of 
DTAG's Internet provider ``T-Online'' (for $ 41 per month). The ISDN 
connection ``AktivPlus'' (including a 50% rebate for voice telephony) 
currently costs DM 54.88 (US$ 27) per month. In total, Internet via 
ISDN amounts to DM 133.88 (US$ 68). If the same customer subscribes to 
DTAG's new T-DSL service as of September 1, 2000, the customer will 
only be charged:

 DM 54.88 for the ISDN connection AktivPlus
 DM 14.89 (T-DSL)
 DM 49 (Flatrate T-Online DSL)
TOTAL: DM 118.77 (US$ 55) including the high speed and higher bandwidth 
of a DSL line.
    (b) The RegTP recently issued an order permitting DTAG to introduce 
a flat rate XXL (DTAG's first flat rate offer) for a test period of 7 
months beginning on June 1, 2000. This is good for Sundays and holidays 
only. Accordingly, DTAG's ISDN customers may choose to accept an 
increase in their monthly fee of DM 14.89 ($8) in order (without 
additional costs):

(1) To have unlimited surfing of the Internet via DTAG's provider T-
        Online; and
(2) To make unlimited telephone calls within Germany.
    Further, customers may not be preselected to a competitor to use 
this service. Also, prior to this order DTAG was only permitted to 
charge for its services on a per-minute basis.
    Competitors widely criticized this rate package unsuccessfully 
arguing that it materially increases the price squeeze between DTAG's 
interconnection charges (calculated on a per-minute-basis) and its end-
user charges. Significantly, DTAG did not offer competitors comparable 
flat-rate services (such as interconnection) to enable them to offer 
their own flat rates. Competitors expect significant customer migration 
as a result of this pricing policy. The offer also blurs the line 
between DTAG's fees for voice telephony, where the RegTP's prior price 
approval is required, and Web communication, where this is not the 
case. It is already foreseeable that the XXL flat rate will lead to 
further congestion on DTAG's network because heavy users, who are no 
longer charged on a per-minute-basis, will remain connected to DTAG's 
network for the entire day. In addition, DTAG will be in the position 
to present bundled offers (for instance, combining voice and Internet 
services) which will undermine any efficient price control by the 
regulator.21
---------------------------------------------------------------------------
    \21\ Id. at 3.
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3. DTAG Has No Outside Incentive to Open Its Local and Long Distance 
        Markets
    As the incumbent carrier for local, long distance and international 
services, there is not one line of the telecommunications business that 
DTAG does not dominate. DTAG already has telecommunications facilities 
in virtually every building in Germany, and has long-established 
relationships with most businesses. In contrast, in the United States 
the Bell Operating Companies (``BOCs'') historically have been 
precluded from providing long distance service. Under Sections 251 and 
271 of the 1996 Telecommunications Act, Congress was able to create a 
large incentive for BOCs to open their local markets, and provide 
interconnection and unbundled local loops, by making the BOCs entry 
into the long distance market conditioned on their complying with the 
regulations and safeguards needed to open the local markets. This is a 
powerful tool that the U.S. Government has for fostering competition. 
Unfortunately, the RegTP does not have such a competitive mechanism and 
there are few, if any, incentives for DTAG to affirmatively open their 
market. Therefore, it is even more critical that the RegTP be totally 
independent from the influences of the German Government, and can take 
an aggressive role regulating DTAG. So far, the RegTP has, after 
initial tough actions under another government, increasingly not been 
able to do so. As a result, DTAG continues to dominate the markets, 
succeeds in dominating new ones, and competition remains embryonic.
   vi. proposed eu legislative measures will not change the picture.
    In many cases, gaps exist between national laws and EU laws as its 
Member States unequally interpret EU directives. The most recent EU 
proposed directives which intend to spur competition and close the 
``digital divide'' with the United States generally will not take 
effect until the end of 2001 and have not yet passed the EU Parliament. 
Past experience has shown that EU Directives are implemented quite 
unevenly within the Member States. In the aforementioned Position 
Paper, the Ministry already warned the EU that ``the adoption of the 
additional legal standards in compliance with the development of 
competition must not be obstructed by EU law.'' The ``principle of 
subsidiarity'' (safeguarding the priority of national law over EU law) 
``must be strictly adhered to.'' The goal is that ``the German 
legislator should have sufficient room for maneuvering to ensure the 
competitiveness of German [emphasis added] carriers on the European and 
global level.'' 22 Therefore, one should not expect that 
pro-competitive missives from Brussels will improve the competitors' 
situation in Germany.
---------------------------------------------------------------------------
    \22\ Id. at 2.
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                             vii. proposal.
    In order to evaluate which measures the U.S. Government should 
adopt to encourage open market environments, the matter should be 
addressed on a country-by-country basis. In the case of Germany, DTAG's 
behavior as a whole has been anti-competitive, and the German 
Government's response has not been in congruence with its WTO 
obligations. Moreover, the competitive situation has actually worsened 
during the last year. Because DTAG's share price has plummeted by 
approximately 60% since the beginning of this year, there is mounting 
pressure from the political level public on the Federal Government to 
interfere with market and competitive forces to bolster DTAG's stock.
     In general, a key goal should be to ensure that U.S.-based 
and financed companies have an open market environment and the 
opportunity to compete, as set forth by the WTO agreements, 
particularly as to cost based interconnection and access to end users. 
The RegTP and the Ministry are obviously under political pressure to 
protect DTAG. However, there is no valid reason that a highly 
industrialized country with an advanced telecommunications regulatory 
regime like Germany should not be able to abide by the WTO standards. 
Therefore, DTAG can and should make the necessary commitments to change 
its anti-competitive practices in order to create an open environment 
and adequate opportunities for meaningful competition in Germany. In 
addition, regulators must actively enforce these commitments by DTAG. 
Provided that these commitments are made and enforced, the United 
States should allow DTAG to own U.S. telecommunications companies.
     Although the German regulatory authorities will take a 
primary role in enforcing DTAG's commitments as they relate to its 
actions in the German telecom market, U.S. regulatory authorities also 
should play a role. The U.S. Government has both expansive and flexible 
competencies in the sector of merger approvals. Merger approvals should 
be granted under the condition that the U.S. Government supervises the 
performance of DTAG and has the power to impose stiff penalties upon 
backsliding and failure to adhere to any commitments it makes. The 
following are the minimum commitments to the regulators that DTAG 
should make to ensure open competition in the German telecom market.
    1) DTAG must timely publish and monitor its internal and external 
provisioning intervals for all products it offers to competitors such 
as unbundled local loops, collocation space, interconnection lines, 
etc. (including all milestones, for instance the intervals for 
preparing the offer). The information should be published for each 
month by the end of the first week following that month.
    2)DTAG must accept considerable contractual penalties for 
provisioning lapses and other service deficiencies in their agreements 
with their competitors. Penalties for failure to meet the benchmarks 
should be assessed in accordance with terms contained in the 
interconnection agreement. A pre-established matrix should be used and 
made publicly available to determine the penalty for failure to comply 
with a given benchmark.
    3) DTAG must provide convincing evidence that it complies with the 
provisioning intervals by observing a benchmark of at least 98.5% of 
all orders (presenting the order collocation space, delivery of 
collocation space, reaction period for a loop order or interconnection 
port order, and delivery of the loop or the interconnection port 
order). Each order should be delivered free from defects. If DTAG falls 
below this benchmark during a certain month, DTAG must make good for 
this difference during the following month if it wants to avoid 
predetermined considerable penalties.
    4)DTAG must make available its internal data which serves as DTAG's 
basis for loop provisioning to competitors so that both competitors and 
DTAG must commence discussions as soon as possible on how to streamline 
the process. The target deadline should be sufficiently in advance of 
the RegTP's review on DTAG's ULL charges by March 31, 2001. Electronic 
bonding, meaning a state-of-the-art online connection between DTAG and 
the competitors for ordering and monitoring of the competitors' orders, 
must be part of the process. The RegTP should review the ULL charges on 
the basis of the streamlined process. The goal is significant reduction 
of DTAG's inflated fees for unbundled loops.
                            viii. conclusion
    DTAG and their government appointed managers have calculatedly and 
deliberately made it onerous for U.S.-based carriers to compete in the 
German market. DTAG should shake off its bodyguard of Government 
investors and managers and compete fairly in the marketplace with 
privately owned competitors. Therefore, DTAG should be allowed to 
invest in the U.S. telecom market if it meets two conditions that will 
serve to help pry open the German market to competition. First, DTAG 
must make specific binding commitments to cease immediately all its 
anti-competitive practices. In this regard, DTAG should commit to 
timely publish and monitor its provisioning intervals on a monthly 
basis; to accept a state-of-the-art ordering and benchmark system via 
electronic bonding as well as severe contractual penalties and other 
prompt and predictable enforcement action for provisioning lapses and 
service deficiencies; to make available its internal planning data for 
loop provisioning; and to significantly reduce its inflated fees for 
unbundled local loops. Second, DTAG's regulators must enforce these 
commitments vigorously, promptly and in a manner that displays no 
favoritism toward DTAG.
