[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE ORBIT ACT: AN EXAMINATION OF PROGRESS MADE IN PRIVATIZING THE
SATELLITE COMMUNICATIONS MARKETPLACE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
APRIL 14, 2005
__________
Serial No. 109-8
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
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------------------------------
COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING, ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
Bud Albright, Staff Director
David Cavicke, Deputy Staff Director and General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications and the Internet
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida Ranking Member
PAUL E. GILLMOR, Ohio ELIOT L. ENGEL, New York
ED WHITFIELD, Kentucky ALBERT R. WYNN, Maryland
BARBARA CUBIN, Wyoming MIKE DOYLE, Pennsylvania
JOHN SHIMKUS, Illinois CHARLES A. GONZALEZ, Texas
HEATHER WILSON, New Mexico JAY INSLEE, Washington
CHARLES W. ``CHIP'' PICKERING, RICK BOUCHER, Virginia
Mississippi EDOLPHUS TOWNS, New York
VITO FOSSELLA, New York FRANK PALLONE, Jr., New Jersey
GEORGE RADANOVICH, California SHERROD BROWN, Ohio
CHARLES F. BASS, New Hampshire BART GORDON, Tennessee
GREG WALDEN, Oregon BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska ANNA G. ESHOO, California
MIKE FERGUSON, New Jersey BART STUPAK, Michigan
JOHN SULLIVAN, Oklahoma JOHN D. DINGELL, Michigan,
MARSHA BLACKBURN, Tennessee (Ex Officio)
JOE BARTON, Texas,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Abelson, Donald, Chief, International Bureau, Federal
Communications Commission.................................. 8
Auckenthaler, Alan, Vice President, Inmarsat Ventures Limited 22
Goldberg, Daniel S., Chief Executive Officer, New Skies
Satellite B.V.............................................. 12
Hecker, JayEtta Z., Director, Physical Infrastructures Team,
Government Accountability Office........................... 25
Spector, Phillip L., Executive Vice President and General
Counsel, Intelsat Global Service Corporation............... 19
(iii)
THE ORBIT ACT: AN EXAMINATION OF PROGRESS MADE IN PRIVATIZING THE
SATELLITE COMMUNICATIONS MARKETPLACE
----------
THURSDAY, APRIL 14, 2005
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications
and the Internet,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:06 a.m., in
room 2123 of the Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Stearns, Shimkus,
Pickering, Terry, Blackburn, Barton (ex officio), Markey,
Inslee, and Dingell (ex officio).
Staff present: Kelly Cole, majority counsel; Will Norwind,
policy coordinator; Anh Nguyen, legislative clerk; Peter Filon,
minority counsel; Johanna Shelton, minority counsel, and Turney
Hall, minority staff assistant.
Mr. Upton. Good morning. I want to again publicly thank our
chairman, Mr. Barton, for the wonderful job he has done the
last week and a half, from when we started the markup on the
Energy Bill. We finished about 10:45 last night, and it was a
great bipartisan effort. And I look forward to having that bill
on the House floor next week in the couple days. I know the
other committees which had much smaller portions also finished
their work yesterday, so we look forward to that.
We are here--for those of you that weren't here last night,
it is a little bit of a slower morning, I guess you could say.
There are a number of different hearings that are going on. I
understand that a number of Democrats are on the way. So that
we can make our 2 p.m. planes this afternoon, I thought that we
would start pretty close to on time. And I will start with an
opening statement, and then we will go down the row. And when
we finish, we will go with our panel, and then with questions.
Today's hearing is entitled ``The ORBIT Act: An Examination
of Progress Made in Privatizing the Satellite Communications
Marketplace.'' Throughout the 1960's and 1970's, the United
States, along with 84 other nations, participated in the
establishment of a global satellite communications system
through the creation of two intergovernmental organizations,
INTELSAT and Inmarsat.
Virtually all member nations or signatories were
represented primarily by their State-owned and controlled
telecommunication companies. And during the 1970's and 1980's,
INTELSAT was the only wholesale provider of certain types of
global satellite communications services, such as international
telephone calls, and the relay of television signals
internationally. But in the early 1980's, a number of
applicants filed petitions with the FCC to offer competitive
international communications services. And as competition with
INTELSAT grew, there was considerable criticism from commercial
satellite companies because they believe that INTELSAT enjoyed
advantages by virtue of its intergovernmental status that
diminished marketplace competition.
By the mid-1990's, these competitors began to argue that in
order for the satellite marketplace to become fully
competitive, INTELSAT would need to be privatized so that all
industry participants could participate on a level playing
field. And at the same time, the U.S. Government was increasing
pressure on INTELSAT and Inmarsat to privatize. And although
both had made public announcements that they intended to
privatize, Congress took additional steps on a bipartisan basis
to ensure that it, in fact, occurred.
In March 2000, Congress passed the ORBIT Act to promote a
competitive global satellite communications services market.
And the ORBIT Act required both INTELSAT and Inmarsat to be
transformed into privately held for-profit corporations with a
board of directors that would be independent of former
signatories.
Today, we are examining the progress that we have made in
privatizing the global satellite communications marketplace,
pursuant to the ORBIT Act. From my perspective, it appears as
if the ORBIT Act has exceeded expectations. In fact, many view
certain segments of the global satellite communications
marketplace to be so competitive today, that coupled with
additional competitive pressure from submarine fiber capacity,
the marketplace is actually unhealthy.
So today, we are going to be examining what marketplace
adjustments might be on the horizon, and whether the ORBIT Act
needs updating or tweaking in light of that.
I look forward to testimony of today's witnesses, and I
thank them for their participation, particularly knowing that
we got their testimony in advance, so that after we finish this
long markup of the last week and a half, we can go home with a
rather thick notebook to look at on the couch, celebrating a
great win on the Energy Bill.
And I yield for an opening statement to the distinguished
chair and good fellow, Mr. Barton, for an opening statement.
Chairman Barton. Thank you, Mr. Chairman, and I want to
thank you and Mr. Shimkus for your fine work, Mr. Dingell who
just arrived. In fact, I might yield my time since we should
alternate between the majority and the minority. Since Mr.
Dingell is here, if he wishes to give his statement, then I
will give mine.
Mr. Upton. Okay.
Mr. Dingell. Mr. Chairman, I insist I be permitted to defer
to the chairman of the committee.
Mr. Upton. Okay. Okay, that is fair.
Chairman Barton. I want to thank you, Mr. Upton, for
holding this hearing. It has been 5 years since Congress passed
the Open Market Reorganization for the Betterment of
International Telecommunications Act, which we call the ORBIT
Act. This hearing is designed to take a look at what Congress
passed and consider the Act today in light of what has happened
since we passed it. It was intended to promote a competitive
global satellite communications service market by requiring the
two intergovernmental organizations, INTELSAT and Inmarsat, to
privatize. Both of those groups were comprised of member
nations or signatories that were represented primarily by their
State-owned and controlled telecommunications companies. For
many years, those were the only satellite providers for
international telephone calls, and the international relay of
television signals. The ORBIT Act was designed to privatize
those organizations, forcing them to compete in the market, and
thereby providing consumers with better and more affordable
services.
I am pleased to say that the goals of the ORBIT Act have
been largely achieved. Today we have a vibrantly competitive
market for international satellite services, and government
ownership in both companies has diminished significantly.
Consumers of those services, as well as the health of the
industry are certainly better for it.
So 5 years after passage of ORBIT, we are here today to
find out how it is working, whether there is any updating that
needs to be made in light of the competitive market today, and
how the satellite industry has developed.
I look forward to hearing from our panel of witnesses, and
thank them for their participation.
Thank you again, Mr. Upton, for chairing this important
hearing. With that, I yield back.
Mr. Upton. Thank you. Now before I yield to Mr. Dingell for
an opening statement, I would just announce that--make
unanimous consent that all members opening statements will be
made part of the record.
With that, I yield to the distinguished gentleman from the
great State of Michigan, Mr. Dingell, for an opening statement.
Mr. Dingell. Mr. Chairman, thank you, and thank you for
holding this hearing today on the ORBIT Act. I want to express
my thanks to you and also, to the chairman of the full
committee.
This Act became law over 5 years ago. It was intended to
primarily manage the privatization of the former international
treaty-based organizations, Inmarsat and INTELSAT, so their
competitors would have a more level playing field on which to
compete. Promoting a fully competitive global satellite
communications marketplace was and is a worthy goal.
This marketplace has changed a lot over the past 5 years.
Inmarsat, INTELSAT, and the New Skies are no longer controlled
by signatories designated by member nations. In fact, these
companies are almost wholly owned by private equity groups.
Early in 2001, the Federal Communications Commission certified
that New Skies had completed all of the Act's original
privatization requirements. Both Inmarsat and INTELSAT recently
petitioned the FCC to certify that they, too, are in compliance
with the privatization provisions of the Act, as amended last
year. The amended Act allows the companies to be certified as
compliant with the Act, if, among other things, the FCC
determines that the companies have achieved substantial
delusion of the aggregate amount of signatory financial
interest in such entities. This requirement was added to the
Act last year as an alternative to the original initial public
offering requirement, which, by the way, has created certain
difficulties.
The Government Accountability Office issued in 2004 a
report on the privatization of INTELSAT and how the Act has
been implemented. According to the GAO, most stakeholders and
experts the GAO spoke with believe that access to the non-U.S.
satellite markets has improved. It is interesting to note that
few attributed this improvement to the ORBIT Act. These
stakeholders credited certain international telecommunications
agreements, and a global trend toward privatization of
telecommunications companies as having improved access to non-
U.S. markets. In fact, several of the persons interviewed by
the GAO said that the Act merely complimented ongoing trends
toward more open satellite markets.
The Act has been amended several times in recent years
without a hearing by this subcommittee. Given these amendments
to the Act and the privatization of Inmarsat, INTELSAT, and New
Skies, today's hearing is appropriate and overdue. And for that
reason, I want to express my particular commendations to you,
Mr. Chairman, for holding this hearing. I look forward to the
witnesses' opinions on how the Act has been working, as well as
any modifications that may be necessary, given the changes in
the marketplace.
I thank you, Mr. Chairman.
Mr. Upton. I recognize Mr. Shimkus for an opening
statement.
Mr. Shimkus. Thank you, Mr. Chairman. I will be brief.
We have got--everybody has laid out why we are here. What I
always talk about it this was really my--the ORBIT Act was
really my first kind of contentious piece of legislation that
pitted a whole bunch of different folks. And I talked to
schools quite a bit, and in my discussions with them, I talk
about--they usually ask me ``Why do you vote the way you
vote?'' And I say, you make campaign promises, hopefully, you
keep them. You have ideology, you have got core values, I said.
But then there are some issues that, you know, you just have to
learn and try to figure out and sort out. And I said, for
example, satellite competition. I mean, it rings no bells to my
constituency. No one even understands what it is about, but
then I go through the history of how a former chairman was on
one side, a subcommittee chairman was on the other side, it was
a big blowup, a big fight. It broke allies and friends in the
committee. A lot of you are smiling, you remember it. It was
not an easy passage. And now--and so I talk about this a lot in
southern Illinois.
So it is good now for me to have a re-look. We just
finished the Energy Bill, and during a couple of the debates,
we would be cautioned. I hope this doesn't come back to bite
us, this amendment or that amendment. I hope years from now, we
don't live to regret it. I think that is the importance of this
hearing, to see how we are doing. And so I can continue the
story back to my district about satellite competition, I
appreciate--it shows you how old I am, how long I have been
here.
Mr. Chairman, I thank you for the hearing. I yield back.
Mr. Upton. I recognize the distinguished ranking member of
the subcommittee from Massachusetts, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman, very much, and I want
to commend you for calling this hearing this morning on the
Open Market Reorganization for the Betterment of International
Telecommunications Act.
Legislation that was approved by Congress 5 years ago, this
hearing will give us an opportunity to gage the Act's success
in achieving several policy goals, and to also test the rule of
Renee Ensomo of whether or not truth and technology triumphs
over baloney and bureaucracy. And so that will be the subject
of today's hearing.
The ORBIT Act was designed to close a chapter in commercial
satellite communications, which was begun in 1962 with the
passage of the Communications Satellite Act. That legislation
spurred the development of two intergovernmental organizations,
namely INTELSAT and Inmarsat, to which dozens of nations and
national signatories joined in a collective effort to provide
international satellite communications. During the 1960's and
1970's, that model worked well because it was iridominated by
relatively little technological change in telecommunications
and largely domestic monopolies across the globe for our
telecommunications services, such as MA Bell here in the Unites
States. However, in many other countries, the equivalent of MA
Bell was actually owned by the government, and these
government-owned or controlled telephone companies were the
owner/shareholders of the international satellite
organizations, with an incentive to favor such organizations in
their domestic markets, to the detriment of private sector
alternatives.
I offered the first bill to address INTELSAT's anti-
competitive behavior and rid it of its government bestowed
privileges and immunities in 1983. Domestically at that time,
the United States was breaking up MA Bell, fostering the
deployment of a cable television infrastructure, and the
personal computer revolution was underway. Despite the changes
in technology and international markets, the two
intergovernmental organizations remained bureaucratic and
complacent at best, and anti-competitive and anti-innovative at
worst.
In 1988, PanAmSat launched a satellite that ushered in the
era of competition. Renee Ensomo, a graduate of Medford High
School, in my district, told me that if I supported his vision,
it could transform the way in which the world was organized
around satellite technology. Renee, as usual, was correct. Yes,
it took a dozen years before Congress updated the 1962 era
statute with the ORBIT Act to reflect the changed technological
and competitive circumstances, and used the leverage of the
U.S. market access to finally force INTELSAT and Inmarsat to
shed their intergovernmental status and fully privatize.
The ORBIT Act contained many provisions, including
provisions ensuring direct access to INTELSAT----
Chairman Barton. Would the gentleman yield?
Mr. Markey. I would be glad to yield.
Chairman Barton. Are you auditioning for Saturday Night
Live? The news that was or whatever?
Mr. Markey. I am still groggy from last night, Mr.
Chairman. I don't even know--we were here last night debating
energy until I don't know what time, so----
Chairman Barton. You had to do it in two committees
yesterday, actually. You were doing double duty. You were in
Resources and Energy.
Mr. Markey. I was losing in two committees yesterday,
simultaneously. It was an incredible challenge to my self
esteem, and I am using this as a little anecdote. Notice how I
am praising myself for the last 20 years of incredible insight
that I have. This is just a little known reason.
What was that guy's name on Saturday Night Live that when
he looked in the mirror? You know what I am talking about?
Chairman Barton. Sarducci?
Mr. Markey. No. Jack Handy. You know Jack Handy?
Chairman Barton. Mr. Markey is a little bit humble. He got
more in the bill and still voted no than most of us that
supported the bill.
Mr. Markey. I am proud of my humility, thank you. I think
it is my best tribute, my best quality.
Where was I here?
