[Senate Hearing 106-833]
[From the U.S. Government Publishing Office]
S. Hrg. 106-833
LOAN GUARANTEES AND
RURAL TELEVISION SERVICE
=======================================================================
HEARINGS
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
ON
LOAN GUARANTEES FOR PROJECTS TO SUPPLY TELEVISION SERVICE TO RURAL
AREAS
__________
FEBRUARY 1 AND 9, 2000
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
U.S. GOVERNMENT PRINTING OFFICE
69-308 DTP WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama PAUL S. SARBANES, Maryland
CONNIE MACK, Florida CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania EVAN BAYH, Indiana
JIM BUNNING, Kentucky JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho
Wayne A. Abernathy, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
Wayne A. Leighton, Senior Economist
Jonathan Miller, Professional Staff Member
Christen K. Schaefer, Legislative Assistant
George E. Whittle, Editor
(ii)
C O N T E N T S
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TUESDAY, FEBRUARY 1, 2000
Page
Opening statement of Chairman Gramm.............................. 1
Opening statements, comments, or prepared statements of:
Senator Bayh................................................. 2
Senator Bennett.............................................. 2
Senator Enzi................................................. 2
Prepared statement....................................... 43
Senator Johnson.............................................. 3
Prepared statement....................................... 43
Senator Bryan................................................ 3
Prepared statement....................................... 44
Senator Bunning.............................................. 3
Prepared statement....................................... 45
Senator Allard............................................... 4
Prepared statement....................................... 45
Senator Sarbanes............................................. 15
Senator Grams................................................ 21
Senator Reed................................................. 24
Senator Hagel................................................ 24
Prepared statement....................................... 45
Senator Shelby............................................... 24
Senator Edwards.............................................. 46
WITNESSES
K. James Yager, President and Chief Operating Officer, Benedek
Broadcasting, Rockford, Illinois, and Joint Board Chairman,
National Association of Broadcasters, on behalf of the National
Association of Broadcasters.................................... 4
Prepared statement........................................... 47
Richard Sjoberg, President and Chief Executive Officer, Sjoberg's
Incorporated, Thief River Falls, Minnesota..................... 6
Prepared statement........................................... 52
Response to written questions of:
Senator Grams............................................ 72
Senator Enzi............................................. 73
B.R. Phillips III, President and Chief Executive Officer,
National Rural Telecommunications Cooperative, The Plains,
Virginia....................................................... 8
Prepared statement........................................... 55
David K. Moskowitz, Senior Vice President of Legal and General
Counsel, Secretary, and Director, EchoStar Communications
Corporation, Littleton, Colorado............................... 9
Prepared statement........................................... 57
Steven J. Cox, Senior Vice President, DIRECTV Incorporated, El
Segundo, California............................................ 11
Prepared statement........................................... 60
Response to written questions of:
Senator Grams............................................ 74
Senator Enzi............................................. 76
Senator Crapo............................................ 77
Gregory L. Rohde, Assistant Secretary for Communications and
Information, National Telecommunications and Information
Administration, U.S. Department of Commerce.................... 25
Prepared statement........................................... 63
Response to written questions of Senator Enzi................ 79
Christopher McLean, Acting Administrator, Rural Utilities
Service, U.S. Department of Agriculture........................ 26
Prepared statement........................................... 64
William Roberts, Senior Attorney, U.S. Copyright Office.......... 28
Prepared statement........................................... 65
Response to written questions of Senator Enzi................ 79
Dale N. Hatfield, Chief, Office of Engineering and Technology,
Federal Communications Commission.............................. 29
Prepared statement........................................... 68
Response to written questions of:
Senator Grams............................................ 81
Senator Enzi............................................. 82
Senator Crapo............................................ 83
----------
WEDNESDAY, FEBRUARY 9, 2000
Opening statement of Chairman Gramm.............................. 87
Opening statements, comments, or prepared statements of:
Senator Enzi................................................. 93
Prepared statement....................................... 107
Senator Bunning.............................................. 96
Senator Allard............................................... 103
Prepared statement....................................... 108
WITNESSES
Conrad Burns, a U.S. Senator from the State of Montana........... 88
Prepared statement........................................... 108
Tim Hutchinson, a U.S. Senator from the State of Arkansas........ 89
Prepared statement........................................... 109
Craig Thomas, a U.S. Senator from the State of Wyoming........... 91
Prepared statement........................................... 110
Blanche Lincoln, a U.S. Senator from the State of Arkansas....... 91
Prepared statement........................................... 111
Dan L. Crippen, Director, Congressional Budget Office............ 97
Prepared statement........................................... 111
LOAN GUARANTEES AND
RURAL TELEVISION SERVICE
----------
TUESDAY, FEBRUARY 1, 2000
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD - 628 of the
Dirksen Senate Office Building, Senator Phil Gramm (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PHIL GRAMM
Chairman Gramm. Let me call the Committee to order.