                               Appendix 1
                          vatm list of members
    ACC Telekommunikation GmbH; Alpha Telecom GmbH; Bertelsmann New 
Media; Broadnet Deutschland GmbH; BT Telecom Deutschland GmbH; Cable & 
Wireless Deutschland GmbH; Callino GmbH; Carrier 1 AG; Carrier 24 GmbH; 
COLT Telecom GmbH; Completel GmbH; KDD Conos AG; debitel AG; D Plus 
Telecommunications GmbH; Drillisch AG; Econophone GmbH; E-Plus 
Mobilfunk GmbH; European Telecommunication Holding E.T.H. AG; EWE TEL 
GmbH; FirstmarkCommunications Deutschland GmbH; First Telecom GmbH; 
Gigabell AG; Global TeleSystems (Deutschland) GmbH; HanseNet 
Telekommunikation GmbH; Hermes Europe Railtel; Hutchison Telecom GmbH; 
Interoute Telecom Deutschland GmbH; isis Multimedia Net GmbH; KKF.net 
AG; Level 3 Communications GmbH; Mannesmann Arcor AG & Co.; Mannesmann 
AG; MCI WorldCom Deutschland GmbH; mcn tele.com AG; MobilCom AG; 
Netcologne GmbH; NETnet Telekommunikationssysteme GmbH; NETZTEL Plus 
AG; One.Tel GmbH; QS Communications AG; RSL COM Deutschland GmbH; Star 
Telecommunications Deutschland GmbH; Talkline GmbH; Talkline 
Infodienste GmbH; Tangens GmbH; TeleBeL Ges. Fur Telekommunikation 
Bergisches Land mbH; Telegate AG; Teleglobe GmbH; Telia 
Telekommunikations GmbH; tesion Communikationsnetze Sudwest GmbH & Co. 
KG; Versatel Deutschland GmbH; Viatel Global Communications; and Victor 
Vox GmbH & Co. KG.
                               Appendix 2
propositions regarding the competitive and regulatory situation in the 
        german telecommunications market--(english translation)
  conditions for fair competition no longer exist-- regulation of the 
           german telecommunications market threatens to fail
    1. Deutsche Telekom (``DTAG'') increasingly determines the rules of 
the game.
    The Regulator (``RegTP'') is threatening to lose control.
    A clear policy favoring competition is required.
    DTAG's strategy ranges from massively influencing political and 
regulatory decisions to systematically delaying and obstructing the 
development of competition.(The following merely outlines some of the 
more important instances out of an extensive repertoire of competition-
obstructing practices by DTAG. Due to their complexity only their 
highlights are presented in the following.)
DTAG Consistently Abuses Its Market Power
    Various services which are of substantial significance to 
competition in telecommunications are being offered solely to DTAG 
subsidiaries or its retail customers, but not to its competitors. One 
example of a technical service not being offered to competitors is 
automatic quality assurance measures in cases of network overload or 
switch failure (overflow and emergency rerouting services). Certain 
services and pricing terms, too, local flat rate calling for example, 
are being exclusively offered to DTAG's IP subsidiary T-Online, 
consequently harming the development of the Internet market. DTAG 
responds to innovative service offerings by competitors, as for example 
xDSL, with massive predatory pricing campaigns.
DTAG Prevents The Implementation Of RegTP's Regulatory Decisions
    Even where DTAG has been forced to compete fairly, DTAG is openly 
obstructing the implementation of regulatory decisions, or is 
circumventing such decisions in practice through new obstructive 
behaviors. In response to DTAG's complete refusal to offer billing and 
collection services to competitors, the regulator more than one year 
later ordered DTAG to submit a new draft contract addressing such 
service. Instead of a full contract and much later than required, DTAG 
merely submitted a set of general terms and conditions which would 
prevent the offering of dial-around (``Call-by-Call'') services. Not 
only does this offer substantially raise prices, it also requires the 
submission by the competitive carrier for each end customer wishing to 
take advantage of dial-around services while having these charges 
appear on his regular phone bill, of a prior written authorization for 
withdrawals from his account. It is in the ad-hoc nature of the dial-
around offering that the carrier does not know who his customers will 
be.
DTAG Prevents The Implementation Of Court Orders
    Even court orders, including threatened fines, are being ignored by 
DTAG. A court order threatening to impose fines of approximately $ 
22,000 upon DTAG for the continuing refusal to offer a service vital to 
competition (billing for competitive value-added services) showed no 
effect. In March of this year, DTAG for the first time was fined for 
contempt. In several cases it took temporary injunctions to force DTAG 
to compete fairly.
DTAG Prevents Customer Acquisition By Dial-around Service Providers
    The principal inroad into the residential market has been through 
dial-around, rather than through pre-subscribed carrier choice. Central 
to the viability of dial-around services is the ability to offer simple 
usage and billing options without prior written agreements. As some 60% 
of the population to date has never utilized a competitive provider to 
make even a single phone call, DTAG is doing all it can to make the use 
and billing of dial-around arrangements as difficult, or at least as 
expensive, as possible. The complete refusal to offer billing services 
to dial-around providers would mean for the customers to receive and 
pay a multitude of bills, at least some of which will be for pennies 
only. Even as competitive carriers will be obliged to establish and 
operate their own customer care and collection services, DTAG is now 
trying to raise the price of its remaining billing services (billing 
and initial payment acceptance) by up to 600%.
DTAG Prevents Customer Acquisition By Preselection Of Long-distance 
        Providers
    Since more and more customers are opting for preselection, instead 
of dial-around, DTAG is increasingly delaying the switching over of 
such customers to competitors, wrongly or never informing customers and 
carriers about impending transfers, with over 10% of transfers being 
switched to the wrong carrier or not switched at all. Customers 
interested in switching over are subjected to unfair win-back marketing 
strategies including rebates. New tariffed offerings by DTAG (for 
example the new XXL Flat Rate) include terms and conditions, which 
preclude subscribers from pre-selecting a competitor, thus leveraging 
DTAG's 97% market share in local exchange to additionally impair the 
newly emerged competition in long-distance telephony. Through these so-
called ``bundled offerings'', DTAG is able to use its overwhelming 
market dominance to once again monopolize markets which were believed 
to be safely on the road to competition.
DTAG Prevents Customer Acquisition by Change Of Local Exchange Network 
        Operator
    The greatest difficulties are those encountered in changing the 
local exchange network operators permanently. Here, DTAG has, and 
continues to, massively delay or prevent the necessary physical switch-
over of the customer loop (claiming that no collocation space is 
available), a practice which at various times has been found to be an 
abuse of dominant market power by the RegTP. Since those regulatory 
rulings however, no measurable improvement has occurred; rather the 
situation is worsening. Now as before, competitive carriers are paying 
more for the unbundled customer loop than end customers of DTAG are 
paying for complete local exchange services. Before this background, 
and at prices which cannot be matched due to the high prices 
competitive carriers are being charged, DTAG is currently offering 
bundled Internet and broadband connections far below its own cost 
(offering such service for a mere approximately $4 extra, despite 
initial deployment costs of about $300 per customer).
DTAG Intentionally Constrains the Supply Of Resources Vital To 
        Competition
    The spectrum of such actions reaches from the firing of DTAG 
technical personnel and their replacement by qualitatively inferior 
subcontractors to the deficient or delayed provisioning of required 
network elements and collocation spaces. In doing so, DTAG is pointing 
fingers at the alleged difficulties of component suppliers, which these 
suppliers are usually unable to confirm. Increasingly, DTAG even argues 
that its own real estate subsidiary is unwilling to provide the 
necessary collocation spaces.
DTAG is Firing Personnel Urgently Required for Competitive Carrier 
        Provisioning
    Increasingly, DTAG claims that personnel bottlenecks are to blame 
for massive delays in processing and provisioning orders. Nevertheless, 
personnel is being reduced in the very areas in which demand will, due 
to the network build-out activities of competitive carriers demanded by 
DTAG itself, continue to be high and increase further. This situation 
is leading to extreme overwork of individual DTAG employees who are, 
despite their own enthusiastic efforts, not able to make up for these 
personnel shortages.
DTAG Is Preventing The Economical Utilization Of Existing Resources
    In spite of existing capacity constraints which are only going to 
increase on a going forward basis, for example with regard to available 
collocation spaces, DTAG is preventing the efficient use of such 
network capacities on a level which in other countries is routine and 
even according to DTAG technically unproblematic. With reference to the 
alleged lack of any legally binding obligation to do so, DTAG is 
refusing to divide existing collocation spaces among competitors, or 
even to simply permit the installation of air conditioning (of course, 
at the expense of the competitive carriers). To date, DTAG has not even 
bothered to respond to a request for a statement on that matter from 
RegTP dating back to January; nor has DTAG replied to concrete 
proposals for the better utilization of existing collocation capacities 
made by competitive carriers in March of this year.
DTAG Is Preventing Reasonable Network Planning By Competitors
    Even where improved network planning on the part of the competitive 
carriers would help to prevent over-subscriptions and therefore at 
least some instances of capacity constraints, DTAG has refused to 
cooperate in such undertakings, by stating that it is under no legal 
obligation to provide existing network planning information to 
competitors, much less prior to their placing orders with DTAG for 
interconnection and collocation space.
DTAG Is Preventing Improvements In Internal Processes
    Even the processing of applications for carrier preselection or 
switching over of individual customers is being consistently 
obstructed, and processing times are being massively exceeded in 
constantly changing locations (up to three times the agreed-upon time 
frames). Only 10% of applications are being processed in a timely 
manner. Many applications still have to be submitted by fax rather than 
via electronic interfaces. Many potentially cost-saving processing 
methods adopted, for instance in the British or U. S. context, are not 
being implemented to the detriment of competition in 
telecommunications.