The ORBIT Act contained many provisions, including
provisions ensuring direct access to INTELSAT for competitives,
rather than forcing American companies to buy through the
government chartered go-between, COMSAT. It permitted--it
prohibited the FCC from auctioning licenses for satellite
frequencies. It stripped the intergovernmental entities of
their privileges and immunities in the marketplace, and it
induced, but did not require, INTELSAT and Inmarsat to conduct
initial public offerings by withholding the opportunity to
serve U.S. customers for non-core advance services.
This last provision was updated last autumn to allow these
entities to privatize through the sale to private equity firms,
rather than conduct an IPO. In addition, there were two
companies created by spinning off assets from INTELSAT and
Inmarsat, and these two companies had several additional
conditions.
Specifically, the two companies were prohibited from having
interlocking directorates and common employees, and both were
also prohibited from re-affiliating with their former parents.
In the case of ICO, for 15 years after the date upon which
Inmarsat was fully privatized, and for New Skies, the Act
stipulated that 11 years had to pass after INTELSAT's full
privatization before it could re-affiliate with its former
parent.
Today's hearing gives us an ability to explore this wide
range of issues, and I want to thank the witnesses, and you,
Mr. Chairman, for conducting this very important hearing.
Mr. Upton. I recognize the gentlelady from Tennessee, Ms.
Blackburn.
Ms. Blackburn. Thank you, Mr. Chairman.
I simply want to welcome our guests. Our ranking member
over there likes to talk about the past to get his information
on satellite communications. I talk to my 24 and my 27-year-
old, who are totally intrigued with what you do and enjoy
spending a bit of their working life in telecommunications. We
welcome you and we look forward to your perspective.
Mr. Upton. Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman.
It is, you know, important to hold this hearing on the
progress that has been made so far on privatizing the satellite
communications marketplace, especially in regard to INTELSAT
and Inmarsat.
I was here when we did this. INTELSAT was previously an
internationally owned organization controlled by a 147-member
government, sort of like a U.N. It is possible that such a
worldwide government sponsored leviathan may have been
necessary in the 1960's and 1970's; however, changing times and
technology, and the increasing ability of private satellite
companies to enter and compete in the marketplace, led, of
course, to the privatization of 2001.
Inmarsat, another intergovernmental organization, also
privatized in similar fashion around the same time. Now, this
is a good thing, and I think all of us on the
telecommunications supported it. The privatization of INTELSAT
and Inmarsat will level the playing field in the satellite
communication marketplace, and will help make them more
responsive, and I believe, effective providers.
Over the past year or so, we have seen several acquisitions
of SATCOM, operators worth billions of dollars buy private
equity firms. Hopefully, these acquisitions will promote
innovations and competition, and ultimately benefit the
consumers. I would also imagine that many of the technologies
developed and promoted by these SATCOM's will have applications
to our military and other defense-related areas.
We try to do our part with the ORBIT Act, and the FCC is
working with us to provide annual updates on the progress of
this privatization in this area. So I look forward to Mr.
Abelson's testimony to learn more about what the FCC is doing
with regard to this. I also understand that the satellite
landscape has changed remarkably since we passed the ORBIT Act.
That is why I am interested in hearing from the witnesses who
represent these SATCOM providers to learn how market access has
improved, and to hear what we may need to do in this
subcommittee to remove any remaining challenges.
So again, Mr. Chairman, I think it is very important to
hold this hearing. I look forward to hearing the witnesses. If
I am not here, I shall be in my office watching on the screen.
And I yield back.
Mr. Upton. Better be taking notes as well.
Mr. Terry for an opening statement.
Mr. Terry. Waive.
Mr. Upton. Okay. That concludes our opening statements.
Again, good morning. Your testimony will be made part of the
record in its entirety. We would like you to take no more than
5 minutes. You have got a little clock there which will tell
you how much time is left to summarize your statement. At which
point, when you are done, we will be taking questions from the
members on the panel.
We are joined today by Mr. Donald Abelson, chief of the
International Bureau from the Federal Communications
Commission; Mr. Daniel Goldberg, CEO of New Skies Satellite,
came all the way from the Netherlands. I chided him yesterday
that if the hearing was going to be postponed, that he should
thank the Lord for frequent flyer miles, because the hearing
would not take place today. Mr. Phil Spector, Executive VP and
General Counsel of INTELSAT Global Service Organization; Mr.
Alan Auckenthaler, Vice President of Inmarsat Ventures Limited,
from Virginia; and Ms. JayEtta Hecker, Director of Fiscal
Infrastructure, Office of Congressional Relations, from the
Government Accountability Office, the GAO.
Welcome all of you. Mr. Abelson, we will start with you.
STATEMENTS OF DONALD ABELSON, CHIEF, INTERNATIONAL BUREAU,
FEDERAL COMMUNICATIONS COMMISSION; DANIEL S. GOLDBERG, CHIEF
EXECUTIVE OFFICER, NEW SKIES SATELLITE B.V.; PHILLIP L.
SPECTOR, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, INTELSAT
GLOBAL SERVICE CORPORATION; ALAN AUCKENTHALER, VICE PRESIDENT,
INMARSAT VENTURES LIMITED; AND JAYETTA Z. HECKER, DIRECTOR,
PHYSICAL INFRASTRUCTURES TEAM, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Abelson. Good morning, Mr. Chairman, Mr. Markey, and
distinguished members of the committee. As the chairman has
said, I am Don Abelson. I am Chief of the International Bureau
at the Federal Communications Commission, and it is my pleasure
to come before you today to discuss the ORBIT Act.
The FCC is actively engaged in implementing the
requirements of the ORBIT Act as set forth by Congress. As
required by the statute, the Commission has reported to
Congress annually on the FCC's implementation. The Commission
intends to submit our next report by the due date of June 15.
Since January 2000, the Commission has undertaken a number
of actions to ensure that INTELSAT, Inmarsat, and New Skies,
the separated entity of INTELSAT, have been privatized in a
manner--in a pro-competitive manner consistent with the
criteria of the statute. Let me provide you with highlights of
these actions.
For INTELSAT, in 2001, the Commission determined that
INTELSAT had privatized in a manner consistent with the
criteria of the Act, except for the requirement that INTELSAT
conduct an initial public offering, or IPO. The Commission
granted licenses for INTELSAT satellites, conditioned on
INTELSAT's completion of an IPO within the timeframe stipulated
by the Act. The original deadline for INTELSAT to complete an
IPO was October 1, 2001. The deadline has been extended several
times by Congress and the Commission. The most recent extension
authorized by Congress provides that INTELSAT must conduct its
IPO by June 30, 2005, unless the Commission extends the
deadline to no later than December 31.
In October 2004, the Commission passed--the Congress passed
an amendment to the ORBIT Act that established a certification
process as an alternative to conducting and IPO. The
certification process has three requirements. First, that
INTELSAT achieves substantial dilution of the aggregate amount
of former signatory financial interest. Second, that no former
signatory possess effective control; and third, that no
intergovernmental organization hold any ownership interest.
In 2004, the Commission approved the transfer of INTELSAT
to Zeus Holdings, which is wholly owned by 20 investment funds
that are ultimately controlled by four private equity fund
groups. Immediately thereafter, INTELSAT filed their
certification, and requested that the Commission determine that
it had met the Act's modified privatization requirements. This
week, the Commission adopted an order regarding this matter,
and expects to release it shortly.
With respect to Inmarsat, the Commission has taken the
following actions.
In 2001, the Commission concluded that Inmarsat had
privatized in a manner consistent with the non-IPO requirements
of the ORBIT Act, and authorized the provision of Inmarsat
mobile services in the United States. The authorization is
subject to Inmarsat complying with its requirements to conduct
an IPO under the terms of the ORBIT Act. As in the case of
INTELSAT, the IPO deadline for Inmarsat was established by
statute and extended several times by the Congress and the
Commission. The current deadline for Inmarsat to conduct an IPO
is June 30, 2005.
The October 2004 amendment to the ORBIT Act also applies to
Inmarsat, and permits Inmarsat to provide a certification to
the FCC as an alternative to conducting and IPO. The
requirements under the certification procedures for Inmarsat
are the same as those I listed for INTELSAT, except that
minimal intergovernmental organization ownership is permitted.
In 2004, Inmarsat filed a certification with the FCC that
it had fulfilled the modified requirements of the ORBIT Act.
The Commission placed Inmarsat's filing on public notice in
December 2004, and this matter is currently pending before the
Commission.
And last, for New Skies, in 1999, prior to the enactment of
the Act, the Commission granted Earth station operators
authorizations to operate with the New Skies system. The grant
was also conditioned on New Skies taking certain actions to
become independent of INTELSAT, including conducting and IPO.
In 2001, the Commission found that New Skies had met the
criteria of the ORBIT Act, including substantially diluting the
ownership of former INTELSAT signatories through an IPO. New
Skies announced a share buy back program in 2002, under which
it would repurchase up to 10 percent of the then outstanding
shares. And in 2003, the Commission found that New Skies share
repurchase program had the effect of further diluting the
interest of former INTELSAT signatories.
And last, in 2004, the Commission approved the transfer of
New Skies to five private equity funds affiliated with
Blackstone, a global investment firm.
In conclusion, 5 years after enactment, significant
progress has been made and is being made to achieve the
privatization goals that the Congress set forth in the Act. New
Skies and INTELSAT are now privately held companies, and
Inmarsat is more than 50 percent privately held. And
furthermore, the Commission continues to implement the
provisions of the Act to ensure that the broad goal of a
competitive global satellite communication market is ultimately
achieved.
Thank you again for the opportunity to appear today, and I
would be happy to respond to your questions.
[The prepared statement of Donald Abelson follows:]
Prepared Statement of Donald Abelson, Chief, International Bureau,
Federal Communications Commission
Good morning, Chairman Upton, Mr. Markey, and distinguished members
of the Subcommittee. I am Donald Abelson, Chief of the International
Bureau of the Federal Communications Commission (FCC) and it is my
pleasure to come before you today to discuss the Open-Market
Reorganization for the Betterment of International Telecommunications
(ORBIT) Act.
The FCC is actively engaged in implementing the requirements of the
ORBIT Act as set forth by Congress. The purpose of the Act is ``to
promote a fully competitive global market for satellite communications
services for the benefit of consumers and providers of satellite
services and equipment by fully privatizing the intergovernmental
satellite organizations, INTELSAT and Inmarsat.''
As required by the statute, the Commission has reported to Congress
on annual basis regarding its actions to implement the ORBIT Act. We
intend to submit our next report to Congress on or before the due date
of June 15, 2005.
Since January 2000, the Commission has undertaken a number of
actions to ensure that the former intergovernmental satellite
organizations, INTELSAT and Inmarsat, and the separated entity of
INTELSAT, New Skies, have been privatized in a pro-competitive manner,
consistent with the criteria of the statute. The Commission took the
following actions since enactment of the ORBIT Act in 2000:
INTELSAT
In August 2000, the Commission granted conditional licenses to
Intelsat--a separate, privately held U.S. corporation created by
INTELSAT 1--to hold U.S. satellite authorizations and
associated space segment assets in anticipation of INTELSAT's full
privatization. The FCC authorizations applied to INTELSAT's existing
satellites, planned satellites, and planned system modifications
associated with INTELSAT's frequency assignments in the fixed satellite
services (``FSS'') C- and Ku- bands existing as of privatization. They
were conditioned upon Intelsat privatizing in a manner consistent with
the ORBIT Act.
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\1\ For the purposes of this testimony, the term ``INTELSAT''
refers to the original intergovernmental organization prior to
privatization. The term ``Intelsat'' refers to the Intelsat Ltd. and
its subsidiaries created upon privatization in 2001.
---------------------------------------------------------------------------
Intelsat privatized in 2001. The Commission determined that
Intelsat had privatized in a manner consistent with the privatization
criteria of the ORBIT Act, except for the requirement that Intelsat
conduct an Initial Public Offering (IPO). The Commission conditioned
its findings on Intelsat conducting an IPO within the timeframe
stipulated by the ORBIT Act.
The ORBIT Act requirement for an IPO was intended to achieve the
independence of the newly privatized company by substantially diluting
ownership by former INTELSAT Signatories. 2 The ORBIT Act
initially required an IPO by October 1, 2001, but gave the Commission
discretion to extend this deadline to no later than December 31, 2002.
Since that time, Congress has amended the ORBIT Act a number of times
to extend these deadlines. The Commission, under the authority of
Congress, has also extended this deadline. Currently, the deadline is
June 30, 2005.
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\2\ Pub.L. 106-180, 114 Stat. 48 621(2).
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In 2004, Congress also enacted legislation amending the ORBIT Act
by adding Section 621(5)(F) allowing for a certification process as an
alternative to conducting an IPO and public securities listing.
3 This process permits Intelsat (and Inmarsat) to certify,
and the Commission to determine, that certain financial and control
interests held by Signatories and former Signatories of pre-privatized
INTELSAT, and certain ownership interests held by intergovernmental
organizations, no longer exist in Intelsat.
---------------------------------------------------------------------------
\3\ Pub.L. 108-371.
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In December 2004, an Order was issued granting applications filed
by Intelsat, and Zeus Holdings Limited, a private equity fund, to
transfer control of certain Commission authorizations from Intelsat to
Zeus. The Commission concluded, pursuant to sections 214(a) and 310(d)
of the Communications Act, that approval of the applications will serve
the public interest, convenience, and necessity.
In December 2004, Intelsat filed a Petition for Declaratory
Ruling and Certification (updated February 9, 2005) requesting that the
Commission find Intelsat to be in compliance with the certification
requirements as provided under Section 621(5)(F) of the ORBIT Act. The
Commission has adopted an order regarding this matter and expects to
release it shortly.
Inmarsat
Since 1978, Inmarsat has provided maritime services to and from
the United States. Inmarsat privatized in 1999, prior to enactment of
the ORBIT Act. In 2001, the Commission concluded that Inmarsat had
privatized in a manner consistent with the non-IPO requirements of the
ORBIT Act and authorized the provision of mobile services in the United
States, subject to Inmarsat complying with its requirement to conduct
an IPO under the terms of the ORBIT Act. The Commission granted several
operators in the United States authority to use Inmarsat for
communications services to, from, or within the United States.
In February 2004, Inmarsat filed a letter informing the
Commission of a series of transactions, which it described as
constituting an IPO pursuant to Inmarsat's remaining ORBIT Act
requirements. In response to this letter, the Commission released a
Public Notice and also extended the deadline for Inmarsat to conduct an
IPO to December 31, 2004.
Congress has amended the ORBIT Act several times to extend the
deadline for Inmarsat to conduct an IPO. Most recently, in October
2004, Congress amended Clause (ii) of Section 621(5)(A) of the ORBIT
Act to extend Inmarsat's IPO deadline to June 30, 2005. 4
---------------------------------------------------------------------------
\4\ Pub.L. 108-371.
---------------------------------------------------------------------------
On November 15, 2004, Inmarsat filed a certification with the
Commission that it has fulfilled the amended privatization requirements
of the ORBIT Act. Inmarsat also petitioned the Commission to determine
that its certification complied with the remaining privatization
criteria of the statute. The Commission placed Inmarsat's Request for
Declaratory Ruling on Public Notice on December 21, 2004. This matter
is currently pending before the Commission.
