    [Senate Hearing 106-1099]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 106-1099

    S. 376, OPEN-MARKET REORGANIZATION FOR THE BETTERMENT OF INTERNATIONAL
                             TELECOMMUNICATIONS ACT
    =======================================================================

                                    HEARING

                                   before the

                         SUBCOMMITTEE ON COMMUNICATIONS

                                     of the

                             COMMITTEE ON COMMERCE,
                          SCIENCE, AND TRANSPORTATION
                              UNITED STATES SENATE

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION
                                   __________

                                 MARCH 25, 1999
                                   __________

        Printed for the use of the Committee on Commerce, Science, and
                                 Transportation

                        U.S. GOVERNMENT PRINTING OFFICE
    65-038                       WASHINGTON : 2002
    ____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512-1800
    Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

           SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                         JOHN McCAIN, Arizona, Chairman
    TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
    CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
    SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West
    TRENT LOTT, Mississippi                  Virginia
    KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
    OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
    JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
    BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
    SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
    SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                           Mark Buse, Staff Director
                      Martha P. Allbright, General Counsel
         Ivan A. Schlager, Democratic Chief Counsel and Staff Director
                   Keven D. Kayes, Democratic General Counsel
                                     ------

                         Subcommittee on Communications

                        CONRAD BURNS, Montana, Chairman
    TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
    SLADE GORTON, Washington             DANIEL K. INOUYE, Hawaii
    TRENT LOTT, Mississippi              JOHN F. KERRY, Massachusetts
    JOHN ASHCROFT, Missouri              JOHN B. BREAUX, Louisiana
    KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West
    SPENCER ABRAHAM, Michigan                Virginia
    BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
    SAM BROWNBACK, Kansas                RON WYDEN, Oregon
                                         MAX CLELAND, Georgia

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held March 25, 1999......................................     1
    Statement of Senator Breaux......................................    48
    Statement of Senator Burns.......................................     1
        Prepared statement...........................................     1
    Statement of Senator Cleland.....................................    22
    Statement of Senator Gorton......................................    70
        Prepared statement of Senator Hollings.......................    77
        Prepared statement of Senator Lott...........................    76
    Statement of Senator McCain......................................     2
        Prepared statement...........................................     3
    Statement of Senator Rockefeller.................................     9
        Prepared statement...........................................    10
        Prepared statement of Senator Stevens........................    76

                                   Witnesses

    Alewine, Betty C., President and Chief Executive Officer, COMSAT
      Corporation....................................................    28
        Prepared statement...........................................    30
    Cuminale, James W., Senior Vice President and General Counsel,
      PanAmSat Corporation...........................................    24
        Prepared statement...........................................    26
    Kullman, Conny, Director General and Chief Executive Officer,
      INTELSAT.......................................................    54
        Prepared statement...........................................    56
    McCann, Vonya B., Ambassador, United States Coordinator,
      International Communications and Information Policy, U.S.
      Department of State............................................     5
        Prepared statement...........................................     6
    Porter, Roderick Kelvin, Acting Chief, International Bureau,
      Federal Communications Commission..............................    11
        Prepared statement...........................................    12
        Letter dated April 20, 1999 to Hon. John D. Rockefeller IV...    20
    Sponyoe, John, Chief Executive Officer, Lockheed Martin Global
      Telecommunications.............................................    49
        Prepared statement...........................................    51

                                    Appendix

    Porter, Roderick Kelvin, Acting Chief, Federal Communications
      Commission, letter dated April 22, 1999 to Hon. Conrad Burns...    79
    Tuttle, F. Thomas, Vice President and General Counsel, Iridium
      LLC, prepared statement........................................    84
    Vos, Richard, Head of International Satellite Consortia for
      British Telecommunications plc, written testimony..............    81

    S. 376, OPEN-MARKET REORGANIZATION FOR THE BETTERMENT OF INTERNATIONAL
                             TELECOMMUNICATIONS ACT

                                  ----------

                            THURSDAY, MARCH 25, 1999

                                   U.S. Senate,
                        Subcommittee on Communications,
            Committee on Commerce, Science, and Transportation,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room SR-253, Russell Senate Office Building, Hon. Conrad Burns,
    chairman of the subcommittee, presiding.
        Staff members assigned to this hearing: Maureen McLaughlin,
    Republican counsel; Paula Ford, Democratic senior counsel; and
    Al Mottur, Democratic counsel.

                    STATEMENT OF HON. CONRAD BURNS,
                       U.S. SENATOR FROM MONTANA

        Senator Burns. We will call the Subcommittee together and
    we will get started. It is a pretty heavy afternoon. There are
    several Senators who want to participate in a briefing later on
    this afternoon, so there is quite a lot of activity.
        I am going to withhold my statement because it is great to
    have the chairman of the full committee here, Senator McCain.
    He, too, is on one of those break-neck kind of schedules. I
    appreciate him coming and I appreciate all of the witnesses
    coming today. This is a very important hearing. This may be the
    hearing that we really need before we go to markup on this
    piece of legislation.
        So, I will withhold my comments. Senator McCain, thank you
    for coming today, and we look forward to your statement.
        [The prepared statement of Senator Burns follows:]
       Prepared Statement of Hon. Conrad Burns, U.S. Senator from Montana
        I want to welcome everyone to this hearing on international
    satellite communications reform.
        Our efforts on satellite reform this year have been marked by a
    spirit of bipartisanship that has resulted in the ORBIT bill gaining
    widespread support. In fact, I am pleased to announce that the ORBIT
    bill is now cosponsored by a majority of the Commerce Committee. I want
    to thank Chairman McCain and Senators Brownback, Dorgan, Bryan, Wyden,
    Ashcroft, Rockefeller, Hutchison, Abraham, Frist and Cleland for
    cosponsoring my legislation to ensure the rapid privatization of
    INTELSAT.
        When I decided to take on the important challenge of encouraging
    competition through deregulatory measures in the rapidly evolving
    international satellite communications industry, I declared five basic
    principles that would serve as the foundation for this effort:

        (1) The legislation must enhance competion in the global satellite
    communications market
        (2) The legislation must be consistent with the United States'
    existing treaty obligations
        (3) The legislation must enhance global satellite connectivity to
    all areas, including remote and rural
        (4) The legislation must ultimately increase consumers' choices,
    enable technological innovation and lower costs
        (5) The legislation cannot impose any unnecessary new regulatory
    schemes on this vibrant global industry.
        These principles are incorporated into the ORBIT bill which I
    introduced on February 4. One of my highest priorities for 1999 is to
    see international satellite reform legislation enacted this year. S.
    376 reflects my commitment to working with my friend, the distinguished
    House Commerce Committee Chairman Mr. Bliley, to achieve that goal as
    quickly as possible this year.

    The ORBIT bill does the following:

      establishes defining criteria for INTELSAT privatization,
    including a new date certain of 2002
      eliminates INTELSAT's and COMSAT's privileges and immunities
      creates a level competitive playing field for satellite
    systems
      creatively uses market access as an incentive fopr a prompt,
    pro-competitive privatization of INTELSAT
      eliminates the antiquated ownership restrictions on the U.S.
    Signatory to INTELSAT
      ends the role of the U.S. government in the commercial
    satellite operations

        It is my main objective that INTELSAT privatization will lead to
    enhanced competion in telecommunications services, resulting in real
    consumer benefits of more choices, lower prices and new services. I am
    very interested in the views of all of the witnesses on my bill. I look
    forward to hearing your thoughts on how to best encourage competition
    in the global satellite market.
        I especially want to thank the witnesses today for taking time out
    of their very busy schedules to testify before this Subcommittee. I
    look forward to your insights on the issues before us.

                    STATEMENT OF HON. JOHN McCAIN,
                       U.S. SENATOR FROM ARIZONA

        The Chairman. Thank you, Mr. Chairman. It is obvious that
    there is great interest in this hearing, Mr. Chairman.
        I think our witnesses and others should know that, with the
    Kosovo situation, there is a briefing this afternoon, which may
    cause some of our members to not be here who otherwise would be
    here. This is a very important issue to this committee and to
    the entire Congress and to the American people. I would like to
    thank all of the witnesses who are appearing today. I would
    especially like to thank Chairman Burns for convening this
    subcommittee hearing on the important issue of international
    satellite reform.
        Over 35 years ago, the Communications Satellite Act of 1962
    helped create a framework for providing a commercial satellite
    system to serve the nations of the world. Through this Act, the
    United States joined with other countries to form INTELSAT, an
    Intergovernmental Organization that provided basic
    telecommunications services.
        The success of INTELSAT has helped foster advances in
    satellite technology. However, in the 37 years since the
    enactment of the Act, the landscape, as would be expected due
    to the inevitable march of advancing technology, changed.
    Commercial satellite systems now offer telecommunications
    services to many countries. Soon, in the not-too-distant
    future, these commercial satellite systems will be providing
    broadband and other advanced telecommunications services around
    the globe.
        INTELSAT management itself has recognized that these
    changes warrant privatization in order for INTELSAT to compete
    in this growing global market. Mr. Chairman, it is time to
    adapt our regulatory framework to conform to this new world. In
    recognition of that, I am pleased and proud to cosponsor
    Senator Burns's ORBIT bill. I strongly believe that Congress
    must pass fair and effective satellite reform legislation this
    session. I commit to my colleagues that I will make it a
    priority to do so.
        Once again, I want to commend Senator Burns on his
    leadership in this very complex and difficult area. The Burns's
    bill provides a principled basis for examining this complex and
    important issue. I recognize that there are different
    perspectives and viewpoints on international satellite reform.
    We will need to work out these differences. I personally have
    some concerns, but I am confident we will work all these issues
    out.
        Again, I thank Senator Burns, and I look forward to hearing
    our witnesses' views. Thank you, Mr. Chairman.
        [The prepared statement of Senator McCain follows:]
       Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
        Good Afternoon. I would like to thank all of our witnesses for
    appearing today, and I commend Chairman Burns for convening this
    subcommitee hearing on the important issue of international satellite
    reform.
        Over thirty-five years ago, the Communications Satellite Act of
    1962 helped create a framework for providing a commercial satellite
    system to serve the nations of the world. Through this Act, the United
    States joined with other countries to form INTELSAT, an
    intergovernmental organization that provided basic telecommunications
    services. The success of INTELSAT has helped foster advances in
    satellite technology.
        However, in the 37 years since we enacted the Satellite Act, the
    landscape has, as would be expected, due to the inevitable march of
    advancing technology--changed. Commercial satellite systems now offer
    telecommunications services to many countries. Soon, in the not too
    distant future, these commercial satellite systems will be providing
    broadband and other advanced telecommunications services around the
    globe. INTELSAT management itself has recognized that these changes
    warrant privatization in order for INTELSAT to compete in this growing
    global market.
        It is time to adapt our regulatory framework to conform to this new
    world. In recognition of that fact, I am pleased to cosponsor Senator
    Burns's ORBIT Bill. I strongly believe that Congress must pass fair and
    effective satellite reform legislation this session. And I commit to my
    colleagues that I will make it a priority to do so.
        Once again, I commend Senator Burns on his leadership in this
    complex area. The Burns's bill provides a principled basis for
    examining this complex and important issue. I recognize that there are
    different perspectives and viewpoints on international satellite
    reform, and we will need to work out those differences. I personally
    have some concerns, but I am confident we will work all these issues
    out. Again, I thank Senator Burns and I look forward to hearing our
    witnesses' views.

        Senator Burns. Thank you, Mr. Chairman. We appreciate that.
    We have way too many chairmen here; I can see that right now.
    [Laughter.]
        The Chairman. We have another chairman just show up.
        Senator Burns. Another one just did. He is probably the
    most important one.
        The Chairman. True.
        Senator Burns. Do you have a statement?
        Senator Stevens. I have no statement. I am here to
    congratulate you for holding the hearing and to listen.
        Senator Burns. Well, that is different in this town.
    [Laughter.]
        I want to welcome everyone to this hearing this afternoon
    on the international satellite communications reform. Our
    efforts on satellite reform this year has been marked by a
    spirit of bipartisanship that has resulted in the ORBIT bill
    gaining widespread support. In fact, I am pleased to announce
    that the ORBIT bill is now cosponsored by the majority of the
    Commerce Committee. I want to thank Chairman McCain and
    Senators Brownback, Dorgan, Bryan, Wyden, Ashcroft,
    Rockefeller, Hutchison, Abraham, Frist, and Cleland for
    cosponsoring the legislation to ensure rapid privatization of
    INTELSAT.
        When I decided to take on this important challenge of
    encouraging competition through deregulatory measures in a
    rapidly evolving international satellite communications
    industry, I declared five principles that would serve as the
    foundation for this effort:
        The legislation must enhance competition in the global
    satellite communications market. The legislation must be
    consistent with the United States' existing treaty obligations.
    The legislation must enhance global satellite connectivity to
    all areas, including remote and rural areas. The legislation
    must ultimately increase consumer choices, enable technological
    innovation, and lower cost. The legislation cannot impose any
    unnecessary new regulatory schemes on this vibrant, global
    industry.
        These principles are incorporated in the ORBIT bill, which
    I introduced on February the 4th. One of my highest priorities
    for 1999 is to see the international satellite reform
    legislation enacted this year. S. 376 reflects my commitment to
    working with my friend and the distinguished House Commerce
    Committee Chairman,
    Mr. Bliley, to achieve that goal as quickly as possible this
    year.
        The ORBIT bill does the following: It establishes defining
    criteria for INTELSAT privatization, including a new date
    certain of 2002. It eliminates INTELSAT's and COMSAT's
    privileges and immunities. It creates a level, competitive
    playing field for satellite systems, creativity or use market
    access and incentive for prompt, pro-competitive privatization
    of INTELSAT. It eliminates the antiquated ownership
    restrictions on U.S. signatory to INTELSAT. It ends the role of
    the U.S. Government in commercial satellite operations. It is
    my main objective that INTELSAT privatization will lead to
    enhanced competition in telecommunications services, resulting
    in real consumer benefits of more choices, lower prices and new
    services.
        I am very interested in the views of all the witnesses on
    this bill today. I look forward to hearing your thoughts on how
    best to encourage competition in the global satellite market. I
    especially want to thank the witnesses today for taking time
    out of their busy schedules to testify before this
    subcommittee. I look forward to your insights on the issues
    before us.
        Today we have on the first panel the Hon. Vonya McCann,
    U.S. Coordinator for International Communications and
    Information Policy, from the Department of State, here in
    Washington, D.C.; and Mr. Roderick Porter, Acting Bureau Chief,
    International Bureau, Federal Communications Commission. I
    would ask Ms. McCann to offer your testimony at this time. I
    would tell you that if you want to summate your testimony, your
    entire testimony will be made part of the record. Thank you for
    coming today.

           STATEMENT OF HON. VONYA B. McCANN, UNITED STATES
             COORDINATOR, INTERNATIONAL COMMUNICATIONS AND
             INFORMATION POLICY, U. S. DEPARTMENT OF STATE

        Ambassador McCann. Thank you, Mr. Chairman.
        We appreciate the opportunity to present the
    Administration's views on the privatization of INTELSAT and
    your proposed legislation, S. 376. The Administration, in
    partnership with Congress, has worked tirelessly for more than
    5 years to bring about the restructuring and privatization of
    the intergovernmental satellite organizations--the ISOs--
    INTELSAT and Inmarsat. These efforts have borne fruit. Next
    month, Inmarsat will complete the privatization of its
    remaining business operations. INTELSAT's new Director-General,
    who was elected on a privatization platform, has stated
    unequivocally his commitment to achieve full privatization by
    2001.
        The Administration does not believe that any legislation is
    necessary to ensure a successful outcome to our international
    negotiations or to protect the U.S. market from harm if
    INTELSAT's or Inmarsat's privatization goes astray. By
    negotiating constructively with the 143 INTELSAT member
    governments and the 86 Inmarsat member governments, we have
    made steady, if sometimes slow, progress toward our goals of a
    more competitive satellite market and a level playing field.
        The Administration will continue to be aggressive in
    ensuring that the plans to restructure and privatize the ISOs
    are pro-competitive. Following ISO privatization, the FCC and
    the Antitrust Division of the Justice Department will have
    ample authority under existing law to protect U.S. interests.
    Nevertheless, if Congress does choose to address ISO
    privatization in legislation, we believe the legislation should
    reflect three key principles:
        First, Congress should be careful not to limit access by
    INTELSAT to the U.S. market in a way that harms American
    consumers, particularly in the fast-growing areas of high-speed
    data transmission, Internet access and video. Second,
    privatization must create a level playing field between
    INTELSAT and its commercial competitors, both U.S. and foreign.
    Third, any legislation must be consistent with our
    international obligations.
        With respect to S. 376, the Administration strongly
    supports the objective of the bill to promote competition by
    encouraging the privatization of INTELSAT. Moreover, we are
    quite pleased that the bill includes provisions to allow the
    United States to maintain its membership in the residual
    intergovernmental organization following privatization of
    Inmarsat's business operations next month.
        Although we believe S. 376 is a very positive contribution
    to the debate over ISO privatization, we would like to see
    several provisions modified or eliminated, in keeping with the
    three principles I noted above. Section 603(b) prohibits
    INTELSAT from providing certain services in the U.S. market
    prior to privatization. Although this provision probably will
    not have any practical effect, in principle, we oppose
    inflexible statutory service restrictions because they would
    limit competition and resulting choices for U.S. consumers.
        Section 613 requires the President, following a decision by
    INTELSAT's members to privatize, to certify that the
    privatization is pro-competitive. This provision is
    unnecessary. The Administration will follow a rigorous review
    process to ensure that INTELSAT's privatization is pro-
    competitive before the United States agrees to support it
    within INTELSAT.
        Section 614 requires that the FCC be bound by the
    President's certification under Section 613. This section
    should be modified to make clear that it would not reduce
    existing FCC authority.
        Finally, let me address the topic of direct access to
    INTELSAT, which your bill would effectively prohibit. Direct
    access to INTELSAT, broadly speaking, is a pro-competitive
    policy that has benefited consumers in countries that have
    implemented it. However, direct access in this country at this
    time probably will produce only modest benefits for U.S.
    consumers of satellite services.
        First, the savings from bypassing COMSAT are less than
    those from bypassing other INTELSAT signatories that are, or
    were, vertically integrated telecommunications monopolies.
    Second, INTELSAT privatization is in sight, and once INTELSAT
    becomes a private provider, anyone should be able to access it
    directly. The issue of direct access will become moot.
        Moreover, we would urge that any direct access scheme be
    implemented in a way so as to avoid a policy of ``fresh look.''
    The Federal Government should not overturn privately negotiated
    contracts. In addition, COMSAT should be reimbursed for its
    true costs of providing INTELSAT services, which are not
    entirely captured by the INTELSAT utilization charge.
        In closing, let me express my gratitude for the committee's
    interest in these issues, and the close cooperation we have
    enjoyed with the staffs from both sides of the aisle. I request
    that my full written statement be part of the record. Thank
    you.
        [The prepared statement of Ambassador McCann follows:]
           Prepared Statement of Hon. Vonya B. McCann, United States
       Coordinator, International Communications and Information Policy,
                            U.S. Department of State
        Thank you for the opportunity to present the Administration's view
    on the privatization of INTELSAT and on your proposed legislation, S.
    376, the ``Open-market Reorganization for the Betterment of
    International Telecommunications Act.'' The international satellite
    services industry is increasingly important. Privatization and
    demonopolization of national telecom operators around the world,
    combined with the Administration's successful conclusion in 1997 of the
    WTO agreement on basic telecommunications services, mean that new
    markets are opening up at an unprecedented rate. And because of recent
    strides in technology, satellites now offer cost-effective global links
    for direct-to-home digital TV, advanced data services, Internet access
    and hand-held wireless phones usable anywhere in the world, in addition
    to traditional telephone calls and television feeds. Privatization of
    INTELSAT, properly carried out, will contribute significantly to the
    dynamism of this exciting industry, benefiting satellite services
    users, providers and investors in the United States and throughout the
    world.
        The Administration, in partnership with the Congress, has worked
    tirelessly for more than five years to bring about the restructuring
    and privatization of the intergovernmental satellite organizations
    (ISOs), INTELSAT and Inmarsat. These efforts have borne fruit. Four
    years ago, Inmarsat's members spun off a significant portion of its
    growth business into a commercial stock corporation, ICO Global
    Communications Ltd., in which Hughes and TRW (as well as Comsat) have
    substantial investments. In March 1998, INTELSAT's member governments
    agree to spin off growth business segments of that organization into a
    new company, New Skies Satellites, N.V., with plans for public trading
    of shares by the end of 1999. Like ICO, New Skies has no
    intergovernmental status nor any privileges and immunities, and it is
    subject to the laws of the jurisdictions in which it will do business,
    including the United States. The Administration negotiated competition-
    safeguard provisions as part of these multilateral actions. These two
    spinoffs were important first steps in the ongoing transition of
    Inmarsat and INTELSAT to commercial status. Significantly, they have
    demonstrated to the member countries, especially those reluctant to
    undertake these steps, that private entities in an open market will
    compete to meet their telecommunications needs.
        As a result, full privatization of the ISOs is now in sight. Next
    month, Inmarsat will complete the privatization of its remaining
    business operations. INTELSAT's Director General has stated
    unequivocally his commitment to achieve privatization by 2001, and
    discussions within the INTELSAT Board of Governors on privatization are
    progressing favorably. The United States will continue to play a
    leadership role within the international community, to get a pro-
    competitive transition plan and an aggressive timetable for full
    privatization of INTELSAT.
        At this time, the Administration does not believe any legislation
    is necessary to ensure that the privatization of INTELSAT and Inmarsat
    does not harm competition in the U.S. market (although legislation is
    necessary for other purposes, as discussed below). The Federal
    Communications Commission (FCC) and the Antitrust Division of the
    Department of Justice have ample authority to protect U.S. interests,
    and the Administration has been aggressive in ensuring that plans to
    restructure and privatize the ISOs are pro-competitive.
        To elaborate, prior to supporting the ISO decisions to create New
    Skies and to privatize Inmarsat, the Administration conducted a
    rigorous process to ensure that competition would be helped, not
    harmed, by these changes. This process included: extensive outreach to
    U.S. industry to identify issues of concern; substantive review of
    restructuring/privatization plans and documents by authorities from the
    FCC and the Antitrust Division, among other agencies; and lengthy
    negotiations with the ISO member governments and competition
    authorities from the European Union and Canada to establish the
    appropriate competition safeguards. Our competition authorities were
    satisfied that the final restructuring/privatization plans represented
    an improvement over the status quo in terms of competition. Had they
    not been, the United States would have ``disassociated'' from the ISO
    decisions and taken the necessary steps to block access to our market.
    Moreover, the FCC retains the authority to block such access if these
    plans are implemented in a way that it believes would harm U.S.
    competition.
        In sum, the Administration has made clear its commitment to ensure
    that INTELSAT and Inmarsat privatizations do not harm U.S. competition,
    and our competition authorities have ample opportunity under existing
    law to do that. Nevertheless, we recognize that Congress was
    instrumental in establishing INTELSAT and Inmarsat and that it may want
    to address ISO privatization in legislation. If so, the Administration
    believes that such legislation should reflect three key principles:
        First, Congress should be careful not to limit access by INTELSAT
    to the U.S. market in a way the harms American consumers--particularly
    in the fast-growing areas of high-speed data transmission, Internet
    access and video. Thus, legislation should avoid requiring INTELSAT to
    meet a fixed deadline or conditions for privatization that are
    infeasible or unrealistic. Two key attributes of the international
    satellite services industry make INTELSAT access to our market a major
    concern. First, the industry is dominated by a small number of
    relatively large providers--one of them INTELSAT--and the industry is
    likely to remain concentrated, because fixed costs are very high and
    there are significant economies of scale. Thus, restrictions on
    INTELSAT's access to the U.S. market could significantly reduce
    competition. Second, U.S. consumers account for nearly half of all
    consumption of global satellite services, and consumption is forecast
    to nearly triple in the next few years. Thus, U.S. consumers would be
    hurt disproportionately by restrictions on INTELSAT or any other major
    services provider.
        Principle two is that privatization must create a level playing
    field between INTELSAT and its commercial competitors, both U.S. and
    foreign. This means that the privatized INTELSAT should:

             be located in a jurisdiction with effective
            competition laws and regulatory oversight and that has made
            open-market satellite commitments under the WTO agreement on
            basic telecommunications;
             not retain any privilege, immunity or other regulatory
            advantage resulting from its former intergovernmental status or
            that is not readily or meaningfully available to other
            satellite competitors;
             compete free of relationships of ownership or control
            with former signatories that confer a competitive advantage in
            providing new services or that provide an incentive for any
            purchaser of the privatized INTELSAT's services to discriminate
            anti-competitively in its favor;
             move rapidly toward public trading of shares on
            internationally traded stock exchanges; and
             obtain no unfair advantage from ``warehoused'' orbital
            slots obtained during its operation as an intergovernmental
            organization.

        The third principle is that any legislation must be consistent with
    the United States' international obligations, including the Fourth
    Protocol to the World Trade organization General Agreement on Trade in
    Services (the WTO basic telecommunications services agreement). In
    addition to raising possible WTO questions, legislation that is seen as
    a means of favoring U.S. satellite services firms may provoke
    retaliation from U.S. trading partners and undermine U.S. efforts to
    accelerate the privatization of INTELSAT. At present, the FCC, in
    consultation with the Executive Branch, has the flexibility to issue or
    condition a license in a manner that is consistent with U.S.
    international obligations; that flexibility should be retained.
                                     S. 376
        The Administration strongly supports the objective of S. 376 to
    promote competition in domestic and international satellite
    communications services by encouraging the full privatization of
    INTELSAT and reforming the framework for regulating Comsat. Moreover,
    we are pleased that the bill includes provisions to allow the United
    States to maintain membership in the residual Inmarsat
    intergovernmental organization following privatization of Inmarsat's
    business operations next month. The Administration requested these
    provisions to protect the interests of U.S. maritime users,
    particularly the Coast Guard, in residual intergovernmental
    organization, which will oversee the global maritime distress and
    safety system. Finally, without expressing any view on the proposed
    acquisition of Comsat by Lockheed Martin, which the Justice Department
    is still reviewing, we believe the provision to lift the cap on
    individual ownership of Comsat is desirable. The cap was put in place
    to ensure Comsat's independence, particularly from the U.S. long-
    distance and international telecom monopolies, at a time when the
    nascent satellite services industry was itself considered a natural
    monopoly. However, the U.S. no longer has long-distance and
    international telecom monopolies, and the satellite services industry
    now has competition as well.
        Although we believe S. 376 is a very positive contribution to the
    debate over ISO privatization, we would like to see several provisions
    in S. 376 modified or eliminated, in keeping with the three principles
    described above:

             Sec. 603(b) prohibits the FCC from authorizing
            INTELSAT to provide certain services (DTH, DBS, DAR and Ka-
            Band) in the U.S. market prior to privatization. This section
            should be eliminated. INTELSAT is unlikely to offer any of
            these services in the U.S. prior to privatization; hence this
            section would have little practical effect. Nevertheless, in
            principle, we oppose inflexible statutory service restrictions,
            because they would limit competition and resulting choices for
            U.S. consumers, as discussed above.
             Sec. 613 requires the President, following the
            decision by INTELSAT's members to privatize, to certify that
            the privatization is pro-competitive and will not distort
            competition in the U.S. market. This provision is unnecessary.
            As noted above, the Administration will follow a rigorous
            review process to ensure that INTELSAT's privatization plan is
            pro-competitive before the United States agrees to support it
            within INTELSAT, and the FCC and Justice's Antitrust Division
            have ample opportunity to review the implementation of this
            plan. At a minimum, the provision should be modified so as to
            require that the certification process take place prior to
            INTELSAT's transition to a private structure.
             Sec. 614 requires that the FCC be bound by the
            President's certification under Sec. 613. This section should
            be modified to clarify that it would in no way reduce existing
            FCC authority.
             Since INTELSAT's beginning, Comsat has served in the
            congressionally chartered role of U.S. Signatory, subject to
            the ``instructional authority'' of the U.S. Government. The
            bill should explicitly continue this authority for as long as
            INTELSAT remains an intergovernmental organization and Comsat
            remains the U.S. Signatory.

        Direct Access. Sec 603(a) effectively would prohibit direct access
    to INTELSAT by its U.S. customers. Although direct access is a highly
    controversial issue in the debate over INTELSAT privatization, the
    rhetoric on both sides may well be inflated. Direct access to INTELSAT,
    broadly speaking, is a pro-competitive policy that has been implemented
    in 90+ countries to the benefit of consumers. However, direct access in
    this country, at this time, probably will produce only modest benefits
    for U.S. consumers of satellite services. But if the benefits will not
    be significant, neither will the harm to Comsat, at least if direct
    access is properly implemented. Two possible effects of direct access--
    on competition and resulting economic efficiency an on the
    privatization process--merit discussion.
        Direct access to INTELSAT, properly implemented, probably would
    yield only modest benefits to U.S. users through greater competition
    and efficiency. First, unlike most INTELSAT signatories at the time
    that direct access was adopted in their home markets, Comsat is not a
    vertically integrated telecom monopoly. To elaborate, many foreign
    countries adopted direct access as part of structural reforms to reduce
    the power of monopoly telecom providers that were also signatories to
    INTELSAT. But because Comsat's sole function is to sell INTELSAT space
    segment, the ability to bypass Comsat through direct access is far less
    significant. Second, benefits to U.S. users from direct access will be
    limited because INTELSAT privatization is in sight. Once INTELSAT
    becomes a private provider, any user should be able to access it
    directly, and the issue will be moot.
        ``Proper implementation'' of direct access refers to two things.
    First, it should not include a policy of ``fresh look,'' which would
    allow Comsat customers to renegotiate their contracts. The contracts
    were negotiated by private parties in an environment that offered some
    competitive alternatives. Moreover, Comsat has made long-term
    commitments to INTELSAT based on the contracts. It would be
    inappropriate for the federal government to overturn such contracts.
        Second, Comsat should be reimbursed for its true costs of providing
    INTELSAT services. Although the INTELSAT utilization charge (IUC) is
    often thought to be the wholesale cost of providing INTELSAT services,
    it is actually an internal accounting convention that excludes some of
    Comsat's legitimate costs. If Comsat customers and direct access users
    (some of whom compete with Comsat) paid only the IUC under a direct
    access regime, the implicit subsidy from Comsat to these customers/
    direct access users would distort competition.
        In addition to competition/efficiency effects, a second broad
    consideration is the effect of direct access on INTELSAT privatization.
    Parts of the executive branch have in the past expressed concern that
    allowing direct access would remove a significant incentive for certain
    signatories to support privatization, because they could bypass Comsat
    and deal directly with U.S. customers without first privatizing. And,
    in fact, several signatories have expressed the view that if they got
    direct access to the U.S. market, privatization might be less urgent.
    However, the momentum for privatization is growing and the potential
    savings to users from bypassing Comsat are modest, as noted above. Thus
    we believe the overall risk to privatization is small.

        Senator Burns. Thank you very much, Ms. McCann.
        We have been joined now by one of the cosponsors on the
    bill, Senator Rockefeller. If you have a statement, before we
    hear from Mr. Porter, we would certainly welcome it at this
    time.

               STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
                    U.S. SENATOR FROM WEST VIRGINIA

        Senator Rockefeller. It is so brief, and you will be so
    pleased. I will submit my full statement.
        Senator Burns. How do we define ``brief''? [Laughter.]
        Senator Rockefeller. My statement that I will submit my
    full statement, with your permission.
        Senator Burns. Wonderful. Without objection.
        Senator Rockefeller. Thank you.
        Obviously, I thank Senator Burns very much for this. He has
    been a driving force on it. I am a cosponsor of the bill. There
    are, I think, 11 of us on the committee who are. I believe that
    it is in the consumer interest to have a private INTELSAT. I
    come from a State where 4 percent of the land, Senator Burns,
    if you can imagine this, is flat, and 96 percent is not. It is
    up and down. I really think that the whole concept of satellite
    services is the way that West Virginia, essentially, and States
    like that, of which there are many--or parts of States--that is
    where their future is, because of mountainous terrain and the
    high cost of providing traditional telecommunications services.
        INTELSAT has a history of serving all parts of the world.
    They appear to have done so at reasonable prices. We have an
    interest in making sure that all parts of the world are part of
    the global information structure. That is one of the advantages
    of something that is floating around in the sky. Whether it is
    high or low, it serves a lot more area. This bill will allow a
    privatized INTELSAT to continue to serve these areas and still
    survive in the face of competition with other countries.
        I am going to continue to work on this bill with,
    obviously, our chairman and Senator Hollings and Senator
    Breaux. It is a good bill, and I am proud to be a part of it.
        Now, was that satisfactory?
        [The prepared statement of Senator Rockefeller follows:]

              Prepared Statement of Hon. John D. Rockefeller IV,
                        U.S. Senator from West Virginia
        First I want to thank Mr. Burns for holding this important hearing.
    International satellite reform is critical to consumers across the
    United States.
        Yesterday I agreed to become a cosponsor of this bill--along with
    Mr. Burns, McCain, Bryan, Brownback, Cleland, Frist and Dorgan. I
    support Mr. Burns' bill because I believe that it is in the consumer
    interest to have a private INTELSAT. Such a competitive entity will
    lead to lower prices, better service, and more efficiency across the
    globe.
        Additionally, removing ownership restrictions on COMSAT will help
    to bring new services to American consumers. I believe that broadband
    satellite services will a very important role in West Virginia's
    future, and this bill will lead to further deployment of these services
    by lifting the ownership restriction on COMCAST. I am excited by the
    possibility of a new competitor in domestic satellite services, and the
    resulting advances in these satellite services. Our mountainous terrain
    and the high cost of providing traditional telecommunications services
    make satellite services particularly important to West Virginia.
        Furthermore, INTELSAT has a history of serving all parts of the
    world at reasonable prices. We have an interest in making sure that
    developing nations are part of the global information infrastructure. I
    will work to make sure that this bill will allow a privatized INTELSAT
    to continue to serve these areas at reasonable prices.
        I must state, however, that while I support this bill, we are still
    in the middle of the legislative process. I am eager to continue
    working with Mr. Hollings, Breaux, and other Senators who are working
    important ideas with great promise. I want to stress that while I agree
    that this bill is the right platform for international satellite
    reform, I intend to keep working hard on this issue.