DTAG Is Preventing The Implementation Of Higher Quality-Of-Service 
        Standards By Competitors
    Delivery of the highest quality service is a precondition for 
successful competition. The competitive carriers are dependent in many 
areas upon DTAG's quality-of-service standards. Requests for higher 
quality-of-service standards have not only been rejected, for example 
with respect to the availability of circuits, but even been met with 
attempts to reduce existing quality-of-service commitments. DTAG is 
even attempting to avoid making available to competitors its overflow 
and emergency re-routing services. Only the intervention of RegTP 
forced DTAG into, for example, offeringrestoration-of-circuit services 
on par with the terms available to DTAG's end customers.
DTAG Is Preventing Effective Network Build-Out By Competitors
    DTAG had always claimed that the competitive carriers are 
attempting to run their businesses at the expense of DTAG and its 
legacy infrastructure, cherry-picking customers with minimal investment 
in technology and without investing in their own networks. Instead, the 
current structure of interconnection pricing has predictably lead to 
massive investment in the competitors' networks, which are carrying 
increasing loads. Even today, DTAG is neither able to timely provide 
competitors with the requested interconnection to the long-distance 
network, nor to comply with requests for interconnection at the local 
loop within the contractually specified time frames. The new structural 
cost model planned to be implemented in 2001 would, if one were to 
apply the assumptions being made by DTAG, not only worsen these 
existing problems, but will also result in substantially increased but 
useless investments in additional switching and transmission 
infrastructure.
DTAG Is Preventing Transparency In Cost Accounting
    The data underlying DTAG's cost-basis models being submitted to the 
regulator is so restricted in nature as to make nearly impossible the 
appropriate review of these cost-models for infrastructure elements and 
services. Despite repeated requests by RegTP, DTAG has often failed to 
provide additional data, so that diverse regulations have had to be 
written on the basis solely of international comparative cost models. 
In the area of end-customer price controls, RegTP has been forced to 
work on the basis of dubious modeling assumptions because of this lack 
of actual data, such as a 20 to 25% minimum cost differential between 
wholesale and retail pricing. The increasing emergence of bundled 
pricing without any transparency of the underlying cost renders these 
simple assumption useless for reviewing DTAG's pricing.
DTAG Favors Obstruction Rather Than Cooperation
    After more than a decade of competitive regulation, the former 
monopolists in the U.S. (AT&T) and the U.K. (BT) have developed 
completely different business philosophies in which their fellow 
carriers are treated as customers. Carrier service offerings have 
become profit centers, i.e. seek to sell to competitive carriers as 
comprehensive a service offering as possible, especially network 
capacity. Thus BT today has a significantly higher share of revenue 
attributable to the carrier services market than DTAG at significantly 
lower prices for leased lines and other services.
DTAG Seeks To Destabilize Rather Than To Shape The Market
    DTAG systematically creates planning uncertainty for competitive 
carriers. Important information, for example about planned customer 
transfers, the making available of interconnection technologies, or 
simply the necessary planning materials are being provided by DTAG with 
the greatest possible delay. Issues agreed upon for planning purposes 
are never confirmed in writing even when explicitly requested. 
Commitments made by DTAG personnel in regional offices are being in 
part or entirely revoked by DTAG's headquarters. Agreed-upon 
provisioning dates are often repeatedly rescheduled at the last minute. 
Short contract terms and brief termination windows create constant 
insecurity from a legal and business perspective, hampering the 
development of new products and the development of business plans.
DTAG Selectively Discriminates Among Competitors
    DTAG seeks to establish a contracting practice skewed in its favor 
by pushing one-sided agreements on specific carriers who share 
overlapping interests with DTAG, or by exploiting inexperienced small 
carriers who are under considerable pressure to get a foothold in the 
market. The jurisprudence of RegTP institutionalizes the bias created 
by this practice, in that larger or more experienced competitive 
carriers in anti-trust proceedings will find themselves faced with the 
argument that these very same practices and rules have become the 
``market standard.''
DTAG Is Waging An All-out Lobbying And Public Relations Campaign To 
        Relax The Regulatory Framework In Spite of Increasing 
        Competitive Obstacles
    DTAG has framed the debate by portraying itself as the last 
enterprise of national pride worth protecting. A campaign on this 
level, in combination with the fact that DTAG remains majority-owned by 
the public, makes for a solid emotional appeal to the public. This 
campaign seeks to make the public forget the significant impact that 
the billions in foreign investment have had on the economy, in addition 
to the millions of jobs, which have been created by the competitive 
carriers and their suppliers in the German telecommunications market. 
This year, the order volume for network equipment placed by competitive 
carriers will overtake for the first time the volume of orders placed 
by DTAG, for instance with Siemens. Meanwhile, DTAG is even trying to 
blame the domestic regulatory framework for its repeated failures in 
international ventures. Its campaign for relaxed regulation culminates 
in its application to be considered non-dominant on the Berlin route 
even as DTAG still holds 97% of all end-user connections to the fixed 
network nationwide.
    RegTP is under significant political pressure to relax the 
regulatory framework in favor of DTAG, despite of DTAG's massive 
obstruction of competition.
    In addition, RegTP does not use its authority to counter the subtle 
obstructionism being practiced by DTAG .
    The flood of technically and economically complex proceedings are 
overwhelming the limited staff and budget of the regulator.
RegTP Is Not Preventing DTAG's Abuse Of Its Market Dominance:
    Even as DTAG has to this day never offered to competitive carriers 
``all essential network services'' as demanded by the 
Telecommunications Act, RegTP is avoiding defining this core criterion, 
prevents decisions from being taken or delays making them. In contrast 
to the regulatory practice in the U.S. which can look back to ten years 
of competitive regulation, the RegTP occasionally lacks an 
understanding of the economic significance of seemingly minor 
irritations, like the refusal of DTAG to offer fast circuit 
restoration, the ability to switch business customers outside of 
business hours, automatic traffic rerouting and overflow routing in 
emergencies and other services which DTAG is providing only to itself 
and its subsidiaries. DTAG itself, according to its internal strategy 
memoranda, increasingly seeks to push competitors out of the market 
through predatory pricing of its products.
RegTP Does Not Prevent Predatory Pricing:
    RegTP usually refuses to allow competitive carriers to join as 
parties the tariff review proceedings of DTAG, since their interests 
are allegedly not at stake--even as this is in fact the heart of their 
matter. Predatory tariff structures are often not even noticeable to 
the regulator, due to the limited knowledge and experience of RegTP 
(for example, the Internet access tariffs). Evermore complex tariff 
structures are being classified as not requiring approval and are 
approved up-front without sufficient review and lacking any factual 
basis for such classification (DTAG's digital subscriber line tariff or 
``T-DSL''), sometimes even being allowed to go into effect for several 
month on a ``trial basis'' without geographic limitation (e.g. DTAG'S 
``XXL'' tariff). RegTP clearly does not have in hand any useful 
instruments to prevent predatory pricing.
RegTP Is Totally Overwhelmed Due To The Multitude And Increasing 
        Complexity Of Violations:
    The number of proceedings before the RegTP dealing with detailed 
technical matters has steadily increased since the beginning of 
liberalization. All agreements which DTAG had initially voluntarily 
negotiated with competitive carriers have been terminated unilaterally 
by it. Following the initial struggle to force DTAG to provide basic 
services to competitors, RegTP is now tasked with deciding upon details 
of service offerings and network elements without which effective 
competition is doomed to fail. DTAG's bundled tariff filings are 
growing ever more complex, strategically mixing different services. 
They can no longer be effectively reviewed for predatory pricing due to 
the decision-making principles thus far established (for example, the 
minimum 25% span assumed to exist between the price for some offering 
charged the end customer and the corresponding wholesale price of such 
offering for competitors). The provision of incomplete and redacted 
data by DTAG, which cannot be challenged by competitors, renders the 
situation even more difficult.
RegTP Is Not Consistently Using Its Existing Authority To Enforce Its 
        Decisions
    In several instances, RegTP has failed to ensure that its decisions 
with respect to DTAG are in fact being complied with. For instance, 
DTAG initially ignored the timeframes of the regulator's decision 
ordering the incumbent to continue to offer billing services to 
competitors and submit a corresponding offer for this service; 
substantively the revisions ordered to be made on DTAG's part are being 
ignored to this day. Similarly, RegTP determined that the significant 
delays in transferring local service customers from DTAG to be a clear 
abuse of market power; yet the regulator has failed over the past three 
months to enforce its order in the face of still-increasing delays in 
processing customer transfers. With respect to retail price tariffs, 
RegTP has failed to enforce the legal requirement that DTAG present 
evidence of cost-based pricing. Rather than to reject tariff 
submissions by DTAG lacking such required proof, the regulator is 
aiding and abetting DTAG's behavior by institutionalizing the recourse 
to makeshift approval processes (tariff approvals based on benchmarking 
or rule-of-thumb measures like wholesale price-plus-25-percent) rather 
than to insist on regularizing such approvals as envisioned by the law.
RegTP Is Not Using Its Authority To Actively Shape The 
        Telecommunications Market
    Even as many competitively problematic issues have long since been 
visible (and RegTP has in fact been informed numerous times of these 
issues) the regulator has to date continued to rely exclusively on 
reactive, quasi-judicial processes for each individual dispute. To 
date, no coherent, overall regulatory plan or rule making for the 
market is evident which would avoid the regulator having to make ad hoc 
decisions under time pressure, and to allow for more predictable 
planning by competitors. Additionally, the decisions made by RegTP 
limit themselves to the bare minimum and do not even begin to address 
future problem-solving approaches. Suggestions made by competitors, 
such as for example with regard to the proposal for more economical 
utilization of limited existing collocation spaces or the provision of 
automatic emergency overflow and rerouting services, were being 
rejected by the regulator as late as December of 1999 as unnecessary. 