New Skies
New Skies is the Netherlands-based private company INTELSAT
created in 1998 as INTELSAT's first step toward privatization. In 1999,
prior to the enactment of the ORBIT Act, the Commission granted U.S.
earth station operators limited three-year authorizations to operate
with New Skies in the U.S. market. This grant was conditioned on New
Skies' taking certain actions to become independent of INTELSAT,
including conducting an IPO as anticipated by the INTELSAT Assembly of
Parties decision approving New Skies' creation. New Skies conducted its
IPO in October 2000. In 2001, the Commission granted New Skies' request
to provide satellite services to, from and within the United States.
The Commission found that New Skies had met the criteria of the ORBIT
Act, including substantially diluting the ownership of former INTELSAT
Signatories through the IPO.
In 2001, New Skies petitioned for, and the Commission granted
under delegated authority, the addition of four satellites operated by
New Skies to the ``Permitted Space Station List'' with conditions to
remove secondary status requirements for certain New Skies' satellites.
In 2002, New Skies announced a share buy-back program under which
it would repurchase up to 10 percent of its then outstanding shares. In
2002, PanAmSat filed an ``Emergency Request for Inquiry into the
Continuing Qualifications of New Skies to Access the U.S. Market.'' In
2003, an Order was issued denying PanAmSat's request, based on a
finding that the New Skies share repurchase program had the effect of
further diluting the combined interest of the former INTELSAT
Signatories in New Skies. Through the buy-back program, New Skies
purchased a higher percentage of shares held by former Signatories than
of shares held by the general public.
Other Actions
The ORBIT Act requires that users and service providers be
permitted to obtain a form of direct access to INTELSAT capacity and
directed the Commission to conduct a rulemaking to determine if users
or providers of telecommunications services have sufficient access to
INTELSAT space segment directly from INTELSAT to meet their service
capacity requirements. Prior to the adoption of the ORBIT Act, the
Commission had decided in a rulemaking proceeding that direct access is
in the public interest allowing customers in the United States to
acquire satellite capacity directly from INTELSAT rather that from the
U.S. signatory, Comsat Corporation (Comsat).
In 2000, the Commission initiated a rulemaking and released a
Report and Order requiring Comsat and direct access customers to
negotiate commercial solutions if possible to ensure that sufficient
opportunity is available for parties to negotiate commercial solutions.
In 2001, Comsat filed a report, as required by the Commission,
detailing the results of negotiations and maintaining direct access
opportunities were increasing at that time. In November 2001, following
INTELSAT's privatization and Intelsat's purchase of Comsat, the
Commission concluded that the underlying basis for the direct access
provisions of its rulemaking no longer existed, and terminated the
proceeding.
Finally, the Commission has authorized several other acquisitions
involving entities subject to the ORBIT Act, including: (1) the
acquisition of Comsat by Lockheed Martin in 2000; 5 (2) the
acquisition of Comsat's former mobile services business from Lockheed
Martin by Telenor in 2001; (3) the acquisition of Comsat's former world
systems business from Lockheed Martin by Intelsat in 2002; (4) the
acquisition of Comsat General from Lockheed Martin by Intelsat in 2004;
and (5) the acquisition of New Skies by Blackstone Funds in 2004.
---------------------------------------------------------------------------
\5\ The ORBIT Act terminated the Communications Satellite Act of
1962's ownership restrictions on COMSAT Corporation (``Comsat''). As a
result, Lockheed Martin and Comsat jointly filed an application with
the Commission for transfer of control of Comsat's various licenses and
authorizations.
---------------------------------------------------------------------------
In conclusion, the Commission will continue to implement and
enforce the requirements of the ORBIT Act as directed to by Congress.
Furthermore, the Commission will continue to inform Congress of the
actions it takes to implement the requirements of the statute in its
next annual report.
Thank you again for the opportunity to appear before you today. I
will be happy to respond to your questions.
Mr. Upton. Thank you. Mr. Goldberg, welcome.
STATEMENT OF DANIEL S. GOLDBERG
Mr. Goldberg. Thank you very much, Mr. Chairman, Mr.
Markey, and members of the subcommittee. Thank you for inviting
me today, and in particular, for holding this hearing,
particularly having worked through the night. We are very
appreciative to be able to participate in this.
My name is Dan Goldberg, and I am the CEO of New Skies
Satellites, a global satellite communications company. New
Skies was created in 1998 when we were spun out of INTELSAT,
and we have been subject to ORBIT since its enactment.
It is our belief that ORBIT has achieved precisely what
Congress intended, a more competitive satellite services market
through the privatization of the IGO's. For this, Congress
should be justifiably proud, having succeeded in fully
privatizing the IGO's. And in light of the dramatic changes
experienced in our market, we believe it is now appropriate for
Congress to make certain minor changes to ORBIT. These changes
are necessary to bring ORBIT in line with current market
realities, and to ensure that our strategic industry is
competitive, robust, and healthy.
Put simply, the international satellite services market is
unrecognizable today from the one Congress confronted when it
began considering these issues. From the creation of our
industry to the late 1980's, INTELSAT, which was then an IGO,
dominated the market. Although private entities in the late
1980's increasingly competed with INTELSAT, Congress recognized
by enacting ORBIT that privatizing the IGO's would facilitate
opening overseas markets, thereby stimulating additional
competition. In order to satisfy ORBIT's requirements, New
Skies conducted an IPO in October 2000, diluting our original
owners by roughly 30 percent. The FCC, as Don has just said,
concluded that this satisfied ORBIT's substantial dilution
requirement and granted us long-term access to the U.S. market.
Since that time, New Skies, INTELSAT, and Inmarsat have
each been acquired by private equity investors. In short, the
three companies that were the subject of ORBIT are now purely
commercial entities, subject to the exacting demands of private
equity investors. Indeed, New Skies and INTELSAT have no
government ownership whatsoever, going far beyond the
substantial dilution that ORBIT required. But the fundamental
change in the ownership structures of New Skies, INTELSAT, and
Inmarsat, not to mention every other major satellite operator,
isn't the only dramatic change in the industry since ORBIT's
passage. Today, as a result of substantial overinvestment in
satellites and undersea fiber capacity, as well as improvements
in transmission technology, the industry today is struggling
with excess capacity, falling prices, and satellite utilization
rates of historic lows. Notwithstanding a 60 percent increase
in supply since the House first passed legislation to privatize
the IGO's, industry revenues have actually declined. Most
operators have responded to this situation by reducing
spending, cutting jobs, and virtually freezing investment in
expansion satellites.
The difficult state of the market represents a real risk to
national security interests, and the public interests more
broadly. Congress has formerly identified commercial satellites
as critical infrastructure. They are of strategic importance to
the Department of Defense, and other U.S. Government agencies.
It is vitally important that the industry's players, including
U.S. satellite manufacturers who rely on the commercial
satellite sector, are financially sound. That said, the present
unhealthy condition of the market isn't necessarily cause for
great alarm. The global operators remain financially stable,
and our fleets operationally robust, albeit underutilized.
Indeed, the market today is near the bottom of the natural boom
and bust cycle that is common throughout many industrial
sectors. And just as in other sectors, natural market forces,
over time, should put our sector on a sunder footing.
But unlike the recent activity in the terrestrial wireless
sector, a subject well-known to this committee, a full and
necessary rationalization of our sector has yet to occur.
Although some consolidation has taken place, most industry
observers expect more.
As the smallest of the global operators, one of our
objectives is to pursue a strategic combination or joint
venture with another operator. INTELSAT is one of a number of
entities with whom it would be logical for us to consider such
a transaction. However, in light of ORBIT's restrictions, we
would be uniquely constrained from entering into that kind of
arrangement, thereby limiting our strategic alternatives and
placing us at an unfair competitive disadvantage.
In conclusion, having achieved everything ORBIT was
designed to achieve, and in light of the dramatic changes in
our sector, there is no longer any policy justification for
keeping New Skies bound by detailed rules that apply to no
other competitive company. Any future satellite industry
consolidation should be market-driven, constrained, of course,
by the need for FCC and antitrust approvals. Indeed, Congress
has provided many alternate safeguards to ensure a competitive
market, including the FCC's public interest test, the antitrust
laws, and other mechanisms ensuring the highest level of
scrutiny for any transaction that implicates national security.
We believe it is now appropriate for you to make certain minor
changes to ORBIT to address the current realities in our
industry.
Thank you for consideration, and I will be pleased to
answer any questions you may have.
[The prepared statement of Daniel S. Goldberg follows:]
Prepared Statement of Daniel S. Goldberg, Chief Executive Officer, New
Skies Satellites B.V.
Mr. Chairman and Members of the Subcommittee: My name is Dan
Goldberg, and I am the Chief Executive Officer of New Skies Satellites
B.V. New Skies is a global satellite communications company that
provides satellite-based transponder capacity for the transmission of
data, video, voice, and Internet-related services. We own and operate a
network of five in-orbit satellites positioned in fixed orbital
locations above the earth, including two that we have designed,
constructed, launched, and placed in operation since our creation in
1998. We have one additional satellite currently under construction by
Boeing Satellite Systems.
I appreciate the opportunity to appear before the Subcommittee
today to review the impact that the ORBIT Act has had on our company
and on the international satellite services sector more broadly since
its enactment in March 2000. The central message I have for you is that
the international satellite services market is unrecognizable today
from the one Congress confronted when it began considering satellite
competition issues in the late 1990s. The ORBIT Act was designed to
promote competition in this market by eliminating government ownership
and control of operators providing international satellite services.
Today, Intelsat, Inmarsat, and New Skies--the three companies that were
the focus of the law--are 100 percent controlled by private commercial
interests. Indeed, the market today is not only competitive, it is
hypercompetitive to the point where the sector, on balance, is
unhealthy. That situation has adverse implications for U.S. national
security interests as well as for the public more broadly.
Although ORBIT was a tremendous success in achieving its twin goals
of promoting privatization and competition, it is now important that
Congress reexamine the law in light of the enormous changes in the
industry and competitive environment that have occurred since it was
enacted. For this reason, we urge the introduction and passage of
legislation to update ORBIT to address the current realities.
New Skies' Creation and Roots
Let me begin by briefly tracing the history of New Skies' efforts
to establish itself in the satellite marketplace, and to compete with
satellite operators many times our size. New Skies was created on April
23, 1998 as a privatized commercial spin-off from INTELSAT, which at
that time was still an intergovernmental organization. INTELSAT formed
the new company under the laws of The Netherlands, and transferred to
it certain assets and liabilities, including several satellites and
related contracts. The members of INTELSAT--primarily governments,
their telecommunications ministries, or their national satellite or
telecommunications providers--were given ownership stakes in New Skies
approximately equal to their respective ownership stakes in INTELSAT.
What INTELSAT did not transfer, however, were any employees or
terrestrial infrastructure required to control and manage the payloads
of the satellites. In that sense, New Skies was literally created from
scratch. A new management team was brought in, composed almost entirely
of Americans with experience in the satellite or telecommunications
fields. I myself started as New Skies' first general counsel. All of us
were required to move our families to The Netherlands, where INTELSAT
had formed the company.
We opened a headquarters office in The Hague, and have since
established a sales and marketing office in Washington, D.C. and a
teleport facility near Manassas, Virginia, as well as offices and other
ground-based facilities in nine other locations around the globe.
Although we are Dutch as a matter of corporate law, all of our senior
officers are Americans, all of our satellites have been built by
American manufacturers, our largest customers are American and, as I'll
say more about later, we are at this time 100 percent owned by
affiliates of the U.S. private equity firm The Blackstone Group.
The ORBIT Act and Privatization
From the creation of the fixed satellite services (or FSS) industry
in the 1960s until the late 1980s, INTELSAT--which was then an
intergovernmental treaty-based organization--held a near monopoly over
international satellite communications. Since the late 1980s, however,
the FSS industry has evolved into a highly competitive, global
industry. Due in large part to pressure from the Congress and other
governments, as well as from newer commercial entrants seeking to
promote competition in the international satellite services market,
INTELSAT began a privatization process in the late 1990s.
The 1998 creation of New Skies described above was only the first
step in that process. Although from our inception New Skies has
operated as a fully privatized, independent commercial entity, Congress
believed more needed to be done to ensure not only nominal
privatization of the industry but also a competitive marketplace for
international satellite services. Accordingly, in March 2000, Congress
enacted the Open-Market Reorganization for the Betterment of
International Telecommunications Act, or the ORBIT Act. The Act
leveraged access to the most important telecommunications market in the
world--the United States--as an incentive for INTELSAT and Inmarsat,
another intergovernmental treaty-based organization, to achieve full
and pro-competitive privatizations.
Although New Skies at that point had already operated for two years
as an independent private entity, ORBIT also imposed a series of
requirements and restrictions on us. These were intended to ensure, on
one hand, that INTELSAT, the intergovernmental organization that
created us and had not yet privatized, would not have undue influence
over our operations; and on the other hand, that New Skies would not be
accorded preferential treatment or benefits from its INTELSAT heritage.
(A summary of these statutory provisions is appended to my testimony.)
Among the most significant of ORBIT's provisions was a requirement
that INTELSAT, Inmarsat, and New Skies each conduct an initial public
offering of shares by various dates specified in the statute in order
to substantially dilute the aggregate ownership of our stock by
signatories or former signatories of INTELSAT. New Skies' deadline for
conducting its IPO under the original statute was July 31, 2001, and we
beat that deadline by more than nine months. From October 2000 until
November 2004, we were a publicly held company whose shares traded on
the New York Stock Exchange (via American Depositary Shares) and on the
Euronext Amsterdam exchange.
To this very day, in fact, New Skies remains the only company
covered by ORBIT that actually did all that Congress originally
required of it, and within the time frame initially established by the
law. We sought a single statutorily permitted extension from the
Federal Communications Commission when, in the spring of 2000, the
Internet bubble burst and sent market conditions spiraling downward the
day before we were to launch our IPO. Even though our balance sheet and
cash flow were strong and, therefore, we did not need to conduct an IPO
to raise capital, we never came back to Congress seeking any further
statutory extensions. Indeed, we proceeded with the required IPO in the
fall of 2000, even in the midst of a bear market. That is how
importantly we viewed the need to demonstrate compliance with the
wishes of Congress. Having completed our IPO, we then sought from the
FCC full and unrestricted access to the U.S. market, which we were
granted in 2001.
Last year, in order to enhance shareholder value and help grow and
develop our company through the financial backing and strong commercial
focus of a private equity firm, New Skies agreed to be acquired by
affiliates of The Blackstone Group, a transaction that was
overwhelmingly approved by our shareholders in July 2004 and concluded
in November 2004. As discussed below, private equity firms now also own
most of our competitors. We are now in the process of planning for a
new IPO, which, if successful, will result in a substantial percentage
of our shares being traded on the New York Stock Exchange.
In the meantime, both INTELSAT and Inmarsat have also fully
privatized through sales of their respective companies to private
equity investors. Those transactions were facilitated by an amendment
to ORBIT approved last fall, which in turn followed several amendments
during the last four years in which Congress repeatedly extended the
statutory deadlines for conducting IPOs. Through last year's amendment,
Congress essentially acknowledged that IPOs were not the only way in
which private ownership and substantial dilution of signatory influence
could be accomplished.