        Senator Burns. Wonderful. Thank you, Senator Rockefeller. I
    appreciate your cosponsorship. We have had a good working
    relationship for a long time. We have served on different
    committees, and it is always a pleasure to work with you and
    your staff. So, we appreciate that very much.
        Mr. Porter, I am looking forward to your statement. Thank
    you for coming today.

          STATEMENT OF RODERICK KELVIN PORTER, ACTING CHIEF,
        INTERNATIONAL BUREAU, FEDERAL COMMUNICATIONS COMMISSION

        Mr. Porter. Thank you, Mr. Chairman, Senator Rockefeller. I
    am pleased to have the opportunity to appear before you today.
        We support new legislation to articulate a national
    satellite policy based on pro-competitive principles. We agree
    with principles upon which legislation should be based, as
    jointly stated by yourself and Chairman Bliley. The ultimate
    goal of satellite reform legislation will be to benefit
    consumers through the encouragement of a truly competitive
    market. Privatization of INTELSAT and INMARSAT would help
    promote competition in the commercial satellite communications
    market, and thereby benefit the consumer.
        Thirty-seven years ago, Congress adopted the Communications
    Satellite Act of 1962. It was well-conceived, and tailored to
    the times. It established a policy that led to the creation of
    INTELSAT and INMARSAT. INTELSAT was created with the goal of
    developing a satellite system that would provide global
    connectivity. INMARSAT was formed for the purpose of improving
    maritime commercial and safety communications.
        The landscape of the communications satellite industry has
    changed markedly over the past 37 years. The international
    satellite organizations are faced with competition from private
    companies through satellite, submarine fiber optic cables and
    other technologies. U.S. policy since the mid-1980's focused on
    promoting this competition as a means of expanding customer
    choice and achieving lower rates.
        The 1962 Satellite Act, however, has undergone little
    change during these developments. INTELSAT and INMARSAT have
    been concerned that their current intergovernmental structure,
    entailing unlimited liability for investors and a slow
    decisionmaking process, inhibits their ability to respond to
    competition. Competitors are concerned about the potential for
    competitive harm from INTELSAT's and INMARSAT's global access
    to markets, special privileges and immunities, and control over
    substantial satellite capacity and choice orbital spectrum.
        Competitors also are concerned that some investors in the
    intergovernmental organizations may be able to restrict
    overseas market access for new entrants. Both INTELSAT and
    INMARSAT have been taking steps to restructure themselves in
    response to competitive pressures. INMARSAT created a private
    affiliate to provide hand-held mobile satellite services in
    1995. It will itself privatize on or about April 15 of this
    year.
        INTELSAT created a private affiliate last year to provide
    video and multimedia services. INTELSAT now is considering
    additional restructuring options, including privatization.
        The United States has been a strong proponent of
    privatization of the intergovernmental organizations, both to
    improve their competitiveness and to eliminate the potential
    for market distortion that flows from their intergovernmental
    status. The issue is not the goal of privatization, but,
    rather, how to achieve it.
        We recognize that even though privatization of INTELSAT
    will be the result of international negotiation, Congress has
    an active and independent role in the process. In fact, it was
    congressional leadership in the 1960's, and U.S. policy
    established by the 1962 Act, that led to the creation of
    INTELSAT.
        Congress is in the position to have the same degree of
    influence in the 1990's for INTELSAT's transformation into a
    true market player. Satellite reform legislation would be an
    appropriate means to establish policy guidelines for U.S.
    efforts to privatize INTELSAT. Legislation also could provide
    an opportunity to immediately eliminate provisions of the 1962
    Act no longer necessary or relevant to achieving a pro-
    competitive privatization of INTELSAT.
        The Commission has taken important actions in the last 3
    years to deregulate COMSAT in view of changing market
    conditions resulting from competition. Upon privatization, the
    overlay of government oversight of COMSAT that exists as a
    result of COMSAT's special role in INTELSAT and INMARSAT should
    be eliminated.
        My prepared statement contains specific comments on
    provisions of S. 376. Mr. Chairman, we commend you and members
    of the subcommittee in moving forward with satellite reform
    legislation, and look forward to working with you on this
    important initiative. Thank you.
        [The prepared statement of Mr. Porter follows:]
          Prepared Statement of Roderick Kelvin Porter, Acting Chief,
            International Bureau, Federal Communications Commission
                               executive summary
        Thirty-seven years ago, Congress adopted the Communications
    Satellite Act of 1962. It was well conceived and it was tailored to the
    times. It established a policy that led to the creation of INTELSAT and
    Inmarsat. INTELSAT was created with the goal of developing a satellite
    system that would provide global connectivity, and Inmarsat was formed
    for the purpose of improving maritime communications and communications
    for the safety of life at sea.
        The landscape of the communications satellite industry has changed
    markedly over the past 37 years. The international satellite
    organizations are faced with competition from private companies through
    both satellite and submarine fiber optic cables. U.S. policy since the
    mid-1980's has focused on promoting this competition as a means of
    expanding customer choice and achieving lower rates. The 1962 Satellite
    Act, however, has undergone little change during this period of change
    in the industry.
        INTELSAT and Inmarsat have been concerned that their current
    intergovernmental structure entailing unlimited liability for investors
    and a slow decision-making process inhibit their ability to respond to
    competition. Competitors are concerned about potential anticompetitive
    conduct by INTELSAT and Inmarsat, and have focussed particularly on
    INTELSAT's and Inmarsat's global access to markets, special privileges
    and immunities, control over significant satellite capacity and orbital
    locations, and the potential for some investors in these
    intergovernmental organizations to restrict overseas market access for
    new entrants.
        Both INTELSAT and Inmarsat have been taking steps to restructure
    themselves in response to competitive pressures. In 1995, Inmarsat
    created a private affiliate to provide hand-held services and plans to
    privatize itself on or about April 15 of this year. Last year, INTELSAT
    created a private affiliate, New Skies, to provide video and multi-
    media services. INTELSAT now is considering additional restructuring
    options, including privatization.
        We agree that the ultimate goal of legislation and regulation in
    satellite communications is to benefit consumers through the
    encouragement of a truly competitive market. We support Congress's
    determination that the time is ripe for reform of the statutes that
    govern the rapidly changing satellite communications market.
    Privatization of INTELSAT and Inmarsat would help promote competition
    in the commercial satellite communications market, and thereby benefit
    consumers.
        The United States has been a strong proponent of privatization of
    the intergovernmental organizations--both to improve their
    competitiveness and to eliminate the potential for market distortion
    that flows from their intergovernmental status. INTELSAT must be
    privatized in a way that allows it to remain viable in the world market
    while preserving our commitment to global satellite connectivity. At
    the same time, however, we need to ensure that its legacy as an
    intergovernmental organization does not impede the ability of private
    competitors to enter the market.
        We recognize that, even though privatization of INTELSAT will be
    the result of international negotiation, Congress has an independent
    and active role in the process. In fact, it was Congressional
    leadership in the 1960s and U.S. policy established by the 1962 Act
    that lead to the creation of INTELSAT. Congress is in the position to
    have the same degree of influence in the 1990s for INTELSAT's
    transformation into a true market player.
        We support legislation to articulate a national satellite policy
    based on pro-competitive principles. We agree with the principles
    jointly stated by Chairman Burns and Chairman Bliley in their letter to
    Chairman Kennard. In keeping with these principles, we believe that
    legislative criteria for privatization of INTELSAT might usefully
    entail: (1) conversion to a publicly held corporation listed and traded
    on public exchange; (2) opportunity for participation in the private
    company by entities other than current signatories; (3) elimination of
    all privileges and immunities; (4) location in a jurisdiction with
    effective competition laws and regulatory oversight; (5) availability
    of non-exclusive access and distribution arrangements that serve
    customer needs; and (6) continued provision of services to developing
    countries by INTELSAT.
        We also support satellite reform legislation that would eliminate
    those provisions of the 1962 Act that are no longer necessary or
    relevant to achieving a pro-competitive privatization of those
    organizations. Comsat ultimately should evolve into a company with no
    special Congressional charter or privileges or obligations. The
    Commission has taken several important actions in the last three years
    to deregulate Comsat in an effort to help it achieve a market position
    that is no more hindered or protected by regulation than that of its
    competitors. The overlay of government oversight of Comsat that exists
    as a result of Comsat's special role in INTELSAT and Inmarsat should be
    eliminated upon privatization.
        S. 376 is designed to achieve these goals. Moving forward with
    legislation of this nature would both be timely and helpful to U.S.
    efforts to promote a robust and competitive satellite communications
    market globally. We look forward to working with you on these critical
    issues.
        Mr. Chairman and members of the Subcommittee, thank you for giving
    me an opportunity to appear before you today to discuss the Open-market
    Reorganization for the Betterment of International Telecommunications
    Act (S. 376). We agree that the ultimate goal of legislation and
    regulation in satellite communications is to benefit consumers through
    the encouragement of a truly competitive market. We will take all steps
    necessary in support of Congress's determination that the time is ripe
    for reform of the statutes that govern the rapidly changing satellite
    communications market. Privatization of INTELSAT and Inmarsat would
    help promote competition in the commercial satellite communications
    market, and thereby benefit consumers. Achieving privatization is and
    will continue to be both challenging and promising. It is challenging
    because other countries that are members of these international
    organizations must be convinced that a solution that promotes
    competition is in their interests. It is promising because successful
    privatization of these organizations may bring new market opportunities
    for satellite service providers throughout the world and increased
    choice for consumers here at home.
        Legislation that both establishes U.S. policy on privatization of
    INTELSAT and Inmarsat and promotes further competition in the
    commercial satellite market is both timely and appropriate. We
    appreciate the opportunity to work with you to reform the U.S.
    legislative framework governing satellite services and to implement
    pro-competitive and deregulatory measures.
                    the communications satellite act of 1962
        The Communications Satellite Act of 1962 was written when the
    primary goal of U.S. satellite policy was the successful deployment of
    a global satellite system that would provide world-wide telephone
    connectivity and video coverage. To a large degree, the 1962 Satellite
    Act assumed the existence of economies of scale calling for
    establishment of a single global satellite system. The Act created
    Comsat as a publicly-traded private corporation to achieve this goal by
    developing and investing in the INTELSAT system. At the same time,
    Congress established extensive government oversight of Comsat. In 1979,
    Congress expanded Comsat's role, making it the U.S. investor in
    Inmarsat. Today, Comsat is traded on three U.S. exchanges, with 1998
    revenues of more than a half billion dollars. The company has
    restructured itself to focus its business on international satellite
    and digital networking services. The challenge for COMSAT will be to
    adapt to the fundamental changes that are taking place in INTELSAT and
    Inmarsat as a result of competitive challenges to those organizations.
                             deregulation of comsat
        The goal of a competitive market that benefits consumers is
    furthered by the existence of a level playing field. Thus, the
    Commission has taken several important actions in the last three years
    to deregulate Comsat in an effort to help it achieve a market position
    that is no more hindered or protected by regulation than that of its
    competitors. In 1996, the Commission waived its dominant carrier
    tariffing rules and permitted Comsat to file tariffs for switched voice
    and private line service with 14 days notice and without cost support.
    In 1997, the Commission waived its dominant carrier tariffing rules and
    permitted Comsat, as do its competitors, to file tariffs for full time
    video and occasional use video on a streamlined basis.
        The Commission granted Comsat significant additional regulatory
    relief in 1998. Specifically, the Commission found Comsat non-dominant
    in the provision of switched voice, private line, and occasional use
    video in competitive markets, and in the provision of full time video
    and earth station services in all geographic markets. Together, these
    markets account for over 92% of Comsat's INTELSAT revenues. The
    Commission also found, however, that Comsat is still dominant in the
    provision of switched voice, private line, and occasional use video
    service in non-competitive geographic markets. Most recently, in
    February of this year, the Commission established an incentive based
    form of regulation in lieu of burdensome rate of return regulation for
    service in which Comsat remains dominant. In addition to these actions,
    the Commission has eliminated requirements for Comsat to (1) obtain FCC
    approval to invest in INTELSAT satellites; and (2) file certain yearly
    reports to the FCC normally required of rate regulated carriers.
                             intelsat and inmarsat
        The U.S. effort in creating the global satellite system envisioned
    by the 1962 Satellite Act was a complete success. Today, INTELSAT has
    143 members and operates a fleet of 19 satellites accessed by thousands
    of earth stations. INTELSAT provides services to hundreds of customers
    in over 200 countries. INTELSAT has revenues of approximately $1
    billion and it has assets worth over $3 billion. The connectivity
    provided by the INTELSAT system makes possible the delivery of voice,
    data, and video communications anywhere on the globe.
        Based on the INTELSAT Intergovernmental Organization (IGO) model,
    Inmarsat was established as an IGO in 1979 to improve maritime
    communications, particularly communications for distress and safety of
    life at sea. Inmarsat has 84 members and operates eight satellites
    providing global maritime, aeronautical, and land mobile
    communications. More than 140,000 terminals of various types are in
    use. Inmarsat revenues for 1999 are projected to be about $450 million.
        INTELSAT and Inmarsat own and operate satellites and the associated
    facilities while signatories and other entities own and operate ground
    facilities accessing the satellites. Each IGO is made up of parties and
    signatories. Parties represent governments' interest in the
    organization through the Assembly of Parties that meets bi-annually.
    Signatories are the investors in the satellite system. Some signatories
    are private entities, but many are wholly or partially owned by foreign
    governments. Investment is tied to the amount of traffic a signatory
    carries over the system. The largest signatories are represented on the
    INTELSAT Board of Governors and the Inmarsat Council. These bodies make
    the major commercial decisions for each organization. It is important
    to note that each signatory represents its own interests and does not
    have a fiduciary obligation to the entire organization. Comsat is the
    U.S. signatory to both INTELSAT and Inmarsat.
        In 1962, when INTELSAT was formed, the world's telecommunications
    infrastructure was quite different than it is today. In the early days,
    most private entities considered the use of satellites for
    telecommunications services to be very risky and expensive. Advances in
    technology as well as increased satellite capacity have made it
    feasible for new entities to enter the global telecommunications
    market. INTELSAT now faces competition from private systems. Since
    1962, application of satellite technology to communications has
    resulted in new and varied options to consumers and has become the
    province of private companies competing to satisfy consumer needs.
    United States policy evolved in the 1980's to introduce competition to
    INTELSAT. The authorization of competing U.S. systems required a
    presidential determination that such competition was, under the 1962
    Satellite Act, in the national interest. Following that determination,
    the FCC began the licensing process for competing U.S. systems. Today,
    private industry provides satellite services for telephony, direct-to-
    home television, other video and data services as well as maritime,
    aeronautical and land-mobile services. In the near future private
    companies will introduce services such as broadband internet, expanded
    video services and hand-held global mobile communications. In the
    broadband video market and mobile satellite services markets private
    companies plan to invest billions just to start operations.
        Growth in global telecommunications has not been limited to
    satellite-delivered services. Over the last decade the capacity of
    transoceanic fiber optic cables has dramatically increased.
    Consequently, INTELSAT's share of the market for international
    telephone service has fallen. Although public switched telephony is
    still its largest revenue source, the percentage of INTELSAT's revenue
    stream from public switched service has fallen and the revenues from
    certain new services are growing. Today, close to half of INTELSAT's
    total revenues are derived from public switched telephone service, down
    from 76 percent in 1988. In addition, INTELSAT's share of the public
    switched service market is expected to continue to decline largely due
    to competition from fiber optic undersea cables. In response to the
    changing market, INTELSAT has expanded into new areas, including the
    market for broadcast video where it faces competition from new
    satellite-based companies.
        INTELSAT has taken steps to react to the changing marketplace and
    the advent of competition. Last year, it created New Skies Satellite,
    N.V., a private commercial affiliate Netherlands company, to provide
    video and multimedia services on a global basis. New Skies is now
    operating as a wholly-owned affiliate of INTELSAT and INTELSAT's
    signatories. Five satellites have been transferred from INTELSAT to New
    Skies and a sixth satellite is scheduled to be launched this year. Over
    90 earth stations in the United States currently are operating with New
    Skies on a special temporary authority basis pending Commission
    consideration of their applications for permanent authority to operate
    with New Skies.
        INTELSAT itself recognizes the need to become a more efficient
    organization and is considering restructuring options, including
    privatization. Privatization will lead to operational flexibility,
    speedier decision-making by a management responsive to a fiduciary
    board of directors, limited liability by investors, and better access
    to capital through public and strategic investors
        Unlike INTELSAT, Inmarsat's revenue stream has maintained itself
    steadily over the years without significant change. Competition for
    Inmarsat, however, is starting to develop. Inmarsat now competes with
    private consortia largely composed of U.S. firms such as Motorola,
    Loral and American Mobile Satellite Corporation. In anticipation of the
    development of competition, Inmarsat has undertaken efforts to
    restructure its operations. In January 1995, Inmarsat created an
    affiliated private company, ICO Global Communications Ltd., to provide
    global mobile hand-held communications services. Inmarsat will
    privatize on or about April 15 of this year. Inmarsat's decision to
    privatize was based on the recognition that the organization could not
    effectively compete with private systems under an intergovernmental
    structure that conferred unlimited liability on its investors and
    involved an inefficient decision-making mechanism slow to react to
    competitive challenges.
        Under the privatization, Inmarsat will transfer its assets
    (satellites, associated facilities, headquarters building, etc.) to a
    newly created private company incorporated in the United Kingdom.
    Existing Inmarsat signatories will be allowed shares in the corporation
    in proportion to their investment shares in Inmarsat. The newly created
    company will own and operate the satellites previously owned and
    operated by Inmarsat and will provide existing commercial and safety
    services. It will not have the privileges and immunities bestowed on
    the current intergovernmental organization. Current Inmarsat contracts
    will be novated to the corporation. Existing land earth station
    operators will distribute the services of the corporation pursuant to a
    Land Earth Station (LES) Operator Agreement with the company. The newly
    created company will retain the name ``Inmarsat''. An Initial Public
    Offering (IPO) is anticipated within two years. A residual
    intergovernmental organization consisting of a small directorate will
    be created to ensure that the new company continues to provide GMDSS
    (Global Maritime Distress and Safety Services) under a Public Services
    Agreement with the IGO. The IGO will not have any control over the
    operations or facilities of the new Inmarsat. Instead the IGO will have
    an agreement with the new Inmarsat whereby the IGO will have the
    ability to ensure that Inmarsat meets its obligations to provide GMDSS.
                 considerations for a new legislative framework
        The Communications Satellite Act of 1962 was enacted to achieve a
    goal long since accomplished. The focus of U.S. policy has been, since
    the mid-1980's, the development of competition. The Communications
    Satellite Act, however, has undergone little change. We believe that
    new legislation could seize on a present opportunity to articulate
    current U.S. national policy based on pro-competitive principles.
        We believe that privatization will help promote greater competition
    in the satellite communications market and will make INTELSAT a more
    effective competitor. INTELSAT's current and potential competitors are
    concerned about their ability to compete with INTELSAT due to
    INTELSAT's global access to markets, control over significant satellite
    capacity, and special privileges and immunities as well as the
    potential ability of some signatories to keep competitors out of their
    home markets. In the countries that have not yet privatized their
    communications systems, the government and the telecom provider acting
    as signatory are the same entity. As a result, some INTELSAT
    signatories may be in a position to affect their government's market
    access decisions, and could impede entry by competitors of INTELSAT.
        Significant steps were taken in 1997 to address the market access
    question. The World Trade Organization (WTO) Agreement on Basic
    Telecommunication Services provides for commitments by 72 countries to
    open their markets for basic telecommunications services, and 49 of
    these countries have made commitments for satellite services. In
    addition, 55 of the parties to the WTO agreement also signed the
    Reference Paper on Pro-Competitive Regulatory Principles. The Reference
    Paper contains a binding set of competition rules and calls for
    separation of a country's telecommunications regulator from its
    national telecommunications service provider. Many INTELSAT members,
    however, have not made WTO commitments. Privatization eliminating
    INTELSAT's intergovernmental imprimatur and permitting diverse
    ownership in the privatized organization would be an effective means of
    further promoting greater market access.
        We recognize that even though privatization of INTELSAT will be the
    result of international negotiation, Congress has an independent and
    active role in the process. In fact, it was Congressional leadership in
    the 1960s and U.S. policy established by the 1962 Act that lead to the
    creation of INTELSAT. Congress is in the position to have the same
    degree of influence in the 1990s for INTELSAT's transformation into a
    true market player.
        We agree that Satellite reform legislation is an appropriate tool
    by which to establish policy guidelines for U.S. efforts to privatize
    INTELSAT. Legislation also provides the opportunity to eliminate
    provisions of the 1962 Satellite Act no longer necessary or relevant to
    achieving a pro-competitive privatization. Upon INTELSAT's
    privatization, all remaining provisions of the 1962 legislation could
    then be eliminated. Comsat would then evolve into a company with no
    special Congressional charter or privileges or obligations. The overlay
    of government oversight and regulation of Comsat that exists as a
    result of Comsat's special role in INTELSAT and Inmarsat would be
    eliminated upon privatization.
        In a letter to Chairman Kennard, Chairman Burns and Chairman Bliley
    stated the following principles upon which to base legislation: (1)
    privatizing INTELSAT by a date certain; (2) enabling the United States
    to participate in a restructured Inmarsat through legislation; (3) a
    pro-competitive privatization of INTELSAT and Inmarsat, eliminating IGO
    and Comsat's derivative privileges and immunities and their potential
    ability to possibly warehouse orbital locations; (4) non-discriminatory
    competition; (5) use of market access as an incentive for a pro-
    competitive privatization; and (6) elimination of ownership
    restrictions on Comsat and other deregulation ending the role of the
    U.S. government in commercial satellite operations. These principles
    support our stated policy objectives and we agree that satellite reform
    legislation based on these principles would establish a clear policy
    framework for pursuit of pro-competitive privatization of INTELSAT that
    will result in benefits for U.S. consumers.
        In keeping with these principles, we believe that legislative
    criteria for privatization of INTELSAT might usefully entail: (1)
    conversion to a publicly held corporation listed and traded on public
    exchanges; (2) opportunity for ownership and participation in the
    private company by entities other than current signatories; (3)
    elimination of all privileges and immunities; (4) location in a
    jurisdiction with effective competition laws and regulatory oversight;
    (5) availability of non-exclusive access and distribution arrangements
    that serve customer needs; and (6) continued provision of services to
    developing countries by INTELSAT. S. 376 is designed to achieve these
    goals. Moving forward with legislation of this nature would both be
    timely and helpful to U.S. efforts to privatize INTELSAT. In that
    spirit we suggest several comments for the Subcommittee's consideration
    on certain provisions of the bill.
        Legislation has the potential to provide effective incentives for
    INTELSAT to privatize in a pro-competitive manner. The availability of
    the U.S. market certainly would create such an incentive. We note,
    however, that S. 376 would determine the availability of the U.S.
    market to INTELSAT through a Presidential certification process that
    apparently would be undertaken prior to completion of negotiation of
    the details of the privatization. The bill provides for a Presidential
    certification that entry by a privatized INTELSAT into the U.S. market
    will not harm competition to be made upon an INTELSAT Assembly of
    Parties decision creating the ``legal structure and characteristics''
    of a privatized INTELSAT. The FCC would be bound by this determination
    in its licensing process. It has been our experience in recent
    negotiations involving the Inmarsat privatization and the creation of
    New Skies by INTELSAT that Assembly decisions on legal structure and
    characteristics are made with negotiations on important details and
    documents on implementation yet to be completed. Typically, these
    details and documents have been finalized by later meetings of the
    INTELSAT Board of Governors or Inmarsat Council.\1\ Thus, under S. 376,
    a Presidential certification binding the FCC would be made absent the
    availability of the final details of the privatization.
    ---------------------------------------------------------------------------
        \1\ See Report of the Twelfth Session of the Inmarsat Assembly of
    Parties, Assembly/12/Report (May 1998). See also Assembly/13 Report
    (October 8 (1998). The Inmarsat Assembly of Parties determined to
    decide upon the legal structure and characteristics of Inmarsat's
    privatization, but left final decision on the details and documents
    associated with the privatization to subsequent meetings of the
    Inmarsat Council held over a five month period. Most implementation
    documents were in draft stages when the Assembly made its decision to
    privatize. Similarly, a number of documents implementing the creation
    of New Skies were finalized by the INTELSAT Board of Governors after
    the INTELSAT Assembly decided to create New Skies. Certain key
    documents underwent extensive changes and are subject to Commission
    review in connection with applications before it to operate New Skies
    in the United States.
    ---------------------------------------------------------------------------
        We recommend that the Subcommittee consider preserving the
    independent regulatory review of the effects on competition by a
    privatized INTELSAT's entry into the U.S. market in any legislation.
    Presidential certification as to the outcome of Assembly of Parties
    decisions would then be based on a national interest standard and other
    traditional Executive branch standards.\2\ Subsequent Commission action
    through the licensing process would involve consideration of the full
    results of the privatization based on a public record with
    accountability to the courts. It would provide a means of maintaining
    U.S. leverage in the final stages of the negotiating process and
    assuring that the principles that the United States agreed to at the
    Assembly have been achieved through implementation.\3\
    ---------------------------------------------------------------------------
        \2\ There is precedent for action on a satellite policy issue
    whereby there is first a Presidential determination based on national
    interest considerations and then, following that, FCC licensing actions
    based on the Commission's public interest standard that implemented the
    policy determination. In 1983, the Commission received several
    applications to operate separate satellite systems in competition with
    INTELSAT. The Commission withheld action on the applications at request
    of the Executive branch pending a decision under Section 102(d) of the
    1962 Satellite Act that competing systems were in the national
    interest. The President made this determination in 1984. Presidential
    Determination No. 85-2 of November 28, 1984 49 Fed. Reg. 46937
    (November 30, 1984). The Commission conducted a rulemaking and issued
    conditional licenses in 1985. See Permissible Services of U.S. Systems
    Separate from the International Telecommunications Satellite
    Organization (INTELSAT). 101 FCC 2d 1046 (1985); On recon, 61 RR 649
    (1986); further recon, 1 FCC Rcd 439 (1986). In establishing a
    regulatory framework for considering applications for competing
    systems, the Commission considered competition and related issues in
    connection with the applications.
        \3\ The Executive branch has previously asked the Commission to
    utilize its licensing process to assure that results of negotiations in
    connection with Inmarsat's creation of ICO Communications were in fact
    properly implemented. See Comsat Authority to Participate in
    Procurement of the Facilities of the ICO Global Communications System;
    FCC 99-21 (released February 25, 1999). In testimony before this
    subcommittee last September, the Administration stated that any
    legislation should ``recognize and incorporate the existing flexible
    authority of the FCC and the Department of Justice to protect
    competition and promote the public interest in the rapidly changing
    telecommunications market''.
    ---------------------------------------------------------------------------
        This approach also would continue the distinction the Commission
    has drawn between WTO-covered and non-covered satellite services in
    establishing a licensing policy to implement the WTO Agreement.\4\
    ---------------------------------------------------------------------------
        \4\ The United States excluded from its scheduled WTO coverage one-
    way satellite transmission of DTH, DBS, and DARS, and submitted an MFN
    exception for those services. Communication from the United States,
    List of Article II (MFN) Exemptions. The FCC decided to apply an
    ``effective competitive opportunities'' test to applications to provide
    these services through all foreign satellite systems, whether or not
    they are systems of WTO Members. Non-U.S. Licensed Satellites providing
    Domestic and International Service in the United States, 12 FCC Rcd
    24094, 24146 (1997) (DISCO II Order). S.376 would have the effect of
    exempting a privatized INTELSAT from this test.
    ---------------------------------------------------------------------------
        S. 376 identifies two means by which the availability of the U.S.
    market would be used as incentives for a pro-competitive privatization
    of INTELSAT: (1) withholding the availability of direct access in the
    United States; and (2) prohibiting INTELSAT's provision of Ka-band,
    DTH, DBS and DARS. INTELSAT does not currently provide Ka-band, DTH,
    DBS and DARS services, but has been considering doing so with the U.S.
    market potentially playing a role in business plans. INTELSAT already
    provides through Comsat a variety of C-band and Ku-band services in the
    United States. These services are available in over 90 countries on a
    direct access basis--that is, directly from INTELSAT rather than only
    through the signatories. Upon the urging of major U.S. users of
    INTELSAT services, the FCC initiated a proceeding to consider the
    merits of requiring direct access in the United States. The FCC made no
    tentative conclusions on whether to permit direct access and the
    proceeding is pending.
        S. 376 repeals various provisions of the 1962 Satellite Act upon
    the date of enactment. We believe that all provisions of the original
    1962 Act will be unnecessary upon privatization of INTELSAT and,
    therefore, their repeal could safely take effect at that time. Pending
    privatization, however, we believe that, in view of the substantial
    responsibility placed on Comsat as the U.S. signatory in carrying out
    U.S. policy, it would be beneficial to retain certain provisions
    providing for Executive branch and FCC oversight of Comsat.\5\ We agree
    that other provisions in the 1962 Act might then be repealed
    immediately upon enactment of new legislation. These would include
    those provisions of the 1962 Act that place limitations on the
    ownership of Comsat. They also would include current requirements that
    Comsat obtain FCC approval to raise debt or issue stock. These
    restrictions do not appear to have a valid purpose for 1999 and serve
    to restrict unnecessarily Comsat's ability to remain competitive in an
    industry requiring extensive and sustained capital investment.
    ---------------------------------------------------------------------------
        \5\ We recommend that pending privatization of INTELSAT, Section
    201(a) and (c)(1)(2)(11) and Section 403 be retained in the 1962 Act.
    ---------------------------------------------------------------------------
        Finally, we suggest that the Subcommittee consider the significance
    of retaining a privatized INTELSAT in the United States. Retention of
    the INTELSAT organization in the United States may prove beneficial to
    the United States in light of the historical role of the United States
    in creating the INTELSAT system and the ongoing role of the United
    States as a leader in global satellite communications.
                                   conclusion
        Legislation, such as S. 376, based on pro-competition principles
    and on the current and projected state of satellite telecommunications
    in the world is important. The 1962 Satellite Act was created to
    achieve global communications connectivity via a then-developing
    technology and to satisfy U.S. national interest goals. Today's
    concerns are different from those that guided policymakers in 1962. The
    WTO Agreement and the accompanying Reference Paper signal that the days
    of state-sponsored service providers are numbered. We look forward to
    working together to ensure that any future privatization efforts
    promote the parallel goals of universal access and competition in
    satellite services for users everywhere. Both of these goals are
    achievable and we are eager to implement such legislation once your
    efforts have been completed.
        Privatization of INTELSAT and Inmarsat is critical to bringing
    about real competition in international satellite communications,
    particularly in the developing world. As Chairman Burns aptly stated,
    ``We need to ensure that satellite technology will continue to provide
    quality service, and we need to spur innovation. The best way to
    accomplish both of these goals is privatization. The private sector has
    always spearheaded technological leaps and I think our first steps into
    the next century should be quantum leaps deeper into the Information
    Age.''
        Your efforts, as well as the changes underway in the INTELSAT and
    Inmarsat, not only will greatly impact the future of the treaty-based
    organizations, but will set the stage for further liberalization in
    countries around the world. Congressional action will help promote an
    open, competitive marketplace.
        We look forward to continuing working with you on these important
    satellite policy issues.