I will ask the witnesses to take their seats. I want to
thank everyone for coming this morning. I am a little
discouraged that we missed all of our hearings last week, and
I'm determined in the next couple of weeks to make up those
hearings.
I would like to follow the following procedure today. When
we get a quorum, wherever we are in the proceedings, I'm going
to stop the hearing and bring up the nomination of Alan
Greenspan to be reconfirmed as Chairman of the Board of
Governors of the Federal Reserve System.
I will give Members until noon to be recorded on that
topic. I would have extended it to 5 p.m., but I am still
hoping that we might push our leadership to bring the
nomination up earlier. Members will have until noon to vote on
that topic.
We are here today to talk about the loan guarantees on the
satellite bill. I think every Member of Congress is familiar
with the issue. It dominated the Congress in the last couple of
weeks of the 1999 session.
We are committed in this Committee to produce a loan
guarantee that will have the following objectives: It will be a
rational approach to the problem of trying to provide an
incentive for the private sector or some nonprofit entity, or
some combination thereof, to provide access to local television
signals in the more remote rural areas of America. We will try
to write a loan guarantee program that maximizes the
probability that the loans will be paid back and that the
taxpayer will not be left holding the bag. I think we can
achieve both objectives.
I have tried during the recess to look back at loan
guarantees for the last 75 years. I have read the bill that was
adopted by the satellite Conference Committee in detail, and
let me say that, given the amount of time they had to work on
it, I think it was a good effort. I do believe that, building
on what they did, we can greatly improve that bill.
I would like to say that we will produce a bill within the
deadline that we set for ourselves in the agreement. I believe
that probably no other Member has done more to make all this
possible than Senator Conrad Burns. He will be testifying
before the Committee on February 9.
We have a lot of work to do. We will be holding an
additional hearing. I believe we have started this process with
an open mind, not an empty mind, but an open mind. If anyone
has any concerns, ideas, or suggestions for how we can improve
the loan guarantee program -- how we can make it work, make it
safer and sounder --we would very much like to hear from them.
Let me see if any of my colleagues would like to make an
opening statement.
Senator Bayh.
OPENING COMMENTS OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Mr. Chairman. I have no opening
statement. I would just like to welcome our witnesses and thank
them for coming today. I look forward to hearing their statements.
Chairman Gramm. Senator Bennett.
OPENING COMMENTS OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you, Mr. Chairman, for holding this
hearing today. I, like Senator Bayh, have no opening statement.
I welcome the witnesses and look forward to hearing their testimony.
Chairman Gramm. Senator Enzi.
OPENING COMMENTS OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Mr. Chairman. I appreciate you
holding these hearings. I would ask that my full statement be
made a part of the record. I would just mention that if you
could see the volume of mail my office has received directed at
satellites, you would know how important this issue is for my
constituents. It is not only the major issue, it is also the
majority of my mail.
Wyoming is a State that has a lot of open space, a lot of
distance. We have only 480,000 people spread over borders that
are 400 miles on a side. It is a long way between people.
Sometimes satellite TV is the only way they have of not only
getting to watch their favorite sports teams and television
shows, but, more importantly, it's the way they get their local
weather warnings that can potentially affect their livelihood,
and in many cases, even their lives. It's not just an
entertainment thing for them. It's a life and death matter.