The Satellite Sector, Then and Now
There can be no doubt that ORBIT successfully accomplished the
goals that Congress set more than five years ago. It is no
exaggeration, Mr. Chairman, to say that the international satellite
services market today is virtually unrecognizable when compared to what
Congress confronted in the mid- to late 1990s when it last debated the
future of the industry.
The three international satellite operators that were the focus of
ORBIT--INTELSAT, Inmarsat and New Skies--are now purely commercial
concerns controlled by private equity investors. As such INTELSAT and
Inmarsat are now fully privatized and no longer enjoy any of the
privileges and immunities once accorded to them by virtue of their
former status as intergovernmental organizations. Nor are the companies
covered by ORBIT the only satellite operators to be acquired by private
equity investors. In addition to New Skies, Intelsat and Inmarsat, both
PanAmSat and Eutelsat are now controlled by private equity consortia.
Independent firms that once complained the deck was stacked against
them by U.S. law and treaty obligations now compete aggressively in a
market untainted by IGOs that once enjoyed special legal and diplomatic
protections. New Skies is one of four global FSS satellite operators--
the others are the privatized Intelsat, SES Global, and PanAmSat--and
we compete with them as well as with numerous other regional and
national satellite operators like Eutelsat and SatMex, and with
suppliers of certain ground-based communications services. Inmarsat,
although a global satellite operator, participates in the mobile
satellite services sector, which is a different market than the FSS
sector.
Unlike the global satellite operators, a number of regional
operators today are owned in whole or in part by governmental entities.
Some of these operators benefit from preferential treatment in their
home markets, treatment that distorts competition in those markets.
ORBIT, however, does not apply to these regional operators and,
therefore, the markets in which they operate must be opened through
bilateral or multilateral trade efforts.
Privatization and private equity participation in the international
satellite services market are not the only ways in which our industry
has changed radically. In five short years, the FSS industry has
evolved into what is widely regarded an intensely competitive--I would
argue, in fact, hypercompetitive--industry. The numbers tell the story
dramatically.
From 1998, when the House of Representatives first passed its
version of what eventually became the ORBIT Act, to the end of 2004,
the amount of satellite supply has swelled by nearly 60 percent,
growing from 5,285 transponders in orbit to 8,299. And this number is
expected to increase still further by the end of 2006. In fact this
dramatic increase substantially understates the actual expansion of
supply, as digital compression and other improvements in transmission
technology have resulted in at least a doubling of effective
transponder capacity, and this is likely a conservative estimate.
In addition to this enormous expansion in satellite supply, the FCC
estimates in its 2004 International Circuit Status Report that there
was more than 40 times as much submarine fiber capacity available in
2003 than in 1998. This fiber capacity is competitive with
international satellite capacity for a variety of applications. Indeed
the FCC estimates in this same report that whereas satellites carried
10 percent of international traffic in 1997, that amount was cut to
just 1 percent in 2003.
This significant expansion of satellite capacity and competitive
undersea fiber has left the industry struggling with substantial excess
supply, falling prices, and satellite utilization rates at historic
lows. Our experience is a good proxy for what's taking place in the
international satellite services market more broadly. Our average
annual rate for a transponder sold in 2000, the year ORBIT was enacted,
was $1.9 million; in 2004, the rate was $1.2 million, a nearly 40
percent decrease. Notwithstanding the fact that the industry has
substantially increased capacity since the time ORBIT was passed--
investing billions of dollars to do so--industry revenues have actually
declined in this period, from $6.8 billion in 2000 to an estimated
$6.75 billion in 2004. And where the industry-wide satellite
utilization rate was 82 percent at the time of ORBIT's passage, it is
now closer to 65 percent, leaving close to 3,000 transponders in orbit
empty. This is slightly more than half of the total satellite capacity
that existed when this Committee first considered legislating in this
area. Many operators have responded to these serious problems by
reducing spending, including cutting jobs, and virtually freezing all
expansion satellite plans.
Although lower prices and vigorous competition are important public
policy objectives, the excessive investment in satellite and undersea
fiber capacity has resulted in an international satellite services
market that today is unhealthy. This unhealthy condition represents a
meaningful risk to U.S. national security interests and the public
interest more broadly. Commercial satellites have been identified as
critical infrastructure by Congress in section 201 of the Homeland
Security Act of 2002, as well as by the Government Accountability
Office and the President's National Security Telecommunications
Advisory Committee. They are of enormous strategic importance to the
U.S. Government and particularly to the Defense Department, which
increasingly relies on commercial space operators for vital services.
Indeed the U.S. Government is the largest single user of New Skies'
satellite fleet and we are proud of the role our company plays in
supporting the U.S. Government's activities around the world. In light
of the critical role the commercial satellite services industry plays,
it is of vital importance that the industry players are commercially
and operationally sound.
In addition to the critical infrastructure commercial satellite
operators provide to government users, these operators are important
customers of the U.S. companies that produce satellites and launch
vehicles, including Lockheed Martin, Boeing, and Space Systems/Loral.
The decision by international satellite services providers to curtail
their investment and expansion plans in the face of the downturn in the
market has severely impacted U.S. satellite manufacturers and launch
service providers. When this happens, the full burden of ensuring that
these important industries have sufficient business activities falls on
the government sector--and the U.S. taxpayer--alone.
The present unhealthy condition of the international satellite
services market is not necessarily a cause for great alarm. Most of the
participants in this market remain financially stable and their
satellite fleets are operationally robust, albeit underutilized. While
the international satellite services market today is near the bottom of
a natural boom and bust cycle that is common in many industrial
sectors, including the broader telecommunications sector, natural
market forces, over time, should put the sector on a sounder footing
just as it does in other sectors.
Yet in contrast to almost every other sector of the
telecommunications industry, a full and necessary rationalization of
the international satellite services market has yet to occur. In spite
of all the overcapacity, we still have roughly the same number of
active satellite operators today--39--as the 42 we had in 1999.
Approximately a dozen additional companies are in various stages of
plans to launch still more FSS satellites. In other words, today we
have about the same number of operators or more battling for the same
pool of revenues we had five years ago, but with substantially more
satellite capacity and abundant undersea fiber that can be used for
certain of the same services. Although some consolidation has taken
place over the years, most industry executives and observers anticipate
more will occur to order to redress the present threats to the industry
and position the operators to offer a broader array of secure and
reliable services to commercial and governmental users.
In sum, while the privatization policy of ORBIT has helped to open
markets and, in this regard, enhanced competition in the international
satellite services marketplace, excessive investment in satellite and
undersea fiber capacity now threaten this strategic industry's health.
New Skies Under the ORBIT Act
In addition to the challenges posed during the last five years by
the general business environment, meeting the ORBIT Act's requirements
also came with considerable economic and regulatory burdens for New
Skies, our employees, and the new shareholders that Congress in effect
created by mandating that we conduct an IPO. Our underwriters in the
2000 IPO, for example, were able to market our shares only at the
lowest end of the estimated offering price range. With market
conditions in the telecommunications sector remaining weak through the
early part of this decade, our share price for some periods fell to
below half of what it sold for in our 2000 IPO.
Later, when we announced a plan to buy back 10 percent of our
shares in an effort to increase value for our shareholders, a
competitor pointed to ORBIT as the basis for seeking an emergency FCC
inquiry into whether we were undoing the shareholder dilution that our
IPO had achieved. Although the FCC ultimately rejected that claim--in
fact, the buyback achieved even greater dilution--we were forced to
spend valuable time and resources over a period of several months
defending our business strategy, which in any other publicly traded
company is a commonly used and well-accepted practice.
ORBIT over time has created operational uncertainties for us as
well. Arm's length transactions with Intelsat that are otherwise
reasonable and customary in the industry, such as the joint use of
certain satellites in exchange for an equitable revenue share, must be
put through an additional level of rigorous legal review that no other
company must undertake. That is because ORBIT limits certain business
dealings between the two companies, but is unclear as to how far those
limits extend. In addition, ORBIT's prohibition on New Skies and
Intelsat combining, while perhaps justifiable at the time of ORBIT's
passage, now represents an unnecessary obstacle to the needed
rationalization of the sector.
ORBIT Must Be Updated to Keep Pace with the New Satellite Marketplace
Having achieved everything that ORBIT was designed to achieve,
Congress should now reexamine the satellite landscape and consider
whether the statute requires updating in light of the tremendous
changes that have taken place since ORBIT's passage. In the fully
competitive satellite world we have today, which in large part is a
result of ORBIT's policies, there is no longer any economic or other
policy justification for keeping New Skies bound by rules and
regulations of a kind that apply to no other competitive company of
which we are aware.
All of the other global satellite operators, as well as Eutelsat,
are substantially larger than we are in terms of both the number of
satellites they have in orbit as well as in terms of their revenues.
Due to their larger sizes, these operators are able to take advantage
of greater economies of scale, enabling them to provide heightened
levels of network redundancy and to devote more resources--both human
and financial--to sales, operations, product development, and strategic
alliances and acquisitions.
In order to enhance our own competitive position and the quality
and breadth of services we offer our customers, one of our objectives
is to pursue an acquisition, joint venture, strategic combination, or
other strategic transaction with another satellite operator as and when
suitable opportunities arise. Under appropriate circumstances, we also
would consider acquiring rights to use additional orbital locations or
frequencies, additional in-orbit satellites, or other facilities and
components necessary for the provision of bundled services. Intelsat is
one of a number of entities with whom it would be logical for New Skies
to consider such arrangements. However, in light of the restrictions in
ORBIT, including those that explicitly apply to any dealings we may
have with Intelsat, New Skies faces uncertainty with respect to its
ability to enter into such arrangements, thereby limiting our
opportunities, placing us at an unfair competitive disadvantage, and
imperiling what may be an otherwise sensible way to achieve the
rationalization the sector sorely needs at this time.
We believe that Congress can justifiably claim credit for the
remarkable changes in the satellite industry over the last half-dozen
years, which were in part the result of ORBIT's privatization and
competition policies. We also believe, respectfully, that it is now
time for Congress to allow every competitor in the satellite industry
to operate on a level playing field. Failing to update the statute to
make it more consistent with present-day realities in the satellite
marketplace will impede the operation of the natural market forces
necessary to strengthen the industry for the benefit of customers
(including government users), suppliers (including U.S. manufacturers
of satellites and rockets), employees and shareholders.
It is probable that the industry will consolidate; we have seen
some signs of that already. If there is in fact further consolidation,
the process should be market-driven, without the need for the kind of
special restrictions that are found in ORBIT. And now that the market
has become fully privatized and fully competitive, there is no risk
that any contemplated transaction might escape the same thorough
regulatory review to which every other company is subject. Through the
FCC's public interest test, the application of the antitrust laws, and
mechanisms that ensure the highest level of scrutiny for any
transaction that implicates national security, to name a few, Congress
has enacted many alternate safeguards to ensure that ORBIT's overriding
objective--a competitive international satellite services market--is
preserved. We urge you to pass legislation updating ORBIT Act to
address these current realities.
Thank you for your consideration, and I will be pleased to answer
any questions you may have.
SUMMARY OF ORBIT ACT PROVISIONS APPLICABLE TO NEW SKIES SATELLITES N.V.
Provisions Specifically Applicable to New Skies Under Section 623:
Public offering conducted no later than July 31, 2001
No interlocking officers, directors, or employees with INTELSAT
No spectrum assigned to INTELSAT as of date of enactment to be
transferred to New Skies
Any merger, ownership or management ties, or exclusive arrangements
between INTELSAT and New Skies prohibited until 11 years after
completion of INTELSAT's privatization
Criteria Applicable to New Skies as well as INTELSAT, Inmarsat, and
Future Successor Entities Under Section 621:
Each shall operate as an independent commercial entity with a pro-
competitive ownership structure
IPO shall substantially dilute aggregate ownership of each entity by
signatories or former signatories
No IGO to have ownership interest in INTELSAT, its successor
entities, or New Skies
No IGO to have more than minimal ownership in Inmarsat or its
successor entities
No IGO privileges and immunities or preferential access to orbital
locations
Each entity to be a national corporation or similar accepted
commercial structure, subject to the laws of the nation in
which incorporated
Shares of successor entities and New Skies to be listed for trading
on one or more major exchanges with transparent and effective
securities regulation
Majority of directors of successor entities and New Skies not to be
directors, employees, officers, or managers, or otherwise serve
as representatives of any signatory or former signatory
No director of successor entities and New Skies to be a director,
employee, officer or manager of any IGO remaining after
privatization
Board of directors of successor entities and New Skies to have a
fiduciary obligation
No officers or managers of successor entities and New Skies to be
officers or managers of any signatories or former signatories,
or to have any direct financial interest in or financial
relationship to any signatories or former signatories
No directors, officers, or managers of successor entities and New
Skies who hold such positions in any IGO
Any transactions or other relationships between or among any of these
entities to be conducted on an arm's length basis.
Successor entities and New Skies subject to the jurisdiction of a
nation or nations that have effective telecom competition laws
and regulations, are signatories to the WTO Basic Telecom
Agreement, and have a schedule of commitments in such Agreement
that includes non-discriminatory market access to their
satellite markets.
Mr. Upton. Thank you very much. Mr. Spector.
STATEMENT OF PHILLIP L. SPECTOR
Mr. Spector. Mr. Chairman, Mr. Markey, members of the
subcommittee, on behalf of INTELSAT, I want to thank you for
the opportunity to appear today before the subcommittee. We
appreciate the opportunity to comment on the progress that has
been made in privatizing the satellite communications
marketplace.
INTELSAT needs no introduction to this subcommittee. We are
a leading provider of satellite communications services and
solutions, with over 40 years of experience in operating
communications satellites. Our customers include major U.S.
corporations, television broadcasters, and other providers of
video services, and many governments, including particularly
the U.S. Government.
If you will indulge me, Mr. Chairman, I will recite a bit
of my personal history, because it provides a useful metaphor
for the larger topic we are here to discuss.
I joined INTELSAT only recently, some 2 months ago, after
over 20 years in the private practice of law here in
Washington. During my years in private practice, I represented
not only INTELSAT, but also PanAmSat and SES Global.
I represented PanAmSat in the late 1980's and the early
1990's, at a time when INTELSAT appears to be acting to
foreclose competition from PanAmSat and others in the global
satellite communications marketplace. Like Mr. Markey, I worked
closely with that tireless advocate for satellite competition,
Renee Ensomo. With the encouragement of this Congress and other
parts of the U.S. Government, INTELSAT began changing to
recognize competitive realities. And by the late 1990's, it was
clearly moving away from its legacy as an intergovernmental
organization. By the time that the ORBIT Act was passed in
2000, INTELSAT was well along the road toward privatization,
and we became an entirely private company nearly 4 years ago in
July 2001.
I am pleased to report to you today that in January 2005,
INTELSAT has its signatory interest diluted to zero. That is
why I joined INTELSAT as its general counsel, because the
company today is owned 100 percent by private commercially
oriented nongovernmental investors. Their only agenda is the
same agenda that all investors in private companies have: to
offer more and better services at lower prices, and thereby to
meet customer needs and to build shareholder value.