        Senator Burns. Thank you very much, Mr. Porter.
        I will begin by asking a few questions. We have already
    heard from your testimony, Ms. McCann, your position on the
    ORBIT bill. You have also been very, very clear in the proper
    role of the executive branch in reviewing this privatization of
    INTELSAT. You have also given us some idea of ``fresh look.''
    If you could iterate the view of ``fresh look'' as we have not
    provided that in our legislation, and we would be interested in
    what you thought of that.
        Ambassador McCann. The Administration does not support a
    policy of ``fresh look.'' We believe that the contracts
    negotiated betweeny Comsat and its customers were negotiated by
    private parties in an environment where some competitive
    alternatives existed. In addition, Comsat has made long-term
    commitments to INTELSAT based upon those contracts. We believe
    it would be inappropriate for the Federal Government to
    overturn such contracts.
        Senator Burns. Given the existence of New Skies and the
    prospect of a privatized INTELSAT, does the administration
    believe that INTELSAT must be broken up, maybe even into
    smaller units or pieces?
        Ambassador McCann. The Administration does not support
    breaking up or divesting INTELSAT into multiple pieces,
    primarily because it is not a sellable position within the
    intergovernmental organization. We have raised this issue and
    discussed it with other member governments and signatories, and
    there is absolutely no support for it.
        Senator Burns. In the view of the Administration, how soon
    would INTELSAT reach complete privatization if Congress did
    nothing or failed to pass this bill this year?
        Ambassador McCann. We believe the privatization
    negotiations are proceeding favorably, and we would anticipate
    closure on the privatization within a couple of years.
        Senator Burns. In other words, you think that this is a
    stepping stone. Will this accelerate it?
        Ambassador McCann. I am not sure that it will accelerate
    it, because, as I said, the negotiations, the discussions, are
    well underway.
        There is some concern, based on comments some of the member
    governments have made to me and others of the U.S. Government,
    that legislative attempts to negotiate the outcome of the
    privatization might be negatively viewed by those governments.
        Senator Burns. Mr. Porter, could we have your assessment of
    the success of the spinoff of New Skies?
        Mr. Porter. Senator, I am not prepared to answer that
    question. I do not want to give you an incorrect answer. I
    would be happy to provide the answer to that in a written
    statement.
        Senator Burns. You can be just like us Senator Stevens. I
    would say ``I do not know.'' [Laughter.]
        Senator Burns. You know what? That is acceptable, too.
    Because the longer I am around here, there is more things I do
    not know than I do.
        In the opinion of the FCC, is INTELSAT's own plan for
    privatization moving too fast? Is it moving too slow? Or do you
    like the pace?
        Mr. Porter. Well, the position of the FCC, Mr. Chairman, is
    that we believe that legislation in this area would serve the
    purpose of encouraging INTELSAT to move at an even faster pace
    toward privatization. We support your efforts in that regard.
    We are not prepared to say that we believe the progress of the
    privatization of INTELSAT at this point is sufficient that,
    absent legislation, such privatization will take place at a
    rapid pace.
        Senator Burns. Senator Rockefeller.
        Senator Rockefeller. Thank you, Senator Burns.
        How is privatization, Mr. Porter, going to help consumers,
    and, most specifically, rural consumers?
        Mr. Porter. Well, privatization, we believe, will allow for
    competitors to have access to satellite services on a more
    equal footing. We believe that that will have a direct benefit
    to consumers in terms of both offering of services and offering
    of services at a price which is more affordable to consumers.
        Senator Rockefeller. That does not answer my rural
    question.
        Mr. Porter. As to rural communities, generally, to the
    extent that markets are open to greater competition, we believe
    that there would be----
        Senator Rockefeller. We do not have competition in rural
    communities, Mr. Porter.
        Mr. Porter. To the extent that there is privatization, and
    the objectives of the bill are to increase consumer choice, we
    would hope that there would be incentives on the part of some
    operators to provide service to those markets that do not
    currently receive service.
        Senator Rockefeller. Yes. I think I need probably a written
    response from you, too. Because what you need to understand is
    that rural areas do not get competition. The history of rural
    areas, as our chairman knows very well, is deregulation leads
    to no service. That can be railroads, that can be
    telecommunications, that can be airplanes. I mean deregulation
    basically means New York, Los Angeles, here we come;
    Charleston, West Virginia, Beckley, bye-bye.
        So, I am for the bill, and you are, too. We agree on that.
    But the FCC needs to give me a better answer on why it is
    convinced that this is going to help rural West Virginia and
    rural America, whether there are mountains or whether there are
    not mountains. We need to know that.
        [The information referred to follows:]

                             Federal Communications Commission,
                                        Washington, DC, April 20, 1999.
    Hon. John D. Rockefeller IV,
    United States Senate,
    Washington, DC.
    Dear Senator Rockefeller:
        As you requested, I am writing to follow up on the questions you
    asked during the March 25th hearing before the Senate Subcommittee on
    Communications on the ``Open-market Reorganization for the Betterment
    of International Telecommunications Act'' (S. 376). I appreciate the
    opportunity to provide these responses.
        You asked for supplemental responses on two questions. First, you
    asked what effect the prospective privatization of INTELSAT might have
    on global international connectivity. Second, you asked what impact S.
    376 would have on provision of telecommunications services to rural
    areas, particularly rural areas of West Virginia.
        INTELSAT is in the process of considering restructuring options,
    including privatization. As to your first question, the FCC shares your
    concern that lifeline services and universal connectivity must continue
    to be provided by a privatized entity. In my written testimony I
    suggest that one of the legislative criteria for privatization that any
    legislation should address would be continued provision of services to
    developing countries.
        In its current deliberations on privatization, INTELSAT has
    identified global connectivity and lifeline services as a core
    principle for any future restructuring. INTELSAT is considering two
    approaches to assure that a privatized entity would continue to provide
    global connectivity and lifeline services to countries that must rely
    upon the INTELSAT system. One approach is to create a small
    intergovernmental organization to monitor and ensure that the
    privatized entity continues to provide these services. The other
    approach is to include in the corporate documents of the private entity
    the obligations and commitments to continue these services. It is too
    early in the process to determine which approach may be taken by
    INTELSAT.
        As to your second question, our response is two part. To the extent
    that S. 376 focuses on the privatization of INTELSAT, there is not a
    direct and explicit relationship to the provision of services in rural
    areas of the United States. INTELSAT, through Comsat, provides space
    segment capacity for use by U.S. service providers such as U.S.
    international carriers for the provision of international
    telecommunications. INTELSAT does provide domestic services to other
    countries--including providing leased transponder service and assisting
    in developing VSAT (very small aperture terminals) based services in
    rural areas. Should INTELSAT privatize, and should it enter the
    domestic U.S. satellite services market, it would, of course, have the
    capability to provide services that could be used for telecommunication
    services in rural areas in the United States--just as domestic
    satellite service providers do today. Whether relevant services at
    appropriate prices become available to rural customers, however, will
    be a matter for the companies that provide the ground segment and the
    rural telecommunications service providers who might purchase satellite
    capacity either from INTELSAT or a distributor of INTELSAT services.
        Additionally, potential benefits to rural consumers of a Comsat/
    Lockheed Martin merger would have to be a result of service offerings
    by the new company to local telecommunication providers. The
    applications filed by Lockheed Martin and Comsat with the Commission to
    approve the first phase of the merger do not specify a commitment to
    providing services to U.S. rural areas. I cannot at this time comment
    further in view of the pendency of those applications.
        You can be assured that we agree with you on the importance of
    supporting service to unserved, rural, and economically isolated areas.
    As we recently stated in our proceeding for establishing services rules
    for mobile satellite services in the 2GHz frequency band, the
    Commission is committed to encouraging delivery of telecommunications
    services, including satellites services, to unserved and high-cost
    communities and seeking to develop cost-effective incentives for such
    services.
        Again, I appreciate this opportunity to expand upon my responses.
                Sincerely,
                                        Roderick Kelvin Porter,
                                                          Acting Chief.

        Senator Rockefeller. The second question would be in terms
    of privatization and the whole question of global satellite
    connectivity, which becomes very important and which Ms. McCann
    brought up. There are potentially some dangers for global
    satellite connectivity as you privatize. Can you speculate on
    what those might be?
        Mr. Porter. The dangers that I would anticipate, Senator,
    would be dangers that flow from a lack of competition. Beyond
    that, I am not sure I can comment.
        Senator Rockefeller. OK, thank you.
        Thank you, Mr. Chairman.
        Senator Burns. We have been joined by Senator Cleland, from
    Georgia. Nice to see you this afternoon, Senator. If you have
    an opening statement, we would sure take that statement at this
    time. If you would like to question our witnesses, you may do
    that also.

        STATEMENT OF HON. MAX CLELAND, U.S. SENATOR FROM GEORGIA

        Senator Cleland. Well, thank you very much, Mr. Chairman.
    Let me just say, to get on the right side of you, ``I do not
    know.'' [Laughter.]
        Senator Cleland. Let me just say I appreciate you, Mr.
    Chairman, for your leadership on INTELSAT privatization
    legislation. As the newest member of this committee, I do look
    forward to working with you and my colleagues on the committee
    on satellite reform.
        As an original cosponsor of ORBIT, I believe that the time
    has come for us to concentrate on passing a satellite reform
    bill that can be enacted into law this year. The current
    INTELSAT arrangement was established by the Communications
    Satellite Act of 1962. The world of 1962 was one of a raging
    cold war and the need for a Western response to the Soviet-
    built Sputnik. INTELSAT was that response, with COMSAT being
    the United States signatory to the INTELSAT Treaty.
        However, today is a radically market than that of the
    1960's. The cold war is no more, and governments are not the
    only entities with access to the means to launch a satellite.
    Many private companies compete with each other for access to
    the skies. I believe that it is time to extend this same
    competitive ability to COMSAT and INTELSAT.
        From the outset, it is important to recognize that much has
    changed since last year, when both the House and Senate
    considered radically different plans to encourage the
    privatization of INTELSAT. However, I understand that this year
    there already is an ongoing dialog, Mr. Chairman, between
    members of the House and the members of the Senate Commerce
    Committee here to reach a consensus on this legislation.
        I look forward to participating actively in such
    discussions as the legislative process moves forward. I think
    it is important to note that this year we have a new player in
    the debate over INTELSAT's privatization. Of course I am
    talking about Lockheed Martin. I would like to thank Mr. John
    Sponyoe, of Lockheed Martin, for joining us today as a witness.
    I believe that Lockheed Martin can provide us with a really
    fresh and new perspective on what is really happening in the
    satellite communications market today, particularly on the
    issue of competition.
        It is no secret that ORBIT would change the statutory
    ownership restrictions on COMSAT, thereby paving the way for
    Lockheed Martin's proposed acquisition of COMSAT. I will be
    interested in hearing from our witnesses on how this proposed
    merger will affect competition in the satellite communications
    industry. Along with the rapid privatization of INTELSAT, I
    believe that Lockheed Martin's interest to the satellite
    communications industry will enhance the already vigorous
    competition.
        Mr. Chairman, just let me conclude my opening remarks by
    saying I look forward to hearing the testimony of all of our
    witnesses, and it is my sincere hope that we can work together
    to move our laws governing the operation of INTELSAT and COMSAT
    out of the 1960's and into the 21st century.
        Thank you, Mr. Chairman.
        Senator Burns. Thank you, Senator. Do you have any
    questions for the present panel? You may continue on.
        Senator Cleland. Yes, sir. Thank you very much.
        Let me just mention one or two things. One provision of
    this legislation provides the President with the authority to
    certify whether INTELSAT has privatized in a pro-competitive
    manner before INTELSAT may have direct access to American
    markets. Either one of you can comment on this. Do you believe
    that this authority is best managed by the Office of the
    President? Is that an opinion that you share one way or the
    other?
        Mr. Porter, your judgment?
        Mr. Porter. We believe that there has to be some provision
    for the independent regulatory agency to make some assessment
    in unusual situations. Just to give you an example, in the case
    today, of WTO countries that automatically get market entry, we
    still have the ability to examine the extent to which there is
    a high risk to competition. To the extent that we have a new
    scenario, where there is no ability on the part of the
    independent agency to make an assessment in unusual situations
    about significant risk to competition, we believe that there
    may be a problem.
        So, we would say that there needs to be a provision to
    ensure that the agency continues to have that ability.
        Senator Cleland. I thank you very much.
        Ms. McCann, you are shaking your head yes?
        Ambassador McCann. I would just like to add that the
    President, as you know, has the authority to negotiate
    international agreements. We would not agree to a privatization
    of INTELSAT--that is, the Administration would not agree to a
    privatization of INTELSAT--that we believed was not pro-
    competitive. So we do not actually believe that the
    certification requirement is necessary, because we would not
    agree to privatization unless it was pro-competitive.
        Senator Cleland. Thank you.
        Either one of you can respond to this, if you like. Mr.
    Porter, you mentioned competition and privatization. Several
    large, multifaceted corporations have entered the satellite
    communications market, bringing forth new ideas and innovation
    for the benefit of consumers. Some of these commercial entities
    include GM/Hughes, Motorola and Boeing. Do you believe that new
    market entrants like Lockheed Martin will be one way to ensure
    more vigorous competition in the satellite communications
    industry?
        Mr. Porter.
        Mr. Porter. Yes, we do, Senator. We believe that one of the
    benefits of legislation that would open the market to other
    entrants is to permit for greater consumer and greater customer
    choices. We believe that that is a positive objective.
        Senator Cleland. Thank you. Ms. McCann, you are shaking
    your head yes?
        Ambassador McCann. I agree.
        Senator Cleland. All right. Well, thank you very much for
    being here today.
        Thank you very much, Mr. Chairman.
        Senator Burns. Do you have any other questions, Senator
    Rockefeller? Any questions?
        Senator Rockefeller. No, Mr. Chairman.
        Senator Burns. I know there have been a couple of Senators
    that have indicated that they want to submit some questions. We
    will get those to you. Just like I say, it is a busy afternoon
    this afternoon. We will get those to you. If you could respond
    to the Senators and the committee, I would certainly appreciate
    that.
        Senator Burns. I thank you for coming this afternoon. You
    are excused. We will move to panel two.
        Ambassador McCann. Thank you, Mr. Chairman.
        Mr. Porter. Thank you.
        Senator Burns. On the second panel this afternoon will be
    Mr. Jim Cuminale, General Counsel of PanAmSat Corporation; Ms.
    Betty Alewine, President and CEO of COMSAT; Mr. John Sponyoe,
    CEO, Lockheed Martin; and Mr. Conny Kullman, Director and CEO
    of INTELSAT.
        We welcome you here this afternoon to a discussion which
    would enlighten all of us. Again, I am sure there will be other
    questions from other Senators that are not here today.
        Mr. Cuminale, of PanAmSat, we welcome your testimony at
    this time.

       STATEMENT OF JAMES W. CUMINALE, SENIOR VICE PRESIDENT AND
                 GENERAL COUNSEL, PANAMSAT CORPORATION

        Mr. Cuminale. Thank you, Mr. Chairman, and good afternoon.
        Senator Burns. Nice to see you again, by the way.
        Mr. Cuminale. The same here. It is becoming a habit.
        Senator Burns. You are going to be in that chair long
    enough that you will be able to vote one of these days.
        Mr. Cuminale. Thank you for extending the opportunity to me
    today to speak to you on this very important issue. Before I
    get into my comments, I want to thank you, Mr. Chairman and
    Senators, for taking up what PanAmSat has long believed was an
    issue that needed to be addressed. It is of critical importance
    to us, but, more importantly, we think to a very important
    marketplace and to a very important service industry.
        The other witnesses today, unless I am absolutely
    surprised, are going to tell you that there is no monopoly. I
    am here today to tell you there is, in over half the world by
    population and geography. That is what the FCC found in the
    COMSAT Nom Dom proceeding, which had to be one of the most
    hotly contested proceedings in which I have ever been involved,
    in which pleadings and economic studies were filed by the
    pound, not the page. That is what the GAO found, in multiple
    reports it has rendered to the Congress. That is what virtually
    every other satellite operator and major customer for satellite
    services will tell you over and over again.
        The problem of satellite monopoly manifests itself both in
    the U.S. domestic market, with respect to international
    services, and of course abroad. Now, the one thing I want to
    try to convince you of today is that if you let that monopoly,
    which is today an Intergovernmental Organization with
    affiliates called signatories, simply go private, then you have
    failed, as have we. Because what you have got is that monopoly
    privatized and unregulated, which is probably the worst of all
    possible worlds.
        Now, on the U.S. side of the formula, the monopoly is in
    the form of COMSAT's control over the bottleneck facility
    INTELSAT. Since there is no other way for the customer to get
    to the destination, the U.S., by law, has effectively given
    COMSAT a tollbooth on the information highway. The FCC has
    found that this toll amounts to an average of 68 percent over
    COMSAT's INTELSAT costs, paid by the U.S. consumer, and the
    customers will tell you that toll is charged for no added
    value, for the most part, in services or facilities. If you
    eliminate that tollbooth, you create the opportunity for
    competition here, which means reduced rates for the U.S.
    consumer immediately.
        Lockheed and COMSAT are suggesting, and S. 376 would allow,
    this toll booth be sold for their benefit, to the detriment of
    U.S. consumers. The question we ask you is, how can the U.S.
    encourage, let alone demand, that other countries eliminate
    bottleneck access to their markets when we maintain that
    monopoly here?
        On the international side, other witnesses will tell you
    that we cannot dictate competitive policies to other countries.
    We are telling you that governance of the U.S. market is
    entirely within your control, and that is the way to obtain a
    pro-competitive privatization. There is absolutely nothing
    wrong with requiring that this international enterprise, that
    was formed for the public good, serve that good by fostering
    competition and rejecting exclusivity and monopoly as a
    condition to providing broad, commercial communication services
    in the U.S.
        We have suggested that the solution is the division of
    today's INTELSAT into two roughly equal competing companies.
    This is a pro-competitive privatization. It would leave each
    market with two competitors who have been in that market ready
    to compete with one another. It would not assure us of the
    ability to get into the market, but we believe, once
    competition is introduced, that is a natural outflow.
        We are open to any other solution that will assure that
    unlimited access to the U.S. market will not be available to
    any privatized INTELSAT that has retained the monopoly market
    access that is a throwback to the days of an intergovernmental
    entity. That notion, by the way, is entirely consistent with
    FCC policy that applies to all U.S. licensed operators. None of
    us is permitted to accept exclusive market access anywhere in
    the world.
        Pro-competitive privatization will not happen overnight.
    So, INTELSAT's conduct between now and then is critically
    important. That is why we need to ensure that INTELSAT cannot
    expand its privileged position prior to privatization. Those
    are the so-called stand-still provisions that we promote.
        Our principal concern with S. 376 is that it suggests and
    encourages, but does not demand or require. Experience and
    logic show that market dominance must be wrested away, not
    requested away. Congress is in a position to do that.
        Now, in the limited time available to me, I cannot take you
    through our comments to the bill, but we have submitted a
    markup of S. 376. We also have a short list of comments that
    are in plain English. Additionally, I would just like to inform
    you that a number of companies, which include GE/Americom,
    Iridium, Teledesic, Alypso, MCI-WorldComm, AT&T, Motorola,
    Final Analysis, Hughes, and of course ourselves, have worked
    together to draft a bill that all of us can support. We would
    be more than happy to provide that bill to you so you can see
    in detail what our interests would indicate.
        Thank you again, Mr. Chairman, for the opportunity to speak
    to you today.
        [The prepared statement of Mr. Cuminale follows:]
      Prepared Statement of James W. Cuminale, Senior Vice President and
                     General Counsel, PanAmSat Corporation
        My name is James W. Cuminale. I am the Senior Vice-President and
    General Counsel of PanAmSat Corporation. I have testified before this
    committee twice, the last time in September 1998 regarding S. 2365. I
    said then that S. 2365 admirably stated the policy objectives of
    creating a competitive marketplace for international satellite
    communications, but was very short on practical implementation of these
    objectives. Ironically, the current bill, S. 376, is better in stating
    the pro-competitive objectives, but even less practical in implementing
    them. Because S. 376 takes a step backward, I would like to use my time
    today to be very clear as to what is at stake here.
        Let's start by drawing a line between what are U.S. domestic
    problems, which the Congress can solve without bringing along 140 other
    countries, and what are international problems, as to which Congress
    can motivate other countries to help solve. One pressing domestic
    problem is that, unlike most other advanced nations, including the 93
    who permit direct access, the U.S. is content to leave in place a
    private monopoly on access to Intelsat: A private monopoly that
    provides no products or services, but merely exacts a toll on all U.S.
    access to the Intelsat satellite system.
        Our other domestic problem is that we continue to countenance the
    provision of commercial satellite services by an inter-governmental,
    treaty-immune satellite cartel; we even have given the Intelsat cartel
    a tax-haven home in the District of Columbia to compete with private
    satellite companies. This is not only unfair to the competitors, it is
    unfair to D.C. taxpayers. Let's begin with the tollbooth and--
             eliminate the private monopoly tax on satellite access
        In the Communications Satellite Act of 1962, Congress created a
    private monopoly in Comsat--a monopoly that allows it to collect a
    tollbooth tax on all transmissions to or from Intelsat satellites
    providing service to and from the United States. By law Comsat collects
    this private tax even though it does not own or operate the wires and
    dishes used to reach those satellites, it does not provide any service
    to carriers in connection with use of those satellites, or allocate any
    U.S. bound traffic among carriers using those satellites. Today,
    customers must write Comsat a check, including a surcharge of up to 68
    percent over Intelsat rates, each time they use an Intelsat satellite.
    This private tax comes right out of the pockets of U.S. consumers.
        This law makes no sense here in the U.S. and it is an embarrassment
    around the world because it makes it more difficult for us to argue for
    the end of access monopolies overseas. The law granting Comsat a
    private monopoly to tax U.S. consumers should be repealed immediately,
    as part of the legislation that allows Lockheed is permitted to acquire
    Comsat.
        When Lockheed Martin urges you to amend the `62 Act to let it buy
    100 percent of Comsat, they are really saying is ``let us buy Comsat's
    private monopoly tollbooth.'' It is an absurdity that the tollbooth
    exists at all. It would be unconscionable if it is permitted to be
    sold.
        Repeal of the private monopoly will not put Comsat out of business
    or take anything away from Lockheed. Comsat, and after the sale,
    Lockheed, would still be the largest shareholder in Intelsat's 20 plus
    global satellites. In fact, Comsat itself is currently the largest
    shareholder in New Skies, last year's private spin-off from Intelsat,
    which operates six former Intelsat satellites for which Comsat now has
    no right to charge a private tax on access. Obviously, Comsat felt that
    the revenue generated from use of the satellites alone was sufficient
    for it to support investment in New Skies. The same result applies to
    Intelsat--it is a sound investment for Comsat, and Lockheed, even
    without the monopoly tollbooth tax. Another thing we can do, taking
    both domestic and international actions, is--
     terminate the u.s.--sanctioned cartel providing commercial satellite
                                    service
        The Intelsat satellite cartel was established decades ago when
    global commercial satellite service was simply too risky for any one
    company to undertake. In addition, at that time there generally was
    only one large telecommunications provider, usually a government
    ministry or corporation, operating in each country. As a result, at the
    urging of the United States, an international cartel composed of one
    monopoly telecommunications provider from each country was formed to
    provide global satellite service. The United States agreed to host the
    headquarters of this new cartel tax free in the District of Columbia,
    leasing them valuable land on Connecticut Avenue for the sum of one
    dollar per year.
        Today private companies have established global and regional
    satellite networks that provide commercial service. In many countries,
    national laws have changed and there are numerous telecommunications
    providers competing in the marketplace. Yet the cartel still exists and
    it has priority access to satellite slots and below commercial market
    financing. Monopoly national telecommunications providers still meet
    today in the rent free headquarters on Connecticut Avenue, courtesy of
    the United States, to set prices and work against open market access by
    other satellite providers.
        Competitive satellite providers seek an end to this injustice.
    Domestically, the United States should repeal the headquarters
    agreement that provides diplomatic immunity, tax protection, and free
    rent to this international satellite cartel. Internationally, we
    actively should seek to terminate Intelsat by spinning off its
    remaining satellite assets to two new private companies, in addition to
    last year's New Skies spin-off. This is what a pro-competitive
    privatization is all about. Termination of Intelsat through
    privatization will not result in the loss of the satellite assets or
    financial investment by those who built the Intelsat system. As New
    Skies will demonstrate, the Intelsat satellite assets can be used to
    provide competitive services without diplomatic immunity. When there is
    a pro-competitive privatization and there is no more intergovernmental
    entity, the private successors to Intelsat will be treated the same as
    all other private regional and global satellite systems.
        The end of Intelsat as an intergovernmental entity also does not
    mean the end of Comsat. As I've said, Comsat is the largest single
    shareholder in Intelsat and the New Skies spin-off. All of the revenue
    stream from Comsat's investment in New Skies six, and Intelsat's 20
    plus satellites will remain. Moreover, Comsat has been working hand in
    glove with the world's key telecom companies for over 30 years; surely
    they can use these contacts and Intelsat's former satellites to develop
    a successful business.
        Finally, ending Intelsat will not result in the loss of satellite
    services to any nation currently receiving such service. Nor will it
    prevent service to any country that seeks satellite services. Private
    companies will provide these services, because, unlike undersea cables,
    satellite coverage is cost-effective throughout broad areas of the
    earth's surface. And if there's any doubt about the capacity of private
    companies to serve poor countries, the United States unilaterally can
    assure global satellite service. All the FCC has to do is require that,
    as a condition for access to the U.S. market, every private satellite
    operator must provide service upon request to any country that is
    within the coverage area of its satellites and has the necessary
    facilities and infrastructure to send and receive satellite service.
        Another international problem posed by the Intelsat system is that
    it makes it more difficult for private competitors to get market access
    to countries that are Intelsat members. Therefore--
           the united states should act to ensure fair market access
        One of the greatest problems posed by the continued existence of
    Intelsat as a government-sanctioned cartel providing commercial
    services is that the members of the cartel, the national
    telecommunications providers, have a direct financial interest in
    requiring use of the Intelsat system. As a result, these national
    providers work through Intelsat to block access to their countries by
    services using competing private satellite services.
        To ensure that the privatized entities created through the
    termination of Intelsat do not impede market access, the United States
    should use access to the U.S. market as leverage to assure that U.S.
    companies have access to foreign markets. This leverage should be
    applied to the privatized spin-offs from Intelsat. The FCC should allow
    access to the United States market by a privatized spin-off only if it:

              (1) is incorporated as a private company in a country which
            has signed the World Trade Organization Basic Agreement on
            Telecommunications Services;
              (2) does not have any employees, directors, officers, or
            assets in common with other privatized Intelsat spin-offs or
            ownership by monopoly telecom companies that control access to
            their home markets; and
              (3) has not obtained satellite slots, or contracted for
            satellites after
            January 1, 1999, other than by using the same satellite
            registration process and financial terms available to all other
            private commercial satellite service providers.
                            some comments on s. 376
        Measured against these goals, S. 376 simply does not go far enough.
    It not only keeps the private monopoly tollbooth, it permits Lockheed
    Martin to buy Comsat's right to tax U.S. consumers. It does nothing to
    end Intelsat's tax-free status in the District of Columbia or its other
    legal immunities in the U.S. The bill doesn't end Intelsat, it merely
    threatens the end of U.S. participation in Intelsat, while still
    creating many back-end exceptions for continuing U.S. participation.
    The bill ousts the FCC from any meaningful determination as to what is
    a pro-competitive privatization, improperly substituting the President
    for the independent licensing agency. And the bill does not use the
    leverage of U.S. market access to open up markets overseas--access that
    is blocked by Intelsat members with the active support of Intelsat.
        For over a decade, PanAmSat has been calling for the Congress to
    step in and correct the legislative framework for the international
    satellite industry. The time is now.

        Senator Burns. Thank you.
        Next we will hear from Ms. Betty Alewine, President and CEO
    of COMSAT.