I want to take this opportunity to welcome David Moskowitz,
Senior Vice President of EchoStar Communications, who employs
several hundred Wyoming residents in his operation in Cheyenne,
with headquarters in Littleton, Colorado. We are very proud and
pleased to have that important facility in Wyoming.
Wyoming only has television stations in three cities --
Casper, Cheyenne, and Jackson. The rest of the State is served
by stations out-of-State or by relay transmitters that bring
stations to the outlying towns. We have long distances and tall
mountains that make even the best efforts of over-the-air
broadcasters and cable companies even more difficult.
For the people that are located in the remote areas of the
State, we need a solution. We are looking to you for the
solution. I thank the Chairman for holding these hearings to
try to arrive at a solution in a timely manner so that these
people will not be left out of television.
Thank you.
Chairman Gramm. Senator Enzi, let me thank you. I
understand today's your birthday. I'm not going to recount the
relatively high number that we're celebrating.
[Laughter.]
In any case, it is higher than it was last year.
[Laughter.]
I want to say, on behalf of the Committee, ``Happy
Birthday.'' I want to thank you for all you have done on this
Committee. I don't remember a new Member of the Committee
contributing more than you have for a very long time. I want
you to know that we appreciate it.
Senator Enzi. Thank you very much.
Chairman Gramm. Do any of you have an opening statement?
Senator Johnson.
OPENING COMMENTS OF SENATOR TIM JOHNSON
Senator Johnson. I will submit a statement for the record.
This is a timely hearing. The issue is both critically
important and very urgent to my home State of South Dakota, and
I appreciate your holding this hearing at this time.
Chairman Gramm. Thank you, Senator Johnson.
Senator Bryan.
OPENING COMMENTS OF SENATOR RICHARD H. BRYAN
Senator Bryan. Mr. Chairman, I would include a statement
for the record as well. I would just say, parenthetically, no
issue that we have dealt with in the last Congress generated
more mail, more phone calls, more e-mail contact than this
satellite issue.
This issue is one of profound importance to my own State,
where, notwithstanding the fact that 85 percent of the people
in Nevada live in metropolitan areas, for those who live
outside of the metropolitan Las Vegas and Reno market, there is
a vast expanse. We
hear from those people that are very much interested in this iss
ue.
I thank you, Mr. Chairman, for convening this timely
hearing and ask that my full statement be made a part of the
record.
Chairman Gramm. Your statement will be made a part of the
record as if read in its entirety.
Senator Bunning.
OPENING COMMENTS OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman. I want to thank
all of the panelists for appearing today. I have a statement
which I would like to include for the record.
In the State of Kentucky, we need a lot of assistance in
servicing all of the people who rely on dishes, particularly in
eastern and rural Kentucky. I am looking forward to hearing the
testimony of our witnesses and to trying to solve this problem.
Thank you.
Chairman Gramm. Thank you, Senator Bunning.
Senator Allard, do you have an opening statement?
OPENING COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, I would like to place my
statement in the record so we can hear from the witnesses.
Thank you.
Chairman Gramm. Your statement will be placed in the record
as if read in its entirety.
Let me now introduce the members of our first panel. I
would like to ask each member of the panel to try to present
their testimony in 5 minutes or less. If you run over a minute
or two and you feel that you absolutely need the time, I am not
going to slam down the gavel and stop you. If you go beyond the
allotted time by more than a minute or two, then I may start
staring at you and throwing ice or something. But try to focus
your testimony to the degree you can in 5 minutes.
Our first witness is James Yager, President and Chief
Operating Officer of Benedek Broadcasting, which is a rural
broadcaster. He is also Joint Board Chairman of the National
Association of Broadcasters and will be testifying on their
behalf. Our second witness will be Richard Sjoberg, who is
President and Chief Executive Officer of Sjoberg's
Incorporated, a small rural cable company located in
northwestern Minnesota. Next, we will hear from Bob Phillips,
President and Chief Executive Officer of the National Rural
Telecommunications Cooperative. Following Mr. Phillips, we will
hear from David Moskowitz, Senior Vice President of Legal and
General Counsel, Secretary, and Director of EchoStar
Communications Corporation. Last, but not least, will be Steven
Cox, Senior Vice President of DIRECTV, Incorporated.