The competitors had pointed RegTP to these emerging problems as much as 
one year previous to that date.
Demands for a Future Pro-Competitive Regulatory Policy:
    1. Competition must be the driving force of:

 lower prices,
 innovative services,
 rapid infrastructure deployment,
 more jobs,
 large-scale foreign investment in the telecommunications 
        market.
    2. The regulation of the still absolutely dominant incumbent is 
only in its infancy and must be recognized as the necessary 
precondition for fair competition.
    3. Predatory market behavior with the aim of eliminating 
competition as a deliberate strategy by DTAG, based on centralized 
monopolistic structures, must be met by stronger regulatory efforts and 
responses.
    4. Only a reliably stable regulatory framework can create:

 future investment,
 innovative technology,
 new jobs with carriers and suppliers, and
 an efficient and consequently cheaper communications 
        infrastructure.
    5. Not the interests of only one company, but functioning 
competition as a whole must be the key for the future competitiveness 
of Germany as a business location.

    Mr. Shimkus. Thank you.
    Next, and our final panelist, Dr. Noll from the Annenberg 
School of Communication. Welcome. You are recognized for 5 
minutes.

                  STATEMENT OF A. MICHAEL NOLL

    Mr. Noll. Thank you, Mr. Chairman, Mr. Markey, and the 
committee, for inviting me to be here today. This is the first 
time I have ever appeared before a congressional committee; and 
the experience is certainly interesting, to say the least, and 
certainly a bit overwhelming, even for an old professor like 
me. While I am a professor at the Annenberg School at the 
University of Southern California, I want to emphasize that my 
remarks and in my written statement are solely mine. I do not 
represent any organization, any institution, or any company; 
and I am here today at my own personal expense.
    Telecommunication like everything else is afflicted with a 
fever of merger mania that has gone global. Such globalization 
seems to have become information-age imperialism as foreign 
countries increase market domination outside their borders 
through companies that they own and control.
    The provision of telecommunication in many countries is no 
longer operated by a department of the government. That is a 
good thing. Telecommunication has been privatized. However, in 
many countries substantial amounts of the stock of the 
allegedly privatized company are owned by the government. This 
is partial privatization. That is not a good thing, since the 
government still has a considerable involvement and financial 
interest in telecommunications. Partial privatization opens the 
possibilities for abuse and for conflicts of interest both 
within the foreign country and internationally.
    Government ownership skews the marketplace. This occurs 
because governments, ours and others, do not operate as do 
markets to maximize economic efficiency. Additionally, 
governments are motivated to protect the government-owned 
company, particularly when telecommunication is still regulated 
by the government, as it is in most countries. Government will 
not regulate itself fairly compared to a competitor. Indeed, 
the business of government is government, not owning the stock 
of telecommunication companies.
    Privatization means no government operation or ownership of 
telecommunication. Privatize means to make private, totally 
private. Telecommunication companies are licensed by the U.S. 
Government to operate as broadcasters and common carriers using 
the public airwaves and rights of way. Clearly such license to 
the use of public property should not be given or sold to a 
company owned by a foreign government. In the end this is an 
issue of national sovereignty. Until partially privatized 
countries eliminate totally their ownership of 
telecommunication, they should not be allowed to own any 
telecommunication business in the United States. And even then 
national security and antitrust issues still need to be 
examined for each particular case.
    Senator Hollings' bill restricts foreign government 
ownership to no more than 25 percent and also eliminates the 
possibility of any FCC waiver of this restriction. Clearly, I 
would want to go all of the way and restrict foreign government 
ownership to zero. But Senator Hollings' bill is a 
strengthening step in the right direction and I favor it. It 
attempts to strengthen that golden share to protect the 
national sovereignty of our airwaves and telecommunication 
infrastructure. This clearly is an important topic deserving 
thoughtful discussion and consideration by the Congress; and 
the subcommittee today clearly is addressing the key issues. 
Everything that I have heard today touches upon them. I hope my 
remarks today and my written testimony help focus and summarize 
the issues for you. Thank you.
    [The prepared statement of A. Michael Noll follows:]
      Prepared Statement of A. Michael Noll, Annenberg School for 
                             Communication
    I wish to thank the House Subcommittee for inviting me to give my 
views on the topic of foreign government ownership of U.S. 
telecommunication companies. This topic has escalated in importance and 
controversy as foreign telecommunication companies with substantial 
foreign government ownership have recently attempted to purchase 
telecommunication firms in the United States.
                     provision of telecommunication
    The Telecommunications Act of 1996 was intended to stimulate 
competition in the U.S. telecommunication industry, but instead mergers 
and industry consolidation are occurring on an epidemic scale. This 
fever of merger mania in telecommunication is now becoming pandemic on 
a global basis as telecommunication firms attempt to turn their pockets 
overloaded with profits into real property.
    Indeed, the world telecommunication market has become global. As a 
positive benefit, globalization could lead to greater competition and 
lower prices to consumers. But globalization could also become a 
disguise for information-age imperialism as countries attempt to 
dominate markets outside their borders. Telecommunications could well 
become the 21st century's oil in terms of future international 
tensions. Mergers on a global scale can reduce both choice and 
competition for consumers. Globalization seems to have become the 
politically correct term for imperialism.
    Except for a brief period during Word War I, telecommunication in 
the United States has always been provided by privately-owned 
monopolies--the old Bell System and the independent telephone 
companies. Nearly two decades ago, the Bell System was disbanded, and 
today many telecommunication markets in the United States are highly 
competitive. However, the monopolistic position of the local telephone 
companies in the United States has been difficult to break, perhaps 
because the provision of local service is more of a natural monopoly 
than the concept is politically acceptable today.
    There are many ways that telecommunication can be owned and 
provided, ranging from a government owned and operated monopoly to a 
completely competitive environment operated by private industry. 
Between are such ways as a private monopoly and a government-owned 
company. The two significant dimensions are ownership (varying from 
completely private to completely public) and market (varying from 
closed monopoly to open competition). The ideal situation is open 
competition provided by private industry--as in the United States and 
in the United Kingdom.
    In the past, telecommunication in most other countries was provided 
by an agency of the government, frequently as the postal, telephone, 
and telegraph (PTT) department. These government owned and operated 
monopolies were usually inefficient and stifled competition. Recently, 
many countries have opened their telecommunication markets to 
competition and have privatized the former government operated 
telecommunication department by creating government-owned corporations, 
but this is not privatization.
                         partial privatization
    Privatization was accomplished in many countries by creating a 
private company to operate the telecommunication system, but the stock 
of the privatized companies was owned by the government. Some of the 
stock was then sold gradually to the public, but in many major 
countries, large proportions of the stock is today still owned by the 
government. I call such ``privatization'' partial 
privatization.1, 2 It appears to be a ruse to 
give the appearance of a private company while the government still 
owns and controls telecommunication, although not anymore directly 
responsible for the operation of telecommunication facilities.
---------------------------------------------------------------------------
    \1\ Noll, A. Michael, ``The Myth of Partial Privatization,'' 
tele.com, Vol. 4, No. 5, March 8, 1999, p. 94.
    \2\ Noll, A. Michael, ``Telecommunication Privatization: Mixed 
Progress,'' info, Vol. 2, No. 1 (February 2000), pp. 21-23.
---------------------------------------------------------------------------
    Privatization must be complete. In the same way a woman can not be 
half pregnant, a business can not be partially privatized. Partial 
privatization opens the possibilities for abuses along with the 
appearance of conflicts of interest. Even a single share can create the 
potential for abuse, particularly if it is the ``golden share'' that 
grants veto power to the government.
                     harms of partial privatization
    The standard should not be to document harm in advance, but rather 
the standard should be a matter of prudence about potential harms. 
There seem to me to be two major causes of potential harms from partial 
privatization. The first center on the commitments made by countries to 
the WTO to open telecommunication markets, and the second involve 
aspects of partial privatization that give me an uneasy feeling of 
concern.
    The WTO is stimulating global business and the opening of markets 
around the planet. In its commitments to the WTO, I could not imagine 
that the U.S. could have agreed to accept partial privatization as 
representing an opening of foreign telecommunication markets to 
competition. Given the high value that the U.S. places on private 
industry, it is inconceivable to me that the U.S. could have agreed to 
this.
    Government ownership skews markets. This occurs because 
governments--ours and others--do not operate, as do markets, to 
maximize economic efficiency. Countries that have only partially 
privatized their domestic telecommunication have not privatized and 
should receive no WTO privileges until they totally privatize.
    Governments are in an awkward position financially because of their 
ownership of the stock of partially-privatized telecommunication firms. 
If the government sells the stock, then the price of the stock will be 
depressed, thereby harming the existing holders of the stock, 
frequently their own people. Since it is the function of government to 
act in the best interests of its people, the government cannot sell 
large blocks of the stock that it owns, and it can only sell very small 
amounts on a gradual schedule. Keeping stock off the open market 
through government ownership inflates the value of the remaining stock 
on the open market.
    These financial conflicts of interest also creates temptations to 
protect the government-owned telecommunication company from competition 
within the domestic market--particularly when telecommunication is 
still regulated by the government in most countries. The opportunities 
for such protectionism--or even the appearances of protectionism--are 
not consistent with competition and open markets. It should not be the 
role of governments to be concerned about the profitability or the 
return on investment of businesses.