     STATEMENT OF BETTY C. ALEWINE, PRESIDENT AND CHIEF EXECUTIVE
                      OFFICER, COMSAT CORPORATION

        Ms. Alewine. Thank you, Mr. Chairman and members of the
    subcommittee. On behalf of COMSAT Corporation, it is a
    privilege to appear again and present our views this time on S.
    376.
        Let me begin by saying that we believe that this bill is a
    balanced and constructive proposal that should serve as the
    basis for revision of the 1962 Satellite Act.
        Now, having said that, Mr. Chairman, when I was growing up
    in Mississippi, I heard a lot of stories about fish that were
    this big. These days, I hear a lot of stories about COMSAT and
    how we are this big. Unfortunately, those stories are just
    about as truthful as the fish stories that I used to hear. Of
    course, it is easy to exaggerate when you are talking about the
    fish that got away. But in COMSAT's case, you can measure us
    and you can weigh us. Whenever policymakers do that based on
    fact, they usually realize that the whoppers people are telling
    are just about as phony as those fish stories.
        Now, what these whoppers have in common is the claim that
    COMSAT is a monopoly. In fact, our market share is less than 20
    percent for voice and data, and less than 35 percent for video.
    Where I come from, you are not a monopolist if 80 percent of
    the market is served by your competitors. But you do not have
    to take my word for it, because last April, almost a year ago,
    after looking at the issue for a full year, the FCC ruled that
    COMSAT had no monopoly power in any major market.
        Now, our opponents try to spin that FCC finding by claiming
    that COMSAT still charges monopoly rates for traffic to
    countries where there are no competitive choices to INTELSAT,
    the so-called thin routes. They go on and on about how many
    thin route countries there are. But what they do not tell you
    is that these countries account for only 7 percent of our
    traffic, and less than 2 percent of all of the circuits used by
    U.S. carriers for their international traffic.
        Last year, COMSAT's total revenue from thin route traffic
    was less than $19 million. This is in an industry where total
    U.S. revenues are about $19 billion. For occasional use
    television, where we supposedly have a monopoly in 142
    countries, our thin route revenue was $500,000. Our prices on
    thin routes are the same as in the most competitive markets. We
    serve thin routes. We go to the rural areas of the world to
    meet our Universal Service obligations, not to earn monopoly
    profits.
        Yet our competitors claim that this tiny, tiny portion of
    our business poses such an anti-competitive threat that the
    Congress of the United States should impose service
    restrictions that will kick us out of the entire market.
        Another whopper you often hear is that COMSAT collects a
    68-percent markup over the rates that it pays to INTELSAT. In
    fact, both the FCC and the National Economic Council have
    stated that the 68-percent figure is misleading, because it
    does not include all the costs that COMSAT incurs in providing
    service. Our actual margin is about the same as our
    competitors. There is nothing monopolistic about that.
        Still another whopper is that COMSAT has monopoly access to
    INTELSAT. It is true that COMSAT is the exclusive service
    provider on the INTELSAT capacity that we own. But providing
    service over the facilities that we paid for does not give us a
    monopoly. The truth is that consumers right now have more
    choices than ever. We face intense competition from fiber cable
    operators, from other satellite systems, and even from other
    INTELSAT signatories.
        Another story that you have heard is that COMSAT's
    customers should be able to nullify our contracts because they
    are anti-competitive. The nice name given to this idea is
    ``fresh look.'' In fact, it is standard industry practice for
    customers to agree to long-term contracts in order to obtain
    lower rates. No different than many of us do every day with
    everything from health club memberships to magazine
    subscriptions.
        Both the FCC and a U.S. district court looked at COMSAT's
    long-term contracts and found that they do not impede
    competition. The FCC noted that these contracts do not lock up
    the market, because they cover less than 20 percent of the
    traffic. We applaud
    S. 376 for expressly rejecting this egregious idea.
        The last whopper that I want to address is that COMSAT
    wants to sell its monopoly to Lockheed Martin. All I can say is
    that when a company with no market share buys a company with
    less than 20 percent market share, that is no threat to
    competition. COMSAT's merger with Lockheed Martin will increase
    competition, and that is exactly why our competitors want to
    stop it. They hope to dominate the market themselves, and
    afraid that this merger will upset their plans.
        The reason for all of these fish stories is simple: If
    there is no monopoly, there is no basis for the punitive
    legislation that our competitors favor, no basis for service
    restrictions for direct access, for nullifying our contracts,
    or for blocking our merger with Lockheed Martin. That is why we
    are pleased that S. 376 is based on reality in the market today
    versus rhetoric.
        S. 376 creates a very powerful incentive to expedite the
    INTELSAT privatization. It modernizes the Satellite Act and it
    looks forward based on the actual market conditions that exist
    today, rather than looking backward at conditions that no
    longer exist.
        Mr. Chairman, a much more detailed discussion of COMSAT's
    views on S. 376 is contained in my written testimony, which has
    been submitted for the record. I would like to thank you and
    each of the members of the committee today for holding this
    hearing, and I would be pleased to answer your questions. Thank
    you.
        [The prepared statement of Ms. Alewine follows:]
       Prepared Statement of Betty C. Alewine, President and CEO COMSAT
                                  Corporation
        Mr. Chairman, and members of the Subcommittee: On behalf of COMSAT
    Corporation (``COMSAT''), it is a privilege to appear today and present
    COMSAT's views on S. 376, the ``Open-market Reorganization for the
    Betterment of International Telecommunications Act'' (``ORBIT''), which
    amends the Communications Satellite Act of 1962 (the ``Satellite
    Act''). I last testified before this Subcommittee seven months ago and
    urged that Congress revise the Satellite Act promptly. Since then, the
    need for legislation has become even greater for three principal
    reasons.
        First, the full privatization of the business operations of
    Inmarsat is set for next month. However, a change in the law is
    required for the U.S. government to continue its participation in
    overseeing the provision of vital Global Maritime Distress and Safety
    Services (``GMDSS'') by Inmarsat.
        Second, the INTELSAT Assembly of Parties is scheduled to meet in
    October 1999, to consider various privatization proposals. Enactment of
    legislation before then will provide U.S. negotiators with clear
    guidelines and objectives for a pro-competitive outcome; and entering
    into that international meeting with a unified position will enhance
    U.S. prospects considerably.
        Third, the approval process at both the Justice Department and the
    FCC for Lockheed Martin Corporation's (``Lockheed Martin'') proposed
    acquisition of COMSAT is underway and could be finished in a few
    months. However, the obsolete provisions in the Satellite Act that
    limit ownership of COMSAT stock must be removed to complete the
    transaction.
        Senator Burns, with the early introduction of S. 376, you and the
    co-sponsors of the bill are to be commended for taking the steps
    necessary to address all these matters. S. 376 will ensure that, after
    Inmarsat is privatized, the U.S. government has the authority to
    continue its role in the provision of GMDSS services. It also will
    allow the United States to be a positive and constructive participant
    in the privatization of INTELSAT. In addition, it will promote
    competition among U.S. satellite companies with long overdue
    deregulation. All of these measures in combination will bring enormous
    benefits to American consumers. Satellite legislation is now poised to
    move quickly this year. Let me explain why.
        We do not begin today's hearing with a blank slate. Much was
    learned about the industry and the forces driving international
    satellite reform during the 105th Congress. The one thing that did
    emerge clearly from the last session is that the Congress and the
    Administration share identical objectives--to privatize INTELSAT in a
    pro-competitive manner and to update the laws regulating the U.S.
    satellite industry to reflect the market conditions of today, rather
    than the state of affairs that existed decades ago after the launch of
    Sputnik. The ``October Sky'' of 1999 bears little resemblance to that
    of 1962 when Congress passed the Satellite Act. Today, the debate
    centers on the specific measures necessary to complete the
    privatization of INTELSAT (a process already well underway), and on
    whether COMSAT's rivals need to have Congress legislate a particular
    market outcome once the Satellite Act's restrictions on COMSAT are
    removed.
        COMSAT submits that S. 376 strikes the right overall balance. It
    creates powerful economic incentives to expedite INTELSAT
    privatization, while minimizing unilateral dictation of specific terms
    and conditions to other nations. At the same time, the bill ensures
    that the interests of U.S. consumers are served by the restructuring
    plan ultimately adopted by INTELSAT. U.S. market access is predicated
    on a Presidential certification that the final privatized structure of
    INTELSAT will not distort competition, as defined by factors clearly
    set forth in the statute. In the event of undue delay, the bill
    provides for U.S. withdrawal from INTELSAT if a final decision by its
    member nations is not attained by January 1, 2002.
        On the domestic side, S. 376 removes all the antiquated provisions
    of the Satellite Act and makes large strides toward regulatory parity
    for all competitors. The bill removes the ownership restrictions of the
    1962 Satellite Act that have prevented COMSAT from merging with, or
    being acquired by, others. This will permit the Lockheed Martin merger
    to go forward, subject to Justice Department and FCC approvals. While
    COMSAT does have concerns with certain provisions of the bill, which I
    will elaborate upon, it is a sound bill. It is a pro-competitive,
    market-oriented and deregulatory privatization measure. It promotes
    user choice and consumer interests, protects the needs of the national
    security community and advances U.S. trade interests.
        For these reasons, S. 376 represents a major milestone in this
    debate. Based on the Subcommittee record and recent administrative and
    judicial decisions, the bill accurately reflects the current state of
    competition in the international satellite industry, appropriately
    relies on market forces and imposes government regulation only where
    absolutely necessary. The bill recognizes, as the FCC did last year,
    that COMSAT's position in the international telecommunications
    marketplace is no longer dominant, and that COMSAT has no monopoly
    power in any major service or geographic market it addresses. The FCC
    has recently held, after extensive analysis, that these major markets,
    comprising 93 percent of COMSAT's business over INTELSAT, are subject
    to ``substantial competition.''
        Only on the so-called ``thin routes''--that is, countries where
    COMSAT carries out its universal service obligations--is the company
    regulated as a dominant carrier. These thin routes in the aggregate
    account for only 7 percent of COMSAT's traffic, and about $19 million
    in revenue of the nearly $19 billion market for U.S. international
    telecommunications services (.001 percent!). It also is important to
    note that COMSAT's rates for these thin routes are the same as, or
    lower than, the rates for the markets where we face the most vigorous
    competition. So it can be said without equivocation that COMSAT
    delivers the benefits of competition everywhere. See Attachment 1.
        Some competitors attempt to mask this reality by pointing to a
    large number of thin route countries for some marginal COMSAT services.
    For example, one competitor frequently cites as evidence of COMSAT's
    enormous monopoly that we are the exclusive provider of occasional use-
    TV satellite capacity to 142 thin route countries. We have actually
    never even received service requests from our customers to more than
    one-third of these countries for many years. Moreover, the Subcommittee
    should be aware that this enormous COMSAT ``monopoly'' generated all of
    $500,000 in revenue in 1998.
        COMSAT secures capacity on these thin routes in furtherance of its
    universal service commitments, not because of the negligible revenue
    generated. For competitors to urge the Congress to bar COMSAT from
    competitive growth markets because we alone serve thin routes makes
    little sense--except to competitors who search for any conceivable way
    to keep COMSAT hamstrung. The sponsors of S. 376 should be commended
    for rejecting this market-distorting rhetoric and crafting legislation
    based on actual competitive conditions.
        COMSAT's monopoly over satellite communications to and from the
    United States ended in 1984, when separate satellite systems were
    authorized to compete with COMSAT and INTELSAT. The international
    telecommunications landscape has changed dramatically since then, and
    COMSAT is now just one firm among many in a marketplace characterized
    by vibrant, facilities-based competition. We face strong challenges
    daily from other satellite companies such as Hughes/PanAmSat, Loral, GE
    Americom, Columbia and Teleglobe Canada. In addition, customers
    requiring international transmission capacity are by no means tied to
    satellite technology. Over the last decade, high-capacity, undersea
    fiber optic cables have actually become the dominant medium for the
    provision of international voice and data services. These cables
    directly connect the U.S. to over 125 countries, including every market
    of significance, with more fiber cables being added on a routine basis.
    For these services, COMSAT competes daily against multi-billion dollar
    carriers such as AT&T, MCI WorldCom and Sprint. See Attachment 2.
        Last year, AT&T generated over $8 billion in international service
    revenue, and is now about to partner with British Telecom in a $10
    billion global telecommunications venture. MCI Worldcom had
    international service revenue of over $4 billion, and Sprint has a
    multi-billion dollar international enterprise as well. To put all this
    in perspective, COMSAT's entire INTELSAT service revenue in 1998 was
    only $266 million. Pleas of these competitors to have Congress
    legislatively nullify our non-exclusive, carrier contracts because
    COMSAT wields ``monopoly power'' over them are ludicrous. These
    companies have enormous bargaining power, and do not need the help of
    Congress to renegotiate their contracts with COMSAT, a pattern they
    have followed for years.
        As described below, COMSAT's market shares have declined
    dramatically in the last decade to levels as low as an average of 12
    percent for voice and data services to countries with the heaviest
    traffic volumes (``thick routes''), and an average of no more than 35
    percent in multi-carrier international video markets. During the same
    time, many of COMSAT's satellite competitors have enjoyed enormous
    success. Later this year, the PanAmSat satellite fleet will surpass
    INTELSAT in size by a significant margin, with 24 satellites in-orbit
    compared to 19 for INTELSAT.
        PanAmSat also touts to Wall Street a ``non-cancelable'' backlog of
    service contracts of $6.3 billion, compared to only a $700 million
    contract backlog for COMSAT. Loral, with its acquisitions of the
    satellite fleets of AT&T Skynet, Orion and Satmex, is another
    formidable competitor. In short, there can be no dispute that the
    competitive marketplace is working. Nor can claims be taken seriously
    that COMSAT has special privileges and advantages that have allowed it
    to maintain a monopoly position. If we did, our competitors would not
    be multiplying and flourishing at the rate that they are.
        The truth of the matter is that, absent rapid privatization of
    INTELSAT and modernization of the Satellite Act, competition will
    diminish. INTELSAT's structure must be privatized if it is to respond
    to customer demands with the simplicity and speed of its competitors.
    COMSAT's investment in INTELSAT is at risk without these fundamental
    changes. COMSAT itself is without the wherewithal in the long run to
    stand alone against the vertically-integrated GM/Hughes/PanAmSat,
    Loral/Orion/Satmex, and foreign global and regional satellite systems,
    not to mention the giant cable consortia led by AT&T and MCI Worldcom.
        That is the reality of today's international telecom markets.
    COMSAT's announced plans to merge with Lockheed Martin are, in large
    part, an effort to meet these competitive challenges. This union will
    combine COMSAT's established satellite and networking business with
    Lockheed Martin's space industry expertise, technology, resources and
    capital to create a more effective competitor in the global
    telecommunications services market. In the end, all the hue and cry
    over the need to restrict COMSAT services, abrogate COMSAT's contracts,
    and minimize its retail business through direct access, is nothing more
    than an effort to avoid that prospect. In contrast, S. 376 will enable
    American consumers to be the true beneficiaries of robust and fair
    competition.
        Before turning to the specific provisions of S. 376, I would like
    to provide the Subcommittee with some additional relevant background on
    COMSAT, and more detailed information on the industry participants
    actively involved in this legislative debate. This material is
    essential to address some misinformation about COMSAT and various
    criticisms being raised about certain provisions in S. 376, criticisms
    which simply do not withstand analysis.
    COMSAT and the Communications Satellite Act of 1962
        In 1962, pursuant to the Satellite Act, COMSAT was created as a
    private American corporation with NO government ownership, subsidies,
    or guarantees. COMSAT is owned by approximately 33,000 shareholders who
    hold 53 million shares of stock traded on the New York Stock Exchange.
    While its name is well known as the pioneer of commercial satellite
    communications, it is actually a small company, with just over $600
    million in total revenue in 1998.
        COMSAT was established to carry out the national policy of creating
    and operating a global satellite communications system in partnership
    with other nations. That satellite system is known as INTELSAT. The
    Congress decided that the United States would participate in this
    global system via COMSAT through private capital invested by ordinary
    Americans. In fact, the Satellite Act directed that the stock initially
    offered by COMSAT ``be sold at a price not in excess of $100 for each
    share and in a manner to encourage the widest distribution to the
    American public.''
        Working to fulfill the mandate of the Satellite Act, COMSAT has
    been successful on a historic scale. COMSAT and INTELSAT today provide
    universal coverage connectivity on a non-discriminatory basis to
    developed and developing countries throughout the world. COMSAT and
    INTELSAT are important components of America's telecommunications
    infrastructure and one of the main reasons why the United States exerts
    technological leadership--dispersed among many companies--in the field
    of satellite communications.
        The satellite facilities COMSAT invested in are vital to both the
    civilian and military functions of the U.S. Government. They enable
    American businesses to serve global markets and manage global
    enterprises. COMSAT is also dedicated to the universal service mission
    of the Satellite Act, and the company carries traffic to foreign points
    that do not generate sufficient volume for international carriers to
    construct their own cable facilities, and/or which other satellite
    firms opt not to serve at all. Moreover, and unlike any other U.S.
    satellite company, COMSAT offers non-discriminatory access at
    competitive rates to its facilities to all comers, including its
    competitors.
        The work being done at COMSAT Laboratories further contributes to
    keeping the U.S. at the forefront of space communications technology,
    including applications to meet national defense requirements. COMSAT
    holds hundreds of patents which are the result of the company's
    investments in research and development. Those innovations have made
    satellites an integral part of today's global information
    infrastructure. To cite the latest example, COMSAT Labs just developed
    a remarkable new technology, known as Linkway 2000TM, which
    allows U.S. carriers and Internet Service Providers to transmit digital
    data streams with the same speed, quality, and reliability as fiber
    optic cables, using a variety of network platforms incorporated in one
    device. The full potential of the Internet can now be made available to
    many developing nations and remote locations lacking adequate
    terrestrial infrastructure--all via COMSAT satellite technology.
    State of Competition
        When COMSAT launched its first satellite in 1965, it was the sole
    provider of international satellite communications services. As a
    monopoly, the company was subject to FCC reviews of its investments and
    had a regulated rate base on which its earnings were strictly limited.
    However, the days of monopoly are long gone!
        In November 1984, President Reagan signed a Presidential
    Determination that opened the market for international satellite
    communications to alternative satellite systems. Since then, a healthy
    U.S. satellite industry has developed, with strong facilities-based
    rivals like Hughes/PanAmSat, Loral, Columbia, GE Americom and foreign
    systems--all competing with COMSAT in the U.S. for the provision of
    international satellite capacity. Space Business News reported this
    February that ``more satellites have already been launched in the
    1990's than in the preceding three decades combined.''
        The transition of the U.S. international satellite industry from
    its single system origins to today's highly competitive environment is
    a remarkable success story. An article in the August 1998 edition of
    Via Satellite captures the current state of competition quite well:

              The United States is home to many of the world's leading
            private global satellite operators. The Hughes/PanAmSat merger
            has created by far the largest of such companies. GE Americom
            and Loral Skynet are expanding beyond their traditional U.S.
            market into Europe, Latin America and the Asia Pacific. These
            companies are building fleets that rival INTELSAT's in size, at
            the same time that INTELSAT is losing market share and spinning
            off five of its spacecraft in a new private venture.

        The facts underlying this assessment are even more revealing. For
    instance, from a single satellite launched in 1988, the Hughes/PanAmSat
    system is currently in the midst of a $2 billion expansion program to
    increase its fleet to 24 satellites by the end of 1999, with the
    company scheduled to launch a satellite every two months between now
    and then. PanAmSat has a backlog of $6.3 billion in firm contract
    orders and had $737 million in revenue in 1998. Today, PanAmSat alone
    has a market capitalization several times larger than that of COMSAT.
        In contrast, INTELSAT divested part of its fleet in 1998, thus
    reducing its size from 24 to 19 satellites. Because COMSAT, in turn,
    must share capacity on INTELSAT satellites with many other Signatory
    owners, and because much of the INTELSAT system is devoted to non-U.S.
    service (e.g., Asia--Europe), the total capacity now available to
    COMSAT to serve the U.S.-international market in competition with
    PanAmSat, Loral and others amounts to the equivalent of just 3--4
    satellites. Moreover, COMSAT's backlog of firm contract orders is nine
    times less than that of PanAmSat, and COMSAT's 1998 revenue from the
    INTELSAT business was only $266 million.
        As noted, Loral is another major U.S. company competing to offer
    international satellite services. As a result of its $1.5 billion
    acquisition of AT&T's Skynet satellites, the Orion system, and a
    majority share of the Mexican Satmex satellites, Loral has 10
    geostationary satellites in orbit, and is planning to expand its fleet
    to 15--17 satellites by 2001. GE Americom, Teleglobe, and Columbia
    Communications are also vying to carry voice, video, and data traffic
    via satellite between the U.S. and overseas destinations. In fact,
    Teleglobe recently announced a new partnership with EUTELSAT (a
    European satellite firm with 14 satellites in-orbit) to provide
    additional transatlantic satellite services to and from the United
    States.
        Given the state of the marketplace and the billions of dollars
    being invested in competing systems (and considering COMSAT's declining
    market shares), no credence can be given to the claims being made that
    COMSAT has unfair advantages which are harmful to competition, or that
    separate satellite systems suffer from foreign market access problems.
    According to the FCC, ``PanAmSat provided full-time video service to
    139 countries''--only four countries shy of the entire INTELSAT
    membership. The harsh reality is that, as a member of an
    intergovernmental treaty organization structured for a much earlier
    era, COMSAT has limited ability to participate in the growth of this
    industry. Indeed, in April 1998, when the FCC granted COMSAT non-
    dominant status in 93 percent of its markets, the agency observed that
    ``over the last three years, PanAmSat's and Hughes' satellites have
    captured 70 percent of the growth in international video traffic to and
    from the U.S.''
        Competition to INTELSAT and COMSAT is about to intensify even more
    with a new generation of satellites that will utilize the super-high
    frequency Ka-band. The FCC has authorized thirteen Ka-band systems,
    comprising some 73 satellites, which will offer a variety of data and
    multimedia applications. These systems are not speculative. On March
    17, 1999, The Wall Street Journal reported that the Board of Directors
    of General Motors Corporation--the parent of Hughes/PanAmSat--approved
    the infusion of $1.4 billion to begin building the Hughes Ka-band
    Spaceway Satellite System, also noting that this ``funding decision
    essentially commits the satellite maker and service provider to spend a
    total of $4 billion on the largest first phase of the project.'' Other
    firms planning to provide similar broadband satellite services include
    Loral, GE Americom, Lockheed Martin and Teledesic (backed by Motorola
    and Boeing). According to the FCC, these new satellites should help
    increase worldwide revenues from commercial fixed and mobile satellites
    from the 1996 level of $9.4 billion to $37.7 billion in the year 2002.
    Again, COMSAT's revenue from its INTELSAT operations in 1998 was just
    $266 million.
        Satellite capacity, however, is only part of the market for
    international telecommunications services available to consumers today.
    Since 1988, undersea fiber optic cables have far and away replaced
    satellites as the dominant medium for international telephone and data
    transmission. This dramatic increase in competition from undersea
    cables resulted from the elimination in 1989 of regulatory protections
    designed to promote international satellite communications, and from
    extraordinary developments in fiber optic technology. The capacity and
    quality of fiber optics is exponentially greater than the old copper
    analog cables. The first trans-Atlantic cable, TAT-1, was laid in 1956
    and had the capacity to provide only 44 voice-grade circuits. TAT-12/
    13, which entered service in 1996, has the all-digital capacity to
    transmit 120,000 voice conversations (or an equivalent amount of data).
    That is 2\1/2\ times the capacity of the largest INTELSAT satellite,
    and is already considered old technology.
        Due to rapid deployment of undersea fiber cables, there is more
    than enough unused international transmission capacity now available to
    absorb all of COMSAT's current traffic. Today, the United States has
    direct fiber connections to over 125 countries, and these cable systems
    continue to proliferate and with even greater capacity. For example,
    CTR Holdings L.P., is in the midst of a fiber-cable project (known as
    Project Oxygen) that will have 265 landing points in 175 countries and
    cost $14 billion. On March 15, 1998, the FCC licensed this private
    cable company to build the first phase ``linking together a total of 78
    countries and locations on all continents except Antarctica.'' Cable
    installation is scheduled to begin later this year.
        Another cable firm, Global Crossing, Ltd., has raised $3 billion
    and is currently laying fiber links from North America to Japan,
    Central America and the Caribbean. The initial installed capacity on
    Global Crossing's first transatlantic cable Atlantic Crossing (AC-1)
    can handle more than 480,000 simultaneous two-way conversations.
    Service commenced in May 1998. By the end of 1998, Global Crossing had
    already reported contract sales for capacity exceeding $1 billion. And
    just last week, Global Crossing entered into an agreement to purchase
    Frontier Corporation--one of the nation's largest providers of domestic
    long distance service--for $11.2 billion. The combined companies will
    have a market capitalization of about $30 billion and $4 billion in
    revenue for 1999.
        There is no question that competition from separate satellite
    systems and fiber optic cables has changed the global
    telecommunications marketplace beyond what could have been imagined by
    the creators of the 1962 Satellite Act. In every significant market
    segment that COMSAT serves via INTELSAT, the FCC has found that
    COMSAT's market share has dropped well below monopoly levels. COMSAT's
    share of the international switched voice and private line market has
    fallen from approximately 70 percent in 1987 to less than 20 percent
    today, and to less than an average of 12 percent in the most heavily
    trafficked geographic and service markets. COMSAT's share of the
    international video transmission market has declined from nearly 80
    percent in 1993 to approximately 35 percent today. Cables and separate
    satellite systems carry the majority of traffic in every major
    geographic market. See Attachment 3.
        Even in the low volume geographic markets (the ``thin routes''
    comprising approximately 2 percent of the circuits utilized by U.S.
    international carriers), U. S. consumers are not confined to COMSAT to
    reach those countries using the INTELSAT system. Users can also turn to
    the Canadian participant in INTELSAT, Teleglobe, which the FCC has
    authorized to operate in the U.S. As a practical matter, this means
    that COMSAT's $19 million thin route business is also subject to real
    competition.
        Teleglobe is now the world's second largest owner of fiber optic
    cable capacity as well, and it recently merged with the 5th largest
    U.S. long distance carrier, Excel Communications. That uncontested
    merger was valued at $7 billion (compared to $2.7 billion for Lockheed
    Martin-COMSAT) and will create a global, integrated service provider
    with access to 240 countries. Teleglobe has opened offices in Chicago,
    Miami and San Francisco, and announced in January that it ``has grown
    to service more than 100 domestic carriers in the U.S., including
    several Regional Bell Operating Companies,'' and that it also provides
    service to U.S. television broadcasters ``including ABC, CBS, CNN and
    Fox News.''
        In February 1999, Teleglobe expanded its U.S. satellite operations
    by entering into a capacity agreement with EUTELSAT. As reported in
    Satellite International, ``EUTELSAT has secured a link to the coveted
    U.S. market without having to deal with the thorny issue of obtaining a
    U.S. license. Under the terms of the deal . . . EUTELSAT will be able
    to offer other customers access to Teleglobe's teleports in New York,
    Washington, D.C. and Montreal.'' This alliance creates yet another
    satellite alternative to COMSAT for U.S. consumers to reach overseas
    markets.
    Deregulation
        In April 1998, the FCC ruled that COMSAT is not a monopoly, but
    rather a single competitor in an industry characterized by substantial,
    facilities-based competition. Specifically, the Commission reclassified
    COMSAT as a ``non-dominant'' carrier and found that:

              Because of the unprecedented growth in the industry . . .
            COMSAT is no longer the sole commercial provider of
            international switched voice and video transmission services
            via satellites. Today, other satellite companies effectively
            compete against COMSAT and the INTELSAT satellite system . . .
            . In the future, new voice, data and video services authorized
            by the Commission will be available to consumers via low Earth
            orbiting, non-geosynchronous satellite systems. . . . These new
            services will compete against existing satellite services,
            thereby providing consumers with more choice for their
            international telecommunications needs. Moreover, the
            transoceanic capacity and geographical coverage of fiber-optic
            cables has burgeoned since 1985, and they now provide a highly
            competitive transmission alternative for providers of
            international switched voice and private line services. The
            emergence of competitors to COMSAT has likewise increased the
            supply of satellite transmission capacity for the provision of
            these services.

    Based on a detailed economic analysis, the FCC then determined that
    COMSAT no longer has monopoly power in the product and service markets
    accounting for over 90 percent of COMSAT's business on the INTELSAT
    system--switched voice and private line service to thick route markets,
    full-time video service in all geographic markets, and occasional-use
    video service in the multiple carrier market.
        Hopefully this will put to rest, once and for all, the seemingly
    never-ending claims that COMSAT's exclusive access to INTELSAT creates
    a monopoly. COMSAT's exclusive right to use the space segment capacity
    it paid for is no different than the exclusive right enjoyed by other
    satellite providers to sell services on the facilities they paid for.
    That alone does not make a monopoly. The primary determining factors
    are whether other suppliers offer consumers substitutable choices and
    whether consumers are able to exercise those choices. There can be no
    doubt that when over 80 percent of international voice traffic to and
    from the U.S. is being placed on non-COMSAT facilities, and over 65
    percent of international video traffic is placed on non-COMSAT
    facilities, COMSAT's exclusive access to INTELSAT is not a monopoly.
    See Attachment 4.
        With all this facilities-based competition, in February 1999, the
    FCC further extended its deregulation of COMSAT. The agency eliminated
    rate of return regulation on COMSAT's thin route business, replacing it
    with a far less onerous form of incentive regulation. In connection
    with that decision, COMSAT pledged to charge consumers of its thin
    route services the same rates we charge on the most highly competitive
    routes (``thick routes''), and not to raise its prices in the future.
    COMSAT also committed to annual 4 percent reductions for voice service
    on those thin routes through 2002. I am aware of no other carrier
    making similar commitments to its customers, and this is certainly not
    the behavior of an alleged monopolist. As the FCC recognized, COMSAT's
    proposal on thin route pricing was driven by the ever increasing levels
    of competition in the global telecommunications markets in which it
    operates.
    Progress on INTELSAT Privatization
        Despite the claims of its competitors, INTELSAT is not immune from
    the dynamic nature of market competition. Because COMSAT is the largest
    investor in INTELSAT, and a private U.S. corporation accountable to its
    shareholders, we could not stand by and allow COMSAT's investment to
    diminish in value as competition significantly intensified. As
    mentioned, the governance and financial structure of an
    intergovernmental treaty organization are simply not suitable for
    today's fast-paced environment. Therefore, nothing short of full
    privatization, in COMSAT's view, will suffice.
        It has taken significant ramp-up time to convince 142 other nations
    to proceed down this path, especially due to concerns about maintenance
    of universal connectivities to less developed countries by a private,
    for-profit firm. Nevertheless, major progress toward achieving this
    goal has already been made. INTELSAT itself divested a quarter of its
    fleet (five in-orbit satellites and one under construction) in November
    1998 and created a new, independent, fully private global satellite
    company, New Skies Satellites, N.V. INTELSAT's member nations also
    unanimously agreed at that time that the New Skies partial
    privatization would only be the ``first step'' in reforming INTELSAT.
    Building on the momentum of New Skies, INTELSAT next elected a new
    Director General and CEO who ran on a platform of full privatization,
    and subsequently has set a goal to reach such an agreement by INTELSAT
    member nations by the end of 2001.
        Demands by some competitors that a pro-competitive privatization
    requires yet another ``break-up'' of INTELSAT into three or four more
    ``successor entities'' lack any rational basis. U.S. legislation
    calling for the break-up of INTELSAT will not advance the privatization
    process, but is more likely to generate backlash and delay. But most
    important, such a drastic measure is not necessary to promote
    competition.
        It bears re-emphasis that, in the aggregate, the INTELSAT capacity
    devoted to serving the U.S. market amounts to the equivalent of less
    than four satellites. The dismemberment of INTELSAT, as Hughes/PanAmSat
    advocates, really should be seen as an effort to fragment INTELSAT into
    a number of weaker systems that will not be able to compete with
    Hughes/PanAmSat effectively. As noted above, the Hughes/PanAmSat global
    satellite fleet will surpass all of INTELSAT in size by the end of this
    year. Given this success, the vigorous efforts of Hughes/PanAmSat to
    have the Congress legislate the dismantling of its major competitor
    into a number of marginal systems is completely self-serving. Other
    satellite competitors, like Loral and GE Americom, are quickly
    approaching INTELSAT in size as well. Moreover, foreign entities, like
    British Telecom, Teleglobe and EUTELSAT, are also serving the U.S.
    market, not to mention the fiber cable consortia controlled by AT&T,
    MCI Worldcom, and others.
        There are, however, sound means for the Congress to ensure a pro-
    competitive privatization, and S. 376 establishes just the right
    framework. INTELSAT will not be given direct access to the U.S. retail
    market unless the President of the United States determines that it has
    been privatized in a pro-competitive manner. That should be a more than
    adequate safeguard to protect competition in U.S. markets. Furthermore,
    the service restrictions embodied in S. 376 will provide a powerful
    impetus for rapid privatization, without impairing U.S. users, the
    national security or U.S. trade commitments. Accordingly, the
    Subcommittee is respectfully urged to reject any thinly disguised
    efforts to require a restructuring that is market-distorting and anti-
    competitive in effect, as Hughes/PanAmSat advocates.
        While INTELSAT has partially privatized and is in the midst of
    completing the process, another international satellite organization,
    Inmarsat (which provides satellite services to maritime, aeronautical
    and land mobile users) has moved rapidly to full privatization. COMSAT
    is the largest owner of Inmarsat, and for the same reasons as with
    INTELSAT, we vigorously pursued a full privatization agenda with the
    other 83 member countries of that treaty organization.
        COMSAT is pleased to report that on April 15, 1999, Inmarsat and
    its fleet of nine mobile service satellites will convert its business
    operations into a fully private, commercial company. A small
    intergovernmental organization with a staff of about three people will
    remain in existence to ensure that the new private firm continues to
    perform its public service obligations of providing Global Maritime
    Distress and Safety Services (``GMDSS''), consistent with the
    international Convention on the Safety of Life at Sea (``SOLAS''), to
    which the United States is a party. However, due to a recent
    interpretation by the Justice Department pertaining to future U.S.
    participation in Inmarsat, legislation is required to conform the 1978
    Inmarsat Act (Section 5 of the Satellite Act) to this privatization,
    and S. 376 contains such conforming language in Section 6.
    COMSAT/Lockheed Martin Merger
        To meet the challenges and opportunities created by the open,
    diverse and highly competitive environment that exists today for
    international telecommunications services, COMSAT wants to merge with
    Lockheed Martin Corporation. The proposed merger will bring together
    the two companies' complementary strengths and capabilities. Combining
    Lockheed Martin's resources and space expertise with COMSAT's
    established reputation and operating experience as a satellite services
    provider will create a new, more vigorous competitor and enable
    consumers to reap the benefits of the operating efficiencies created by
    the merger.
        Lockheed Martin's purchase of COMSAT will not result in an increase
    in concentration or a reduction in the number of competitors, because
    Lockheed Martin currently does not offer satellite communications
    services to and from the United States in competition with COMSAT. With
    the explosive growth in the number and capacity of service providers in
    the international telecommunications market, including both satellite
    and undersea fiber cable operators, the effect of the merger on
    competition will be very positive. In particular, the merger will
    create an international telecommunications company that has the
    critical mass necessary to compete effectively against other industry
    giants, like AT&T/BT, MCI Worldcom, Loral, Hughes/PanAmSat, GE Americom
    and Teleglobe. This will undoubtedly promote U.S. technological
    leadership, and provide valuable employment opportunities in a high-
    growth sector of the economy.
        The merger also will foster advanced satellite and ground segment
    technologies and turnkey telecommunications solutions that promise vast
    benefits to users in the United States and around the world, in both
    well-served and thin route markets. With privatization, it will
    complete the transformation of COMSAT into a normalized corporate
    entity with no special legislative status. It will help expedite the
    full privatization of INTELSAT by bringing Lockheed Martin's resources
    to bear in support of the objectives of S. 376.
        At present, the Satellite Act prevents any company from acquiring a
    majority of COMSAT's stock. Thus, Congress must amend to the Act before
    the two companies can complete the proposed merger. However, both
    companies wanted Lockheed Martin to be able to obtain, as quickly as
    possible, the maximum stake in COMSAT consistent with existing law.
    This necessitated a two-step transaction. In step one, which is
    currently before the FCC, a Lockheed Martin subsidiary is seeking
    authority to acquire up to 49 percent of COMSAT as an ``authorized
    carrier'' under the Satellite Act. Approval of step one is within the
    FCC's jurisdiction under existing law. The full public benefits of the
    transaction can only be achieved, however, upon completion of step two,
    which is the merger itself. We therefore request that Congress act
    swiftly on S. 376 to allow the merger to be completed.
    Section-by-Section Discussion of S. 376
        Chairman Burns, as stated earlier, you should be commended for
    introducing legislation with firm measures to promote INTELSAT
    privatization, and for undertaking the long overdue modernization of
    the 1962 Satellite Act. Although efforts were attempted with H.R. 1872
    (the bill passed by the House of Representatives last year), we believe
    S. 376 improves upon that initial groundwork in major respects.
        As this Subcommittee may recall, the Administration announced its
    strong opposition to H.R. 1872 at your hearing last September, but well
    after the House vote. The Administration objected to the approach taken
    in H.R. 1872 for many reasons, chief among them that: (1) it would
    retard, not promote privatization, by imposing ``unrealistic''
    conditions; (2) it was ``likely to reduce, not increase, competition''
    and raise prices to consumers; (3) it would ``have significant adverse
    national security and maritime safety implications'', and (4) it could
    ``provoke retaliation from U.S. trading partners'' and be inconsistent
    with the United States' WTO obligations.
        In opposing H.R. 1872, the Administration also observed, and COMSAT
    fully concurs, ``that Congress was instrumental in establishing
    INTELSAT and Inmarsat and that it may want to address their
    privatization in legislation.'' Moreover, legislation is essential in
    order to update the 1962 Satellite Act. With that in mind, COMSAT now
    offers its views on specific provisions of S. 376.
                INTELSAT Access to the U.S. Market
        Section 603, ``Restrictions Pending Privatization,'' will operate
    to prohibit INTELSAT from entering the U.S. market directly to provide
    any retail satellite communications services or space segment capacity
    to carriers or end users until a pro-competitive privatization is
    achieved. This provision is a major improvement to Section 641 of last
    year's House legislation, which would have required direct access to
    INTELSAT before privatization occurs. S. 376 appropriately uses U.S.
    market access as a lever to speed INTELSAT privatization, without
    harming U.S. consumers or competition in the process. COMSAT agrees
    with this approach for the following reasons.
        INTELSAT currently does not sell satellite services directly in the
    U.S. retail market. Rather, it is a cost sharing international
    cooperative whose owners, the Signatories, jointly invest in the
    satellites and cover the expenses of operating the system. The
    Signatories in each country then sell the capacity they own on the
    system in their national retail markets. In the U.S., that investment
    responsibility and sales function are performed by COMSAT, the owner of
    the U.S. portion of the system.
        As a U.S. corporation, COMSAT pays U.S. corporate income taxes on
    the revenue it generates from its INTELSAT business. As a U.S. common
    carrier, COMSAT is licensed and regulated by the FCC, and is fully
    subject to the U.S. antitrust laws in its common carrier activities.
    Additionally, as a U.S. publicly-traded corporation listed on the New
    York Stock Exchange, COMSAT is subject to the disclosure and filing
    requirements of U.S. securities laws.
        None of this would apply to INTELSAT if it were permitted to
    directly access the U.S. market at the retail level before converting
    to a private corporation. As an intergovernmental international
    satellite organization, INTELSAT would be entirely exempt from U.S.
    taxation. Quite correctly, S. 376 recognizes that this would give
    INTELSAT an unfair competitive advantage over every other satellite
    operator doing business in the U.S. and paying U.S. taxes. It would
    also deprive the U.S. Treasury of millions of dollars of tax revenue
    now paid by COMSAT--creating, in effect, a U.S. taxpayer subsidy of
    INTELSAT.
        As the recipient of this subsidy, INTELSAT would have no incentive
    to privatize more quickly if direct access were allowed now. It is this
    avoidance of U.S. tax expense that makes immediate direct access so
    attractive to the U.S. carriers. With no U.S. income, property or
    payroll taxes (on non-U.S. employees) to pay, INTELSAT could offer
    satellite capacity more cheaply than COMSAT, because its costs of
    production (building, customer support, operations, marketing, billing,
    etc.) would be lower. Is it any wonder why U.S. carriers and users find
    direct access so attractive? Yes, below-cost prices are appealing to
    U.S. consumers, but such ``gains'' are not attributable to any true
    efficiencies derived from direct access, but are an unfair advantage
    derived from INTELSAT's tax exempt status. For the Subcommittee's
    benefit, attached to my testimony is a study just completed in December
    1998, by Professors Jerry R. Green and Hendrik S. Houthakker of Harvard
    University, and Johannes P. Pfeifenberger of The Brattle Group, which
    explain these points in greater detail. See Attachment 5,* ``An
    Economic Assessment of the Risks and Benefits of Direct Access to
    INTELSAT in the United States'' (``Direct Access Study'').
    ---------------------------------------------------------------------------
        *  [Study maintained in the Subcommittee's files.]
    ---------------------------------------------------------------------------
        But below-cost access is not the only problem with direct U.S.
    retail market entry by INTELSAT prior to full privatization. INTELSAT
    is also totally immune from FCC regulation and U.S. antitrust laws. The
    FCC recently held in its DISCO II Order (implementing the WTO
    Agreement) that privileges and immunities much narrower in scope than
    those INTELSAT enjoys would distort competition and constitute grounds
    for denying entry to the U.S. domestic market. The same reasoning would
    apply with even greater force to direct U.S. market entry by INTELSAT.
        Section 603 properly recognizes that to reward INTELSAT and foreign
    signatories with direct U.S. market access now takes away much of their
    economic incentive to privatize. Why? Because if these foreign PTTs are
    given the right to sell INTELSAT services in the U.S. immediately and
    on preferential terms (as compared to COMSAT), no reason exists for
    many of those same Signatories to work hard to change the
    intergovernmental nature of the organization. Direct access does
    nothing to bring about change to INTELSAT's structure; instead, it
    reinforces it. INTELSAT would gain expanded U.S. distribution channels,
    foreign Signatories would have immediate access to the U.S. market, and
    privatization would come to a grinding halt. The debate for
    commercializing INTELSAT would shift to greater direct access versus
    full privatization. No matter what benefits the proponents of direct
    access claim, this is far too high a risk to take--especially since
    COMSAT's exclusive U.S. Signatory access will end forever immediately
    upon privatization anyway. As Section 603 recognizes, the quicker
    INTELSAT privatizes, the sooner American consumers will realize the
    true economic benefits of fair competition. Significantly, S. 376
    requires INTELSAT privatization by the end of 2001.
        Even before the prospects for privatization were on the near
    horizon, the FCC consistently rejected direct access to INTELSAT,
    finding that it would neither increase competition nor lower prices to
    end users. To quote the U.S. Court of Appeals in affirming that
    Commission decision:

              [The FCC] concluded that direct access was not in the public
            interest; it would not save users money either by increasing
            efficiency [or] enhancing competition. . . . In assessing the
            likelihood that direct access could lower costs, the agency
            examined each category of costs on which COMSAT based its space
            segment tariff. The FCC concluded that each category was
            properly allocable to the tariff. . . . In the Commission's
            view, direct access probably would not reduce any of these
            costs; it would, rather, simply redistribute the costs among
            COMSAT and the carriers. Western Union Int'l v. FCC, 804 F.2d
            1280, 1285 (D.C. Cir. 1986).

