[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
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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.
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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.
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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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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
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\1\ United States Trade Representative Office
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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.''
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\2\ Congressional Research Memorandum to Senate Commerce Committee,
July 24, 2000, WTO Compatibility of Proposed Legislation Prohibiting
Certain FCC Licensing.
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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
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\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.
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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
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\4\ Section 5021 of the Omnibus Trade and Competitiveness Act of
1988.
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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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