The ORBIT Act played a key role in moving INTELSAT to the
place it is today, a private company serving customer needs in
a competitive marketplace. Thanks to the members of this
committee and of this Congress, the goals of the ORBIT Act have
been achieved.
There is one area, however, in which the ORBIT Act needs
fine-tuning. As written, the Act prohibits the re-affiliation,
by merger or otherwise, of a privatized INTELSAT and any
separated entity. The separated entity referred to in the Act
is New Skies, a company that was spun off from the old INTELSAT
prior to privatization. New Skies is today, like INTELSAT, 100
percent owned by private investors having no relationship to
the old signatories. The prohibition on re-affiliation may have
made sense in 2000 when it was envisioned that both INTELSAT
and New Skies, while they might privatize, would continue to
have substantial signatory ownership for many years to come.
Five years later, with both INTELSAT and New Skies owned
entirely by private investors, the prohibition makes no sense.
Indeed, I can not think of any other statute of the United
States that flatly prohibits the merger of two entirely private
companies.
It is important to emphasize that other U.S. statutes
provide substantial protection to ensure that public policy
goals are served. Any merger of INTELSAT and New Skies would be
subject to review and approval by the Department of Justice
under the antitrust laws, and by the Federal Communications
Commission under its public interest standard. All interested
parties who conceivable might be affected by the merger,
competitors, customers, and public interest groups, would have
an opportunity to voice any objections they might have.
In summary, Mr. Chairman, we at INTELSAT see no valid
public policy purpose served by the current prohibition on a
re-affiliation with New Skies, and we urge this subcommittee in
the House to work with us on amending the statute to strike out
the prohibition.
In closing, let me repeat that the ORBIT Act was successful
in transforming the satellite communications marketplace, and
that the Congress is to be given credit for this impressive
accomplishment.
I thank you for your attention this morning, and stand
ready to answer any questions.
[The prepared statement of Phillip L. Spector follows:]
Prepared Statement of Phillip L. Spector, Executive Vice President and
General Counsel, Intelsat Holdings, LTD.
Mr. Chairman, on behalf of Intelsat, I thank you for the
opportunity to appear today before the Subcommittee. We particularly
appreciate the opportunity to comment on the ORBIT Act, and on the
progress that has been made in privatizing the satellite communications
marketplace.
Intelsat needs no introduction to this Subcommittee. We are a
leading provider of satellite communications services and solutions,
with over 40 years of experience in operating communications
satellites. Our customers include major U.S. corporations, television
broadcasters and other providers of video services, and many
governments, including particularly the United States Government. We
compete vigorously with both other satellite operators and those who
operate terrestrial and undersea facilities.
If you will indulge me for a moment, Mr. Chairman, I will recite a
bit of my personal history, because it provides a useful metaphor for
the larger topic we are here to discuss. I joined Intelsat only
recently, some two months ago, after over 20 years in the private
practice of law in Washington, D.C. During my years in private
practice, I represented not only Intelsat, but also two other large
satellite service providers, PanAmSat and SES Global.
In particular, I represented PanAmSat in the late 1980s and early
1990s, at a time when Intelsat appeared very much to be acting to
foreclose competition from PanAmSat and others in the global satellite
communications marketplace. With the encouragement of this Congress and
other parts of the U.S. Government, Intelsat began changing to
recognize competitive realities, and by the late 1990s it was clearly
moving away from its legacy as an intergovernmental organization. By
the time that the ORBIT Act was passed in 2000, Intelsat was well along
the road toward privatization, and we became an entirely private
company nearly four years ago, in July 2001.
It would have been unthinkable for me, as one of Intelsat's active
adversaries over several years, to have joined the pre-privatization
Intelsat, but I also do not think I would have joined the Intelsat
organization as it existed from mid-2001 until January of this year.
Although Intelsat had privatized, it was still owned by many of the
same Signatories whose ownership was of concern to the Congress when
the ORBIT Act was passed in 2000. Thus the ORBIT Act appropriately
required that the influence of the Intelsat Signatories be
substantially diluted.
I am pleased to report to you today, Mr. Chairman, that in January
2005 Intelsat had its Signatory interest diluted to zero. The Intelsat
that I joined as General Counsel is owned 100% by private, commercially
oriented, non-governmental investors. Their only agenda is the same
agenda that all investors in private companies have: to offer more and
better services at lower prices, and thereby to meet customer needs and
to build shareholder value.
The ORBIT Act played a key role in moving Intelsat to the place it
is today, a private company serving customer needs in a competitive
marketplace. In this respect, the ORBIT Act has been a resounding
success, and those Members of Congress who were ``present at the
creation'' can take considerable pride in this success. More than is
the case with most statutes, there is a clearcut opportunity to say
here: The goals of the ORBIT Act have been achieved.
There is one area, however, in which the ORBIT Act needs fine-
tuning. As written, the Act prohibits the ``reaffiliation'' by merger
or otherwise of a privatized Intelsat and ``any separated entity.'' The
``separated entity'' referred to in the Act is New Skies Satellites, a
company that was spun off from the old Intelsat prior to privatization.
New Skies is today, like Intelsat, 100% owned by private investors
having no relationship to the old Signatories.
The prohibition on reaffiliation was included in the ORBIT Act to
ensure that the spin-off of New Skies would constitute an irreversible
first step on Intelsat's road to privatization. The prohibition may
have made sense in 2000, when the Act was passed, at a time when
Intelsat was still an intergovernmental organization debating
privatization and New Skies was owned by Intelsat's Signatories. But
five years later, with both Intelsat and New Skies owned entirely by
private investors, the prohibition makes no sense. Indeed, I cannot
think of any other statute of the United States that flatly prohibits
the merger of two entirely private companies.
If New Skies were to be up for sale, and if Intelsat were to be
interested in buying New Skies, we would likely be just one of several
interested buyers. But I see no reason why this Congress would want to
limit artificially the universe of buyers, as the ORBIT Act does today.
Such a limitation is simply anti-competitive, when I know that this
Subcommittee and this Congress are focused on enhancing competition.
It is also important to emphasize that, if Intelsat and New Skies
were to agree on a merger, other U.S. statutes provide substantial
protection to assure that public policy goals are served. Any such
merger would be subject to review and approval by the Department of
Justice under the antitrust laws, and to review and approval by the
Federal Communications Commission under the public interest standard of
the Communications Act. In the context of both of these processes,
moreover, as is always the case in merger review, all interested
parties who conceivably might be affected by the merger--competitors,
customers, and public interest groups--would have an opportunity to
voice any objections they might have.
In summary, Mr. Chairman, we at Intelsat see no valid public policy
purpose served by the current prohibition on our reaffiliation with New
Skies, and we urge this Subcommittee and the House to work with us on
amending the statute to strike out this prohibition. In closing, let me
repeat that the ORBIT Act was successful in transforming the satellite
communications marketplace, and that the Congress is to be given credit
for this impressive accomplishment.
I thank you for your attention this morning, and stand ready to
answer any questions that Members of the Subcommittee may have.
Mr. Upton. Thank you. Mr. Auckenthaler.
STATEMENT OF ALAN AUCKENTHALER
Mr. Auckenthaler. Mr. Chairman, Mr. Markey, members of the
subcommittee, good morning. My name is Alan Auckenthaler. I am
a Vice President of Inmarsat Ventures, Limited, which in ORBIT
terms is the successor entity to the International Mobile
Satellite Organization. But I was also the general counsel of
Inmarsat and the predecessor intergovernmental organization
from 1994 until last year, throughout virtually the entire
privatization and ORBIT compliance process.
On behalf of my company, I thank the subcommittee for
holding this hearing and for your interest in the status of our
privatization. I also thank the members of this subcommittee
for supporting three amendments to the ORBIT Act to give us
more time and new ways to comply with the law in light of
changed conditions in the financial markets.
Let me begin by describing some exciting recent business
developments at Inmarsat, because they demonstrate how
privatization is resulting in real benefits to our customers in
the U.S. Federal Government and American businesses.
Our privatization process started long before ORBIT in
1993, but it is nevertheless a remarkable policy success for
the United States, because the U.S. delegation played a leading
role at the intergovernmental organization in forging a
political consensus in support of privatization, and in driving
the process to completion. A month ago, on March 11, the
largest and most powerful commercial communications satellite
ever built was successfully launched on Lockheed Martin's Atlas
V rocket from Cape Canaveral. This was the first of our
Inmarsat IV satellites. These new satellites will enable our
distributors to provide mobile and portable broadband services
at around half a megabit per second to customers using
terminals no larger than a notebook computer. This is an
example made by Hughes Network Systems here in the United
States. We call these services broadband global area network,
or BGAN. The Inmarsat system is already relied upon by the U.S.
Department of Defense, our largest customer, to which we devote
at least 25 percent of our total network capacity, and by the
Coast Guard and the FAA for safety communications, and by
various Federal law enforcement agencies. We expect to be the
communications link of choice when long-range vessel tracking
and container monitoring systems are developed to comply with
the requirements of the Maritime Transportation Security Act.
American business also depends on Inmarsat. Examples
include the Deere Company's Precision Farming Service, the
vessel monitoring system that is used to manage the
sustainability of our fisheries, use of portable Inmarsat
terminals by companies engaged in energy and mining
exploration, and construction projects in remote regions of the
world, and by journalists for digital news gathering.
These BGAN services that our distributors will provide via
our new Inmarsat IV satellites will enable these customers and
others to do all of these things and more at broadband speed
and at less cost. We have vetted our company on the promise of
broadband. We invested $1.5 billion in the construction and
launch of our satellites and the associated ground
infrastructure. And this is the point that I want to make: this
kind of risk-taking would not have been possible in an
intergovernmental organization. The organization anticipated
that more than 10 years ago. As I said, the process of
privatizing Inmarsat began in 1993. Led by the U.S. delegation,
Inmarsat pioneered the privatization model that was
subsequently followed by INTELSAT and UTELSAT. The Inmarsat
business was transferred in April 1999 from the
intergovernmental organization to a newly created private
company that had no privileges and immunities. Thus when
Congress passed the ORBIT Act in March 2000, we were already
well on our way to satisfying the privatization criteria laid
down there.
In December 2003, two private equity funds managed by Apax
Partners and Premira, acquired the majority of Inmarsat. Last
October, the Congress amended the ORBIT Act to accept this new
way of substantially diluting former signatories as an
alternative to an IPO. On November 15, we filed a compliance
certification with the Commission, and we are awaiting their
decision.
I do think there is a need to update the ORBIT Act in light
of the ownership changes, and the changes in the competitive
marketplace that have occurred since the Act was passed 5 years
ago. Inmarsat would be pleased to work with the committee on
such legislation.
Thank you for this opportunity to testify.
[The prepared statement of Alan Auckenthaler follows:]
Prepared Statement of Alan Auckenthaler, Vice President, Inmarsat
Ventures Limited
My name is Alan Auckenthaler. I am a Vice President of Inmarsat
Ventures Limited, which in ORBIT terms is the privatized ``successor
entity'' to the International Mobile Satellite Organization. I was
General Counsel of Inmarsat and the predecessor intergovernmental
organization from 1994 until last year, throughout virtually all of the
privatization and ORBIT compliance process.
On behalf of my company, I thank the Subcommittee for holding this
hearing, and for its interest in the status of our privatization. I
also thank the Members of the Subcommittee for supporting amendments to
the ORBIT Act three times during the past few years to give us more
time and new ways to comply in light of financial market conditions not
foreseen when the Act was passed.
Let me begin by describing some exciting recent business
developments at Inmarsat, because they demonstrate how privatization is
resulting in real benefits to our customers in the federal government
and American business, and to others around the world. Our
privatization process started in 1993, long before ORBIT, but it is
nevertheless a remarkable policy success for the United States, because
the U.S. delegation played a leading role at the intergovernmental
organization in forging a political consensus in support of
privatization and in driving the process to completion.
A month ago, on March 11th, the largest and most powerful
commercial communications satellite ever built was successfully
launched on Lockheed Martin's Atlas V rocket from Cape Canaveral. This
was the first of our Inmarsat-4 satellites. With 60 times the power,
228 spot beams, and advanced modulation and coding techniques, the
Inmarsat-4 satellites will use spectrum up to 17 times more efficiently
than our previous satellites. The Inmarsat-4 satellites will enable our
distributors to provide mobile and portable broadband services at
around half a megabit per second to customers using terminals no larger
than a notebook computer. We call these services Broadband Global Area
Network or BGAN.
The Inmarsat system is already relied on for the Global Maritime
Distress and Safety System and by the United States Coast Guard for
Search and Rescue operations. It is also relied on by the Federal
Aviation Administration to support Air Traffic Control communications.
The United States Department of Defense is our largest customer. We
devote at least 25% of our total network capacity to serve DoD. There
has been heavy usage of Inmarsat services in Afghanistan and Iraq. In
addition, Inmarsat supplies mission-critical communications services on
United States Air Force VIP planes, including Air Force One, the 89th
Air Wing at Andrews Air Force Base that transports members of Congress,
and the planes of regional Combatant Commanders. U.S. law enforcement
agencies such as the Coast Guard, FBI, Immigration and Customs
Enforcement, and Drug Enforcement Administration, use our services. We
expect to be the communications link of choice when long-range vessel
tracking and container monitoring systems are developed to comply with
the Maritime Transportation Security Act.
American business depends on Inmarsat too. The Deere Company uses
Inmarsat's satellite communications for its precision farming service.
U.S. flag vessels have integrated Inmarsat communications into ship
operations and to provide crew calling. The Vessel Monitoring System
that industry and government rely on to manage the sustainability of
fisheries by tracking commercial fishing vessels and enforcing fishing
regulations uses our satellite network. Portable Inmarsat terminals are
used in remote regions around the world by American companies engaged
in energy and mining exploration and construction projects, and by
journalists for digital news gathering. You may remember watching live
broadcasts by journalists using Inmarsat video phones on vehicles in
troop caravans driving north in the opening days of the war in Iraq.
Agencies of the United Nations and non-governmental organizations
like the Red Cross rely on Inmarsat communications to respond to
natural disasters, like the tsunami last year, or to help refugees
displaced by wars. Inmarsat is a partner of NetHope, a consortium of
U.S.-based aid agencies that provide communications infrastructure to
support assistance activities in developing countries.
The BGAN services that our distributors will provide via our new
Inmarsat-4 satellites will enable these customers and others to do all
of these things and more at broadband speed and at less cost. We have
bet our company on the promise of broadband, investing $1.5 billion
dollars in the construction and launch of our Inmarsat-4 satellites and
the associated ground infrastructure.
This kind of risk-taking would not have been possible in an
intergovernmental organization. The organization anticipated that more
than 10 years ago. The process of privatizing Inmarsat began in 1993.
Led by the U.S. delegation, Inmarsat pioneered the privatization model
subsequently followed by Intelsat and Eutelsat. The Inmarsat business
was transferred in April 1999 from the intergovernmental organization
to a newly-created private company.