    Moreover, the FCC decided against direct access at a time when COMSAT
    was the only international satellite company serving the U.S. Today, by
    contrast, there is significant facilities-based competition--both
    intermodal (undersea cable) and intramodal (separate satellite
    systems). As the FCC has stated again and again, in view of this robust
    competition, COMSAT's role as the U.S. provider of INTELSAT capacity
    accords us neither a monopoly nor market power. Thus, the need for
    direct access is even less than when it was first rejected by the FCC.
        This brings us now to the issue of the infamous COMSAT ``mark-ups''
    and the remedy of direct access. It is probably the most misunderstood
    issue of all. COMSAT's critics attempt to demonstrate that COMSAT
    engages in monopoly pricing by comparing the difference between what
    COMSAT charges its customers at FCC-tariffed rates and the payments we
    make to INTELSAT for capacity. Equating that to a mark-up in the
    ordinary meaning of the term is simply false.
        As the Administration informed the House Commerce Committee, it is
    ``misleading'' to use the term mark-up in this context, because the
    amounts COMSAT pays to INTELSAT do not cover all of the costs of
    providing the U.S. portion of the INTELSAT space segment. For example,
    COMSAT is required by law to perform numerous duties on behalf of all
    users as the U.S. Signatory to INTELSAT, which generate expenses
    entirely separate from what INTELSAT charges COMSAT for only the
    satellite capacity. In addition, COMSAT necessarily bears other costs
    in providing INTELSAT satellite capacity (e.g., engineering,
    operational support, transaction costs, customer billing, satellite
    insurance). Those costs must obviously be taken into account before
    actual margins can be calculated.
        However, based on a calculation which erroneously excludes the
    foregoing costs, proponents of direct access often cite a three-year-
    old average mark-up figure of 68 percent. The truth is that, after
    COMSAT's unavoidable and recoverable costs are properly considered,
    COMSAT's actual operating margins are about 38 percent, virtually
    identical to our satellite competitors.
        Finally, it is often said that if 93 other countries have adopted
    direct access, why should the United States lag behind? There is a very
    simple answer. Direct access in other countries is used as a means to
    address a problem that does not exist in the U.S.--that is, complete
    control of all telecommunications by a single PTT or former PTT. Unlike
    COMSAT, these PTTs provide local exchange telephone service, domestic
    long distance service, and international service. Unlike COMSAT, they
    own capacity in fiber optic cables and other satellite systems. Unlike
    COMSAT, they control earth stations that access INTELSAT. The only way
    to break that bottleneck and promote alternatives for international
    services in those countries is to allow new entrants to access INTELSAT
    satellite capacity directly, thus bypassing the PTT. In the United
    States, we did it right initially. COMSAT was specifically created to
    prevent the dominant U.S. carrier, AT&T, from controlling both
    satellites and cables. Today, U.S. users do not lack for choices for
    sending traffic overseas. Other countries are just trying to catch up!
        A few proponents of direct access attempt to make much of the fact
    that COMSAT subsidiaries operating in Argentina and the U.K. take
    advantage of direct access while COMSAT opposes its implementation in
    the U.S. Unlike other countries in which the Signatory is a
    telecommunications service provider, the Signatory in Argentina is its
    regulatory authority, an agency similar to the FCC. Thus, because the
    Signatory is not a service provider, there is no other way in Argentina
    to obtain space segment capacity except through direct access.
        The U.K. is another aberration. In stark contrast to COMSAT, and
    even though BT is the second largest owner of INTELSAT, its investment
    share is only 5.7 percent compared to 18 percent for COMSAT. Unlike
    COMSAT, which is an independent supplier of space segment to U.S.
    carriers, BT simply uses the capacity itself as part of the retail
    services it offers to end users. Moreover, BT is a $26 billion company
    with a local exchange, long distance, and international business (which
    is about to join with AT&T). BT also owns capacity in undersea fiber
    optic cables and other satellite systems.
        Given these enormous differences, for BT to assert that it should
    be the model for the U.S. to follow on direct access is nonsensical and
    absurd. Offering capacity that COMSAT owns on the INTELSAT system is
    our company's primary business (and not a negligible investment as with
    BT), and therefore, the practical consequences of direct access here in
    the U.S. are not comparable to the U.K. situation at all.
                Service Restrictions
        Section 603(b) of S. 376 would prohibit INTELSAT and COMSAT from
    providing direct-to-home satellite services, direct broadcast satellite
    services, satellite digital audio radio services, and broadband
    satellite communications services in the Ka-band. These are some of the
    most promising new markets for the satellite industry, and many of our
    competitors are already prospering in these markets.
        As a general rule, efforts to exclude one firm from participating
    in growth markets where that firm lacks market power are anti-consumer
    and anti-competitive. In this instance, however, we believe that
    Section 603 (b) is a significant improvement over the broad punitive
    service restrictions contained in the House-passed bill of last year,
    H.R. 1872. That bill provided that, during the transition to
    privatization, COMSAT would be prohibited from providing many of its
    existing services to U.S. consumers. H.R. 1872 defined those prohibited
    services to include high-speed data transmission and Internet access.
    COMSAT has already contracted with INTELSAT for capacity to provide
    these services and is, in fact, actively providing them today. This
    restriction, for example, would completely deprive consumers of
    COMSAT's new Linkway 2000TM technology for Internet
    applications, as described above.
        The Administration squarely opposed the House bill's imposition of
    service restrictions, finding that they are ``likely to reduce, not
    increase, competition in the U.S. market for satellite
    telecommunications services.'' In fact, in commenting on the service
    restrictions that would be imposed by H.R. 1872, the Administration
    noted that:

              [T]he bill may effectively eliminate two important service
            providers from the most rapidly growing markets for satellite
            services--markets which may be served by only a small number of
            firms, given the inherent structure of this industry (high
            fixed costs and large economies of scale). The result: fewer
            options and higher prices to U.S. consumers, including the
            federal government. Although the bill includes some protections
            if few alternative providers exist, they are unlikely to be
            sufficient to ensure that American consumers are not harmed.
                Executive Branch Leadership
        S. 376 is superior to the House-passed bill because it properly
    vests the leadership role for achieving a pro-competitive privatization
    in the President of the United States. The President has the
    Constitutional responsibility for treaty-making and for representing
    the United States in international fora, and INTELSAT is a treaty-based
    entity whose restructuring requires extensive ``give-and-take'' with
    foreign governments.
        The Executive Branch has consistently taken the lead role in
    advocating and implementing U.S. policies concerning INTELSAT--from its
    creation in the 1960s, to the treaty amendments in the 1970s, to the
    instructional process, which the Executive Branch coordinates before
    every INTELSAT Board meeting. The Executive Branch, through the
    Antitrust Division of the Justice Department, also has taken an active
    part in ensuring that the privatization of INTELSAT does not harm
    competition. Thus, a strategy employing Presidential leadership for
    handling the privatization negotiations and associated competition
    issues is sensible and constitutionally sound. In fact, it has been
    through the strong efforts of the Executive Branch that the successful
    full privatization of Inmarsat was achieved, and the divestiture of New
    Skies into a new private firm was realized.
        Both S. 376 and the House-passed bill provide the FCC with
    authority to condition or deny applications by a privatized INTELSAT to
    provide satellite communications to and from the U.S. But again, only
    S. 376 does so effectively because it clearly states that, in making
    such a public interest determination, the FCC is bound by the
    President's certification that entry by the privatized entity would not
    distort competition in the U.S. market. This provision makes it clear
    that the FCC should not be able to undermine the international
    negotiating authority of the President, or to factor its views of the
    negotiated results into post-privatization licensing decisions. The
    Administration has also criticized the House-passed bill on the basis
    of these issues. Specifically, it stated:

              Provisions of [the House-passed bill] purport to require the
            President to adopt specific positions on INTELSAT and Inmarsat
            privatization that would make international negotiations
            unwieldy and cumbersome, thus frustrating the President's
            ability to conduct foreign policy effectively. The bill also
            gives the FCC exclusive authority to determine if the outcome
            of multilateral negotiations is suitable--a determination that
            should be made by the FCC in consultation with the Executive
            Branch.

    Let us be absolutely clear on this point. COMSAT has no objections to
    the maintenance of the FCC's traditional public interest role in the
    regulation and licensing of satellite carriers doing business in the
    U.S. COMSAT's concerns are over efforts to expand that role into an
    area that normally is the preserve of the President of the United
    States--the reformation of an international treaty organization.
                Privileges and Immunities
        Section 621, titled ``Elimination of Privileges and Immunities,''
    provides that COMSAT shall not have any immunity in its role as the
    U.S. Signatory to INTELSAT, except: (1) for those actions taken at the
    direction of the U.S. Government; (2) for actions taken in fulfilling
    obligations under the INTELSAT Operating Agreement; (3) for INTELSAT
    Signatory activities which COMSAT does not support; and (4) in
    accordance with any other exceptions made by the President of the
    United States. Additionally, it provides that any liability of COMSAT
    shall be limited to the portion of any judgment that corresponds to
    COMSAT's percentage of responsibility. Finally, the elimination of
    privileges and immunities by this section is prospective from the date
    of enactment of the bill. With privatization, COMSAT's Signatory role
    will end and all residual privileges and immunities will terminate.
        COMSAT supports this removal of privileges and immunities. This
    measure is fully responsive to those who maintain that COMSAT's
    existing limited immunity as the U.S. Signatory somehow gives the
    company an unfair advantage in the marketplace. As the courts have
    consistently ruled, when COMSAT competes in the market with other
    service providers, it has NO antitrust immunities. Moreover, when
    COMSAT acts in its Signatory role within INTELSAT, three agencies of
    the U.S. Government (State, Commerce and FCC) are sitting right there
    with us, and possess the authority to instruct COMSAT as to how to
    vote, or what position to take, on any issue. That is not a situation
    conducive to anticompetitive conduct. Indeed, the enormous success of
    our competitors belies the notion that COMSAT's limited immunity as the
    U.S. Signatory translates into any market advantages whatsoever.
        Nevertheless, COMSAT is prepared to relinquish this Signatory
    immunity, subject to the reasonable safeguards enumerated in S. 376.
    Obviously, COMSAT should not be held liable for following the
    instructions of the U.S. Government at INTELSAT meetings. Nor would it
    be fair to expose COMSAT to liability if INTELSAT takes some action
    over the objections and opposing vote of COMSAT. We should only be held
    responsible for our own volitional actions, and S. 376 eliminates any
    possible doubts about that.
        The draconian approach of the House-passed bill, H.R. 1872, which
    does not contain comparable safeguards, is both unfair and unworkable.
    For the reasons stated above, COMSAT supports the provisions of S. 376
    clarifying that it is not immune from suit or legal process with
    respect to its volitional, affirmative acts as the U.S. Signatory to
    INTELSAT, pending privatization. This provision is rational and fully
    consistent with the overall pro-competitive approach taken by S. 376.
                Abrogation of Contracts
        Section 622 of S. 376 expressly prohibits the nullification of
    COMSAT's contracts that are in effect on the date of enactment of this
    bill. COMSAT believes this provision is necessary and proper given the
    history surrounding these contracts, as explained below.
        Section 622 in S. 376 stands in stark contrast to the so-called
    ``fresh look'' provision of the House-passed bill, which would have the
    U.S. Congress decide that COMSAT's customers should be free to walk
    away from the business commitments they freely entered into with
    COMSAT, all in exchange for significant COMSAT rate reductions. Based
    on those contracts, COMSAT in turn made long term, non-cancelable
    capacity commitments to INTELSAT to secure the lowest possible rates
    for our customers (and which are reflected in the steadily declining
    prices COMSAT charges under those contracts). If ``fresh look'' were
    adopted, COMSAT would therefore be left bearing the cost of the
    INTELSAT investment necessary to service those contracts. Under the
    Fifth Amendment to the Constitution, Congress is prohibited from taking
    private property without just compensation. To do so in the manner
    proposed by the House bill would clearly constitute a ``taking'', and
    expose the U.S. Treasury to significant damages claims.
        The proponents of ``fresh look'' point to a handful of cases where
    companies adjudicated to hold unlawful monopolies were required to let
    other parties opt out of contracts that were being used to perpetuate
    those monopolies. In this case, however, a federal court has expressly
    found that COMSAT's long-term carrier contracts are not derived from an
    unlawful monopoly or exercise of monopoly market power, as had been
    alleged by PanAmSat. Specifically, in 1996, the U.S. District Court for
    the Southern District of New York held:

              [A]lthough the record does reflect that Comsat entered long-
            term contracts with many common carriers, nothing in the record
            suggests that Comsat secured any of the contracts by means of
            any anticompetitive acts against PAS. On the contrary, the
            record suggests that for their own reasons, the common carriers
            elected to secure long-term deals with Comsat only after
            considering and rejecting offers from PAS. (emphasis added)

        The FCC reached the identical conclusion. When COMSAT petitioned
    the FCC for non-dominant status in 1997, Hughes/PanAmSat again raised
    the issue of COMSAT's long-term contracts, claiming they ``locked up''
    the market and restricted competition. Hughes/PanAmSat and others urged
    the Commission not to grant COMSAT non-dominant status without a
    condition imposing ``fresh look''. The FCC disagreed, and it is worth
    reading closely the reasoning behind this decision.

              We agree with COMSAT for the reasons stated below. COMSAT's
            long-term contracts do not impede COMSAT's customers from
            switching service providers. It is true that AT&T and MCI have
            entered into contracts with COMSAT that expire in 2003. The
            record lacks evidence of any other long-term contracts between
            COMSAT and its customers for switched voice service. COMSAT
            estimates that the three contracts represent approximately 25
            percent of the U.S. switched voice service market. Given the
            growth rate in the switched voice service market, AT&T's and
            MCI's long-term contracts are likely to represent an even
            smaller share of this market today. Additionally, the contracts
            only obligate AT&T and MCI to transmit part of their
            international switched voice traffic using COMSAT. Based on our
            review of these contracts, we conclude that the contracts
            permit AT&T and MCI to use COMSAT's competitors for services.
            Therefore, notwithstanding these long-term contracts, we
            confirm the finding in our August 1996 Order that COMSAT's
            switched voice customers are sophisticated customers possessing
            significant bargaining power giving them the flexibility to
            route a significant portion of their switched voice traffic to
            their own transmission facilities or those of alternative
            carriers as they choose (emphasis added).

        In light of these findings, it would be unprecedented for Congress
    to enact a statute mandating the abrogation of these very same
    contracts. It would be tantamount to a Congressional determination that
    COMSAT's long-term contracts are anticompetitive. However, unlike the
    Courts or the FCC, Congress does not adjudicate disputes among private
    parties as a matter of constitutional separation of powers. Thus, we
    submit respectfully that any Congressional determination to simply
    nullify these contracts by legislative act would amount to an
    unconstitutional bill of attainder.
        Application of ``fresh look'' in this case is unsupportable from a
    policy perspective as well. COMSAT negotiated the subject long-term
    contracts with the three largest long distance companies (i.e. AT&T,
    MCI and Sprint) to carry international traffic using INTELSAT's
    facilities. These contracts were designed to guarantee a steady stream
    of traffic in the face of increased competition from other satellite
    systems and fiber optic cables. In return for long-term traffic
    commitments, COMSAT dropped its prices considerably. This is no
    different than what happens every day in many commercial settings,
    whether its lower rates for multi-year magazine subscriptions or season
    tickets to sporting events. To be sure, these carriers themselves offer
    their customers reduced tariff rates in exchange for longer service
    commitments.
        COMSAT's long-term carrier contracts, which are non-exclusive, were
    renegotiated in 1993 and 1994, subsequently modified, and all at a time
    when competing satellite systems were permitted to--and did--bid for
    this traffic. Based on the long-term guarantee of traffic resulting
    from COMSAT's carrier-contracts, COMSAT contracted with INTELSAT for
    the capacity to handle that traffic and designed satellites to assure
    the carrier traffic could be accommodated. COMSAT's obligations with
    INTELSAT would remain in force, even if the U.S. carrier contracts that
    formed the basis for the commitments we made to INTELSAT were struck
    down by Congress. COMSAT's liability to INTELSAT currently exceeds $500
    million over the life of those contracts, and the investments in
    satellites built with capacity to accommodate the carriers would be
    stranded. Under these circumstances, ``fresh look'' is completely
    unjustified, and as noted above, would result in the U.S. government
    being liable for substantial damages to COMSAT for taking our property
    without just compensation.
                Other Issues
        While S. 376 is a fairly well-balanced bill, COMSAT does have
    concerns with some of its provisions. First, we are concerned with the
    requirement that if INTELSAT fails to privatize fully by January 1,
    2002, the U.S. must withdraw as a party to the INTELSAT organization.
    We believe that this is too extreme a sanction for INTELSAT's failure
    to privatize fully by the stated deadline. It is key that the United
    States maintain a leadership role in the pro-competitive privatization
    of INTELSAT. To do so effectively, it must maintain its commitment and
    active involvement throughout the entire process--even if that process
    should be delayed along the way.
        The withdrawal provision could actually have the perverse effect of
    creating incentives for INTELSAT's satellite competitors to attempt to
    find ways to delay privatization by raising frivolous--but time
    consuming--issues along the way. Think about it. If the deadline is not
    met, and COMSAT must withdraw from INTELSAT, what happens to all the
    traffic now carried by COMSAT? It necessarily will have to be
    reallocated to COMSAT's competitors, and/or flow North or South to
    foreign Signatories in Canada and Mexico, respectively. U.S.
    legislation to privatize INTELSAT should not include incentives to
    penalize an American company for dilatory actions of foreign
    Signatories.
        Mandatory withdrawal at a time certain is also counterproductive.
    If the Congress wants INTELSAT to privatize by a date certain, it is
    necessary for U.S. negotiators to stay actively engaged in the process.
    If the process slips and is not fully completed by January 1, 2002, and
    the U.S. disengages, we only hurt ourselves and the U.S. consumers that
    rely on the system, including national security users. COMSAT
    respectfully submits that the prospect of denying U.S. retail market
    access, and the restrictions on service expansion pending privatization
    set forth in S. 376, are sufficient incentives to privatize without a
    mandatory withdrawal provision.
        COMSAT was also disappointed to observe that S. 376 does not
    contain the regulatory parity provision contained in S. 2365 in the
    105th Congress. It is imperative that, in a competitive marketplace,
    all satellite system operators and satellite service providers compete
    against each other based on a common set of rules. Contrary to claims
    being made by some competitors, this would not necessarily mean more
    regulation for them--just the same, equal framework applied to all. We
    strongly urge that this issue be revisited during the debate on this
    bill.
        Finally, we have some concerns over the language used in Section
    631, which is a new law intended to prevent the warehousing of orbital
    slots and spectrum. COMSAT fully supports this concept. No satellite
    provider should be able to reserve orbital slots with ``paper''
    satellite filings or reserve spectrum not required for operation of
    their systems. For example, Loral Orion has tied up an orbital slot for
    14 years without any use, a problem recently brought to the FCC's
    attention by another U.S. satellite competitor, Columbia
    Communications. In contrast, INTELSAT has acted responsibly and de-
    registered seven of its unused orbital slots in December, 1998.
        Unfortunately, Section 631 is too vague to achieve its stated goal
    of preventing warehousing. It states that operators must ``make
    efficient and timely use'' of orbital slots and spectrum, and if such
    ``assurances cannot be provided'', satellite operators ``shall''
    relinquish their rights to these resources. As a practical matter,
    whether one makes ``efficient use'' of a slot or spectrum is far too
    subjective given the penalty for non-compliance. Does efficient use
    require comparisons to other providers? Does it favor operators with
    earth stations employing digital compression technologies or that
    employ collocation within orbital slots? Does it mean that companies
    with older satellites in-orbit must relinquish a slot if another
    company with newer satellites, or satellites having greater capacity,
    seek the slot? Should inclined orbit satellites be required to be de-
    orbited before their useful life has expired?
        We respectfully submit that the vagueness of the language as
    drafted in Section 631 will ultimately defeat its purpose. It needs to
    be reworked to incorporate a more objective test. One approach might be
    for the system operator to bear the burden of demonstrating that an
    orbital slot or spectrum requirement is necessary and appropriate for
    actual system operations and planning. The International
    Telecommunication Union (``ITU'') is also in the midst of resolving
    this issue with ``due diligence'' procedures that will prevent
    warehousing. Measures being considered include a time limit on filings
    and evidence of a launch service contract.
    Conclusion
        Mr. Chairman, I would like to thank the Subcommittee again for
    holding this hearing today and for allowing COMSAT to present its views
    on S. 376. We are confident that passage of this legislation will spur
    the timely and pro-competitive privatization of INTELSAT, while
    allowing the benefits of COMSAT's merger with Lockheed Martin to be
    realized as quickly as possible. Above all, the public interest in a
    deregulated and even more competitive international satellite industry
    is most certainly achievable in the near term with this legislation.
        [Attachments 1 to 4 are as follows:]

                                                           Attachment 1
                                        DATE: February 26, 1999
    For immediate Release
                   COMSAT LOWERS RATES ON THIN ROUTE SERVICES
                 --Telecommunications Carriers and Broadcasters
              Receive 4% Rate Reduction and Guaranteed Rate Caps--

    BETHESDA, Md.--COMSAT Corporation today announced it will reduce rates
    on a majority of its thin route services provided over the INTELSAT
    satellite system. These reductions, which take effect Wednesday, March
    3, will benefit telecommunications carriers and broadcasters using
    public switched telephony services on certain routes and occasional use
    broadcast services.
        COMSAT is reducing rates by 4 percent for public switched
    telecommunications services on thin routes--countries served by COMSAT
    with low volumes of telecommunications traffic to and from the United
    States. The company will also cap prices for thin routes at or below
    rates charged on heavily trafficked routes. In addition, COMSAT is
    reducing rates by 4 percent for occasional use video services on all
    routes.
        ``COMSAT is the only U.S. satellite service provider committed to
    providing the same level of high quality service to both developed and
    developing countries throughout the world,'' said John Mattingly,
    president, COMSAT Satellite Services. ``These rate reductions guarantee
    that our customers in developing countries will continue receiving the
    same service and price benefits enjoyed by COMSAT's customers in
    locations with higher service volumes.''
        COMSAT Corporation (NYSE:CQ), headquartered in Bethesda, Md., is a
    global provider of satellite services and digital networking services
    and technology.
              * * * * *
                                                           Attachment 2

                                                           Attachment 3

                                                           Attachment 4

        Senator Burns. Thank you very much, Ms. Alewine.
        We have been joined by Senator Breaux. Do you have an
    opening statement? We have two more witnesses to hear from.

                   STATEMENT OF HON. JOHN B. BREAUX
                      U.S. SENATOR FROM LOUISIANA

        Senator Breaux. No, thank you, Mr. Chairman.
        Senator Burns. We have now Mr. John Sponyoe, who is CEO of
    Lockheed Martin. Good afternoon, and thank you for coming
    today.
        Mr. Sponyoe. Good afternoon.
        Senator Burns. By the way, I will tell you that your entire
    statement will be made part of the record, all of you.