    Regulation should be an adversarial process, and this is awkward 
when the government's regulators are attempting to regulate an entity 
owned by the government. There is also the appearance and suspicion 
that the regulators might be treating the government-owned entity more 
favorably.
    In some ways, the privatization of telecommunication is an internal 
domestic matter for each sovereign country. However, total 
privatization most likely benefits consumers by stimulating both 
competition and foreign investment and thus benefits those countries 
that privatize completely. If a country wants to play on a global 
basis, however, then the ownership of telecommunications becomes the 
concern of other countries and is no longer an internal domestic 
matter.
    It is particularly disturbing when a government-owned 
telecommunication company acquires telecommunication companies in 
another country. In effect, such acquisitions are government 
acquisitions because of the government ownership, and this is little 
more than old-fashioned imperialism, with all its evils. When a 
government-owned company acquires a company in another country, it is 
poor business policy when the acquiring government and country are 
dragged along in the venture. This can ultimately be the potential for 
increased international tensions. Government does not belong in 
business.
    Many of the partially-privatized companies are very active in 
international acquisitions, mergers, and partnerships. It is almost as 
if they are more interested in mergers and acquisitions than in 
concentrating on improving and developing their domestic 
telecommunications. Profits from domestic operations are being used to 
fuel these global mergers and acquisitions. The partially-privatized 
companies can appear to be fronts for their governments in these 
international ventures.
    Another potential problem area is interlocking ownership and 
managements across government-owned telecommunication entities. For 
example, 2 percent of France Telecom is owned by Deutsche Telekom, 
although the investment is planned to be sold by 2002. These kinds of 
global alliances between government-owned telecommunication firms are 
disturbing because they can reduce competition and have the appearance 
of colonial alliances.
              deutsche telekom acquisition of voicestream
    This summer, Deutsche Telecom announced its intent to acquire 
VoiceStream Wireless in a deal valued at over $50 billion. The 
financial aspects of this proposed acquisition do not make much 
sense.3 VoiceStream lost $455 million on revenue of $475 
million in 1999. The price being paid by Deutsche Telecom is equivalent 
to over $20,000 per wireless subscriber--an amount that would require 
yearly profits of $3,200 per subscriber to recoup the investment in 10 
years at a return of 10 percent.
---------------------------------------------------------------------------
    \3\  Noll, A. Michael, ``A Big `Nein' to Deutsche Telekom,'' Los 
Angeles Times, July 26, 2000, p. B9.
---------------------------------------------------------------------------
    Clearly, at such an exorbitant price, Deutsche Telecom will have an 
impossible task in recouping or obtaining a return on its investment. 
Why then is Deutsche Telekom making such a foolish investment? Is this 
just an example of a company that must do something with its overvalued 
stock before it is too late? What will be the reaction of the German 
people and government when the size of this financial calamity becomes 
apparent? Are there some other aspects of this acquisition that are 
escaping scrutiny? Will the price of the deal be lowered through the 
intervention of the German government?
    If Deutsche Telekom makes a catastrophic business decision, then 
U.S. and other companies would be expected to attack Deutsche Telekom 
in its domestic market. But how can this otherwise happen if the German 
government owns and protects Deutsche Telekom in its to foolish 
business decisions? I would have no problem with the acquisition of 
VoiceStream by Deutsche Telekom if Deutsche Telekom were not owned by 
the German government, although U.S. security and antitrust issues 
would still need to be examined.
                               conclusion
    My views about foreign ownership of US telecommunication firms 
might well be perceived as xenophobic. But I do believe that the 
``business of government is government''--not owning the stock of 
telecommunication, or any other, companies. I therefore believe that 
privatization must be complete--not partial. ``Privatize'' means to 
make private--totally private! Other foreign countries are not 
respecting their obligations to the WTO to privatize completely their 
telecommunications. Until they do so, they should be ineligible to own 
telecommunication companies in the United States.
    If a company has been totally privatized with not a single share of 
its stock owned by the government, then most of the potential domestic 
and international problems that I foresee evaporate. I would see little 
opportunity for harm if such a privatized foreign company acquired a 
United States telecommunication company--other than the possible 
antitrust and national security issues that would need to be assessed 
for each particular case.
[GRAPHIC] [TIFF OMITTED] T7113.047


                                TABLE I.
                Government Ownership of Telecommunication
------------------------------------------------------------------------
                                                                  %
              Country                Telecommunication Firm   Government
                                                                Owned
------------------------------------------------------------------------
Canada............................  Bell Canada............    always 0%
United Kingdom....................  British Telecom........           0%
New Zealand.......................  Telecom New Zealand               0%
                                     Ltd..
Italy.............................  Telecom Italia.........         3.5%
Australia.........................  Telstra................        50.1%
Japan.............................  Nippon Telephone &               53%
                                     Telegraph (NTT).
Germany...........................  Deutsche Telekom.......        58.0%
Korea.............................  Korea Telecom..........        58.9%
France............................  French Telecom.........        63.2%
Sweden............................  Telia..................          70%
South Africa......................  Telkom SA..............          70%
Singapore.........................  Singapore Telecom......        78.7%
------------------------------------------------------------------------


                                TABLE II.
                        Foreign Ownership Limits
------------------------------------------------------------------------
                  Country                     Foreign Investment Limit
------------------------------------------------------------------------
Australia.................................  5%
Canada....................................  46.7%
France....................................  20% in radio-based networks
                                             & France Telecom
Germany...................................  no limits
India.....................................  25%
Italy.....................................  no limits
Japan.....................................  20% in KDD & NTT
Korea.....................................  49% on facilities--20% Korea
                                             Telecom
Malaysia..................................  30%
Mexico....................................  100% cellular--49% other
                                             services
New Zealand...............................  49.9% in NZ Telecom
Singapore.................................  74% (combined direct &
                                             indirect) permitted
South Africa..............................  30%
Sweden....................................  no limits
United Kingdom............................  no limits
United States.............................  20% direct
------------------------------------------------------------------------
The data in this Table is based on ``WTO Basic Telecommunications
  Services Agreement--Summary of Country Commitments'' posted at the Web
  site of the U.S. Department of Commerce's Office of Telecommunications
  Technologies.


    Mr. Shimkus. Thank you.
    The Chair now recognizes himself for 5 minutes. I want to 
ask Mr. Stanton and Mr. Bahr, my statement and questions to the 
other panel dealt with the national security issues, and you 
both didn't precisely address that, but in your testimony I 
thought there were some assumptions made.
    Can you address the accusations being imposed about a 
threat to national security through this process?
    Mr. Stanton. We have had some experience with the national 
security issues. Our largest shareholder today is a Hong Kong-
based company. They made a substantial investment in our 
business, which was closed in February. A precondition for 
completing that investment was a review by the committee for 
foreign investment in the United States. We went through that 
process. We also went through a process of negotiating an 
agreement with the FBI which provided for certain protections 
that were described by Mr. Di Gregory and the gentleman from 
the FBI. Those processes I believe are thorough; and I believe 
that, as the national security concerns have been expressed to 
us by CFIUS and by the FBI, they were satisfied in those--in 
the agreements and the approval process respectively.
    Mr. Tauzin. Thank you. Mr. Bahr.
    Mr. Bahr. This is not an area of my expertise, and I 
mentioned in my testimony that I listened carefully to Mr. Di 
Gregory and the witness from the FBI, and I would have to be 
guided by their satisfaction that the national security would 
be served in any merger.
    Mr. Shimkus. Following up on your testimony which I found 
very intriguing because of the international corporation, kind 
of a competition trade and the communications workers being 
supportive of this merger, and so I want to follow up on the 
premise, in your testimony you talked about the governing board 
of 20, 10 being members of the bargaining unit. And that is a--
carrying on your testimony, you are saying that would be good 
because it could--it may work its way into the business, the 
communication industry as competition moves and may be a good 
example for other companies to follow, if I am reading into 
that. That is how I interpreted that.
    How would a governing board with 20 members, 10 members and 
two only being government officials be a possible assault on 
the national security of entering into the United States market 
if your premise of the 20-member governing board, 10 being 
communication workers, two being members of the government and 
eight being management?
    Mr. Bahr. That is not a premise. That is a fact. That is 
what the governing board----
    Mr. Shimkus. So the communication workers and the 
management would be in cahoots with the government in a 
national security concern? Is that what you are saying?
    Mr. Bahr. The company, as I understand it, is run by the 
governing board that appoints the management board on which 
there is no government representative. It would seem to me that 
the negotiations that we heard on the previous panel would take 
place with VoiceStream with the full cooperation of those who 
manage Deutsche Telekom, and I have a lot more confidence in 
the outcome based on the governing board that exists with 
Deutsche Telekom than some other countries.
    Mr. Shimkus. Based upon that premise, I think that would 
speak against a fear of a national security risk based upon the 
organization that that has set up. So that is why I was 
intrigued by the organizational structure because I don't think 
that it speaks in support of a fear of a usurping of national 
sovereignty and a national security risk for this country.
    Mr. Bahr. I agree.
    Mr. Shimkus. Mr. Sidak?
    Mr. Sidak. I have two brief points on that. One is that the 
acquisition of VoiceStream is substantially smaller than the 
acquisition of AirTouch last year by Vodaphone, which already 
went through a very exhaustive FBI national security analysis, 
and there were conditions laid down there.
    The second thing I would hope is that the FCC in the 
exercise of its discretion under the public interest standard 
would pay attention to what country the foreign investment is 
coming from. If it is a NATO ally of ours, I think that is a 
very different situation from one in which the investment is 
coming from North Korea or Iraq or some country which has 
lukewarm relations with the U.S.