Thus, when Congress passed the ORBIT Act in March 2000, we were
already well on our way to satisfying the privatization criteria laid
down there. The Federal Communications Commission determined in October
2001 that we had satisfied all ORBIT criteria except the requirement to
conduct an IPO to substantially dilute the aggregate ownership of
former Signatories.
An IPO was part of the privatization model agreed upon by the
Inmarsat stakeholders. They set a target for the company to conduct an
IPO within approximately two years. Like Congress, they could not
foresee the collapse of the IPO markets.
The company prepared five times for an IPO, spending over $10
million dollars on external fees, as well as demanding an enormous
amount of internal management effort. We had to ask Congress for two
deadline extensions, which were granted in November 2001 and June 2003.
Again, I express our appreciation for these extensions.
Notwithstanding the problems of the IPO markets, private equity
funds did see the value in satellite companies. In December 2003, two
funds, managed by Apax Partners and Permira, acquired the majority of
Inmarsat. As a result, the aggregate ownership by shareholders that had
formerly been Signatories in the intergovernmental organization was
reduced to 42.54%. Of 85 former Signatories, only 15 retain an on-going
ownership interest. Telenor Satellite Services of Norway, COMSAT
Investments (now owned by Lockheed Martin), and KDDI Corporation of
Japan own 14.95%, 13.96%, and 7.55% respectively. This result far
exceeds the dilution that could have been achieved through an IPO of
equity shares. And our new owners did conduct an IPO of debt securities
that had the effect of subjecting Inmarsat to substantially the same
kind of securities regulation that would have applied if we had listed
equity securities.
We spent most of 2004 seeking a determination from the Commission
that we had satisfied the IPO requirement in ORBIT by means of the
private equity takeover and IPO of debt securities, but the Commission
had concerns about whether Congress intended them to have discretion to
make such a finding. Congress solved this problem by further amending
the ORBIT Act last October. That amendment allows us to satisfy ORBIT
without an IPO of equity securities if former Signatories neither own a
majority of the financial interests in the company nor retain effective
control through other means. We filed a certification to that effect
with the Commission on November 15th, and are waiting for their
decision.
If this Committee is now going to consider additional amendments to
the ORBIT Act, I submit the following examples of restrictions that no
longer make sense and should be eliminated:
Section 621(5)(D)(ii)(II) prohibits our officers or managers from
owning shares in telecommunications companies that were
formerly Signatories, even if those companies did not remain
Inmarsat shareholders after the takeover. Although the
Commission did adopt a de minimis threshold, the prohibition
nevertheless constrains the personal investment opportunities
of our officers and managers, and also places an administrative
burden on Inmarsat to annually survey these staff to confirm
that they have not exceeded the allowed threshold.
Section 624 prohibits reaffiliation with ICO Global Communications
for 15 years, and also prohibits interlocking directorates. In
case you don't remember, ICO was spun off by Inmarsat in 1995.
It has since gone through Chapter 11 and does not yet have an
operating system. I can imagine no public policy reason for
retaining this prohibition.
The purpose of the ORBIT Act was to ensure that Intelsat, New
Skies, and Inmarsat completed their privatizations in a pro-competitive
way. That objective has been realized. Inmarsat, and the many
independent American companies across the United States engaged in
distributing our services, manufacturing equipment for our network, and
developing innovative service applications to meet the needs of
government and commercial customers here and abroad, are ready to use
our new Inmarsat-4 satellites to deliver BGAN and other services in the
competitive marketplace.
Thank you for this opportunity to testify. I look forward to
working with the Subcommittee on further legislation to update the
ORBIT Act in light of the ownership changes and changes in the
competitive marketplace that have occurred since the Act was passed
five years ago.
Mr. Upton. Thank you very much. Ms. Hecker.
STATEMENT OF JAYETTA Z. HECKER
Ms. Hecker. Good morning, Mr. Chairman, and other members
of this committee. My name is JayEtta Hecker, and I am a
director at GAO, and I generally have been overseeing
transportation deregulation, and have recently taken over some
responsibility for telecommunications issues. I am very pleased
to be here to discuss the privatization of INTELSAT and the
implementation of the ORBIT Act. It is based on a report that
we completed recently for this committee and the Senate.
The three areas that I will speak about will be the initial
impetus for the privatization of INTELSAT. Second, the extent
to which implementation has occurred consistent with the ORBIT
Act provisions. And finally, the improvement in market access
that has resulted after the ORBIT Act.
On the first issue of the impetus, I think many of you
correctly set this back to 1962 with the U.S. national policy
trying to promote the creation of a global satellite
communication system. The key in that period was the premise or
the assumption that the risk and the costs of deploying a
global satellite system made this investment or this
development a natural monopoly. And that, of course, is why
INTELSAT and Inmarsat were set up the way they were. But very,
very soon thereafter, really, demand in the telecom industry
grew, and the telecommunications technology was evolving and
competitors were growing. It was not a natural monopoly. So as
the marketplace grew, the restrictions left on INTELSAT, the
requirements that countries only provide primary access to
INTELSAT, really impeded the development of these other
emerging firms. And the real impetus was that these firms felt
that there was not a level playing field, and it was time to
open up the market.
At the time, INTELSAT itself was realizing that the complex
bureaucratic structure of an IGO was not workable, and they
could not compete. They knew they were, in fact, confronted by
competing firms, and they were not adapting, they were not
investing, they were not really able to advance and continue to
mature. So they, too, called for and were interested in taking
initial steps to privatization.
But the real action, I think, was locked into place with
the ORBIT Act of 2000, with the Congress calling for the full
privatization of INTELSAT, and very specific requirements laid
out to ensure that that occurred.
Now, the issue of whether privatization has been consistent
with the Act, really, I think Mr. Abelson covered, because you
put FCC in charge of making the determination of whether the
actions were taken consistent with the Act. And in our report
and as Mr. Abelson has said, that was really determined 2
months before the actual privatization of INTELSAT in 2001 in
an advance review of the plan, and a determination that it was
consistent with the requirements in many respects. But the
grant of operating rights within the U.S. was made conditional
on the IPO, which was the remnant requirement.
The recent actions with INTELSAT stock being sold to a
consortium really changed the environment, but the Congress
anticipated that with changes last October that recognize that
the IPO was really a proxy for the full dilution and
privatization of the firm, but that other means were
acceptable. And so now we are looking at one final action, I
guess, by the FCC that has to rule on this determination, and
this complete dilution from former signatories.
The final issue is the one of market access, which of
course, is essential for a market to occur, a global market,
and our work in the mid-1990's and a lot of the complaints that
led up to the ORBIT Act made a very public concern about the
limitations of access globally. Mr. Dingell was right that our
report gave primary credit, as did the stakeholders we met
with, the primary change was the WTO international agreement to
open up telecom markets. That really was the commitment by
countries to actually remove existing barriers. Now, the ORBIT
Act played a very important and complimentary role in
accelerating and facilitating the privatization of the industry
domestically, and also internationally, the removal of the
national entities in the telecom center.
In sum then, the Congress intent in the ORBIT Act,
promoting a competitive and fully privatized global satellite
communication market, has been completely achieved. INTELSAT
has been successfully transformed into a fully private held
for-profit corporation. There are other global satellite
companies, as well as other regional companies, that users can
go to. Moreover, as you know, technology has continued to
evolve and users can turn to other options, even if the
satellite industry is concentrated. There are other ways to
move voice and data, and other telecom services, as these
people all know from their declining business and pressure on
their prices.
So in conclusion, the Act was a success. Our work did not
address the issue of the New Skies issues, but I would be happy
to take any questions that might be helpful.
[The prepared statement of JayEtta Z. Hecker follows:]
Prepared Statement of JayEtta Z. Hecker, Director, Physical
Infrastructure, Office of Congressional Relations, U.S. Government
Accountability Office
Mr. Chairman and Members of the Subcommittee: I am pleased to be
here today to discuss the privatization of INTELSAT and the
implementation of the ORBIT Act. In 2000, the Congress passed the
Openmarket Reorganization for the Betterment of International
Telecommunications Act 1 (ORBIT Act) to help promote a more
competitive global satellite communication services market. Today we
will discuss (1) the impetus for the privatization of INTELSAT
2 as competition developed during the 1990s, (2) the extent
to which the privatization steps required by the ORBIT Act have been
implemented, and (3) whether access by global satellite companies to
non-U.S. markets has improved since the enactment of the ORBIT Act.
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\1\ Pub. L. 106180, 114 Stat. 48 (2000).
\2\ The official name of the intergovernmental organization was
INTELSAT--all capital letters. After privatization, the privatized
company is known as Intelsat. We make this distinction throughout this
report.
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To address these issues, we have drawn upon our previous work on
the international satellite market and the ORBIT act. We issued two
reports on the international satellite market in 1996.3 In
addition, we issued two reports in September 2004, one of which focused
on the implementation of the ORBIT Act;4 see appendix I for
a list of related GAO products. For the latter report, we conducted
semistructured interviews with satellite service providers and experts.
Additionally, we interviewed officials from the Federal Communications
Commission (FCC), the United States Trade Representative; the
Department of State; and the National Telecommunications and
Information Administration of the Department of Commerce. We conducted
our work for the September 2004 report from February through June 2004
in accordance with generally accepted government auditing standards.
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\3\ See GAO, Telecommunications: Competitive Impact of
Restructuring of the International Satellite Organizations, GAO/
RCED96204 (Washington, D.C.: July 8, 1996); and GAO,
Telecommunications: Competition Issues in International Satellite
Communications, GAO/RCED971 (Washington, D.C.: Oct. 11, 1996).
\4\ See GAO, Telecommunications: Intelsat Privatization and the
Implementation of the Orbit Act, GAO04891 (Washington, D.C.: Sept. 13,
2004); and GAO, Tax Policy: Historical Tax Treatment of INTELSAT and
Current Tax Rules for Satellite Corporations, GAO04994 (Washington,
D.C.: Sept. 13, 2004).
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Following is a summary of our findings:
When commercial satellite technology was first deployed, a worldwide
system was seen as the most efficient means to facilitate the
advancement of a fully global provider. INTELSAT was thus
established as an intergovernmental entity that was protected
from competition in its provision of global satellite
communications services. By the 1980s, however, technology
developments enabled private companies to efficiently compete
for global communications services, and in 1984, President
Reagan determined that it would be in the national interest of
the United States for there to be greater competition in this
market. New commercial satellite systems emerged, but within a
few years, these providers became concerned that INTELSAT
enjoyed certain advantages stemming from its intergovernmental
status that impeded others from effectively competing. The new
satellite companies began to argue that the marketplace would
not become fully competitive unless INTELSAT became a private
company that no longer enjoyed such advantages. At about the
same time, decision makers within INTELSAT decided to privatize
the organization because of the difficulties of making business
decisions within an intergovernmental entity.
Just prior to INTELSAT's privatization in July 2001, FCC determined
that INTELSAT's privatization plan was consistent with
requirements of the ORBIT Act. FCC thus authorized Intelsat,
LLC--the U.S. subsidiary of the privatized entity Intelsat
Ltd.--to use its U.S. satellite licenses to provide services
within the United States pending an initial public offering
(IPO) of securities that was mandated by the ORBIT Act to occur
at a later time. In 2004, however, new legislation allowed
Intelsat to forgo an IPO if it achieved substantial dilution of
its ``signatory'' ownership--or dilution of ownership by those
entities that had been the signatories to INTELSAT when it was
an intergovernmental entity. Since Intelsat has recently been
sold to a consortium of four private investors, it no longer
has, according to an Intelsat official, any former signatory
ownership. FCC is still reviewing this transaction to determine
whether Intelsat has met the requirements of the ORBIT Act as
amended and thus no longer is required to hold an IPO.
Most of the stakeholders we spoke with said that access to non-U.S.
satellite markets has generally improved during the past
decade. This improvement in market access is generally
attributed to global trade agreements and privatization trends.
Despite this general view, some satellite companies expressed
concerns that some market access issues still exist. These
remaining market access problems were attributed to foreign
government policies that may limit or slow satellite
competitors' access to certain markets. For example, some
companies noted that some countries may favor domestic
satellite providers or may choose to continue obtaining service
from Intelsat because of long-term business relationships that
were forged over time. Nevertheless, Intelsat officials noted
that it seeks market access on a transparent and
nondiscriminatory basis and that Intelsat has participated with
other satellite operators, through various trade organizations,
to lobby governments to open their markets.
BACKGROUND
The Congress passed the Communications Satellite Act of 1962 to
promote the creation of a global satellite communications system. As a
result of this legislation, the United States joined with 84 other
nations in establishing the International Telecommunications Satellite
Organization--more commonly known as INTELSAT--roughly 10 years
later.5 Each member nation designated a single
telecommunications company to represent its country in the management
and financing of INTELSAT. These companies were called ``signatories''
to INTELSAT and were typically government-owned telecommunications
companies, such as France Telecom, that provided satellite
communications services as well as other domestic communications
services. Unlike any of the other nations that originally formed
INTELSAT, the United States designated a private company, Comsat
Corporation, to serve as its signatory to INTELSAT.
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\5\ By the time Intelsat privatized in 2001, 148 countries had
become parties to the intergovernmental organization.
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The ORBIT Act, enacted by the Congress in March 2000, was designed
to promote a competitive global satellite communication services
market. The act did so primarily by calling for the privatization of
INTELSAT after about three decades of operation as an intergovernmental
entity.6 The ORBIT Act required, for example, that INTELSAT
be transformed into a privately held, for-profit corporation with a
board of directors that would be largely independent of former INTELSAT
signatories. Moreover, the act required that the newly privatized
Intelsat retain no privileges or other benefits from governments that
had previously owned or controlled it. To ensure that this
transformation occurred, the Congress imposed certain restrictions on
the granting of licenses that allow Intelsat to provide services within
the United States. The Congress coupled the issuance of licenses
granted by FCC to INTELSAT's successful privatization under the ORBIT
Act. That is, FCC was told to consider compliance with provisions of
the ORBIT Act as it made decisions about licensing Intelsat's domestic
operations in the United States. Moreover, FCC was empowered to
restrict any satellite operator's provision of certain new services
from the United States to any country 7 that limited market
access exclusively to that satellite operator.8
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\6\ The act also pertained to Inmarsat. A discussion of Inmarsat's
privatization is outside the scope of this testimony.
\7\ This provision was limited to those countries that were not
members of the World Trade Organization.
\8\ Additionally, once INTELSAT was privatized under provisions of
the ORBIT Act, Comsat Corporation's role as the U.S. signatory to the
INTELSAT operating agreement was ended.
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CONCERNS THAT INTELSAT ENJOYED COMPETITIVE ADVANTAGES PROVIDED IMPETUS
FOR ITS PRIVATIZATION
When satellite technology first emerged as a vehicle for commercial
international communications, deploying a global satellite system was
both risky and expensive. Worldwide organizations were considered the
best means for providing satellite-based services throughout the world.