     STATEMENT OF JOHN SPONYOE, CHIEF EXECUTIVE OFFICER, LOCKHEED
                    MARTIN GLOBAL TELECOMMUNICATIONS

        Mr. Sponyoe. Mr. Chairman, I thank you and the other
    members of the committee for the opportunity to present
    Lockheed Martin's views on the ORBIT legislation.
        Let me say at the outset that Lockheed Martin applauds and
    supports this legislation. It is a well-reasoned, balanced and
    effective blueprint for achieving critical national objectives.
    This, in a market segment in which the U.S. always has
    demonstrated leadership and which our country now has the
    opportunity to strengthen its competitive stature.
        ORBIT also will lead to another critical benefit--choices
    for customers. We acknowledge that ORBIT represents the
    enabling legislation for us to complete our combination with
    COMSAT. But let me give you a much broader perspective on why
    this combination is in the best interest of all parties. ORBIT
    will allow Lockheed Martin to transition COMSAT into a viable,
    dynamic presence in the world marketplace, a marketplace that
    is expanding at a rate nothing short of amazing.
        By marrying our technological, financial, entrepreneurial
    assets with COMSAT's experience as a commercial service
    provider and its ownership interest in a global satellite
    fleet, we can provide new technologies and new services.
    Equally important, we can deliver highly competitive services
    and better value for the U.S. Government and commercial
    customers. Together, we are fully confident this combination
    will increase U.S. competitiveness and ultimately retain and
    grow U.S. jobs.
        Let me assure the committee, Lockheed Martin is not making
    a significant investment in order to preserve the status quo.
    Far from it. We are prepared to invest nearly $3 billion in
    COMSAT, and become the U.S. INTELSAT signatory because we
    believe our objectives and those of this committee and the
    administration are identical. We share a belief in pro-
    competitive legislation and the privatization of INTELSAT and
    the global telecommunications marketplace. The INTELSAT in
    which Lockheed Martin would acquire an equity position is on a
    privatization path to become a viable commercial system,
    operating in a manner indistinguishable from any other
    commercial enterprise.
        This is why we see our combination with COMSAT as a means
    for achieving not only our own business objectives, but also
    major U.S. policy objectives. We view your ORBIT legislation as
    the right way to achieve these objectives, and we are keenly
    interested in passage of this legislation early in this session
    of Congress.
        The INTELSAT privatization process will benefit directly
    and immediately from this legislation, which will serve as a
    guide and means for encouraging true, pro-competitive
    privatization, using a clearly defined timetable. In our view,
    this process should be completed no later than the year 2002,
    and must, at a minimum, entail termination of INTELSAT's
    intergovernmental status and its privileges and immunities,
    such as tax exemption and antitrust immunity, and operate fully
    subject to laws and regulations that apply to all other
    commercial systems operators. We also support ORBIT's
    requirement that the privatization process be reviewed by the
    executive branch on the basis of relevant, competitive criteria
    set forth in statute, with the assistance of the FCC.
        Mr. Chairman, you and your committee are confronted with
    two simple but vital choices: encourage the transition of
    COMSAT toward becoming an integral element in the dynamic
    future of commercial telecommunications, or allow COMSAT to
    wither as a result of the tactics of its competitors.
        A quick scan of a newspaper will tell you that the
    telecommunications industry is undergoing a dramatic
    consolidation. Every week, new mergers and global alliances
    within our industry are redefining the marketplace. This
    consolidation has, and will continue, to adversely affect
    COMSAT's competitive position. COMSAT needs critical mass to
    equitably compete in the global telecommunications marketplace.
    COMSAT needs continued capital investment to expand its
    international digital networking business. COMSAT needs freedom
    from the constraints that forestall its ability to fully
    commercialize its technological assets.
        COMSAT's principal assets, combined with Lockheed Martin's
    financial and other resources, will create a formidable new
    American competitor in the global telecommunications
    marketplace. Many of our competitors have greater financial
    resources and global presence and are without similar statutory
    ownership, governance restrictions or comparable and burdensome
    regulatory oversight.
        Our competitors, many with billions and billions of dollars
    in annual revenues, versus COMSAT's $600 million, already have
    extensive dedicated satellite systems in operation. That is why
    I find it particularly ironic that our competitors voice
    opposition to this merger by characterizing COMSAT as a
    monopoly. Instead, this merger will be good news for conditions
    in the U.S. and elsewhere. It will provide a level playing
    field. It will provide customers with more choices among
    suppliers. It will provide greater access to competitively
    priced services.
        Mr. Chairman, as you may know, I am relatively new to the
    telecommunications business. Recently, I had the opportunity to
    give a presentation of our business plan to a group of security
    analysts in Phoenix. At the conclusion of my remarks, I was
    followed on the panel by Mr. Fred Lanman, CEO of Hughes/
    PanAmSat. In his opening statement, he half jokingly commented
    on my presentation, saying that PanAmSat is already where
    Lockheed Martin Global Telecommunications wants to be in 5
    years.
        Mr. Chairman, I would like to say all we are asking for
    today is the opportunity to give Hughes/PanAmSat and our other
    competitors a run for their money. We believe the ORBIT
    legislation provides that opportunity.
        Thank you for inviting me here today, and I look forward to
    addressing any questions you may have. Thank you.
        [The prepared statement of Mr. Sponyoe follows:]
         Prepared Statement of John Sponyoe, Chief Executive Officer,
                   Lockheed Martin Global Telecommunications
        Mr. Chairman, I would like to thank you and the other members of
    the Committee for the opportunity to present Lockheed Martin's views on
    the ORBIT legislation that you have introduced, and that your
    colleagues, Chairman McCain and Senators Bryan, Brownback, Cleland, and
    Dorgan have co-sponsored. Lockheed Martin commends the Subcommittee for
    its willingness to undertake a timely and much-needed modernization of
    the 1962 Satellite Act, with a view toward promoting the benefits of
    privatization and increased competition in the global satellite
    services marketplace. Lockheed Martin applauds and supports this
    legislation--it is a well-reasoned, balanced and effective approach to
    achieving critical US objectives in a marketplace in which the US
    always has demonstrated leadership, and in which the US now has the
    opportunity to do so again.
        Mr. Chairman, Lockheed Martin has been a prominent player in the
    satellite industry for as long as there has been an industry--we have
    developed, built, and launched more satellites than any other company
    in the world. But both the downturn in post-Cold War defense spending
    and the explosive growth in global telecommunications and information
    markets, have combined to create a strong impetus for LM to evolve even
    more quickly into a new competitive provider of commercial satellite
    and telecommunication services. This commercial objective is very
    important for us and advances the Department of Defense's policy on
    diversification of its contractor base. At the same time, our
    government customers are themselves becoming increasingly reliant upon
    commercial communications systems and services to meet national
    security needs. Thus, the question for us is clearly not whether to
    enter the commercial telecommunications services market, but how best
    to do it?
        Lockheed Martin began its commercial satellite services initiative
    3\1/2\ years ago when we filed an FCC application for authorization to
    build and operate Astrolink--a satellite system that will make cost-
    efficient, advanced, broadband communications readily accessible to
    consumers regardless of location--urban or rural, populated or under-
    served remote areas. We also have moved quickly to pursue other
    business opportunities with partners in the US and abroad (LMI, GE
    Satco, AceS). Several months ago, our Corporation formed a separate
    Global Telecommunications subsidiary for the specific purpose of
    focusing our business efforts in the commercial telecom services area.
    Soon thereafter we announced our intention to acquire Comsat
    Corporation, a publicly-traded US company. The rationale for this
    acquisition is very straightforward--to marry our own technological and
    entrepreneurial assets with Comsat's 37 years of experience as a
    provider of satellite services.
        Mr. Chairman, you may be tempted to ask, given the challenges that
    confront us, why Lockheed Martin has chosen to pursue a business plan
    that requires an enabling act of Congress in addition to the normal
    regulatory approvals. The answer is simple: the Lockheed Martin/COMSAT
    combination is good for our two companies--and very good for market
    competition more broadly. Within the next five years, we intend to be a
    leading provider of worldwide telecommunications services via both
    satellite and terrestrial infrastructures. As a consequence, our
    support for satellite reform legislation is driven by two major
    considerations: First, we are poised to make a $2.7 billion investment
    in COMSAT. Let me assure the Committee that we are not pursuing this
    investment for the purpose of preserving the status quo at COMSAT--far
    from it. We want to buy COMSAT, transform it into a normal US
    commercial business operation, and integrate it into LMGT to form a
    strong new competitive entrant in the global telecommunications
    services marketplace.
        Second, the Comsat combination will also give us a significant
    interest in INTELSAT. Mr. Chairman, I can assure you that, as a
    businessman, we have no intention of buying COMSAT to acquire an 18%
    share either in a ``mini-United Nations'' or of a diminishing asset.
    With all due respect to my colleagues seated with me today, whatever
    perceived advantages INTELSAT may or may not have in its current
    incarnation, these advantages are certainly not reflected in its
    steadily decreasing market share. By the end of this year, the GM/
    Hughes/PAS satellite fleet will be far larger than INTELSAT, and far
    better positioned to compete in commercial telecom growth markets.
    Indeed, INTELSAT's current position in the US-international market vis-
    a-vis other satellite and terrestrial competitors is so far from
    anything that could be accurately termed ``dominant'' that I have to
    wonder whether its current structure might not pose a greater threat to
    itself than to its competitors. The INTELSAT Lockheed Martin wants to
    be part of is one that can soon be a viable commercial system that
    operates in a manner indistinguishable from any other commercial
    system. That's what this committee and the Administration want as well
    and are pursuing. This is why we see our combination with COMSAT as a
    means for achieving not only our own business objectives, but major US
    policy objectives as well.
        We view your ORBIT bill as an ideal way to achieve our mutual
    objectives and as a result, Lockheed Martin is keenly interested in the
    passage of this legislation early in this session of Congress. We need
    congressional action in order to acquire and reshape COMSAT, enabling
    the emergence of a vibrant competitor. ORBIT legislation appropriately
    removes outdated ownership caps and governance provisions upon
    enactment, and similarly prohibits government intrusion into COMSAT's
    competitively won contracts with its corporate customers.
        Congress is faced with some fairly simple, but important, choices:
    you can enhance competition by allowing COMSAT to be acquired and
    repositioned so that it can move away from its static past and play a
    key role in the dynamic future of the commercial satellite industry; or
    you can diminish competition by allowing COMSAT to languish as a result
    of the delaying tactics of its competitors--companies, such as Hughes,
    a subsidiary of General Motors and itself a parent corporation to
    several satellite systems including PanAmSat, DirecTV, and--if they
    continue to consolidate-USSB and PrimeStar/Tempo. These companies dwarf
    COMSAT in size [Note: Both GM and GE are larger companies than LMC],
    have greater financial resources, considerable global presence, no
    statutory ownership or governance restrictions, and no comparable and
    burdensome regulatory oversight. Moreover, they and others already have
    extensive, dedicated satellite systems in operation--COMSAT does not
    and neither does Lockheed Martin. Thus, the Lockheed Martin/ COMSAT
    combination--if allowed to proceed--can only enhance healthy
    competition in the global marketplace: That may not be good news for
    the established players, but--Mr. Chairman--it is good news for
    consumers in this country and elsewhere. They will have more choices
    among suppliers, and greater access to competitively-priced services,
    which I know lies at the heart of your satellite reform legislative
    efforts.
        We also firmly believe that the INTELSAT privatization process can
    benefit directly from legislation that defines the US view of what
    constitutes a pro-competitive INTELSAT privatization. Congress also has
    the opportunity to act quickly and send a firm but reasonable signal to
    our the US's partners in INTELSAT about US determination to see the
    organization thoroughly and quickly privatized. The privatization
    process is already taking shape and Congress has a unique opportunity
    to have a positive impact on it. For years, some critics have
    maintained that INTELSAT's intergovernmental character gives it an
    unfair advantage in the global marketplace. ORBIT recognizes this by
    appropriately withholding further expansion of INTELSAT in the US
    marketplace until it sheds its intergovernmental status through a pro-
    competitive privatization--ORBIT uses expanded access to the US market
    as the proverbial carrot to INTELSAT. At the same time, INTELSAT
    management and some many Signatories understand that these very same
    intergovernmental attributes are now a handicap (particularly in
    getting Signatories to make the necessary capital investment
    commitments) in a dynamic and increasingly competitive global market.
    As a result, there is pressure from within and without INTELSAT to
    evolve quickly from an inter-governmental treaty-based organization
    into a true commercial company, one that is indistinguishable from
    other competitors in the global satellite services market. I firmly
    believe that the marketplace imperatives that compel this
    transformation are well understood by INTELSAT management and its
    leading Signatories. The vision of privatization set forth in the Orbit
    legislation also is in the US interest in that it ensures continued
    competition among global satellite systems--rather than market
    dominance by any single system--not INTELSAT, GM/Hughes / PAS, GE,
    Loral or anyone else. One of the most effective ways to promote long-
    term facilities-based competition in the international satellite
    telecommunications market is to put an end to the conditions that both
    insulate and handicap INTELSAT by spurring the pro-competitive
    privatization of INTELSAT.
        Legislation, such as ORBIT, would serve as an effective, but
    appropriate, means for encouraging a bona fide privatization.
    Specifically, we support the bill's clearly defined timetable for
    privatization: the process should be completed by no later than, but
    preferably prior to, 2002. Speed is not the only goal, however.
    Privatization must transform the this politicized and bureaucratic
    organization in a pro-competitive manner. In Lockheed Martin's view,
    pro-competitive privatization must entail both termination of
    INTELSAT's intergovernmental status and its privileges and immunities,
    such as tax exemption and anti-trust immunity, and operation in the
    marketplace fully subject to the laws and regulations applicable to
    other commercial satellite system operators. Why do we believe this?
    Because only upon its fully fledged privatization will INTELSAT--and
    its owners--be genuinely subjected to the positive discipline of the
    marketplace. And this, we believe, will make the organization more
    efficient and ultimately more profitable. INTELSAT would also be
    required, as a condition of access to the US, to not enter into any
    arrangement to secure exclusive access to any national telecom market.
    The privatized post-INTELSAT entity would then be permitted, subject to
    the same FCC regulatory approval as its competitors, to expand its
    access to the US market in terms of customers and service offerings.
        Lockheed Martin is committed to using its prospective role as an
    INTELSAT stakeholder to vigorously support and advance the US
    objectives for rapid and complete privatization of the organization.
    Quite frankly, our business plans only entail a future relationship
    with a fully privatized INTELSAT, and we will, by virtue of our $2.7
    billion investment in COMSAT, probably be the most highly motivated
    entity--in either the public or private sectors--to bring about such a
    result as quickly and as thoroughly as possible.
        However, all of us in this debate--private and public sector
    participants--must carefully address the best way for the US Government
    to exercise a constructive role in a multinational, intergovernmental
    setting like INTELSAT. The US, as you fully know, played a key role in
    the formation of INTELSAT, and it was in furtherance of important US
    foreign policy goals that our Government worked to have so many
    countries join in this US-led satellite communications initiative. As a
    consequence of the US's historic role, the US needs to remain mindful
    of the multilateral nature of INTELSAT privatization, and The US
    Government must be especially attentive to the concerns of developing
    countries that do not view their small telecom service requirements nor
    those of their consumers as being of any great commercial interest to
    INTELSAT's commercial competitors. INTELSAT's treaty commitment to
    serving all countries, rich and poor alike, providing universal access
    under a regime of non-discriminatory pricing--for both lucrative and
    uneconomical routes--has led many of INTELSAT's less developed member
    countries to rely on INTELSAT as not only a carrier of last resort but
    as their only link to the world.
        On the other hand, we also understand that there are long-standing
    concerns about market access to foreign markets by US providers of
    commercial satellite services. We share these concerns. With respect to
    satellite market access issues linked to the investment of government-
    owned telecom entities in INTELSAT, it is clear that, as a result of
    market incentives and the persistent market opening efforts of the US
    Government over many years, there is an irreversible trend toward
    market liberalization and privatization around the world. In fact,
    approximately 75% of INTELSAT is owned today by telecommunication
    entities that are privatized to some degree or committed to
    privatization. To the extent that satellite market access issues have
    been linked to the role of INTELSAT itself, I would point out that as
    of February 1997, of the 52 countries that made WTO market access
    commitments for fixed satellite services, 50 of them are INTELSAT
    member countries--demonstrating that there is nothing inherent about
    INTELSAT's investment structure that impedes a country from opening its
    market to competition. And, while the privatization process should
    result unqualifiedly in an INTELSAT that does not have the ability to
    compete unfairly with other commercial satellite operators, the
    INTELSAT privatization process is not the appropriate mechanism for
    addressing broader satellite service market access and trade concerns.
    These concerns should be addressed through either the WTO or, perhaps
    more effectively--through a focused US program of bilateral trade
    negotiations with ``problem'' governments.
        We also support the bill's requirement that the privatization
    process be reviewed by the Executive Branch on the basis of relevant
    criteria set forth in statute, and that a determination be made
    concerning whether the privatization process either is or is not pro-
    competitive. On the basis of this review, the FCC would then be able to
    accept and process applications for or by the privatized INTELSAT in
    the same way it deals with other satellite-related applications--
    applying the FCC's current DISCO II standard and its traditional public
    interest test. We believe that this is the appropriate ``division of
    labor'' within the government--one that ensures that all issues raised
    by the privatization process of an intergovernmental organization are
    reviewed by the competent agencies, and that licensing related to the
    privatized INTELSAT can move forward quickly. Mr. Chairman--your bill
    is, appropriately, ``de-regulatory''--consistent with what the US quite
    literally ``preaches'' to the rest of the world. Perhaps as a
    relatively new player we take US rhetoric about the importance of
    minimal regulation too seriously. But I have to admit that we have been
    taken aback by other proposals in this area that would involve
    elaborate rulemaking proceedings that would go on for years, and page
    after page of detailed licensing requirements. An overly complicated
    regulatory process--and the protracted delay that would result from the
    procedural gamesmanship such a process would encourage--do not serve
    the goals of either privatization or enhanced competition. It would
    only serve to advantage INTELSAT's competitors. A fully privatized
    INTELSAT is an important prerequisite to establishing a level
    competitive playing field. Congress should not allow itself or this
    legislation to be used by one set of competitors to mis-use the
    regulatory process for the purpose of delaying or precluding the
    privatized INTELSAT from being a full participant in the marketplace.
    Nor should a properly privatized INTELSAT be subject to an ongoing,
    special regulatory regime unique to it alone--or be made to bear
    regulatory burdens to which no other industry player is subject.
        Mr. Chairman--the ORBIT bill recognizes that enhanced competition
    is not something that can be micro-managed into existence by
    legislators or regulators, but must instead arise freely out of the
    pursuit by commercial adversaries of customers under laws and
    regulations that apply equally to each. ORBIT will promote just such a
    competitive environment,--a level playing field--and the Lockheed
    Martin-COMSAT transaction is exactly the type of market-driven
    combination that is the logical and beneficial outcome of such an
    environment. Should Congress enact legislation embodying these
    principles this year, the winners will be the consumers of
    international telecommunications services. Enactment of ORBIT
    legislation will make those consumers--from populated urban centers to
    remote and rural areas--the beneficiaries of enhanced competition,
    technological innovation and the availability of advanced
    communications services at competitive prices. ORBIT also will
    strengthen the U.S. position in the global marketplace and preserve and
    grow jobs in an important economic sector. Accordingly, Lockheed Martin
    urges the Senate to help make this reform of the competitive
    marketplace a reality by enacting ORBIT as expeditiously as possible.
        Thank you for inviting me this morning and for listening to my
    brief presentation. I look forward to addressing any questions that you
    may have about Lockheed Martin's support for the ORBIT bill or matters
    related to our proposed acquisition of COMSAT.

        Senator Burns. Thank you very much.
        We will hear from Mr. Conny Kullman, Director and CEO of
    INTELSAT. Thank you for coming today.

        STATEMENT OF CONNY KULLMAN, DIRECTOR GENERAL AND CHIEF
                      EXECUTIVE OFFICER, INTELSAT

        Mr. Kullman. Good afternoon, Mr. Chairman and members of
    the subcommittee. It is a pleasure for me to be here again. I
    had the opportunity to be here in September on the same
    subject, and it is a pleasure to be here again today.
        This afternoon I would like to address three points. I will
    begin by updating you on the significant progress that INTELSAT
    has made toward further privatization and commercialization
    since I appeared before you in September. Next I will identify
    several factors which influenced how our members proceed with
    this effort--the INTELSAT members. Finally, I will provide
    INTELSAT's views on your bill, S. 376.
        First, a word on our progress, Mr. Chairman. I am pleased
    to report that on the 30th of November, last year, we
    transferred one-quarter of our satellite assets to the new
    company, New Skies Satellites. It is a private company, based
    in the Netherlands. New Skies is now in business, competing
    against INTELSAT and all the other satellite operators in the
    business.
        New Skies may seem modest in size, but its significance to
    the privatization process is considerable. New Skies was the
    first real test of whether INTELSAT signatories and parties
    would be willing to start down the path toward privatization.
    The answer was yes, by unanimous consent.
        I can assure you, therefore, that creating New Skies was
    just the first step. I was selected the INTELSAT Chief
    Executive Officer on a platform that emphasized
    commercialization and privatization for clear business reasons.
    I take that mandate very seriously. However, we must bear in
    mind that, as an organization with 143 member nations, INTELSAT
    can achieve privatization only by consensus reached through
    multilateral negotiations.
        Indeed, I recently travelled four continents in an effort
    to forge a consensus on privatization among our members. During
    my trip, I met with around 50 party and signatory
    representatives. I do not recommend that you travel that many
    time zones in that short timeframe as I did, but I made this
    trip because I believe strongly that privatization is necessary
    for INTELSAT survival.
        In today's global marketplace, INTELSAT faces intense
    competition from other geostationary satellite systems, and
    also from the emerging low-earth-orbit satellites, the LEO's,
    and also from the massive build-out of the transoceanic cables.
    Mr. Chairman, it is the global market forces that are driving
    the privatization of INTELSAT, not the will of any one member
    country, including the United States.
        Let me now bring you completely up to date by reporting on
    the Board of Governors meeting that was held last week here in
    Washington. Restructuring and privatization not only led, but
    dominated, the agenda. The Board instructed INTELSAT management
    to immediately develop business plans for implementing the most
    aggressive privatization options.
        Mr. Chairman, this brings me to my second point. While the
    U.S. advocates privatization, the U.S. regulatory and
    legislative environment is making it difficult for us to
    achieve a consensus. On the regulatory front, I am not here to
    speak for New Skies, but it is clear that the INTELSAT members
    view the regulatory treatment of New Skies as a barometer for
    how a privatized INTELSAT will fare. What they see in the
    United States is frankly quite disturbing. Let me elaborate.
        Your FCC has permitted those U.S. earth stations, formerly
    serviced by INTELSAT capacity, to connect with New Skies only
    on a temporary basis, in the FCC's own words, ``at their own
    risk.'' Further, the FCC has thus far refused to act on
    applications filed by potential new customers of New Skies.
    Such impediments, which could jeopardize the New Skies IPO, and
    further diversity in ownership, send the wrong message to the
    international community. Will the United States allow a
    privatized INTELSAT to compete on a level playing field, or
    will it erect roadblocks similar to the ones faced by New
    Skies? Our members need to know as they decide the future of
    the organization.
        On the legislation front, it is essential that the FCC's
    negative message not be echoed by the U.S. Congress. It would
    be ironic and unfortunate if U.S. legislation intended to
    foster INTELSAT privatization in fact did just the opposite. I
    am confident, Mr. Chairman, that this is not the message you
    intend to send.
        Last, I would like to address the proposed legislation. I
    want to emphasize that INTELSAT agrees with the U.S.
    administration's positions set forth last September by
    Ambassador McCann, and also today, that no legislation is
    necessary to ensure that INTELSAT privatizes pro-competitively.
    If Congress does choose to legislate, however, we endorse your
    overall approach of recognizing that the United States should
    work constructively with its international partners and with
    INTELSAT.
        Nevertheless, we do have concerns about several aspects of
    S. 376 which differ significantly from the bill you introduced
    last year, Mr. Chairman. For example, last year's bill
    specified goals and objectives for the U.S. to advance within
    the framework of INTELSAT agreements. In contrast, the present
    bill prescribes precise criteria for privatization, and imposes
    penalties if these criteria are not met.
        Further, last year's bill did not limit INTELSAT's access
    to the U.S. market. In contrast, the present bill would violate
    U.S. international obligations by imposing an immediate freeze
    on INTELSAT services.
        Entirely separate from your proposed bill, Mr. Chairman, I
    would like to identify three elements that our members would
    find objectionable in any legislation passed by any country.
    One, no national legislation should require INTELSAT to produce
    more piecemeal spinoffs. Rather, further privatization must
    encompass the entire organization. Breaking up INTELSAT might
    be good for our competitors, but definitely not good for
    competition and the consumers.
        Two, no national legislation should bar INTELSAT's current
    owners from holding an interest in any privatized entity.
        Three, the international community is squarely opposed to
    any legislation that would require one INTELSAT party to
    retaliate against another party simply because they do not
    share the same privatization agenda. I do recognize that your
    bill would not do so, Mr. Chairman, but I mention these points
    because the prior House bill had taken such an approach and
    included these three elements.
        In closing, I look forward to working with you as INTELSAT
    takes further steps toward privatization. Thank you.
        [The prepared statement of Mr. Kullman follows:]
        Prepared Statement of Conny Kullman, Director General and Chief
                          Executive Officer, INTELSAT
        Good afternoon Mr. Chairman, and Members of the Subcommittee. I am
    Conny Kullman, Director General and CEO of the International
    Telecommunications Satellite Organization--``INTELSAT.'' I appeared
    before this Subcommittee last September to discuss the international
    telecommunications market and the role of INTELSAT in that competitive
    market. Today, four months into my tenure as Director General and CEO,
    I appreciate this additional opportunity to update you on developments
    in the international telecommunications market and INTELSAT's
    privatization effort. I would also like to offer some observations on
    the satellite reform legislation you are considering and highlight some
    very real concerns our Members have about the U.S. treatment of a
    future privatized INTELSAT. These concerns have been heightened by the
    regulatory experience of New Skies Satellites.
        Since I appeared before you last September, INTELSAT has taken
    significant steps toward privatization. Specifically, the transfer to
    the INTELSAT spin-off, New Skies Satellites N.V., of five operating
    satellites and one under construction was completed last December. New
    Skies is a totally separate Netherlands-based company. It is a new
    competitor in the global satellite market, capable of competing with
    INTELSAT and everyone else. While New Skies may seem modest in size,
    its significance to the privatization process is considerable. New
    Skies was the first real test of whether the Signatories and Parties
    that comprise INTELSAT would be willing to start down the path towards
    privatization. The answer was yes, by unanimous consent.
        I can assure you, therefore, that creating New Skies was just the
    first step. I was elected to the office of Director General on a
    platform that emphasized commercialization and privatization, and I
    take that mandate seriously. Privatization lead the agenda at the
    INTELSAT Board of Governors meeting held last week in Washington.
    Indeed, at that meeting, the Board agreed to examine a number of
    specific options for operating INTELSAT as a private business
    enterprise. But, in doing so, we must protect the interests of all our
    current users, including those lifeline users in developing nations
    that rely on INTELSAT as their sole connection to the rest of the
    world. And we must bear in mind that, as a 143-member nation
    organization, INTELSAT can achieve privatization only by consensus
    forged from multilateral negotiation. I am committed to using our
    multilateral consensus-building process to achieve the privatization of
    INTELSAT as quickly as possible.
        Mr. Chairman, with all due respect, it is global market forces that
    compel the commercialization and privatization of INTELSAT, not the
    will of any one Member, including the United States. In short,
    privatization should go forward because it is necessary for INTELSAT's
    survival in the increasingly competitive market that we face. But
    change, however necessary, cannot be achieved by the fiat of a single
    country, regardless of how well-intentioned that effort might be. As a
    result, legislation by any one country that seeks to mandate change to
    the INTELSAT organization will not facilitate change or accelerate the
    process. To the contrary, it would likely be counterproductive. It
    could cause the privatization efforts to be delayed or, worse,
    derailed.
    INTELSAT's Position in the Dynamic and Competitive Satellite Market
        During my last appearance, I tried to dispel the myth promulgated
    by our competitors that INTELSAT is a monolithic power that dominates
    the international satellite market. Far from thwarting competition, we
    welcome it. We want to fight our battles in the marketplace and not in
    the regulatory arena or the halls of the U.S. Congress. Mr. Chairman,
    recent events further underscore INTELSAT's non-dominant position:
        INTELSAT is not a cartel: INTELSAT neither restricts the volume nor
    controls the prices of services that Signatories sell to others, nor do
    we prevent Signatories from investing in or using competing
    international facilities. In fact, the recent actions of our New
    Zealand Signatory, Telecom Corporation of New Zealand Ltd., bear this
    out. Telecom New Zealand is the leading investor in the $1.2 billion
    Southern Cross Cable, which will soon connect New Zealand with
    Australia, Fiji, Hawaii, and the mainland United States. It will be the
    first direct fiber optic link between the Pacific Rim and the United
    States. No cartel would permit one of its members to spearhead a
    venture which would pose such significant competition to the
    organization.
        INTELSAT is not a monopoly: The events of the past few months have
    further discredited any notion that INTELSAT exerts monopoly power in
    any market. For example, Hughes/PanAmSat (our leading competitor) told
    you last September that INTELSAT should be disbanded by legislative
    fiat because it possessed the largest single fleet of Western-built
    commercial geostationary communications satellites. In reality, both
    Hughes/PanAmSat and INTELSAT currently operate fleets consisting of 19
    satellites. Later this year, however, when Hughes/PanAmSat launches the
    Galaxy XI, it will own the world's largest commercial fleet. Indeed,
    Hughes/PanAmSat is likely to hold its leading position for some time.
    INTELSAT has no new launches scheduled before mid-2000, by which time
    Hughes/PanAmSat plans to deploy even more new satellites. Already,
    Hughes/PanAmSat boasts on its Web site to customers and investors that
    its global system provides ``unparalleled coverage of the Americas,
    Europe, Africa, the Middle East and Asia.''
        INTELSAT Exercises No Market Power Even on Thin Routes: In
    September, I emphasized that the FCC had recently found that INTELSAT
    enjoys no market power on any major international communications route
    to or from the United States. At that time, the FCC had not yet
    examined the so-called ``thin routes,'' where no other satellite
    carrier is willing to provide service. On these routes, INTELSAT's
    prime objective of ensuring global interconnectivity obligates it to
    provide communications services on a non-discriminatory basis. Our
    leading competitor, Hughes/PanAmSat, had suggested that these thin
    routes, which account for only 8% of INTELSAT's U.S. revenues, provide
    INTELSAT with a lucrative monopoly. Just last month, however, the FCC
    issued an order determining that our U.S. Signatory's uniform pricing
    commitment--and the U.S. Signatory's commitment to lower its tariffs by
    four percent annually until at least 2002--together prevent it from
    exercising market power or distorting prices even on the thin routes.
    Thus, the FCC has in effect concluded that INTELSAT enjoys no market
    power on any route to or from the United States--major or minor.
        INTELSAT Faces Increasing Competition From Fiber Optic Cables:
    Since the last hearing, the TAT-14 transoceanic submarine cable
    connecting the United States and Europe has nearly been completed. At a
    cost of $1.5 billion, the TAT-14 will soon be able to carry more than
    7.7 million simultaneous telephone calls when it enters onto service
    next year. And it will be owned and used by a consortium of more than
    50 telecommunications operators, many of them INTELSAT Signatories.
        But TAT-14 was only the beginning of the global buildout in modern
    fiber optic transoceanic submarine cables that will compete against
    INTELSAT and other satellite carriers. Several submarine cable projects
    even larger than TAT-14 have recently been launched. The billion dollar
    FLAG Atlantic-1 Cable, will link the USA, the UK and France and will be
    capable of carrying nearly fifteen million simultaneous telephone calls
    on each of two transatlantic cables. When it is completed next year,
    the FLAG Atlantic-1 will have the largest capacity of any submarine
    cable system in the world. But it will not have the longest cable. That
    honor will belong to the 29,000-kilometer Southern Cross Cable Network
    currently under construction. With enough capacity to carry 1.5 million
    simultaneous telephone calls, this $1.2 billion dollar cable will be
    the first direct fiber optic link between the Pacific Rim and the
    United States. And, as I have already noted, the lead investor in the
    Southern Cross Cable is the INTELSAT Signatory for New Zealand.
        The reign of the Flag Atlantic-1 and the Southern Cross as the
    world's biggest and longest submarine cables may be short-lived. Even
    as we speak, a ship called the Long Line is slowly crossing the Pacific
    Ocean, en route from California to China, unspooling the $1.2-billion
    China-U.S. Cable. This cable will be able to carry nearly 5 million
    calls at once--or all the programming of all the U.S. cable television
    networks. And the most ambitious undersea cable plan to date is
    ``Project Oxygen,'' an initiative to connect 78 countries and locations
    with over 150,000 kilometers of undersea cable, at a projected cost of
    $15 billion dollars. Earlier this month, the FCC authorized Project
    Oxygen to land in the United States. By the time Project Oxygen is
    completed in 2003, it promises to compete vigorously against INTELSAT
    and other satellite and cable providers.
        Historically, INTELSAT's international public switched network
    operations have been an essential component of its business. The
    proliferation of cable competition has steadily eroded INTELSAT's share
    of this carriage. Indeed, INTELSAT has had to substantially reduce its
    IPSN business projections. The disproportionate build-out of
    transoceanic cables to and from the U.S. has significantly reduced
    American usage of INTELSAT space segment. In contrast, other countries
    with fewer cable options have become heavier users of INTELSAT space
    segment and are understandably concerned about its future.
        In sum, INTELSAT faces a world of competition that it never faced
    before. This is in addition to the competition that INTELSAT has long
    faced from other geostationary satellite systems, and from low earth
    orbit satellites, or ``LEOs,'' that can provide many similar services.
    The speed of technological innovation ensures that INTELSAT will
    continue to face competition from a myriad of sources. I have attached
    some charts that illustrate these trends.
    Proposed Legislation
        With this background, let me now comment on the Chairman's proposed
    legislation.
        First, we commend your bill for recognizing that the United States
    must ``work constructively with its international partners, and with
    INTELSAT itself.'' As a treaty-based organization, each of our member
    nations has a voice in our operations, present and future.
        We also understand that, given the dramatic technological changes
    that have reshaped global satellite communications during the past
    several decades, the United States and other countries may wish to
    update their own national laws and regulations. Of course, this is the
    sole prerogative of individual INTELSAT parties, and INTELSAT takes no
    position on domestic aspects of the proposed legislation. Mr. Chairman,
    the issue of direct access has been raised in your proposed
    legislation. With all due respect to you and other Members of this
    panel, I want to make it clear that this is an issue for the United
    States and not for INTELSAT.
        Turning to the international aspects of the legislation, INTELSAT
    Members are well aware of the United States' strong policy favoring
    privatization. This position has been vigorously advocated by both the
    U.S. Party and its Signatory throughout the privatization process. And
    INTELSAT understands that the Congress may wish to establish through
    legislation the goals and objectives to be pursued by the U.S. Party
    and Signatory. In this regard, Mr. Chairman, INTELSAT supported the
    overall approach of the bill you introduced last year, which would have
    established such goals and objectives. But it is neither necessary nor
    helpful for the United States to unilaterally legislate mandates and
    benchmarks for INTELSAT's privatization.
        Indeed, in the highly competitive and dynamic marketplace that I
    have described for you, there is no pressing need for legislation and
    certainly no justification for employing punitive and anticompetitive
    sanctions and restrictions ostensibly to hasten INTELSAT's
    privatization. Such sanctions, though good for INTELSAT's competitors,
    would not be good for competition or consumers.
        For example, the bill requires that the United States withdraw from
    INTELSAT if certain timetables are not met. If this ultimate sanction
    were applied, INTELSAT would be forced to stop serving the U.S. market.
    With one less provider and significantly less satellite capacity
    available, both competition and space segment supply would be
    diminished, and prices likely would increase. Though our competitors
    would benefit, U.S. consumers and service providers would not.
        Further, INTELSAT has serious reservations about the ``carrot and
    stick'' approach employed throughout S. 376. In some instances, these
    provisions would improperly restrict INTELSAT's treaty-based rights to
    serve U.S. international markets. For example, Section 603(b) would in
    effect freeze existing services provided via the INTELSAT system
    pending privatization. This restriction would conflict with U.S.
    obligations under the INTELSAT Agreement, which prohibit any Party from
    restricting global connectivity via the INTELSAT system. Indeed, after
    frank discussions between INTELSAT and the Argentine government,
    Argentina recently lifted similar constraints on INTELSAT's ability to
    operate to and from its territory.
        The bill also prescribes various criteria that must be met by the
    privatized INTELSAT in order to avoid sanctions under the bill. We do
    not believe that the U.S. or any other INTELSAT member can or should
    attempt to mandate the precise outcome of the privatization process by
    restricting the ability of INTELSAT or its successors to compete.
    Successful reform is achieved through vigorous negotiation, respect for
    the framework already established by international agreement, and
    broad-based consensus-building among Member nations--not through
    restrictive mandates and unilateral sanctions. Indeed, the process of
    privatization would be brought to a crashing halt were multiple Members
    to lock themselves into rigid positions on outcome. For the past two
    weeks, I have engaged in discussions with our member governments and
    Signatories around the world on the future structure of INTELSAT. In
    all parts of the globe--Africa, Asia or Europe--the Parties and
    Signatories have all expressed their concerns that the U.S. could enact
    punitive legislation that would seek to preempt the continuing process
    of INTELSAT's privatization.
        Finally, the bill specifies factors for the FCC to apply in
    granting access to the U.S. market by New Skies that essentially codify
    the FCC rule in DISCO II for IGO spin-offs. INTELSAT and other
    interested parties (including the U.S. government) took great pains to
    structure New Skies in a manner that is consistent with the
    requirements of DISCO II. However, we believe it is inappropriate to
    codify the DISCO II criteria only for IGO spin-offs. Indeed, locking
    criteria into law forecloses necessary flexibility in the regulatory
    process. For example, this provision would prevent the FCC from ever
    leveling the playing field for IGO spin-offs with regard to market
    entry.
        We would also like to bring to your attention that the pro-
    privatization message coming from the U.S. Congress and Administration
    is being undercut by U.S. regulatory treatment of New Skies. Indeed,
    our Parties' and Signatories' experience in the New Skies matter has
    given them cause for concern with regard to further privatization. Let
    me be more specific.
        To date, twenty U.S. companies holding licenses to operate over 90
    earth stations have applied to transfer their existing operating
    authority from INTELSAT satellites to New Skies satellites. Rather than
    granting the applications, however, your FCC has permitted these earth
    stations to operate only on a temporary basis. These U.S. earth
    stations are, in the words of the FCC, operating ``at their own risk.''
        The agency's refusal to grant existing or new earth stations
    permanent authority to communicate with New Skies' satellites has
    created uncertainty. Because of the FCC's delay, New Skies cannot offer
    any new services or obtain any new customers. At the same time, the FCC
    has recently streamlined its application processes for the
    international submarine cables that compete against satellite carriers.
    Under the new procedures, companies seeking to land submarine cables in
    the United States face essentially no regulatory delay.
        These regulatory hurdles have created uncertainties for New Skies
    and, if not resolved promptly, could jeopardize New Skies' Initial
    Public Offering and its ability to further diversify its ownership. Yet
    early diminution of the percentage of Signatory ownership of New Skies
    was a major U.S. objective.
        Such impediments hinder INTELSAT's privatization by sending the
    wrong message to the international community. Mr. Chairman, as I have
    found in my recent travels, such actions not only send conflicting
    messages about the U.S. direction on privatization, but could also
    influence the ultimate location and regulation of a privatized
    INTELSAT.
    Conclusion
        In closing, INTELSAT urges this Committee to ensure that U.S. laws
    and policies adhere to the following basic principles: (1) The United
    States should respect its international commitments embodied in the
    INTELSAT Agreements; (2) The United States should continue to encourage
    privatization of INTELSAT through good faith negotiation and respect
    for the interests of all Members and not by the unilateral actions of
    one Member; and (3) the U.S. regulatory authority should treat
    privatized entities in a fair and equitable manner that allows them to
    compete on a level-playing field. We look forward to working with you
    to achieve these ends.