    Mr. Stanton. I think you correctly described the Deutsche 
Telekom supervisory board as having two members, one direct and 
one indirect from government, 10 from the workers group. The 
other eight are actually outsiders, business people in Germany.
    Mr. Shimkus. I appreciate that correction. I yield back the 
balance of my time, and I turn to the ranking member, Mr. 
Markey. You are recognized for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    Let me begin by first of all saying to you, Mr. Stanton, 
that you represent the very best of the United States and our 
leadership in the wireless area, and I think every member of 
this committee admires you and your company and what you stand 
for in our economy and potentially in the global economy.
    Mr. Stanton. Thank you very much.
    Mr. Markey. Mr. Bahr, the same thing is true of your union 
members and your incredible grasp of the technical issues which 
they have which has made it possible for your employees working 
with leadership in the companies across our country to give us 
without question looking over our shoulder at No. 2 and three 
or four in world leadership, which is obviously why the rest of 
the world wants to come to the United States.
    We stand here not trying to do anything other than to 
enhance the capacity for the United States to become the big 
winner. We know that you will be, Mr. Stanton, but ultimately 
this committee's goal has to be that the cover of Business Week 
or Forbes is the United States of America is the winner, in the 
same way that Germany Inc. or Japan Inc. might want to have 
their country's symbol on the cover of those magazines, and 
they do so through this relationship. Kiretsu, or call it what 
you will in these countries, that has historically been the 
relationship between the government and the private sector.
    The Securities and Exchange Commission filing which 
Deutsche Telekom has had to make is quite illuminating. For 
example, under the section ``civil servants'' it says as of 
December 31, 1999, approximately 41 percent of all employees of 
Deutsche Telekom are in fact civil servants. In particular, 
civil servant salaries are set by statute in Germany and not by 
Deutsche Telekom or by collective bargaining agreement. In 
addition, civil servants are tenured employees and may not be 
unilaterally terminated except in extraordinary statutorily 
defined circumstances. This concerns me. This concerns me that 
in the event Deutsche Telekom merges with other companies, 
American and otherwise, might have to protect their own 
employees under German statutes by government dictate that 
could ultimately come to harm American workers because the 
bylaws of that company will tie their hands in terms of who is 
expendable.
    Further, on the page dealing with share holding, it says as 
long as the Federal republic directly or indirectly controls 
the majority of Deutsche Telekom shares, it will, like any 
majority shareholder in a German stock corporation, have the 
power to control most decisions taken at shareholder meetings, 
including the appointment of all of the members of the 
supervisory board elected by the shareholders and approval of 
proposed dividend payments.
    Again, this keeps the government making all of the 
decisions; and no matter how you might try to cloud it in 
public statements, in their SEC filing they have to be quite 
forthright about that nexus that will continue to exist between 
the Federal Government of Germany and this corporation.
    I think that Mr. Noll's testimony is quite helpful. On page 
9 of his testimony he gives a grade to countries around the 
world in terms of how successful they have been in privatizing 
their telecommunications sector. Obviously, the United Kingdom 
and New Zealand, as I mentioned in my opening statements, 
deserve A's; and he gave it to them. Singapore was given a D 
minus with 78.7 percent still owned by the Singapore 
Government.
    Germany and France are somewhere in the middle of the pack 
with a can-do-better note attached, and that is what this 
hearing is all about. They can do better, a lot better. We saw 
in our testimony from the last panel that our government 
negotiators don't really take the time to send that message to 
them. You can do better in this one little field, ownership, 
because that ownership question implicates so many other 
aspects of the German Government, as we can see from their SEC 
filing; and ultimately that can come back to haunt American 
shareholders, American workers who might become part of some 
conglomerate that is organized out of the German Government.
    So we who are proposing this legislation are really trying 
ultimately to be helpful to you, Mr. Stanton, and to you, Mr. 
Bahr, and to any in the future that might have dealings with 
Deutsche Telekom. We hope that Deutsche Telekom purchases you, 
Mr. Stanton; but we hope that they do so without the government 
being the owner. We think that it would be good for the United 
States for Deutsche Telekom to purchase you. We will go that 
far. I think every member of the committee will agree with 
that. I think it is hard--Mr. Bahr, if you would just let me 
finish. I think that people don't understand the extent to 
which our committee is committed to ruthless Darwinian global 
telecommunications competition. It is not protectionist; it is 
this advocacy for this Darwinian competition that brings us 
here today. Mr. Bahr.
    Mr. Bahr. I just wanted to comment on the 41 percent civil 
service. If you look at the history of the process of 
privatization, you will find that you had 100 percent of the 
employees who were civil service workers owned by the 
government. The union played a very strong role in the 
legislation to let the privatization, and this was a 
compromise. This was an accommodation to grandfather the 
benefits for 41 percent, or whatever it was originally. That is 
a declining number as people pass through the system and 
retire. I don't know how long it takes to phase it out, but the 
number will continue to reduce.
    Mr. Markey. The point that I am trying to make here is if 
you are the German Government and you own a company and 41 
percent of the people are civil servants, that might affect the 
way that you view the decisions that you make. We prefer that 
it be a private sector company that has this responsibility. 
The contractual relationship obviously would have to continue, 
but at least there you could keep the government from perhaps 
tilting and putting their finger on the scale with regard to 
other issues related to the openness of their 
telecommunications marketplace in an effort to continue to prop 
up this firm which has so many civil servants working for it.
    Mr. Stanton. If I may comment, your statistics were correct 
as of December 31. It may be helpful to know that as of June 30 
they had reduced that percentage to 33 percent in part because 
of the retirements that Mr. Bahr mentioned and in part because 
of the increase in the total size of the work force.
    Mr. Shimkus. Mr. Largent is recognized for 5 minutes.
    Mr. Largent. Are you aware of any of the signatories to the 
WTO basic telecommunications agreement, if any of those other 
countries have government ownership limitations like those 
proposed in the Hollings bill? Is anybody aware of countries 
that have legislation similar to what we are proposing to do?
    Mr. Lipman. Canada does have a limitation with foreign 
ownership. It is essentially limited to 46 percent of facility-
based carriers, but I believe they took an exception or a 
footnote to the WTO agreement, and there are several other 
countries that do have restrictions on foreign ownership. 
Interestingly, none of the European Union countries no longer 
have foreign ownership restrictions.
    Mr. Largent. Are they foreign ownership? I want to make the 
distinction. Are they foreign ownership restrictions or foreign 
government ownership restrictions?
    Mr. Lipman. No, just foreign ownership that I am aware of.
    Mr. Largent. This is a foreign government ownership 
limitation?
    Mr. Lipman. Countries have done that on a case-by-case 
basis as in the case of Spain with KPN and in the case of Italy 
with Deutsche Telekom, but I don't believe that was a matter of 
statute. It was a matter of policy.
    Mr. Largent. So in other words what you are saying is that 
what they did in those case-by-case issues, we could do in this 
country as well based upon the testimony of the panel that went 
before you?
    Mr. Lipman. I would agree with that.
    Mr. Largent. I wanted to ask Dr. Noll, in your testimony 
both written and spoken, you talked about market domination, 
that government-controlled industries have exhibited market 
domination as a result of the power. Could you name some 
examples of market domination by a government-controlled 
company?
    Mr. Noll. What I wanted to do in my testimony, but I didn't 
have the data, was look at two dimensions. One dimension was 
the extent to which the former government entity has been 
privatized and what extent there was still some government 
ownership. The other dimension that I wanted to look at was the 
extent to which markets in those countries had been opened to 
competition. I thought those were really the two key things, 
and I would have liked to have seen whether there was any 
relationship between the two.
    The problem is how do you determine the extent to which a 
market has been opened. How do you determine whether that 
government, former monopoly, still dominates in that country or 
not? The simple fact that there are hundreds of carriers 
available doesn't necessarily mean that there is still not a 
dominant one. A good example----
    Mr. Largent. Would market share be a good index?
    Mr. Noll. It is difficult to look at another country, but 
one of the ways to do that is think about the United States. If 
you talk about long distance competition, I think everyone 
would agree that has been very successful. There is not really 
a dominant carrier; it used to be AT&T. When you start to get 
to the local level, local phone companies, you can point out 
that there are hundreds of competitive local exchange carriers 
in the United States; but when it comes down to it, it is the 
Baby Bells who are the dominant ones. It is a difficult 
question. My general sense in a number of these countries, 
there is still one big dominant carrier, and that is the former 
government monopoly and that is what I was referring to.
    Mr. Largent. Well, let me ask you this question because you 
spoke in your testimony about liking the Hollings bill. To me, 
I guess, the question I would have for you is why is having a 
merger between a company that is--that 25 percent of the 
company is owned by the government versus 44 percent, why is 
that better? To me it is--I don't see why one is less risky or 
less risky than another.
    Mr. Noll. I stated today that actually I would prefer zero. 
I would like to get government out of telecommunications. It 
was enlightening to me today to sit here and listen to the 
trade representative try to handle those questions. I spent 
many hours myself looking on the Web trying to understand what 
did the United States agree to in the WTO, and I was horrified 
not to find much written documentation of anything. It seemed 
to be a bunch of people handshaking and making up loose 
schedules.
    If some country says we will privatize and if their idea is 
to create a company that is mostly owned by the government, 
that was disturbing to me. Before allowing them into the United 
States, I would like to see that ownership to be zero. If zero, 
I would then also want to give to the FCC the right to waive. 