When INTELSAT was established, the member governments put in place a
number of protections to encourage its development. In essence,
INTELSAT was created as an international monopoly--with little
competition to its international services allowed by other satellite
systems, although domestic and other satellite systems were allowed
under certain conditions. As such, during the 1970s and early 1980s,
INTELSAT was the only wholesale provider of certain types of global
9 satellite communications services such as international
telephone calls and relay of television signals
internationally.10
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\9\ Some other satellite companies provided fixed satellite
services between some countries, but INTELSAT was the only provider at
that time that could provide service to all parts of the globe.
\10\ While INTELSAT was the only provider at that time of what is
called global fixed satellite services--that is, services provided
between fixed points on land--another global satellite organization
that was also formed based on amendments to the Communications
Satellite Act provided global maritime satellite communications. This
organization is commonly known as Inmarsat.
---------------------------------------------------------------------------
As satellite technology advanced, it became economically more
feasible for private companies to develop global satellite systems.
This occurred in part because of growing demand for communications
services as well as falling costs for satellite system equipment. In
particular, some domestic systems that were already in operation
expressed interest in expanding into global markets. By the mid-1980s,
the United States began encouraging the development of commercial
satellite communications systems that would compete with INTELSAT. To
do so under the INTELSAT treaty agreements, President Reagan determined
that competing international satellite systems were required in the
national interest of the United States.11 After that
determination, domestic purchasers of international satellite
communications services were allowed to use systems other than
INTELSAT. In 1988, PanAmSat was the first commercial company to begin
launching satellites in an effort to develop a global satellite system.
Within a decade after PanAmSat first entered the market, INTELSAT faced
other global satellite competitors. Moreover, intermodal competition
emerged during the 1980s and 1990s as fiber optic networks were widely
deployed on the ground and underwater to provide international
communications services.
---------------------------------------------------------------------------
\11\ See Presidential Determination Number 85-2.
---------------------------------------------------------------------------
As competition to INTELSAT grew throughout the 1990s, commercial
satellite companies became concerned that INTELSAT enjoyed certain
advantages stemming from its intergovernmental status. In particular,
the new satellite companies noted that INTELSAT enjoyed immunity from
legal liability and was often not taxed in the various countries it
served. Additionally, new competitors noted that the signatories to
INTELSAT in many countries were typically government-owned
telecommunications companies, and many were the regulatory authorities
that made decisions on satellite access to their respective domestic
markets. As such, new satellite companies were concerned that those
entities, because of their ownership stake in INTELSAT as signatories,
might favor INTELSAT and thus render entry for other satellite
companies more difficult. Because of these concerns, competitors began
to argue that the satellite marketplace would not become fully
competitive unless INTELSAT became a private company that operated like
any other company and no longer enjoyed any advantages.
During the same time frame, some of the signatories to INTELSAT
came to believe that certain of INTELSAT's obligations as an
intergovernmental entity impeded its own market competitiveness. For
example, decision-makers within INTELSAT became concerned that the
cumbersome nature of the intergovernmental decision-making process left
the company unable to rapidly respond to changing market conditions--a
disadvantage in comparison with competing private satellite providers.
In 1999, INTELSAT announced its decision to become a private
corporation, but to leave in place a residual intergovernmental
organization that would monitor the privatized Intelsat's remaining
public service obligations.12
---------------------------------------------------------------------------
\12\ The residual intergovernmental organization is known as the
International Telecommunications Satellite Organization (ITSO).
---------------------------------------------------------------------------
FCC BELIEVES INTELSAT'S PRIVATIZATION WAS CONSISTENT WITH THE ORBIT
ACT'S REQUIREMENTS
On July 18, 2001, INTELSAT transferred virtually all of its
financial assets and liabilities to a private company called Intelsat,
Ltd., a holding company incorporated in Bermuda. Intelsat, Ltd. has
several subsidiaries, including a U.S.-incorporated indirect subsidiary
called Intelsat LLC. Upon their execution of privatization, INTELSAT
signatories received shares of Intelsat, Ltd. in proportion to their
investment in the intergovernmental INTELSAT.13 Two months
before the privatization, FCC determined that INTELSAT's privatization
plan was consistent with the requirements of the ORBIT Act for a
variety of reasons, including the following:
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\13\ In addition, some portion of the intergovernmental Intelsat
was owned by nonsignatory--or ``investing''--entities, which also
received pro rata shares in the new Intelsat, Ltd.
Intelsat, Ltd.'s Shareholders' Agreement provided sufficient evidence
that the company would conduct an initial public offering
(IPO).
Intelsat, Ltd. no longer enjoyed the legal privileges or immunities
of the intergovernmental INTELSAT.
Both Intelsat, Ltd. and Intelsat LLC are incorporated in countries
that are signatories to the World Trade Organization (WTO) and
have laws that secure competition in telecommunications
services.
Intelsat, Ltd. converted into a stock corporation with a fiduciary
board of directors.
Measures were taken to ensure that a majority of the members of
Intelsat, Ltd.'s Board of Directors were not directors,
employees, officers, managers, or representatives of any
signatory or former signatory of the intergovernmental
INTELSAT.
Intelsat, Ltd. and its subsidiaries had only arms-length business
relationships with certain other entities that obtained
INTELSAT's assets.14
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\14\ These entities include New Skies Satellites N.V., a spin-off
company created approximately 1 year before the privatization of
Intelsat that received some of INTELSAT's satellites, and the
International Telecommunications Satellite Organization, the ongoing
intergovernmental organization responsible for monitoring Intelsat,
Ltd.'s continuing ``lifeline'' obligations, which received start-up
funding from INTELSAT when it was privatized.
---------------------------------------------------------------------------
In light of these findings, FCC conditionally authorized Intelsat
LLC to use its U.S. satellite licenses to provide services within the
United States.15 However, FCC conditioned this authorization
on Intelsat, Ltd. conducting an IPO of securities as mandated by the
ORBIT Act. In the past year, however, several changes have occurred
that alter the circumstances and requirements associated with
Intelsat's IPO. On August 16, 2004, Intelsat, Ltd. announced that its
Board of Directors approved the sale of the company to a consortium of
four private investors. According to an Intelsat official, this
transaction, which was completed on January 28, 2005, eliminates former
signatories' ownership in Intelsat. Additionally, on October 25, 2004,
the President signed legislation modifying the requirements for
privatization in the ORBIT Act. Specifically, Intelsat, Ltd. may forgo
an IPO under certain conditions, including, among other things,
certifying to FCC that it has achieved substantial dilution of the
aggregate amount of signatory or former signatory financial interest in
the company.16 FCC is still reviewing this transaction to
determine whether Intelsat has met the requirements of the ORBIT Act as
amended and thus is no longer required to hold an IPO.
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\15\ In its required annual reports to the Congress on the ORBIT
Act, FCC has continued to report that Intelsat has complied with ORBIT
Act provisions.
\16\ In the law, significant dilution means that a majority of the
financial interests in Intelsat is no longer held or controlled,
directly or indirectly, by signatories or former signatories.
---------------------------------------------------------------------------
WHILE MARKET ACCESS HAS IMPROVED, SOME COMPANIES SAY THAT CERTAIN
MARKET ACCESS CHALLENGES REMAIN
According to most stakeholders and experts we spoke with, access to
non-U.S. satellite markets has generally improved during the past
decade, which they generally attribute to global trade agreements and
privatization trends. In particular, global satellite companies appear
less likely now than they were in the past to encounter government
restraints or business practices that limit their ability to provide
service in non-U.S. markets. Satellite companies and experts we spoke
with generally indicated that access to non-U.S. satellite markets has
improved. Additionally, most stakeholders attributed this improved
access to global trade agreements that helped to open
telecommunications markets around the world, as well as to the trend
toward privatization in the global telecommunications industry. At the
same time, many stakeholders noted that the ORBIT Act had little to no
impact on improving market access. According to several stakeholders,
market access was already improving when the ORBIT Act was passed.
Despite the general view that market access has improved, some
satellite companies and experts expressed concerns that market access
issues still exist. These remaining market access problems were
attributed to foreign government policies that limit or slow satellite
competitors' access to certain markets. For example:
Some companies and experts we spoke with said that some countries
have policies that favor domestic satellite providers over
other satellite systems and that this can make it difficult for
nondomestic companies to provide services in these countries.
Some companies and one expert we spoke with said that because some
countries carefully control and monitor the content that is
provided within their borders, the country's policies may limit
certain satellite companies' access to their market.
Several companies and an expert we interviewed said that many
countries have time-consuming or costly approval processes for
satellite companies.17
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\17\ Some stakeholders we spoke with who made this point also noted
that the same countries may have bureaucratic and costly processes for
any foreign company--not just satellite or telecommunications
companies--that wants to do business in their country.
---------------------------------------------------------------------------
In addition to these government policies, some stakeholders believe
that Intelsat may benefit from legacy business relationships. Since
INTELSAT was the dominant provider of global satellite services for
approximately 30 years, several stakeholders noted that Intelsat may
benefit from the long-term business relationships that were forged over
time, as telecommunications companies in many countries may feel
comfortable continuing to do business with Intelsat as they have for
years. Additionally, two stakeholders noted that because companies have
plant and equipment as well as proprietary satellite technology in
place to receive satellite services from Intelsat, it might cost a
significant amount of money for companies to replace equipment in order
to use satellite services from a different provider. Alternatively,
representatives of Intelsat, Ltd. told us that Intelsat seeks market
access on a transparent and nondiscriminatory basis and that Intelsat
has participated with other satellite operators, through various trade
organizations, to lobby governments to open their markets. Further,
some companies and many of the experts we interviewed told us that, in
their view, Intelsat does not have preferential access to non-U.S.
satellite markets and that they have no knowledge that Intelsat in any
way seeks or accepts exclusive market access arrangements or attempts
to block competitors' access to non-U.S. satellite markets.
Finally, some of the companies we spoke with believe that FCC
should take a more proactive role in improving access for satellite
companies in non-U.S. markets. For example, one satellite company said
that section 648 of the ORBIT Act, which prohibits any satellite
operator from acquiring or enjoying an exclusive arrangement for
service to or from the United States, provides a vehicle for FCC to
investigate the status of access for satellite companies to other
countries' markets. Conversely, FCC officials told us they do not
believe that FCC should undertake investigations of market access
concerns without specific evidence of violations of section 648 of the
ORBIT Act. While some comments filed with FCC in proceedings on
Intelsat's licensing and for FCC's annual report on the ORBIT Act raise
concerns about market access, FCC has stated that these filings amount
only to general allegations and fall short of alleging any specific
statutory violation that would form a basis sufficient to trigger an
FCC enforcement action.
Mr. Chairman, this concludes my prepared statement. I would be
happy to respond to any questions you or other Members of the
Subcommittee may have at this time.
Mr. Upton. Well, thank you very much, all of you. And at
this point, we will proceed with questions from the members,
and not take more than 5 minutes each.
As I look at what Congress has done over the last number of
years, I agree with you, Ms. Hecker, I think it has been a
success. And some might say we have achieved exactly the
success, perhaps a little faster than some might have
predicted, and historically as this panel has continually
looked at the ORBIT Act and the way things have transformed
itself for the last number of years, I guess the question today
would be focusing on the re-affiliation prohibition, what Mr.
Goldberg cited, and the ban, the 11-year ban that prohibits Mr.
Goldberg's firm from re-affiliating at all, and that time clock
really doesn't start, as I understand it, until the FCC says
go. Is that right? Which is going to be relatively soon, I
think. Is that right, Mr. Abelson? The first pitch is about
ready to be thrown, it is not going to go extra innings?
Mr. Abelson. Yes, that is correct.
Mr. Upton. But the game is 11 years long. And the question
that I think that Congress will ultimately look at as to
whether or not that 11-year time clock is going to change. Is
it going to become, as they say at Wrigley Field, a game called
because of darkness, though they have lights now?
And what we are going to take a look at, and I guess that
is where my focus is, and I just want to know, maybe hear from
each of you. Maybe we will start with Ms. Hecker since she was
the last one to testify with her statement, and indicated that
she didn't comment specifically about this provision, but would
be willing to do so. What are the--do you think the marketplace
is ready for this? That is the first question. And second, what
are the--who would be against it? I am not aware of any, but
maybe you have heard of some.
Ms. Hecker.
Ms. Hecker. Well, I----
Mr. Upton. You have got to hit that mic button.
Ms. Hecker. I would just use logic, because our work has
not explicitly done that. But the way I looked at the Act, you
had an intent when that provision was in there to prevent the
subversion of the planned privatization of INTELSAT, and the
emergence of competition. New Skies was a spin-off to try to
spur that competition. But the reality is there are multiple
firms, and that competition is there and they are all fully
privatized. One is not anymore aligned with the former
signatories than any of the others. And I think really the role
of the antitrust laws and the FCC review, and perhaps even DOD
review, because of some of the security issues, are really the
mechanisms that perhaps appropriately apply at this stage to
examine for the consolidation in this industry.
Mr. Upton. Mr. Auckenthaler.
Mr. Auckenthaler. Thank you, Mr. Chairman. I will not
comment on the ban on re-affiliation between INTELSAT and New
Skies, but I would like to ask that when you consider changing
the law in that respect, you also look at the ban on re-
affiliation between Inmarsat and ICO. As you probably know, ICO
went through Chapter 11 protection, came out in the year 2000.
Now owned by a group of investors led by Craig McCaw. There is
not commonality of ownership at all between ICO and Inmarsat.
And I can think of no public policy reason why there should be
a 15-year ban on any possible relationship between the two
companies. Thank you.
Mr. Upton. Mr. Spector.
Mr. Spector. Mr. Chairman, if I may use your same metaphor
about a baseball game, I think the nature of the game has very
much changed from where we were back in 2000. And today, the
marketplace is a very different one than the one that Congress
envisioned back then. If you have two entirely private firms,
each owned entirely by private investors, why should the
Congress get in the middle and why should U.S. statutes get in
the middle of that private decision about what those firms do.
Obviously, there are laws on the books. The Sherman Act and
other antitrust laws, the Communications Act and other laws
administered by the FCC that would relate directly to any
merger in the communications industry and that would be part of
looking at any merger. But certainly from a marketplace
standpoint, we believe that to be the case.
I would also say on your question of who is against this
that we don't know of anyone who is against getting rid of this
re-affiliation prohibition, and we don't see how anyone really
could be against it, because in the end, it is about
competition and as we know in this Congress particularly has
been a big supporter of competition. We don't know of anyone
who is making the anti-competitive argument that somehow this
law should remain on the books.
Mr. Upton. Mr. Goldberg, would you agree with that
conclusion?
Mr. Goldberg. Yes, I share the perspective of the other
panelists, which is the market is radically different. Again, I
said unrecognizable from the time that ORBIT was passed. There
are, I believe, adequate safeguards in terms of the antitrust
laws, the FCC's public interest standards, and other oversight
that is applied whenever there are combinations that implicate
national security concerns. And again, our perspective is this:
set aside just the privatization issues and how we think
remarkable and extraordinary it is that there be a provision
that absolutely prohibits two entirely commercial companies
from combining, but the market is very, very aggressive today.
It is very, very competitive. I think most industry observers
anticipate that there will be some consolidation in our sector.
And from our perspective, whether New Skies ultimately
participates in that, I think it would be artificial to exclude
INTELSAT from that equation. That is why we think the time has
come for Congress to revisit that provision.