        Senator Burns. Thank you, Mr. Kullman. Senator Breaux, if
    you want to offer an opening statement.
        Senator Breaux. I will just make some comments when I ask
    questions.
        Senator Burns. Mr. Cuminale, we have heard quite a lot
    about size and fishing today. How does the size of your
    satellite fleet compare to those of your competitors, and will
    the size of your fleet increase by the year 2000?
        Mr. Cuminale. Sure. As a matter of fact, I am glad you
    asked that question, because our fish is not so big. What we
    have for you, Mr. Chairman, and I will leave it with you
    today----
        Senator Burns. It is not big enough for bragging rights?
        Mr. Cuminale. Well, we brag plenty, but I think it has been
    suggested that what PanAmSat is looking to do is actually
    diminish INTELSAT so that we would end up bigger than any other
    international satellite company in the world, and we have two
    responses to that.
        One is, I have got two charts here that I will give you
    that demonstrate that both at the end of 1998 and at the end of
    1999, when you take all of our satellites and compare them to
    INTELSAT, and you compare all of our satellite capacity to all
    of the capacity that INTELSAT has in 36 MHz equivalent
    transponders, which is the way things get measured, we are
    substantially less than and will be substantially less than
    half the size of INTELSAT when you compare the satellites that
    we use to compete with them in the international market.
        The second chart I have for you, because we basically serve
    two markets, U.S. domestic, which is a noninternational market,
    which essentially involves services entirely within the United
    States, and then international, on the U.S. domestic side, we
    have basically compared for you the capacity that PanAmSat has
    versus all of our other competitors, and essentially--actually,
    not all our competitors. Telstar and GE, who are the two major
    competitors in the U.S. domestic market.
        Now, the fact is that you can say we are going to have 24
    satellites, INTELSAT is going to have 24 satellites, but that
    is not going to give you a sense of competition between the two
    of us, because the satellites that we have devoted entirely to
    domestic service do not compete with the INTELSAT satellites,
    entirely different service, entirely different market, so I
    will leave that with you.
        But the answer is, are we a robust company with a great
    business? Absolutely. Does Fred Lanman brag about it, yes, and
    he should, but the reality is that the fleet that we have and
    the fleet that we are going to have to compete with the
    INTELSAT business does not come up to the size of INTELSAT and
    will not and would not even if INTELSAT were cut into two
    pieces, and so I will leave that for you today, Mr. Chairman.
    We will make sure copies get circulated to the members.
        Senator Burns. I guess we could also talk fleet size, but
    how about capacity size?
        Mr. Cuminale. When you look at capacity on 36 MHz
    transponders at the end of 1999 we will have, in terms of
    transponders in orbit internationally, 469 transponders in 36
    MHz equivalents compared to 1,328 for INTELSAT, and that
    excludes the new skies capacity of 296 transponders, so that
    clearly they are looking at not quite a 3 to 1 advantage on the
    U.S. side at the end of 2000 we are showing Telstar with 240,
    GE with 410, and PanAmSat with 427, which makes PanAmSat the
    leader, having a 39.6 share of the capacity in orbit, followed
    right by GE with 38.1 percent and Telstar with 22.3 percent, so
    that is how the markets break up for the two of us. As I say,
    we have these charts here for you.
        Senator Burns. Well, we thank you for that. Do you agree
    that direct access not only provides carriers with access to
    INTELSAT without having to go through COMSAT but also provides
    INTELSAT with direct access to the largest and most lucrative
    market in the world, and that is the U.S. market? Why would
    INTELSAT agree to privatize if it already is given one of its
    principal business objectives?
        Mr. Cuminale. Another very good question, Mr. Chairman.
        We agree that if it is unencumbered access, direct access
    by INTELSAT or by customers to INTELSAT does equate to direct
    access by INTELSAT to the U.S. market, which is the very thing
    we are saying you should use in your bill.
        The position we have developed, however, on direct access,
    is simply this, that for the core services for which INTELSAT
    was formed, INTELSAT should be allowed to deal directly with
    the carriers. We have been persuaded that that will save the
    consumers money and we have been persuaded that a couple of
    other things may follow from it.
        First, one of the conditions that we would place on that
    direct access is that INTELSAT would waive its privileges and
    immunities with respect to new contracts for those services, so
    things beyond what is currently being provided today would
    require some waiver, which as you know is a real hot button for
    us and for all the competitors. We would like to see those go
    away and, frankly, we would like to induce them to be waived.
        Second, and probably more importantly, is the fact that if
    the market access is limited in terms of the scope of services
    for which direct access can be provided, you still have the big
    hunk of the carrot to give away, and we think that that is the
    part of the carrot that ought to be used to induce INTELSAT to
    want to move forward into complete direct access into the U.S.
    market, so what we see this limited direct access as providing
    is a taste of the carrot for INTELSAT, a possibility for seeing
    some waivers of privileges and immunities, and an immediate
    reduction of costs for the consumer in the U.S.
        Senator Burns. Senator Rockefeller.
        Senator Rockefeller. Thank you, Mr. Chairman. This question
    would be to both John Sponyoe and also Betty Alewine. You argue
    that lifting the ownership cap on COMSAT will lead to more
    competition in satellite services.
        Now, occasionally I am capable of being parochial. When it
    comes to satellite services and particularly broadband
    satellite services, how does what you see in this benefit a
    State, a rural State like West Virginia?
        Mr. Sponyoe. As we had, I think this discussion in your
    office sometime ago, we really feel that broadband is the wave
    of the future. In fact, it is one of the things that is being
    discussed as being withheld on the carrot and stick approach
    with INTELSAT.
        We believe that satellites do an excellent job of providing
    the coverage you talked about earlier, and we look not only in
    West Virginia but around the world in areas that are
    underserved or unserved today. We believe without that
    infrastructure that will not be there for years, if ever. We
    can provide that service.
        I think that as we put up--we are bidding on a thing called
    Astrolink in the not too distant future. That will provide a
    beam that goes all the way from Washington, D.C. and covers the
    entire West Virginia State. We believe that would give you the
    capability for small businesses and homeowners to provide that
    coverage for high speed Internet connection E-commerce, et
    cetera, within your State and other rural States within the
    United States.
        We cannot close, as you know, without this bill being
    amended, and close in terms of purchase of COMSAT. We really
    believe, if we take a look at where we are today and the need
    to have their experience over the last 30-some years in this
    business, that will give a very, very powerful, capable
    competitor, and one which will get those capabilities out to
    your State and many others.
        Thank you.
        Ms. Alewine. I would agree with all of that. I would just
    like to add a couple of things. As I had mentioned in my oral
    remarks at the beginning, when we are accused of having a
    monopoly on the thin routes, that is--part of our mission,
    Senator, is on a nondiscriminatory basis, to offer
    nondiscriminatory pricing to the big and the little as well as
    the developed and the developing.
        We are used to providing universal service. One of the
    things that the merger with Lockheed Martin and COMSAT does, we
    are a very, very, very small company. We have $600 million a
    year in revenue, and of that $600 million only $250 million of
    it comes from the INTELSAT business.
        In order for us to grow and serve our customers better, who
    serve right now the State of West Virginia, we need critical
    mass to thrive, to grow, to develop new service offerings, and
    to serve our customers, so the merger in that regard is in the
    public interest.
        You know, I listened to Mr. Cuminale read that very
    impressive list of big companies that are against this merger
    and I ask myself, with our size, it is usually the small guy
    that is coming and complaining about the large guy. In this
    one, it is just the reverse. It is the large guys complaining
    about the small guys. It is a little bit like Goliath trying to
    kill David, and you know, right now we are precluded from
    providing service ourselves domestically in the U.S.
        If the Satellite Act is changed, if the 10-percent cap is
    lifted, if Lockheed Martin and COMSAT are able to merge, it
    will be a very vibrant and very strong competitor. The size of
    the list that was read to you--that will add a competitor to
    the playing field, will add another choice for the consumer,
    and that has got to benefit your rural users, too, because then
    we can do things together in terms of pricing that COMSAT
    cannot do alone.
        Thank you.
        Senator Rockefeller. Mr. Chairman, later on this afternoon,
    as I told Senator Breaux, I am going to be visited by the
    chairman of Mobil Oil Corporation, which is fairly large, and
    used to belong to something called Standard Oil, and what they
    are proposing is to merge with Exxon, which as I recall, if I
    think about it carefully, used to be a part of Standard Oil,
    also.
        Senator Burns. Are you thinking about writing a book?
    [Laughter.]
        Senator Rockefeller. No. I was just thinking about thanking
    him for putting the old business back together again.
    [Laughter.]
        Senator Rockefeller. But it is very interesting, what
    mergers are doing, and we will now go to basically three oil
    companies, and that is an entirely nother subject.
        But Mr. Cuminale, I will not ask it of you, but you have
    talked about an interest in serving the so-called thin route
    countries, and you may or may not face some barriers in doing
    that. I would like you to discuss that, but I would also like
    you to discuss whether or not, in offering that service, you
    will do that at a price that these countries are able to
    afford, and that global interconnectivity has to be a bottom
    line to all of this.
        To be able to do it is one thing. To be able to do it at a
    price that they can afford is another. How do you answer?
        Mr. Cuminale. First, in terms of our willingness to provide
    service in the thin route countries, I think we have said on
    the record more than once, and I think it goes back all the way
    to Fred Lanman, that we will provide service in any country in
    any part of the world where we physically can, and I think we
    have demonstrated a commitment to doing that in terms of trying
    to obtain licensing in virtually any country that will let us
    do it to provide services.
        I will tell you that we went to an extreme effort to be
    allowed to provide domestic service in the country of Pakistan
    when they opened up their market for domestic services, even
    though they indicated that if they ever launched their own
    satellite they would want to be able to kick us out.
        In terms of pricing, the thing that I think is most
    important to understand about satellites and is critical about
    competition is that there is no additional cost for us to
    provide a circuit to Zimbabwe over the cost of providing a
    circuit into New York City. It is exactly the same cost because
    of the nature of the satellite and the nature of its geographic
    coverage.
        We have built satellites that have whole beams over parts
    of the world that we still cannot get access to for vast
    numbers of services, but we have done it on the hope of being
    able to provide those services and to recover our cost with,
    obviously a profit.
        Examples of that are most recently Australia. We had an
    Australian beam on our PASS-4 satellite that we knew we could
    not use when we launched it back in 1995. We were not allowed
    to use it until 1998, and we still think it was a smart move
    for us to build it. In terms of whether we can provide those
    services at competitive rates, all I can tell you is that when
    we are allowed market access, and when we offer our product and
    services, those products and services get taken up, and they
    get taken up because they are competitive and they do provide a
    quality service.
        We believe in the power of competition, always have, and we
    believe that if we are afforded the opportunity to provide
    service we can do it and will do it at effective rates.
        Senator Rockefeller. So you are saying that the satellite
    service provides no price differentiation in terms of the area
    that it covers, but then you indicate that if you were allowed
    to provide access, and that was the first part of my question.
        Mr. Cuminale. That is the nub of the issue, Senator, of
    this bill, which is that there are large parts of the world
    where INTELSAT really is the only company that can provide
    services.
        I had one of our sales organizations just last week come to
    me and tell me they wanted to do a VSAT system in 15 countries.
    It happened to be covering a market that we are pretty good at.
    It is Latin America. The amount of time, and it was a 5 MHz
    circuit, which in the world of satellites represents--well, of
    a 36 MHz transponder, you can do the math, it represents less
    than a quarter, less than a sixth.
        We loaded up all of our regulatory people and went out and
    got the licensing necessary to do the first six countries and
    we are committed to doing I think another 11 countries, but
    that is the kind of effort we have to do to be able to provide
    that service.
        I will tell you that INTELSAT could provide that service
    tomorrow without a blink, and they make a real point of that in
    the marketplace, so that for us to provide a relatively simple
    circuit to a customer that had a need in 17 countries, we are
    going to have to jump through all sorts of regulatory hoops to
    get there, and that is really the issue here.
        Senator Rockefeller. Maybe I am showing my ignorance here,
    but you are saying that, I mean, a satellite, when you beam
    something up, and then it comes down over a broad area, that is
    a completed transaction insofar as the beaming down begins.
        You are either suggesting one of two things. One is that
    your satellite beamed down is blocked, is denied access to
    whatever Latin American countries, or you are suggesting that
    the FCC says that you have the satellite up there and that then
    the beam is able to be beamed down but they are not letting you
    do it, and I do not understand the technological answer to
    either of those questions.
        Mr. Cuminale. A very good question, Senator. Let me
    explain. PanAmSat's business, if you look at it, is almost 80
    percent video, which if you think about it, we beam up a video
    signal and it rains down in the footprint of the satellite. For
    the most part, all around the world receive only television,
    TVRO, TV receive only is allowed. That service can be provided
    in virtually any country in the world, and it is one of the
    reasons why it is 80 percent of our business.
        The communications services that are so integral to
    developing our business and to really competing are services
    that require not only the uplink and the downlink and the in-
    country, but also the ability to uplink the signal from that
    country to our satellite and downlink it back to the U.S. or
    wherever.
        The uplinking activity is the activity----
        Senator Rockefeller. That is where you get stopped.
        Mr. Cuminale. Yes, and that is the problem, so when you
    hear us say that we cannot do VSAT services, and VSAT stands
    for very small aperture terminal, but what it is, it is a
    network service. If you look at your mobile station, since you
    are going to be seeing mobile later on top of the station, you
    see that satellite dish. What is happening with that dish is,
    they are receiving information from corporate headquarters, and
    they are transmitting information back on sales.
        That uplinking and downlinking, that kind of network has a
    higher regulatory hurdle, and it is that kind of business from
    which we have been precluded in vast areas of the world.
        Senator Rockefeller. Mr. Kullman, how would you respond to
    that, sir?
        Mr. Kullman. There is a couple of statements Mr. Cuminale
    has done that I would like to address, starting at the end with
    the market access. We have a principle that is called matching,
    so if a certain use or a certain customer wants to set up in 15
    markets we have to go out and work with those 15 countries to
    get their matching to that service.
        If they do not agree to that service, they will not match,
    and we cannot provide the service, so in many cases we face
    similar obstacles to set up a service of this nature, and
    taking South America as an example we fought for 1\1/2\ years
    to get international access to Argentina in Ku band services.
    They stopped us from doing those services in that country, and
    so these types of difficulties are really not only our
    competition's, they are also our problems in a number of
    situations.
        The second issue I wanted to address, and here I will
    probably shock you, but I will agree with Mr. Cuminale that in
    terms of rural services we provide a lot of services today to
    developing countries, to remote areas of countries, domestic
    services for those countries, and we do not differentiate that
    cost.
        That is one of the principles we have, equal pricing for
    equal services, and we do not subsidize these services, we run
    them the same profits coming out of serving a remote area as an
    urban areas, and that is the beauty of the satellite systems.
    You get these coverages really for free.
        The cable operators, the terrestrial operators, they would
    have to pull cables to each of these points, and there fore
    they would incur extra cost, but for us it is really a good
    market to be in. It is a type of telecommunications business
    where satellites function really, really well.
        The last issue I wanted to address is the size of PanAmSat
    versus the size of us. Mr. Cuminale omitted to tell you that he
    has also a very attractive satellite fleet serving the U.S.
    market, a market that we today cannot address for domestic
    services, and he said he has 469 transponders, or 36 MHz units
    versus our 1,328, if I remember the numbers right. That also
    gives me another reflection.
        Today, PanAmSat, more than 50 percent of their satellites
    are for the international market, and so just scaling these
    numbers would mean that he would be on the order of 9, perhaps
    1,000 units in total for his services. He will surpass us in
    revenue for this year. We have 1,328. He has roughly 1,036 MHz
    units. Our revenues are about the same, so that would give you
    an indication of who has the lower prices and who sells at the
    best prices to the consumers.
        So I think that numbers have to be correct, and it is
    extremely inappropriate to exclude the U.S. domestic market
    segment from the numbers that PanAmSat is quoting. If you
    started to do that, we should also strip out everything we do
    that has to do with domestic services. Many of the smaller
    countries around the world, and also quite some substantial
    countries, use the INTELSAT capacity also to serve the domestic
    markets.
        So I think the most fair comparison is to look at the
    overall number of satellites, look at the overall capacity, and
    the overall revenues for these companies, and when you do that
    you will find that they have the same number of satellites as
    we have today. Their revenues, according to their own
    announcement, will surpass us this year.
        If we look to the year 2001, and using the Wall Street data
    from DLJ, PanAmSat will have revenue of around $1.8 billion,
    and 24 satellites. INTELSAT, with the projections we have in
    place right now, will be around $1.04 billion with 22
    satellites, and so these companies are really starting to be in
    the same size today, and you can also draw your own conclusion
    from those numbers when it comes to the pricing of the
    services.
        I also want to take the opportunity to correct something I
    said. I forgot a little important word in my presentation, the
    word not. My staff in the back reminded me that I might have
    jumped that one, and so I wanted to again restate what I
    intended to say about breaking up INTELSAT, and that is that
    breaking up INTELSAT may be good for our competitors, but
    definitely not good for competition.
        Mr. Cuminale. I liked it better before. [Laughter.]
        Ms. Alewine. Mr. Chairman, may I just add something,
    please?
        Senator Rockefeller. Actually, I had a question that I was
    going to give Mr. Cuminale a chance.
        Mr. Cuminale. If I may, I will be very, very brief. I think
    in terms of revenues--Conny, I am sorry to hear you had such a
    bad year, but as I recall, last year, 1997, INTELSAT did $900
    million in revenue, and I know this year--I have not seen your
    numbers for this year, but I know our numbers are more like 780
    for 1998, which means you had a real bad year in 1998, because
    you do surpass us.
        The other thing I would like to point out to you is,
    remember that PanAmSat sells to the end user. INTELSAT sells to
    the signatory who sells to the end user and there is indeed a
    markup there of some sort, and we can argue about how much of
    it goes to the cost of the service provider and how much does
    not, but if you want to consider INTELSAT's revenue, I am using
    1997's revenue, because that is the only number I have, but it
    was around $1 billion.
        If you figure that the customer that receives the service
    of INTELSAT, the end customer pays roughly the same markup for
    all the capacity that COMSAT charges overall, and I am not
    saying it is all profit, I am just trying to get you to a gross
    number, that gets you to about $1.6 billion in terms of total
    revenue from end consumers for satellite capacity. Ours is 750,
    so keep that in mind.
        The other thing I just want to point out is, I did mention
    our domestic fleet, but when you talk about competition you
    have to talk about assets that you put in competition with one
    another. The fact is that I also mentioned to you we provide
    domestic services in Pakistan. Our international capacity is
    used for both international services and domestic services
    abroad. We use it for anything we can, and we think all of our
    international capacity is at competition with INTELSAT, but to
    suggest that our domestic capacity competes with them, well, it
    clearly does talk about our financial strength, and I will not
    argue that issue.
        I agree with Mr. Kullman, we are a very strong company, and
    we have about $3/4 billion in revenues, but I will argue that
    we do not compete with him using those assets, and there are
    other companies abroad that are like that also. Astra, for
    example, is purely domestic in Europe. We do not consider them
    a competitor of ours. We do not do that business, and we are
    not competitors with them, and I think it is very important
    that when you do look at numbers you parse them in a way that
    makes some sense, and I argue our way does.
        Senator Burns. Did you want to comment? I am going to move
    to Senator Breaux.
        Ms. Alewine. I sure would like to, and I will be as brief
    as I can, but this is in response to a couple of Senator
    Rockefeller's questions. The first one was about--and I think
    Mr. Cuminale has left the committee with perhaps a wrong
    impression that in the countries where they cannot offer
    service right now, that it is INTELSAT that would either be
    able to approve that or is standing in their way.
        I would agree with Mr. Cuminale on one thing. We
    wholeheartedly support open and free competition, but in those
    countries that is a Government issue, and we would encourage
    our Government, our party to work on a bilateral basis to help
    open those markets for any and all comers. That is not an
    INTELSAT responsibility. It is not INTELSAT that is standing in
    the way in those markets.
        I thank you, Mr. Chairman. I just wanted to clear that up.
        The only other thing I wanted to say, when Mr. Cuminale was
    talking transponders, you can throw numbers around fairly
    freely, but what I would rather do is simply quote PanAmSat's
    new CEO, Mr. Kahn, who was not able to be here. I was looking
    forward to meeting him, but he was in New York on Monday of
    this week, and he did address the Morgan Stanley
    Telecommunications Conference, and these are direct quotes from
    the new CEO of PanAmSat.
        ``We are the market leader in both video and
    telecommunications. 70 percent of U.S. VSAT's communicate over
    PanAmSat. We reach 98 percent of the world's population with 19
    satellites.''
        Now, this goes to the transponder issue. ``By mid-2000 we
    expect to have 16 percent of the market based on transponders,
    with INTELSAT at 13 percent.''
        When Mr. Kahn was asked why he joined PanAmSat and came
    into this position, he said because ``Hughes PanAmSat is the
    industry leader, with phenomenal space segment access.''
        Thank you.
        Mr. Kullman. Mr. Chairman, I also want to----
        Senator Burns. Let's hold the phone here. I do not know,
    you can take a nap if you like. [Laughter.]
        Mr. Sponyoe. Just very briefly, I do not want to be left
    out on this. I do not know who originally coined the term
    voodoo economics, but I have heard it for the first time here,
    first-hand. PanAmSat is a private corporation making a
    determination where they want to make their investment. The
    fact that they are choosing to invest in satellites over the
    U.S. is their choice. I agree 100 percent with INTELSAT in
    terms of their valuation.
        Second, as we speak today, I have people in the
    Philippines, I have people in Thailand, I have people in India,
    all struggling to get licenses that have nothing to do
    whatsoever with INTELSAT. I would suggest to you that is what
    the market is out there, and we all have to live with it.
        Thank you.
        Mr. Kullman. Fifteen seconds, please, just to comment on
    the numbers. 1997 is not a good comparison. We should compare
    numbers in 1999, after we have spun off the satellites to New
    Skies, and this year our run rate in terms of revenue will be
    equal.
        Thank you, Mr. Chairman.
        Senator Burns. Senator Breaux.
        Senator Breaux. Well, than how, Mr. Chairman. Let me
    congratulate you for your efforts in trying to look at
    telecommunications beyond just the old arguments that this
    committee has always dealt in about long distance versus local
    service, and the things that have been in the past.
        I mean, this is really looking at the future of
    telecommunications and what we need to be talking about, and
    the issues like the use of the international spectrum and
    allocation interference issues, and proper privatizing of
    INTELSAT is also part of that.
        I mean, this is where the next generation and of
    congressional efforts I think is going to be headed, and I
    congratulate you for it and the effort that you have put into
    putting together a bill that regulates this.
        After listening to all of this, you almost make Medicare
    sound simple. [Laughter.]
        Senator Breaux. That is saying an awful lot, I want you to
    know, because this is certainly something that after it
    eventually gets out of this committee, I mean, it is just a
    huge amount of education that is going to be necessary for most
    Members of Congress who have almost--who are limited to no idea
    of all of the conflicts, and the things we are trying to do
    here.
        We are basically trying to establish a framework that makes
    sense for private competition in this business, and it has been
    very, very difficult, but I think the chairman is moving in the
    right direction, and I hope to be able to join him in the
    package when it comes out of this committee.
        Let me ask Jim Cuminale, one of the concerns that I have is
    that the bill does not seem to recognize the fact that when you
    had a private company that is competing against other private
    companies in this business and is going to be sort of sitting
    at the table making some of the decisions about how
    privatization is to occur, that it seems like the bill in this
    area is fairly vague about protections for everybody.
        When COMSAT, or Lockheed acquires COMSAT, and then we are
    going to be talking about privatization of INTELSAT, I mean, is
    that handled properly as far as the bill is concerned, and then
    I will get Mr. Sponyoe to comment too.
        Mr. Cuminale. Thank you, Senator. I think we have gone on
    the record as saying that it is not--insofar as the ability of
    that company, privatized, to enter the U.S. market is not as
    restricted as it could be, and the criteria for determining
    whether it has met the standard, as it were, is also not as
    sharp as it could be.
        I heard earlier criticism about the way New Skies has been
    treated in the U.S. market and, frankly, we filed with respect
    to New Skies entry, but we proposed that New Skies be allowed
    to enter until it can prove that it has met the criteria,
    because it is a brand new company. It did inherit this
    business, and we did not want to see service get shut off, but
    the fact of the matter is, even the limited criteria that the
    FCC adopted in DISCO-2 are not met by New Skies at this time,
    and they have been afforded opportunity to do business in the
    U.S.
        Senator Breaux. My point is, on the chairman's bill. Is it
    adequate, the way it is set up, or can it be improved?
        Mr. Cuminale. We think it can be improved.
        Senator Breaux. How?
        Mr. Cuminale. We have submitted a markup, Senator, we would
    be happy to share with you, but fundamentally what we think is
    that the criteria for determining whether the private company
    is pro-competitive is somewhat soft, and that they are
    suggestive as opposed to required.
        Senator Breaux. Mr. Sponyoe, do you agree with that?
        Mr. Sponyoe. No. As a matter of fact, I think it is a very
    balanced bill, and I submit my rationale with the fact that
    Conny calls me about every 3 days complaining about the bill. I
    do not think we ought to give INTELSAT a free ride in the
    United States. They have immunities today, as I mentioned
    earlier, to antitrust, to taxation, and so I think there ought
    to be a carrot and stick. I think you have a corporation called
    COMSAT today paying taxes.
        As we have talked about before, I do not think we have been
    able to develop a good balance, as opposed to Mr. Cuminale's
    suggestion that we put some kind of a noose around INTELSAT's
    neck, and so I support it very strongly.
        Senator Breaux. What about the objection that it is fairly
    vague?
        Mr. Sponyoe. Well, if it is fairly vague, I would like to
    understand where it is fairly vague. I think there has been a
    lot of time spent on it. We spent a lot of time on it. We
    believe it is very specific in the areas of importance where it
    spells out the requirements in terms of the metrics that are
    going to be utilized in order to make a determination of
    whether or not they truly have met those objectives of
    privatization.
        Senator Breaux. Well, I clearly do not understand, and Mr.
    Cuminale, what is your response to that?
        Mr. Cuminale. Well, obviously we have a disagreement about
    how specific the criteria should be.
        I think the other thing we feel very strongly about is that
    the FCC ought to have a real voice in the execution of the bill
    and particularly in the granting of market access, which is
    clearly not the case under the current bill, and I want to
    point out that while we make that recommendation the FCC has
    not always ruled in our favor on these issues. We do, however,
    believe that the process they go through, and the rules that
    they apply, assure fairness, and we think that they should have
    a very prominent role in the bill.
        Senator Breaux. It is always very, very difficult. We have
    got multimillion-dollar industries. We try and establish a
    level playing field. I mean, I am a big believer in the
    marketplace, but in this area we have to have some guidelines
    and parameters. The bill attempts to do that, and my main goal
    is just doing it right.
        We should not be in the business of picking winners and
    losers. That is something the marketplace should do. But our
    job is to try and establish a level playing field, and I want
    to work with the chairman to help do that, and hope everybody
    succeeds.
        Thank you.
        Senator Burns. Thank you very much, Senator Breaux.
        Senator Gorton.