There might be some conditions. If the country went from 60 
percent to 20 percent in 1 year, and they were planning to 
reduce that 20 percent next year to zero, I would say that 
shows good faith; and I would allow the FCC to have the right 
to let somebody do something today. But I would like to see 
zero.
    Trying to cut it between 40 percent, or as I said jokingly 
to Chairman Kennard, maybe we should pick a number like 3.79 
percent and let everybody struggle with why we came up with 
such a silly number. I would like it to be zero. I think that 
eliminates the possibilities, the concerns of everything I 
heard today. I don't see what the problem is. There are some 
countries like New Zealand that took it to zero quickly. Some 
countries like Canada never had any government ownership of 
telecommunications. It can be done. Yes, it is going to be a 
problem with the stock when the stock is dumped on the market 
and drops in value, but let's go all of the way. Let's not have 
a sense of trying to create a partial pregnancy. Let's have it 
all of the way. That is my personal belief.
    Mr. Shimkus. Mr. Cox is recognized for 5 minutes.
    Mr. Cox. I thank the chairman, and I would like to thank 
the panel for being here and also to echo exactly what my 
colleague from Massachusetts said about the business leaders 
that are here with us. Mr. Stanton, your company is not under 
scrutiny here today. Rather, you have a proposed business 
transaction that has some very interesting policy questions 
attached to it.
    Mr. Stanton. Thank you.
    Mr. Cox. But none of this has anything to do with your 
company. We had a hearing like that yesterday, unfortunately.
    Mr. Stanton. My children were worried about that when I 
talked to them last night.
    Mr. Cox. But all of this in a certain sense reflects well 
upon your company and your workers.
    Mr. Sidak, of course representing the acquiror, likewise is 
paying a compliment to your firm because they are a suitor.
    Mr. Lipman is here as a competitor and not surprisingly has 
the competitor's view of the wisdom of what you are up to.
    And the only person who is here without a stake in the 
outcome is Dr. Noll who even paid his own way here, so I am 
particularly interested, Dr. Noll, in what you have to say.
    Let me ask you this question. We watched as Europe and the 
U.K., for example, went through great travail in some major 
privatizations, some of them necessitated by government 
ownership of industry that we never witnessed in this country. 
It was very hard politically. In those circumstances the voters 
of the countries involved were the sovereigns. If we import 
government ownership of our industry into this country, then 
don't we have an even worse predicament in the sense that we 
are just like they used to be in the U.K., let us say pre-
Thatcher, because now we have got government-owned industry in 
this country that we would like to privatize but we can't vote 
to influence the government to change because we don't live 
there? The government in this case would be Germany or the 
government would be Hong Kong or the government would be 
somewhere else, but it is not the U.S. Government. The U.S. 
Government has a salutary policy of private ownership of 
business. Aren't we even worse off than they are in the U.K. 
before Thatcher?
    Mr. Noll. Mr. Cox, that is an excellent point. This country 
would be moving backwards in essence by allowing government 
ownership of telecommunications sort of once removed. That 
would be disturbing to me. Good perspective. I hadn't thought 
of it myself.
    Mr. Cox. Mr. Lipman, Dr. Noll said in his testimony that 
government doesn't belong in business, and he also said that 
the relationship between business and the regulators should be 
arm's length.
    Your testimony was to the latter point, that at present in 
your view that relationship is not at arm's length. Do I 
understand that correctly?
    Mr. Lipman. That's correct, Congressman.
    Mr. Cox. One of the things that I am sure that the FCC will 
be interested in is the future, is where the government stake 
in Deutsche Telekom is headed. Mr. Sidak has some trends that 
he shows which would encourage us I think to believe--hope--
that this is a work in progress and that we are headed in the 
right direction and in fact will arrive at our destination; but 
I don't know if anyone here knows presently whether or not 
there is anything that we can reliably accept from the German 
Government as a commitment to dispose of their interest. Am I 
wrong in that?
    Mr. Stanton. Two comments, Congressman Cox.
    I think it is important to appreciate that there is a 
distinction, for example from New Zealand, which, while having 
done a terrific thing, is a much smaller country than Germany. 
The German Government has said publicly, there is a letter that 
has gone from the embassy to each of the members that says that 
they clearly intend to reduce their interest. The problem 
bluntly is the size of the interest that they have. The value 
of that stock today is worth somewhere in the neighborhood of 
$75 billion; and notwithstanding Dr. Noll's comments, I think 
it is fair to say that the German Government wants to make sure 
that it gets value for its stock. They have done very large 
public offerings for the last several years to reduce the 
interest. They have expressed that they intend to continue to 
do large offerings, but it takes huge offerings. The largest 
public offering in history is AT&T Wireless' stock sale. If 
they were to do a transaction that size, it would take seven of 
those to reduce the interest to zero.
    What we are doing with this merger is diluting them. You do 
make an interesting point, the notion of stepping backwards; 
but I would suggest that what this does is that it dilutes the 
government from 57 percent to 44 percent, and they have--which 
is moving from a majority to a minority. It is clearly still a 
substantial stake. I am not going to argue that.
    Mr. Cox. The German Government--we have other foreign 
government ownership restrictions across our economy, and one 
of the ways that the Department of Justice and other agencies 
of the Federal Government have dealt with these in the past is 
voting agreements and voting trusts. Is that something that 
Deutsche Telekom would consider?
    Mr. Stanton. I am not in a position--I represent 
VoiceStream not Deutsche Telekom. We have not discussed 
anything like that. We would be happy to put the question to 
them.
    Mr. Cox. Do you happen to know, Mr. Sidak?
    Mr. Sidak. Let me clarify I am not representing them as a 
lawyer.
    Mr. Cox. I understand that. I didn't mean to impugn your 
reputation in that way.
    Do you have any idea whether they would look favorably upon 
that kind of a proposal from the FCC?
    Mr. Sidak. I would be happy to take the suggestion back to 
them and invite them to respond to your question.
    Mr. Cox. Mr. Lipman was about to interject.
    Mr. Lipman. Thank you, Congressman. I want to say that the 
German Government can, of course, modulate its interest in 
Deutsche Telekom; but they can also do several things today to 
demonstrate to U.S. policymakers that they are removing 
themselves from their involvement and we would submit their 
interference in the German telecom market. They can stop 
reversing decisions made by the regulator, RegTP, and they can 
stop trying to roll back some of the modest procompetitive 
steps that RegTP has taken. They can eliminate the license fees 
in Germany, which as we show in our testimony are far and away 
the highest in Europe. It costs nearly $6 million up front to 
get a license to serve all of Germany, and they can also 
encourage and stop discouraging open market standards.
    That is really what our clients would like to see 
accomplished here, that Deutsche Telekom and the German 
Government, particularly the ministry, meaningfully move to 
open competition for both the German market as well as the 
U.S.-to-German market.
    Mr. Shimkus. For the sake of our voting ability on the 
floor and our timely departure----
    Mr. Cox. I yield back the balance of my time.
    Mr. Shimkus. The gentleman yields back. I want to thank the 
panel. This hearing is adjourned.
    [Whereupon, at 4:56 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
   Prepared Statement of Thomas J. Donohue, President and CEO, U.S. 
                          Chamber of Commerce
    Mr. Chairman and members of the committee, I am Thomas J. Donohue, 
President and Chief Executive Officer of the United States Chamber of 
Commerce. The U.S. Chamber is the world's largest federation of 
business organizations, representing more than three million businesses 
and professional organizations of every size, in every business sector, 
and in every region of the country. The Chamber serves as the principal 
voice of the American business community here in this country and 
around the world through our 88 American Chambers of Commerce abroad.
                            i. introduction
    Mr. Chairman and members of the Subcommittee, I welcome the 
opportunity to testify on an issue that is critically important to 
American consumers and businesses of all sizes--free and fair 
competition in our telecommunications markets. The U.S. has the largest 
and most dynamic economy in the world. Our telecommunications products 
and services for consumers have grown exponentially over the last 
several years, as witnessed by the incredible growth of new 
telecommunication services, the wireless market, the use of cell 
phones, pagers, and the latest personal handheld devices. These 
telecommunications products are becoming more affordable and available 
to all consumers as a direct result of our open markets and healthy 
competition.
    There are proposals currently before Congress that could stifle 
this incredible growth and threaten the benefits American businesses 
and consumers have begun to enjoy in the telecommunications market. 
These proposals could also lead to a counterproductive and damaging 
trade war with our foreign trade partners. Specifically, H.R. 4903 
would prohibit all companies with 25 percent or more foreign government 
investment from obtaining a telecommunications license from the Federal 
Communications Commission.