Mr. Upton. Mr. Abelson, would you wish to comment?
Mr. Abelson. Sure. The first thing I would say, of course,
is that the Commission has not yet considered the matter that
you are addressing. But then let me talk about what would
happen if you were to change it, and what would the Commission
do. In fact, we got a merger application from, for example, New
Skies and INTELSAT, we would review the proposed merger
pursuant to the relevant sections of the Communications Act,
most particularly Section 310. And we normally in such a review
undertake a public interest analysis and review the identity--
to try to identify both potential public interest harms and
benefits. A Commission grant of the merger would, in fact, have
to show that it served the public interest, convenience, and
necessity. We would look at a number of things, including the
likely competitive effects of the proposed transaction, whether
such a transaction raises significant competition issues, and
also the likely public interest benefits of it.
Mr. Upton. My time is expired.
Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Goldberg, what percentage of international
telecommunications traffic is underseas and how much is
satellite? Do you know?
Mr. Goldberg. I cited in our written testimony a report
that the FCC issued. I think it is their 2004 International
Circuits report. And I believe at this point in time, again,
according to the FCC's report, and I believe that what this
looks at is international traffic between the United States and
a foreign point. I understand that today--if you give me just 1
second. Satellites, at least in 2003, the FCC hasn't issued the
numbers for 2004. Satellites are carrying just 1 percent of
international traffic. That is in contrast back to the time
when--back in 1997 when there was a lot of activity here when
ORBIT was first passed, at least by the House. At that time, 10
percent of international traffic was carried by satellites. And
this is another thing that we try to emphasize. Not only has
the satellite industry become much, much more competitive
because we have all launched collectively so much more
capacity, but there is now 40 times more undersea fiber
capacity than there was some years ago, and we have lost an
enormous market share to the undersea fiber providers.
Mr. Markey. Thank you.
Mr. Spector, the previous owners of INTELSAT, which
included several signatories, made a decision after the ORBIT
Act to domicile the company for legal purposes in Bermuda,
while keeping its headquarters here in DC. Are the new owners
management reconsidering that decision to have the domicile in
Bermuda?
Mr. Spector. Mr. Markey, the short answer to that is no,
but I want to point out in that context that INTELSAT was never
a U.S. company. This is not an example, as with some companies,
of a U.S. company moving offshore. INTELSAT was an
intergovernmental organization headquartered in Washington, DC,
and then when it became a private company, it began life as a
Bermuda company.
That is because INTELSAT's business, frankly, is all over
the world. It is not just in the United States. And while we
very much value the United States and do a lot of business
here, as well as have a significant presence here in
Washington, DC, we are an international company.
Mr. Markey. Okay. Mr. Abelson, which country, in your
estimation, is the worst about discrimination about satellite
competition?
Mr. Abelson. That is a very interesting question. I would
have to actually defer to the trade representative that
collects these kinds of complaints from U.S. industry. They
filed--I believe they put out a report just 2 days ago on
telecom trade----
Mr. Markey. Did you read the report?
Mr. Abelson. I did read the report. I don't think they
cited any satellite issues in that report.
Mr. Markey. Do you have any offhand idea as to which
countries are the worst, a grouping of countries?
Mr. Abelson. I really don't. We have looked at competition
globally in the satellite industry, but with regard to the
countries that are the worst, I don't have a way of knowing. I
really rely on the companies to report to me what they were
experiencing.
Mr. Markey. But again, they might not want to anger the
country.
You are saying you really don't know, Mr. Abelson, which
countries in the world discriminate against satellite
competition? You really have no idea?
Mr. Abelson. I have knowledge about the regulatory
practices of foreign countries----
Mr. Markey. Yeah, so which ones are bad?
Mr. Abelson. Which countries have bad----
Mr. Markey. Yeah, which companies have bad policies in the
competition? That is your job, right?
Mr. Abelson. My job is actually to look at competition here
in the United States in the satellite industry.
Mr. Markey. Okay.
Mr. Abelson. And we have been doing a lot of work, as I
have noted, to promote competition in this field.
Mr. Markey. Yes. But you don't know what goes on in the
world?
Mr. Abelson. I rely upon the trade representative in the
Commerce Department that are responsible for getting access
overseas on these issues.
Mr. Markey. Okay. Just this Monday, Mr. Abelson, the DC
circuit heard the case of Northpoint Communications versus the
FCC on an issue stemming from the ORBIT Act's prohibition on
auctioning licenses for satellite frequencies. Is the FCC
seeking any clarification or change to this provision?
Mr. Abelson. At this point, the Commission has not
considered the matter of whether to seek change to this
provision. Our position with regard to the ORBIT Act and the
court case that you referred to is that the exemption applies
only to global or international satellite systems.
Mr. Markey. I actually--and I will be honest with you. I
wish we had an 11-year or a 15-year prohibition on MA Bell re-
affiliating after the Telecom Act. That would have been a good
addition to have built into the law. And I do understand that
the satellite market has become widely competitive, and
therefore, worth revisiting these prohibitions. And I am open-
minded about it, Mr. Chairman, about making adjustments, and
perhaps on some other issues as well.
Mr. Upton. Thank you.
Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman.
Again, it is great to listen and to follow up on the
testimony. I am trying to figure out how I can extend my
comments to the kids, you know, as I have used this example in
the past. And I think the conclusion is we were successful, but
as in most pieces of legislation, we have to re-look and we
have to retune and we have to manage that. And that is what
this hearing is about. And I think we have already identified
some things that just don't quite make sense anymore. And
hopefully, we will be able to resolve that.
I know I have been involved on the peripheral with some of
the extensions, because as was mentioned before by Mr.
Auckenthaler, of a John Deere and their technology. And I was
talking to Mr. Terry, who was by me before, and just the
amazing things that are capable about the self-directing
tractors and the evaluation of soil composition. And for my
environmental friends, the ability to specifically identify the
needed land piece and the fertilizer or the component in that
soil so you don't overspread. And this is all being self-
directed without, really, an operator in a tractor. It is just
phenomenal. At night, with no lights on. So that is the new
era, that is the new world, and competition brings that to
bear.
I have also, with the military background, understand,
really, the benefits to our men and women in the Armed Services
of the access to a competitive satellite system. And I don't
think, a lot of times, what we understand, because the
Department of Defense is huge and unruly, and really gets beat
up a lot of times for inefficiencies and cost over-rise that--I
think there are claims being made and I believe in that,
because they are using a for-profit satellite system and
carrier that there are cost benefits versus the Defense
Department's management of that satellite system to begin with.
So I appreciate this, and this is more of an opening
statement, but the question I do have, and as a reservist, I do
work with the Army War College, and we bring these general
wannabe's before and we grill them. I get some of my colleagues
to help. And we always try to bring in questions that are not
particularly what they are prepared for, just to shake them up
and to realize that once you are at a Congressional hearing,
anything can be asked.
So I throw this question out, just because of--it is one
that I have and you may not be able to answer it, but I have
always been concerned on our reliance on technology, both for
the world and for the military, because of, you know, threats
to disruption. Talk to me about electromagnetic pulses and what
would that do to the world economy, or really, a digitized
battlefield today which really, the Army is going to. Is there
a fear that--I mean, that just kind of send us into the dark
ages again? Can anyone speak on that?
Mr. Goldberg. I can tell you that the commercial satellite
operators right now are engaged in well over a year long effort
with the Department of Defense. In fact, there was a follow up
meeting just 2 weeks ago over at the Pentagon where we are
working with the Department of Defense to increasingly
integrate our commercial operations with their military
operations on lots of different levels. They are, today,
looking at procurement form, how they go about procuring
commercial satellite capacity for their requirements. They are
looking at sort of safety and protection issues, including both
our actual terrestrial facilities, so making sure that our
Earth station facilities have proper security, as well as of
the satellites themselves. How can the satellites be operated
in a more secure way?
We are looking at encrypted TT&C, the telemetry and control
of the satellites, so this is actually an area--the Department
of Defense is increasingly relying on the commercial satellite
industry, which we think is a good thing, and it is very much
consistent with the Congressional mandate that they received to
stop doing everything themselves. As part of that, they are
insisting that we work more closely with them to address some
of these security concerns.
I can't speak directly to what would be the impact of an
electromagnetic sort of pulse or surge, but I can tell you that
there is an ongoing conversation right now between the
commercial providers and our military customers to make sure
that the satellites that they rely on are as robust as
possible.
Mr. Shimkus. And just for, you know, just to be clear. You
know, that is primarily from a nuclear air burst in the
atmosphere that would do that, and I think that is a major
concern. It has been a concern for the military for a long
time, and we are so reliant now on the interconnectivity and
the use of satellites for everything: for banking, for--I just
throw it out there. And if there is times when your folks can
come back and talk to me about that, I would receive it happily
and readily.
Thank you, Mr. Chairman. I yield back.
Mr. Upton. Thank you.
Mr. Inslee.
Mr. Inslee. Thank you, Mr. Goldberg. I am new on this
committee, so some of this discussion may be repetitive.
But I just want to ask you, in your comments that I was
reading just about the potential merger that you have
discussed, is there anything that critics would argue especial
about this space, so to speak, literally and figuratively, that
would make this different from other mergers of other privately
held or publicly held companies at this point? What arguments
would be made, and how would you respond to them?
Mr. Goldberg. You know, it is always hard to speculate as
to, you know, what someone would come along and say. I do
believe that our industry is going to consolidate. I do believe
that will be a healthy development for our industry. I do
believe that any proposed combinations will get significant
scrutiny over at the FCC and at the Justice Department or at
the FTC.
New Skies, I have been at New Skies since its inception. In
looking back over the years, it was always difficult for me to
project that we would be where we are today. Equally projecting
forward, it is still hard for me to say where we will be next.
New Skies is the smallest global operator, but we are larger
than a number of regional operators. As a result, if there is
consolidation and we participate in it, we ourselves could try
to achieve scale to put us in a better competitive position
relative to our bigger competitors. Equally, I think New Skies
would, from the perspective of some of the larger operators, be
a compelling company to combine with.
I don't believe that any arguments that would be presented
in connection with a proposed INTELSAT/New Skies combination
would really be meaningfully different from the same arguments
that would arise if New Skies were proposing to combine with
any of the other larger operators.
And so, I don't believe that there is anything unique about
our competitive position and INTELSAT's competitive position
that would bring extraordinary arguments to bear. Candidly, I
think if it were proposed that we combine with one of the other
two global operators, I think we would be looking at
essentially the same set of arguments. To the extent that
anybody does come forward and offer any opposition, and I am
not persuaded in light of what the industry looks like today,
that anybody would come forward and offer those objections.
Mr. Inslee. So is it fair to say that you--and I welcome
any other comments from the panel--basically look at this
industry, you would suggest to us that at this point, we really
should have no different regimen of protocols in how we handle
merger than we do the dog food market or trucking industry or
anything else. Is that kind of a fair statement, or is there
some gradiations there we should think about?
Mr. Goldberg. I think that, you know, if the dog food
market consolidates, I am not sure what sort of national
security implications that has, but the satellite industry will
attract heightened scrutiny because of the national security
implications that arise because of the services that we
provide.
But do I believe that there should be a fundamentally
different approach to how proposed combinations in the
satellite sector are reviewed relative to the terrestrial
wireless sector, the fixed line telecom network? From my
perspective, no, I don't believe that there should be any sort
of extraordinary review or anything fundamentally different,
particularly in light of the fact that satellites are
increasingly competing with these other technologies.
Mr. Spector. Mr. Inslee, if I may, I would also add that a
difference from the dog food industry or many other industries
is that we do have, as was discussed earlier, FCC reviews. So
in addition to the typical Justice Department or FTC review of
a merger, you are always going to get a second look at a merger
by the Federal Communications Commission under a very broad
ranging public interest standard.
Mr. Inslee. Well, thank you very much, and any time you
want some help buying some more Boeing products, let me know
and I will give you a hand. Thanks a lot.
Mr. Spector. We are buying a satellite from them.
Mr. Upton. Thank you.
Mr. Shimkus, do you have additional questions?
Mr. Shimkus. No, Mr. Chairman.
Mr. Upton. Mr. Markey?
Mr. Markey. You know what, if I may?
Each of you just give us a 1-minute summation of why a
merger is a good idea or not a good idea. One minute. Mr.
Abelson.
Mr. Abelson. I can be very quick. I can't give you an idea
about whether it would be a good or a bad thing, but if it were
presented to us at the FCC, we would very seriously consider
it.
Mr. Markey. Mr. Goldberg.
Mr. Goldberg. I believe the industry today is unhealthy. I
believe that the negative consequences of that are that the
industry is losing jobs. We are not attracting the best quality
of people to come into this sector. I believe that some
satellite operators have gone bankrupt over the past few years.
I think the industry is unhealthy. I do believe that
consolidation will help the industry, and not just our
industry, but the downstream providers, the Boeings who build
satellites for us, the Lockheed's. I think that the world is
fundamentally different than it was when ORBIT was passed, and
I think that it is time to revisit ORBIT.
Mr. Markey. Mr. Spector.
Mr. Spector. INTELSAT has certainly not decided whether a
merger with New Skies would be a good thing or a bad thing for
us. What we do know is that the current flat statutory
prohibition on such a merger is a bad thing, and that it
artificially inhibits what would otherwise be a natural
competitive process of looking at all of the options for both
of these companies.
Mr. Markey. Mr. Auckenthaler.
Mr. Auckenthaler. Thank you, Mr. Markey. I would echo what
Mr. Spector said. My company is not actively considering
whether to discuss a merger with ICO. I only would say that
there is no--in my view, no public policy need for any special
constraints on that kind of commercial activity, and that
normal reviews that would occur at the FCC and the Justice
Department and in the siphious process would be sufficient.
Thank you.
Mr. Markey. Thank you.
Ms. Hecker.
Ms. Hecker. The original purpose for the re-affiliation
prohibition seems to have been taken over by time. It seems to
be no longer relevant. Both firms have been fully divested of
any signatory or former signatory ownership, and there is a
good case that can be made that any restrictions on constraints
on the consolidation of these firms really prevents the market
from coming up with the most efficient and market-based result.
Mr. Markey. Thank you, Ms. Hecker, very much. We thank all
of you.
Mr. Chairman, in my 22 years experience on this subject,
because of the excitement attached to it--this is actually the
largest crowd we have ever had attend a hearing on this
subject. And with Mr. Inslee and Mr. Shimkus here, the largest
number of members to ever show up and stay at a hearing on this
subject. So we thank each of you for your riveting testimony.
We appreciate it.
Mr. Upton. Yes. We have been notified, not by satellite,
but by Blackberry, that we are expecting votes on the House
floor momentarily, a series of votes.
I want to join Mr. Markey and others for thanking you for
your testimony and the great lengths that you took to get here
today and yesterday. Again, we appreciate your testimony. We
look forward to continuing to oversee exactly what happened and
examine the marketplace, and look forward to hearing from you
in the months ahead. I thank you all.
We now adjourn the hearing.
[Whereupon, at 11:23 a.m., the subcommittee was adjourned.]