                    STATEMENT OF HON. SLADE GORTON,
                      U.S. SENATOR FROM WASHINGTON

        Senator Gorton. Mr. Chairman, I think Senator Breaux has
    hit the nail right on the head. We are here in an attempt to
    come up with an appropriate public policy with a goal toward
    seeing to it that there is vigorous competition in this field,
    and that the users interests be met to the maximum possible
    extent. It leads me to suggest that Mr. Chairman, that either
    we ought to have another hearing, or some less formal way in
    listening to users, the customers, and seeing what they think
    is likely to promote competition and a valid pricing system to
    the maximum possible extent.
        It seems that we have three different points of view
    presented here today, two of which at least enthusiastically
    say that their position best advances competition, and the
    other, the present INTELSAT gives lip service to it, but I am
    not certain whether it really believes in it or not.
        Senator Breaux said something else that was very important,
    and that I am afraid may have been a shortcoming in some of the
    things this committee has done.
        We here on this committee should try to work this out in a
    way that has broad agreement among members of this committee,
    because these issues are so technical, and if we do something
    on a divided basis here, we almost guarantee that we are not
    going to be successful overall on the floor, and so it is
    important for us to try to work this out.
        We have to ask ourselves this question, Mr. Chairman. Who
    benefits if we do nothing, who benefits if we do not get this
    job done at all, and then we should look, I think, somewhat
    askance at the views of whatever interest that is.
        I would be a lot more comfortable, I tell you, if the two
    real competitors here have been more or less at each other's--
    PanAmSat and COMSAT were able to reach a greater degree of
    accommodation than they have so far, because I rather suspect
    that the two of them are not going to be benefited by doing
    nothing in any particular fashion.
        But if they cannot, we should, and we should do it in a way
    that binds together most of the members of this committee with
    a degree of confidence that will allow us to pass a bill and
    move on to the next generation in a field in which our
    predecessors 35 years ago did a magnificent job, given what
    they had in front of them at that time, but the technology is
    so different now that we need to do the job over again.
        I am told that PanAmSat says that it has worked with a
    number of other people, including one of my constituents, with
    some, either a different bill or alternatives to this bill. We
    have not seen it. If they want it considered, we had better see
    it pretty soon, it seems to me, but even more important than
    that, I will say very bluntly, is that the two of you sitting
    in the middle of the table and your allies, see whether or not
    you cannot settle some of your differences and give the
    Congress a real opportunity to move forward.
        Senator Burns. Senator Gorton, I think you bring a good
    point up on users, and to hear something from users, and we are
    prepared to have another hearing with regard to that. I think
    you make a good suggestion, and we had talked about this, and I
    think that is a good suggestion to hear from the users, and we
    will do that rather quickly before we go to a markup.
        I want to ask one more question. Did you want to respond?
        Mr. Sponyoe. Mr. Chairman, if I might, to the Senator's
    question regarding who is harmed if we do not pass the bill. We
    and Lockheed Martin, of course, cannot close the transaction
    without the bill being adopted, and I think that would be a
    terrible tragedy not to be able to do this today, because I
    think COMSAT, as I said in my earlier remarks, is not going to
    be able to compete on a level playing field in the environment
    that exists to day in the global telecommunications
    marketplace.
        Senator Gorton. Well, that gives you a heck of an incentive
    to see whether or not you cannot reach a consensus.
        Mr. Sponyoe. It certainly does, sir.
        Senator Burns. I want to ask one other question, because
    where we still--the ongoing dialog, Ms. Alewine, is in the area
    of Fresh Look, and I would just like for the record your
    opinion on Fresh Look, and would have other comments from other
    members of the panel with regard to that particular issue.
        Ms. Alewine. Thank you, Mr. Chairman, and I would welcome
    the opportunity to give the committee my comment on Fresh Look.
        There is no requirement for Fresh Look. The FCC and the
    U.S. courts have looked at that very issue and have each
    individually ruled on that. Those contracts were won
    competitively. They have been updated, amended. The people who
    signed them have considered PanAmSat, and when they signed on
    with us and the amendments to the contract and there is
    absolutely no reason for fresh look.
        The state of play of competition in this country is so
    significant, which means that the playing field is so very
    competitive now, that if we do not offer competitive prices and
    services, our customers have so many options.
        If I might take just 10 seconds of the committee's time, 30
    seconds maybe, I do not think I can do it in 10, one of the
    things in preparing for today's hearing was, we hear so many
    times, and that is why I addressed it in my oral remarks, that
    we are a monopoly.
        If I could, because a picture communicates--you know, it is
    worth 1,000 words, and I know I do not have 1,000 words left in
    terms of time, but if I could be allowed to show the committee
    what I mean by the state of play now in international
    competition,
    Mr. Chairman, with your permission, and I apologize to the
    people sitting behind me. We only have one copy of this. This
    was the state of play in 1984.
        What you see below the map of the United States are 12
    INTELSAT satellites, and 15 years ago, ladies and gentlemen,
    that is the picture of a monopoly. Almost all of the
    communications that were going in and out of the United States
    internationally were going over one of those 12 INTELSAT
    satellites or copper cables.
        Let us fast forward to year end, 1998. That is the picture
    of a full field of competition. What you have in blue are the
    INTELSAT satellites, 12 of them. What you have in pink are the
    Hughes PanAmSat satellites. What you have in yellow are the
    other 41 satellites providing international communications in
    and out of the United States. Below the line in red are the
    ones that are planned to be launched and operational by the
    year 2000, and that is only half of the story.
        At the top on the map are all of the fiber optic cables
    that now offer service, voice, video, and data in and out of
    the United States.
        That is a fully competitive playing field. What has been
    the impact on COMSAT? Why do we need critical mass, and why do
    we need to partner with another company where we can thrive and
    survive and offer services to the future, and to our customers
    today?
        In 1984, no doubt about it, that is the picture of a
    monopoly. We had 99 percent of the video business. We had 70
    percent of the voice business, the market share for
    international coming in and out of this country.
        In 1998, 15 years later, we have 35 percent of the video
    business, and that is including New Skies, the New Skies number
    would have to separated out of that, and we have 20 percent of
    the voice and data business.
        Who would be hurt if INTELSAT is not privatized, if this
    merger is not allowed to go forward? The U.S. consumer and the
    state of play for competition, because it would take another
    competitor off the field.
        Thank you.
        Mr. Sponyoe. I will start off by saying I never met a
    customer who does not want a better price, so I guess with that
    premise it comes down to a question of fairness.
        Is Betty right in suggesting that these contracts were
    awarded in a competitive environment and we should be required
    to prove that?
        The one thing I find slightly hypocritical on the part of
    the customers, though, is during the dialog on Fresh Look it
    was suggested that the bill also include making certain that
    those savings go back to the end customer. The suggestion was
    that that is better left to the regulators as opposed to the
    legislators.
        Thank you.
        Mr. Kullman. Mr. Chairman, I would like for you to let me
    ask a question of Senator Gorton regarding the issue of
    INTELSAT paying lip service to these issues. If he could help
    me clarify that, what he means by that, it would help me.
        Senator Gorton. It simply seems to me that your interest in
    changing the present system is not overwhelming.
        Mr. Kullman. The only thing I can say to that is that I was
    elected to this job on a platform of privatizing INTELSAT, and
    my management team and I are totally 110 percent dedicated to
    making sure that happens. There is no future for INTELSAT
    unless it privatizes. It is going to go down the tubes.
        So we see a growth rate today of 4 percent per year. Our
    aggregate compounded aggregate growth rate of the competitors
    is on the order of 17 to 19 percent. We have to work
    differently, and the only way for us to do that is to work in a
    different structure, a privatized structure, so I can only
    assure you that it is our 100 percent intent to make sure that
    privatization happens.
        Now, we have 143 member nations, and we need to convince
    them to move forward, and you know how difficult it is in this
    room and down in the Senate to get agreement. We have to get
    those types of agreements from 143 different nations, and we
    have to move that process forward in a multilateral,
    multinational discussion and negotiation environment, and that
    takes a lot of effort on our part, and also on the part of
    everyone who is a member of this organization.
        Thank you, Mr. Chairman.
        Ms. Alewine. Mr. Chairman, if I might add one quick thing,
    when you asked the question of the Government representative,
    Ambassador McCann today, and she responded about Fresh Look,
    that they did not support it, I would like to tell the
    committee that one of the reasons that I believe they do not
    support it is because a year ago at this time, when the FCC
    granted us non-dominant status based on the fact that we had no
    market power in any of our markets, what they said in that
    order, and I would like to read these two sentences, is that
    ``COMSAT's long-term contracts do not impede COMSAT's customers
    from switching service providers.''
        ``COMSAT's switched voice customers are sophisticated
    customers, possessing significant bargaining power giving them
    the flexibility to route a significant portion of their
    switched voice traffic to their own transmission facilities or
    those of alternative carriers at any time, as they choose.''
        This also has been looked at by the Federal courts and in
    their written decision they said, ``nothing in the record
    suggests that COMSAT secured any of the contracts by means of
    any anticompetitive act against''--and in this particular
    instance we had been sued by PanAmSat--``against PanAmSat.''
        ``On the contrary, the record suggests that for their own
    reasons the common carriers elected to secure long-term deals
    with COMSAT only after considering and rejecting offers from
    PanAmSat.'' Those contracts should not be overturned. That is a
    taking of a private, publicly traded U.S. company's property.
        Thank you.
        Senator Burns. Thank you. A little bit on Senator Gorton's
    question. With 143 countries that makes up your INTELSAT, can
    you privatize by January 1, 2002?
        Mr. Kullman. We are on a schedule where we will approach
    the Governments in October of this year and we will work very
    hard to get the decision in principle in that meeting that we
    are heading down the right path. It is our internal work
    schedule then to convince the Governments and the signatories
    for the final solution within a year's period after that date,
    which would take us to the year 2000.
        Senator Burns. What will happen to INTELSAT should the U.S.
    pass legislation calling for COMSAT withdrawal should INTELSAT
    not privatize by date certain and COMSAT does, in fact,
    withdraw?
        Mr. Kullman. That is a hypothetical question.
        Senator Burns. I know it is hypothetical. That is what we
    were dealing in a while ago.
        Mr. Kullman. It would be very unfortunate, obviously. If
    that happened I would think INTELSAT would still continue to
    exist and serve the rest of the world.
        Senator Burns. Mr. Cuminale.
        Mr. Cuminale. Mr. Chairman, could I take us back to direct
    access and Fresh Look, because while it is not our issue, and I
    would encourage you when you have your hearing or discussions
    with users to raise it with them, because they are passionate
    about it, so much so that they have convinced us that direct
    access along the lines I testified as to earlier makes good
    sense for the U.S. consumer and we should not argue against it,
    which historically PanAmSat did.
        Their argument essentially is that when they made the
    contracts they made with COMSAT they did not have competitive
    choices, and that those contracts therefore are contracts that
    were obtained at a time of monopoly, and I suppose there will
    be some debate as to where on that spectrum we saw on those
    charts they were when those contracts were entered into.
        Their feeling is, with direct access they should have Fresh
    Look, because without Fresh Look direct access makes no sense,
    and more importantly, without Fresh Look--of course, Fresh Look
    makes no sense without direct access.
        They go so far as to say, because one of the things COMSAT
    has said is, fine, have direct access, fine, let them have
    Fresh Look. They cannot get satellite capacity, because we are
    the ones who are holding it, so one of the things they want to
    talk to you about is portability of the capacity if they do
    Fresh Look and if they do compete those contracts
    competitively.
        It is an interesting notion, because if they are so
    interested in the portability of the capacity, I think one of
    the things they figure is, where they are probably going to end
    up is on a direct access deal with INTELSAT, not with PanAmSat,
    and not on the cable systems, otherwise they would not be
    interested in that portability.
        But I would suggest to you that you inquire of them,
    because it truly is their issue and not ours.
        Ms. Alewine. Mr. Chairman, if I might respond to direct
    access, and I know this is beginning to sound like he-said,
    she-said, and I apologize for that.
        Senator Burns. Well, at least it is in public. [Laughter.]
        Ms. Alewine. I do not know where Mr. Cuminale gets his
    quotes from that we said this or we said that. I know where I
    get mine. I get mine from public meetings. To the best of my
    knowledge, no one in my corporation has ever said, fine, let
    them have direct access, fine, let them have Fresh Look, we
    have tied up all the capacity. I have never heard that before.
        But let us talk about that capacity, and let us talk about
    direct access, because a lot of people say that we want direct
    access to your assets. Well, we happen to own the U.S. portion
    of the INTELSAT system. Everybody talks about facilities-based
    competition. Those are, ladies and gentlemen, our facilities.
    Yes, we were created by an act of Congress, but we have never
    had one penny of Government funding, one penny of a taxpayer
    dollar in the creation or our investments in INTELSAT.
        This corporation, COMSAT Corporation, was created by an
    initial public offering of $200 million. It has had shareholder
    money in it from the get-go, and those are our facilities that
    we have invested in.
        Now, as I said earlier, there is this big brouhaha about
    all of the big guys attacking, trying to take the little guy's
    revenue.
        Remember the number that I quoted to you? We get $250
    million a year of revenue from our INTELSAT business. It is in
    public documents, so I know this number is correct, and that is
    just a little more than one of the companies that is on Mr.
    Cuminale's large company impressive list spent on their ad
    budget in 1998. Iridium spent $200 million for advertising.
        I am having a real hard time, Mr. Chairman, understanding
    why all of these very big companies now have focused on taking
    our facilities, taking our assets. Yes, we control access to
    them, but that does not make us a monopoly. It is just as
    PanAmSat controls access to their Hughes satellites.
        I am having a really hard time, unless you connect the
    dots, and you say they do not want INTELSAT privatized, they
    want all of this delayed and tied up in legislation, and COMSAT
    and Lockheed Martin tied up in knots. They do not want this
    merger to go through, because in fact they do not want another
    strong competitor. They would like to keep us at $250 million a
    year in an intergovernmental organization that cannot take
    decisions quickly.
        That is not procompetitive, and that is not in the U.S.
    public consumers' best interest.
        Thank you.
        Mr. Sponyoe. Which I believe is the short or long form,
    depending upon your perspective, of Senator Gorton's question.
        Mr. Kullman. Let me just make one comment on direct access,
    Mr. Chairman. It is not really an issue for INTELSAT. Direct
    access is a national--it is a domestic issue, regulatory issue
    for each individual country to decide on, but I also want to
    make clear that we do not see direct access as our carrot. We
    really see the issue of direct access and privatization as two
    separate issues. What is important for us is to privatize for
    business reasons and get on with it as fast as we can.
        Senator Burns. Just about all the questions that I have had
    today have been covered in the give-and-take and the rhetoric
    today, and I appreciate that.
        I will insert Senator Stevens' statement for the record.
        [The prepared statement of Senator Stevens follows:]
        Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
        I want to congratulate Senator Burns for holding this hearing and
    for championing this issue in the Senate.
        Reforming and bringing true privatization to the international
    satellite world is a true challenge.
        I would argue it is even more ambitious than reforming our domestic
    telecommunications industry. At least by 1996, Judge Greene had showed
    us the way by breaking up AT&T.
        I've met with Senator Burns on this issue and am convinced that his
    goal is to privatize INTELSAT and to ultimately level the playing field
    in the satellite industry.
        Based on that conviction, I am committed to helping him get a bill
    to take to conference with Chairman Bliley.
        I hope that sometime this summer, I can stand on the floor of the
    Senate and rename S. 376 the Burns-Bliley bill.
        Is this bill perfect? No. But I believe Senator Burns is definitely
    on the right track.
        We need true privatization, we need free market access to all
    carriers, and we need to discourage monopolistic behavior.
        I'm convinced Sen. Burns wants these things too, and I look forward
    to helping him achieve these goals.

        Senator Burns. We also have a statement by the Majority
    Leader, Senator Lott, who is supporting our efforts.
        [The prepared statement of Senator Lott follows:]
      Prepared Statement of Hon. Trent Lott, U.S. Senator from Mississippi
        Let me first thank my friend Senator Burns, the distinguished
    Chairman of the Communications Subcommittee, for holding this hearing
    to build upon past discussions to privatize international satellite
    operations.
        I am grateful for his leadership in moving ahead on this much-
    needed reform of a 35-year old policy.
        The issues are both complex and important in this global
    marketplace America finds itself in.
        Senator Burns has taken the bull by the horns, and I appreciate his
    willingness and tenacity to tackle this issue.
        I am here today to add my personal support to the Chairman's
    efforts to ensure that customers benefit from whatever approach is
    finally taken in the international satellite field . . . a field that
    just a few decades ago was dominated by intergovernmental
    organizations.
        Today's international marketplace is different from the one found
    in 1962 when all this began. And Senator Burns is right--today's policy
    solutions must reflect the realities of 1999 and be flexible enough to
    reach into the next century.
        Congress was right in 1962, even visionary, to establish an
    international cartel--INTELSAT--to blaze the trail of a global
    communications network. The private sector did not have the capability
    to do a commercial satellite system.
        COMSAT, as INTELSAT's U.S. signatory, has done an excellent job for
    over 3 decades in carrying out its Congressional charter to fulfill our
    national policy of global communications. COMSAT has laid a solid
    foundation.
        However, commercial satellite service has come of age. Today, it is
    a viable opportunity and a real option.
        In fact, numerous private companies have established global and
    regional satellite networks that provide workable commercial services.
    And these services are growing in demand.
        Yes, strides have been made by these intergovernmental entities to
    privatize. This is good, but this is not enough.
        Congress needs to take this opportunity to both encourage and
    ensure that the new public policy for the next century will provide
    competition in the new satellite community.
        Congress should enact a pro-competitive bill because American
    customers deserve the benefits.
        Congress also needs to look past the surface debate of which
    organization will provide the services and focus on the ultimate
    consumer.
        Congress also needs to factor in our domestic market as it relates
    to markets around the globe.
        Conrad, you've got a great catchy title for your bill--the Open-
    Market Reorganization for the Betterment of International
    Telecommunications Act--or ``ORBIT.''
        You have changed it from your original approach in the last
    Congress. This is good.
        This new bill already enjoys broad bipartisan support from several
    members of this Committee. This is good.
        I am encouraged because the stage is now set for an open debate.
        I know that Senator Breaux has some concerns about market access,
    and other remaining issues may need to be ironed out before a unified
    Senate position can be achieved . . . but I believe we can.
        I have on several occasions spoken with Chairman Bliley about this
    matter. As most of you know, Chairman Bliley has for years been the
    champion for satellite privatization in the House.
        Chairman Bliley indicated his continued interest and willingness to
    work together on a bill that can pass both chambers this year. This is
    good.
        Mr. Chairman, it is my understanding that today's hearing is the
    1st of a 2 part series, and the next hearing will be for the customers.
    This is crucial because their needs are the reason why Congress is
    advancing the competition and choice aspects. Hearing their
    perspectives will be useful.
        I want to thank today's witnesses for their time and insights as we
    move forward on the debate.
        I see some familiar faces.
        At this time I do not want to ask questions, but I would like to
    reserve the right to submit questions at a later date for the record.
        I look forward to bringing a consensus bill onto the floor soon for
    the full Senate's consideration.
        Again, Mr. Chairman, thank you for holding this hearing.

        Senator Burns. Any questions that might be directed to you
    by anybody else on the committee, I would appreciate a response
    to them and to the committee. All of your testimony will be
    made a part of the record, and I am sure that we will keep the
    record open for comments as we continue the dialog on this.
        Senator Hollings also has his statement that he wants to
    enter into the record today, and without objection we will do
    all of that.
        [The prepared statement of Senator Hollings follows:]
                Prepared Statement of Hon. Ernest F. Hollings,
                        U.S. Senator from South Carolina
        INTELSAT and COMSAT were initially established when there was no
    global satellite service. Both organizations have successfully
    fulfilled their mission in linking the United States and countries
    around the world by satellite communications. Since their inception,
    however, the marketplace has changed. Today, there are a number of
    satellite systems providing a wide variety of services and many more
    preparing to implement service. Recognizing these changes, INTELSAT is
    working to become a private company.
        While it is critical for INTELSAT to privatize, it is also
    important that it does so in a pro-competitive manner. The fact is that
    privitization of INTELSAT in a non-competitive manner, will enable it
    to distort competition in the U.S. market thereby potentially adversely
    impacting the ability of U.S. systems to enter foreign markets.
        Once INTELSAT is privatized, the role of COMSAT will change. In
    addition, there has been on-going speculation about the purchase of
    COMSAT by Lockheed Martin. Before that can occur, however, the
    statutory ownership restrictions on COMSAT must be lifted. In light of
    Lockheed's proposal and the privatization of INTELSAT, COMSAT will
    ultimately has to transition from a signatory to a non-signatory role.
        Senator Burns introduced last year as he has again this year,
    legislation concerning the privatization of INTELSAT. This hearing
    presents a good opportunity to examine the provisions of Senator Burns'
    bill--in particular, the provision that addresses the Administration's
    certification of INTELSAT's privatization. This provision places the
    Administration in the role of the FCC in reviewing the entry of
    INTELSAT into the U.S. market.
        Thus, I welcome the witnesses and look forward to hearing their
    testimony. I thank Senator Burns for having this hearing.

        Senator Burns. I appreciate your time today. It has been a
    long afternoon, very busy, but as we make our way down the
    trail on this I am satisfied we can come up with a piece of
    legislation that will do what we want to do and also what you
    want to do.
        Thank you for coming today. These hearings are closed.
        [Whereupon, at 4 p.m., the subcommittee adjourned.]
                                A P P E N D I X

                             Federal Communications Commission,
                                        Washington, DC, April 22, 1999.
    Hon. Conrad Burns
    United States Senate
    Washington, DC
        Dear Mr. Chairman,

        With this letter, I am providing a written follow up to a question
    you asked in the March 25th hearings on the Open-market Reorganization
    for the Betterment of International Telecommunications Act before the
    Senate Subcommittee on Communications (S. 376). I appreciate the
    opportunity to provide these responses.
        You asked for my assessment of the recently created spinoff of
    INTELSAT, New Skies Satellites, N.V. (New Skies). New Skies was created
    as a result of a
    March 31, 1998 Assembly of Parties decision to form a private satellite
    company incorporated in the Netherlands to provide various video and
    broadband services.\1\ The United States associated provisionally with
    the Assembly decision in creating New Skies because it believed there
    was continuing uncertainty as to whether true separation and
    independence of New Skies from INTELSAT could be effected.\2\
    ---------------------------------------------------------------------------
        \1\ INTELSAT Assembly of Parties, Record of Decisions of the
    Twenty-Second (Extraordinary) Meeting. (AP-22-3E) Salvador, Brazil,
    March 31, 1998.
        \2\ See Statement of the United States appended to the Assembly of
    parties, Record of Decisions of the Twenty-Second (Extraordinary)
    Meeting (AP-22-3E) Salvador, Brazil, March 31, 1998.
    ---------------------------------------------------------------------------
        On November 30, 1998, INTELSAT transferred to New Skies five
    operating satellites and one satellite under construction. New Skies
    then began operations. At that time, in order to assure continuity of
    services to U.S. customers already using the satellites transferred
    from INTELSAT to New Skies, the International Bureau authorized
    temporary operation of 90 earth stations to operate with New Skies
    satellites pending Commission action on applications filed by the earth
    station operators for permanent authority.\3\ The authorizations permit
    licensees to add new customers pending Commission action on the
    applications of the earth station operators.
    ---------------------------------------------------------------------------
        \3\ Requests for Special Temporary Authority to Operate INTELSAT
    Satellites Transferring to New Skies Satellites, N.V., Report and
    Order, DA 98-2431, November 30, 1998, (STA Order).
    ---------------------------------------------------------------------------
        In reviewing applications to operate with New Skies, the Commission
    will apply the standard implementing the WTO Agreement on Basic
    Telecommunications Services (DISCO II Order) \4\ for affiliates or
    spinoffs of INTELSAT or Inmarsat to provide service in the United
    States. In the DISCO II Order, the Commission adopted a presumption in
    favor of entry for space stations licensed by WTO members. However, the
    Commission reserved the right to attach conditions to the grant of
    authority, or in the exceptional case in which an application would
    pose a very high risk to competition in the U.S. satellite market, to
    deny the application. The DISCO II presumption in favor of entry will
    apply to New Skies because New Skies' satellites will be authorized by
    the Netherlands, a WTO member.
    ---------------------------------------------------------------------------
        \4\ Non-U.S. Licensed Satellites Providing Domestic and
    International Service in the United States, Report and Order, 12 FCC
    Red 24094 (Nov. 26, 1997)(DISCO II Order).
    ---------------------------------------------------------------------------
        In the DISCO II Order the FCC also set forth criteria that apply to
    New Skies. These criteria are reflected in S. 376 which would in
    effecting codify the FCC's approach to considering INTELSAT and
    Inmarsat spinoff entry into the U.S. market. In determining whether an
    application to serve the U.S. market by an INTELSAT spinoff raises the
    potential for competitive harm, the FCC will consider any potential
    anti-competitive or market distorting consequences of continued
    relationships or connections between INTELSAT and New Skies,
    particularly the risk or likelihood of collusive behavior or cross-
    subsidization. Specifically, the Commission will evaluate the ownership
    structure of New Skies, including its affiliation with INTELSAT and the
    effect of INTELSAT and signatory ownership; whether New Skies can
    directly or indirectly benefit from INTELSAT's privileges and
    immunities; the extent to which there is arms length conditions
    governing the relationship between INTELSAT and New Skies. The FCC will
    consider the extent to which there are separate directors, officers,
    employees, accounting systems as well as fair market valuing for
    permissible business transactions that is verifiable by an independent
    audit and consistent with normal commercial practice; whether there is
    common marketing or recourse to INTELSAT assets for credit or capital;
    and whether INTELSAT will register or coordinate spectrum or orbital
    locations on behalf of New Skies.
        In applying the DISCO II standards the Commission will assess
    progress being made toward independence of New Skies from INTELSAT and
    whether New Skies is unfairly benefitting from its unique INTELSAT
    heritage to the detriment of its competitors. The Commission will apply
    DISCO II standards to the facts contained in the record. For example,
    New Skies currently is 100 percent owned by INTELSAT and its
    signatories. (INTELSAT has a ten percent ownership in a nonvoting trust
    and the signatories have the remaining 90% share). New Skies has
    entered into various time-limited services agreements with INTELSAT
    that involve INTELSAT in operation of important aspects of New Skies
    satellites. In addition, customers inherited by New Skies from INTELSAT
    continue to look to INTELSAT as a guarantor of service either because
    contracts have been assigned rather than novated, or the customers are
    served under ``lease back'' arrangements.
        The FCC staff is reviewing petitions and comments filed in response
    to the applications, as well as documents submitted by New Skies in
    February 1999 that reflect INTELSAT and New Skies implementation of
    March, 1998 Assembly of Parties decision. The staff also has been in
    discussions with New Skies representative regarding these documents.
    The staff has requested and is awaiting information from New Skies as
    to whether New Skies will begin public trading of shares by the end of
    1999.\5\ We are hopeful of submitting recommendations to the Commission
    for consideration in the near future.
    ---------------------------------------------------------------------------
        \5\ See Testimony of Ambassador Vonya B. McCann before the
    Subcommittee on Communications, Senate Committee on Commerce, Science,
    and Transportation, September 10, 1998.
    ---------------------------------------------------------------------------
        Thank you again for the opportunity to testify at the March 25
    hearing and to expand upon my responses in this letter. If you or your
    staff have further questions, please feel free to contact me.
                Sincerely,
                                        Roderick Kelvin Porter,
                                                   Acting Bureau Chief.
                                     ______

                                     ______

      Prepared Statement of F. Thomas Tuttle, Vice President and General
                              Counsel, Iridium LLC
                                  introduction
        Iridium LLC, a Washington, DC-based, global mobile satellite
    telephone company, appreciates the opportunity to submit testimony for
    today's hearing. Iridium is pleased that the Subcommittee is
    considering legislation that addresses the privatization of the
    intergovernmental satellite organizations (IGOs), a goal Iridium fully
    supports.
        Congress authorized U.S. participation in the IGOs, INTELSAT and
    Inmarsat, and guided the initial development of the commercial
    satellite services market by passing the Communications Satellite Act
    in 1962 and the International Maritime Satellite Telecommunications Act
    in 1978. It is appropriate that Congress is now turning its attention
    to the impressive growth of the commercial satellite services market,
    the major and increasing role of private industry in that market, the
    resulting need for privatization of the IGOs, and the potential impact
    such privatization will have on competition in the market for
    international satellite services.
        Satellite legislation dealing with competition in the global
    marketplace comes around once in a generation. The legislation that
    will be enacted is likely to be the most significant (if not the only)
    legislation addressing competition in the international satellite
    services for many years to come. Iridium is concerned, therefore, that
    there is nothing in S. 376 that addresses the consequences of
    Inmarsat's privatization or the effect such privatization will have on
    market access and competition in the mobile satellite services. Without
    addressing the privatization of Inmarsat, S. 376 is incomplete. It may
    address the impact of the privatization of an IGO on the market for
    fixed satellite services, but it does nothing to promote a fully
    competitive domestic and international market for mobile satellite
    services.
        Inmarsat was created in 1979 and began providing service in 1982.
    As Inmarsat's current Internet web site explains,

              ``When Inmarsat began service in 1982, its remit was to
            provide communications for commercial, distress and safety
            applications for ships at sea.
              Inmarsat's name is an acronym of its original full title, the
            International Maritime Satellite Organization, and, while it
            has branched out into other, non-maritime markets and changed
            its name to the International Mobile Satellite Organization,
            the acronym has remained.
              Inmarsat grew out of an initiative of the then International
            Maritime Consultative Organization. At the time, mobile
            satellite communication was an unexplored technology and the
            industry an embryonic, untested one.
              So it was decided that Inmarsat should be a joint co-
            operative venture of governments, with their signatories--
            nominee organizations, in most cases the country's post and
            telecommunications provider (PTT)--contributing the capital and
            bearing the high risk involved.''
        Inmarsat's web site also explains that,

              ``[Inmarsat] has since expanded into land, mobile and
            aeronautical communications, so that users now include
            thousands of people who work in remote areas without reliable
            terrestrial networks, or travellers anywhere.
              In addition to maritime customers, today's typical users
            include journalists and broadcasters, health teams and disaster
            relief workers, land transport fleet operators, airlines,
            airline passengers and air traffic controllers, government
            workers, national emergency and civil defence agencies, and
            heads of state.''

        At the time the IGOs were created, there were no privately owned
    international satellite systems. Satellite technology was still being
    developed, making satellite-based services both risky and very
    expensive. As a result of technological advances over the last four
    decades, it is now economically possible for private companies to
    provide increased satellite based services with competitive benefits
    such as lower costs to consumers and expanded services to meet new
    demand. The convergence of technologies in which the US is preeminent--
    telecommunications network design, computer-based communications
    applications, micro-miniaturization of electronic components, and
    Earth-orbiting satellites--has provided unparalleled access to the
    advantages to modern telephone and data infrastructures around the
    globe.
        On November 1, 1998, the Iridium system commenced commercial
    operations, providing mobile satellite services (MSS)--the types of
    services provided by Inmarsat, but from a constellation of low Earth
    orbiting (LEO) satellites. The 66-orbiting satellites in the Iridium
    system function as cellular towers in the sky, providing for the first
    time a completely global telephone and messaging network that can be
    used on land, on sea, or in the air.
        The Iridium system is not the only MSS system that will provide
    mobile satellite telecommunications services within the next few years.
    US-based (LEO) systems such as Globalstar, Ellipso, and Constellation,
    are at various stages of design, development, and deployment, with
    Globalstar expected to follow Iridium as the second to market in 1999.
    There are also regional geostationary mobile satellite systems under
    development all over the world, including the already operational AMSC
    system in the U.S. All of these systems will be competing with each
    other and with Inmarsat and its ``privatized'' affiliate, ICO Global
    Communications (ICO). The European-based ICO was established by
    Inmarsat in 1995. ICO and Inmarsat have substantial common ownership
    and control. The ICO system is expected to begin services in the year
    2000.
        In September 1998, Inmarsat's Assembly of member governments
    reached an agreement to privatize Inmarsat in April 1999.
                     privatization, competition and s. 376
        Iridium fully supports Inmarsat privatization. Iridium is
    concerned, however, that S. 376 does not recognize and address the
    consequences of Inmarsat's privatization.
        When the privatized Inmarsat begins operations as a ``private''
    entity, it will still (at least for another two years) have the same
    owners (many of which are government-controlled entities) that give it
    extraordinary access to global spectrum and foreign markets. It will
    retain the same assets, including the satellites and the huge amount of
    spectrum it received and controlled as an IGO. No mobile satellite
    operator that is truly private controls anywhere near that amount of
    spectrum today or is likely to in the future. No U.S. company can match
    this incredible competitive advantage.
        Inmarsat should not be permitted, through privatization, to
    transform spectrum from public to private use to the disadvantage of
    consumers and competition. There is no regulatory relief or remedy
    available to the mobile satellite services industry to rectify the
    mobile satellite spectrum inequity.
        With S. 376's focus on INTELSAT and fixed satellite services, the
    mobile satellite services sector is left without any opportunity for
    competition issues to be addressed in this legislation. S. 376 states
    that the purpose of the Act is to promote a fully competitive domestic
    and international market for satellite communications services for the
    benefit of consumers and providers of satellite services by fully
    encouraging the privatization of the intergovernmental satellite
    organizations, INTELSAT and Inmarsat, and reforming the regulatory
    framework of COMSAT Corporation.
        Yet S. 376 fails to meet this purpose in at least two respects.
    First, it fails to provide competitive benefits to the consumers of
    mobile satellite services by failing to give the US the ability to use
    incentives, restrictions, penalties and regulatory benefits necessary
    to ensure a level-playing field for all competitors in the market for
    mobile satellite services. Second, it facilitates access to the US
    market for a privatized Inmarsat that has an unreasonable amount of
    spectrum globally without addressing the issue of how this impacts
    competition in the mobile satellite communications market.
        The exclusion of Inmarsat from any review of competitive harm
    ignores the impact of Inmarsat's privatization on consumers and the
    mobile satellite industry and is inconsistent with the treatment of
    INTELSAT in the bill. While it is true that privatization of Inmarsat
    is apparently ahead of the privatization of INTELSAT, since Inmarsat is
    scheduled to establish the private company next month, it must be
    recognized that privatization is not complete on the day that the IGO
    establishes the new, private company. Privatization is a process that
    includes a transition phase that begins the day the IGO transfers its
    assets to a private company and ends after completion of the initial
    public offering (IPO). Inmarsat is not currently scheduled to issue its
    IPO until at least another two years after the ``private'' company is
    created and the IGO assets transferred to it.
        As a matter of US policy, the privatization of Inmarsat should be
    conducted in a way that meets the same competitive requirements as the
    privatization of INTELSAT. The provisions of S. 376 on access to the US
    market, certification, review of license applications, and efficient
    use of spectrum resources should apply to Inmarsat until it has
    completed an IPO.
        There are other issues that need to be addressed in this
    legislation to ensure a fully competitive global market for satellite
    communications. Most importantly,
    S. 376 should prohibit any merger or exclusive arrangements between the
    privatized Inmarsat and ICO, the first ``privatized'' spin-off of
    Inmarsat.
                      market access and spectrum dominance
        The greatest challenge that Iridium and other privately owned MSS
    companies face as they prepare to introduce competitive services in the
    global marketplace is obtaining access to spectrum and markets world-
    wide. That challenge is made more difficult when their government-owned
    competitors have the ability to exert influence and/or control over
    access to markets and spectrum. Iridium has experienced first hand this
    particular difficulty, which is why it is so concerned about the
    absence of provisions that address market access for the privatized
    Inmarsat in S. 376.
        The General Accounting Office (GAO), in its July 1996 report,
    Competitive Impact of Restructuring the International Satellite
    Organizations (GAO Report), raised concern about the competitive edge a
    newly created affiliate would have over competitors when a large
    percentage of the affiliate is owned by Inmarsat's signatories. GAO
    noted that signatories have the incentive to grant access to their
    markets and preclude or inhibit access to other competitors, even
    though the competitors might offer services at lower prices.
        GAO wrote that ``when Inmarsat created ICO, it provided an example
    of how a treaty organization could restructure by forming a single
    affiliate whose ownership was primarily restricted to the parent
    organization and its signatories. ``Inmarsat and its signatories have
    both the incentives and the ability to provide ICO with market
    advantages over its potential competitors.'' GAO Report at 10.
        GAO addressed industry concern about an ICO and restructured
    Inmarsat relationship, especially since Inmarsat is on record as having
    an interest in the possibility of a future merger of ICO with a
    restructured Inmarsat. The GAO noted that ``ownership ties between ICO
    and a largely privatized Inmarsat could create a company with
    significant advantages in the market that would be free of any of the
    decision-making or operational burdens imposed by an intergovernmental
    structure. Such ownership ties might reinforce the incentives of
    Inmarsat's signatories to open their domestic markets to ICO and the
    reorganized Inmarsat but not necessarily to potential competitors.''
    GAO Report at 14.
        Inmarsat and ICO together currently control access to 75% of the
    spectrum that can be used for global MSS systems through the year 2005.
    If Inmarsat and ICO are permitted to reunite, the mobile satellite
    industry will be dealt a devastating blow and the hope of a competitive
    mobile services market will be unlikely due to the impossibility of
    other MSS providers obtaining the necessary spectrum to provide global
    services.
                                    summary
        S. 376 can offer the incentive that will encourage other countries
    to open access to spectrum and markets. Access to the US market is the
    only way the US can create a level playing field. Congress can send a
    very important message to Inmarsat and its owners that access to the US
    market will be dependent on equitable allocation of MSS spectrum
    globally. The Commission and the United States government will
    incorporate the intent of Congress in their decisions on access to the
    US market.
        The privately financed US mobile satellite industry has struggled
    against crushing financial odds, technical challenges, and barriers to
    access to spectrum to provide services unheard of fifteen years ago.
    For this industry to grow and develop and effectively compete, Congress
    must sweep away the last vestiges of state-supported monopolies and
    allow the free-market to work. Iridium and other US satellite companies
    seek a fully competitive market--an equal opportunity to compete for
    spectrum and customers--not protection from competition.
        Pioneering companies like Iridium should not be competitively
    disadvantaged while Inmarsat begins its transition to a privatized
    commercial entity with tremendous assets gained at public expense. We
    urge the Senate to adopt aggressive and forward-looking legislation
    that ensures that true privatization will occur without harm to US
    mobile satellite service providers.
        We urge the Senate to expand the scope of S. 376 in order to
    fulfill genuinely the goal of the legislation to promote a fully
    competitive domestic and international market for satellite
    communications services for the benefit of consumers and providers of
    fixed and mobile satellite services.