    The legislation is bad policy and should not be supported for 
several reasons: (1) The legislation is a potential violation of the 
World Trade Organization (WTO) agreement and would likely lead the 
European Union (EU) and other member WTO countries to retaliate by 
closing markets to American goods and services; (2) foreign investment 
in U.S. telecommunications providers would diminish markedly, limiting 
the competitive benefits of such investment to U.S. consumers and 
truncating technological innovation and economic expansion; and (3) 
procedures currently exist to protect U.S. national security interests 
and to ensure that the public interest is considerd in any 
telecommunications mergers or investmens by foreign entities with U.S. 
providers.
ii. protectionist provisions would lead to foreign retaliation against 
                      u.s. producers and consumers
    The U.S. Chamber of Commerce has helped lead the fight to open 
markets overseas so that American businesses and their employees can 
benefit from increased trade opportunities and the jobs supported by 
foreign trade. Since 1995, the U.S. has worked hand-in-hand with the 
WTO to ensure that foreign trading partners open their markets to 
American businesses and abide by fair trading practices. Although the 
U.S. has not won every case before the WTO, American businesses and 
workers have clearly benefited as U.S. exports have risen by more than 
35 percent since 1994.1
---------------------------------------------------------------------------
    \1\ United States Trade Representative Office
---------------------------------------------------------------------------
    In the specific area of telecommunications, on February 15, 1997, 
the United States and 68 other countries reached a market-opening 
accord on a set of commitments under the 1995 General Agreement on 
Trade in Services (GATS) that fundamentally changed the structure of 
the global telecommunications market. This set of commitments, known as 
the WTO Basic Telecommunications Agreement, is guided by a worldwide 
commitment to opening markets, promoting competition, and preventing 
anti-competitive behavior. This agreement is continuing to increase 
competition significantly in the U.S. and foreign telecommunications 
markets--to the benefit of American consumers and businesses.
    For example, free trade under the WTO and the WTO Basic 
Telecommunications Agreement paved the way for a recently-concluded 
bilateral agreement between the United States and Japan. Under the 
agreement, Japan has agreed to reduce interconnection fees now charged 
by Nippon Telegraph and Telephone to U.S. telecommunication companies. 
This agreement will begin to allow U.S. telecommunications companies to 
compete more effectively in the Japanese market. This historic 
agreement with Japan and other benefits under the WTO could not have 
been negotiated against the backdrop of the narrow protectionist 
ownership restrictions contained in H.R. 4903 had been in effect at the 
time.
    Moreover, as outlined in the Congressional Research Service 
Memorandum on this issue, it is likely that H.R. 4903 or similar 
legislation would place the U.S. in violation of its commitments under 
the WTO Basic Telecommunications Agreement.2 There is also 
little doubt that this legislation would spark counterproductive and 
damaging retaliation by our foreign trading partners. The EU has 
already threatened retaliation over U.S. violation of the WTO 
Agreement. On July 24, 2000, EU Trade Commissioner Pascal Lamy wrote to 
United States Trade Representative Charlene Barshefsky regarding 
congressional efforts to restrict foreign telecommunications ownership: 
``This [the proposed legislation] would clearly violate US commitments 
in the WTO . . '' Lamy further urged Barshefsky to ``resist such 
legislation and indicate clearly to the Congress the opposition of the 
US Administration to its adoption . . . We have to avoid a very 
damaging trade fight in this highly important sector.''
---------------------------------------------------------------------------
    \2\ Congressional Research Memorandum to Senate Commerce Committee, 
July 24, 2000, WTO Compatibility of Proposed Legislation Prohibiting 
Certain FCC Licensing.
---------------------------------------------------------------------------
    The U. S. Chamber of Commerce is never afraid of a good fight when 
the interests of our members are at stake. So we are not simply 
reacting to EU threats. We are, however, strongly reacting to efforts 
that would set a bad precedent and risk putting the United States in an 
unnecessary trade war with our European trading partners and other 
members of the WTO.
iii. unnecessary restrictions on foreign investment would hurt american 
                               consumers
    Consumers benefit from competition in the global marketplace. 
Greater competition and greater market opportunities for American 
producers and consumers provide for greater choice at better prices in 
the U.S. and abroad. Our continued and unprecedented economic expansion 
is a testament to the willingness, too often grudgingly, of government 
to stand aside and let the marketplace govern. Clearly, American 
businesses and consumers will suffer if foreign governments retaliate 
by closing their markets to American goods and services.
    Moreover, American businesses and consumers will also be harmed by 
the loss of foreign investment in this country. Access to capital is 
the lifeblood that pulses through the American economy. Access to 
capital is what has energized the technological advancements and 
innovation so fundamental to the recent economic expansion. Billions of 
dollars of foreign investment is made annually in the U.S. This 
investment has helped to fuel the growth and investment in this 
country. If telecommunications firms cannot raise needed investment 
capital to provide new products and services for consumers, the engine 
of our record economic expansion could find itself out of gas.
    By imposing unnecessary and counterproductive protectionist 
restrictions on foreign investment, H.R. 4903 would chill foreign 
investment in the U.S. telecommunications sector. This legislation 
would unwisely tie the hands of executive branch in favor of a rigid 
``auto-pilot''--``one solution for every problem'' approach to U.S. 
foreign investment in the face of an increasingly flexible global 
investment regime. This would set a dangerous precedent and send the 
wrong message to our trading partners.
           iv. current law already safeguards public interest
    Current law protects the public interest from foreign investment 
that may be harmful. Under section 310(b)(4) of the Communications Act 
of 1934, the Federal Communications Commission (FCC) must make an 
affirmative finding that the public interest would be served before any 
foreign entity (including one with foreign-government ownership) can 
obtain control of a U.S. entity that owns a common carrier licenses.
    The FCC in every case will consider any risks to domestic 
competition and potential harm to consumers, including any of the 
threats identified by the sponsors of H.R. 4903. The FCC also consults 
with the Executive Branch, including the Federal Bureau of 
Investigation, the Department of Justice, and the United States Trade 
Representative, to determine whether foreign investments pose a risk to 
national security, law enforcement, foreign policy, or trade.
    The FCC has the legal authority to condition its approval of both 
foreign and domestic telecommunication mergers to protect U.S. 
interests relating to competition, national security, or law 
enforcement.
    The ability to raise much needed investment capital in the cutting 
edge telecommunications industry has always been based on the 
investor's rights to secure assets such as an FCC license. Denying such 
rights without the FCC being able to consider the overall ramifications 
of such actions, such as improving competition, could severely hinder 
U.S. telecommunications entities from securing much needed capital in 
order to compete in the global market place. Such outright restrictions 
could have the unintended consequences of hindering investment in all 
telecommunication entities whose survival may depend on the ability to 
secure foreign investment.
    In addition to the FCC, the Department of Justice (DOJ) and the 
Federal Trade Commission (FTC) have significant roles in determining 
the public interest in any telecommunications mergers. Under Section 7 
of the Clayton Act, the DOJ Antitrust Division and the FTC review 
proposed mergers, including combinations that would bring common 
carrier licenses under the direct or indirect control of a corporation 
in which a foreign government holds more than a 25% interest.
    These agencies may--and often do--sue to enjoin mergers that would 
harm competition and consumers in the United States. If a transaction 
involving a foreign corporation poses a threat to competition, DOJ has 
full authority to take preventive action.
                v. national security is fully protected
    Some have argued that the national security of the U.S. would be 
threatened if new legislative restrictions on foreign 
telecommunications ownership are not enacted. This is simply not true. 
Current law protects our national security interests. Foreign 
investments of any type in the U.S. telecommunications market are 
already strictly scrutinized to ensure that our national and domestic 
security is well protected.
    Recently, an August 24, 2000 article in the Wall Street Journal 
outlined the extensive scrutiny given by the Federal Bureau of 
Investigation (FBI) to foreign telecommunications companies in the U.S. 
The article points out the significant hurdles these companies must go 
through before any deal is approved. For example, according to the 
article, negotiations between Verio and Nippon Telegraph and Telephone 
were delayed for nearly three months as ``the FBI pushed to assure that 
the Japanese government, which owns 53% of NTT, would have no role in 
Verio's day-to-day operations or involvement in wiretapping Verio's 
network. The agency also demanded--and the companies agreed to--a 
variety of restrictions on who could have access within Verio to 
federal wiretapping information.'' 3
---------------------------------------------------------------------------
    \3\  Neil King Jr. and David S. Cloud, Wall Street Journal, August 
24, 2000, Global Phone Deals Face Scrutiny From a New Source: The FBI.
---------------------------------------------------------------------------
    In addition to FBI oversight, current law also gives the President 
the power to block any acquisition of a U.S. company that would result 
in foreign control and ``threaten to impair national security.'' Under 
the ``Exon-Florio provision,'' the President consults with the 
Committee on Foreign Investment in the United States (CFIUS), an 
eleven-member interagency body that includes, among others, the 
Secretaries of Defense, State, Treasury, and Commerce and the Attorney 
General.4
---------------------------------------------------------------------------
    \4\ Section 5021 of the Omnibus Trade and Competitiveness Act of 
1988.
---------------------------------------------------------------------------
    The President then may exercise his authority under Exon-Florio to 
suspend or prohibit any foreign acquisition, merger or takeover of a 
U.S. corporation in order to alleviate national security and law 
enforcement concerns. In the telecommunications arena, the threat of 
possible actions under Exon-Florio has forced companies to accept 
conditions relating to U.S. national security interest. These 
conditions have included restricting the foreign parent's access to 
sensitive information and authority over sensitive activities; required 
that facilities used to manage U.S. domestic telecommunications 
infrastructure remain in the United States; and required that various 
records be maintained and remain available in the United States.
                             vi. conclusion
    Mr. Chairman, Congress must reject the proposed restrictions to 
foreign government ownership of American telecommunications companies 
found in H.R. 4903. Enactment of these restrictions would invite 
retaliation by the EU and other WTO countries, starting an unnecessary 
trade war. The federal government has sufficient authority to protect 
America's businesses and consumers under current law. American 
consumers rely on the benefits from competition in the global 
marketplace, which would be jeopardized by these restrictions. Finally, 
the current law already allows for strict scrutiny of any foreign 
investment in the U.S. telecommunications markets to ensure that our 
national security is protected.
    Thank you again for the opportunity to testify today. I would be 
pleased to answer any questions you might have.
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