Mr. Yager, we are ready to hear your testimony.
OPENING STATEMENT OF K. JAMES YAGER
PRESIDENT AND CHIEF OPERATING OFFICER
BENEDEK BROADCASTING, ROCKFORD, ILLINOIS
AND JOINT BOARD CHAIRMAN
NATIONAL ASSOCIATION OF BROADCASTERS
ON BEHALF OF THE
NATIONAL ASSOCIATION OF BROADCASTERS
Mr. Yager. Thank you, Mr. Chairman. Broadcasters very much
appreciate your holding this hearing on a subject that is vital
to the public's access to local television. This is also an
important issue to me personally. My company, Benedek
Broadcasting, currently operates 26 television stations in
small markets located in 16 States across the country,
including seven of the States represented by Senators on this
panel.
As the Chief Operating Officer of Benedek, I am very
concerned that consumers living in the Benedek markets will
never have the chance to see our network-affiliated stations on
their satellite dish without a loan guarantee program similar
to the one proposed by the House and Senate conferees last
year. Given how important local stations are in providing news,
weather, emergency, and other information to local viewers, all
of this should make resolving this issue a high priority.
Currently, there are 211 television markets nationwide.
Both DIRECTV and EchoStar, the two largest satellite providers,
are focused on providing local signals only in the top 35 or 40
markets around the country. Another operator, Local TV on
Satellite, says it may go to the top 68 markets or so. But even
with that coverage, 25 percent of the audience nationwide would
have no chance of seeing local stations on satellite.
Let me point out that 17 States have no television market
in the top 50 television markets in the country. As a result,
both we and you have been looking at ways to resolve this issue
in a consumer-friendly, yet cost-effective, manner.
There are any number of economic and technical hurdles
facing someone trying to create a viable business plan to
provide local signals to medium- and small-sized markets. The
first is clearly the limited number of people who live in the
smallest 150 markets or so, making it tough for anyone to break
even in the short-term in this business. Moreover, in order to
make the service consumer-friendly and to hold down costs, the
rural plan needs to focus on wholesaling local signals, rather
than bearing the burden of retailing them directly to
consumers.
The likely partners for such a relationship are sitting
next to me at this table -- EchoStar and DIRECTV. But they each
have different systems for delivering their signals, so many
technical issues will have to be resolved to make any rural
service compatible and workable. The large number of stations
located in rural America also requires a special satellite
using spot-beam technology, an additional orbital slot, and
numerous uplink facilities. At the end of the day, we
anticipate that implementing any local service will cost
anywhere between $600 million and $1 billion in the small- to
mid-sized markets.
As we look at this challenge, the National Association of
Broadcasters (NAB) supports the concept of having the
Government provide an economic incentive to allow local-into-
local service to spread beyond the major markets. However, any
such incentives should be consistent with other loan guarantee
programs already in use by the Government. In addition, Mr.
Chairman, please do not create another bureaucracy or allow the
Government to mandate the specifics of a business plan.
Let me add that some here today may suggest the elimination
of the time- and court-tested principle of must-carry, which
has been consistently endorsed by Congress. That approach would
be exclusive, not inclusive, and defies the very tone of this
hearing today, which has focused on providing more local TV
service to consumers, not less. Any call to drop must-carry
should be rejected.
Last year, the conferees developed a loan guarantee
proposal that ultimately was taken out of the satellite bill
that passed. In looking at that proposal, we see a number of
areas that need further refinement. For example, that proposal
placed limits on the size of the loans allowed. We believe that
issue would best be left open-ended in order to accommodate the
various means of accomplishing the local-into-local service.
We feel the proposal involved too many Government agencies.
Congress, the U.S. Department of Agriculture, the OMB, and the
NTIA would all have a cut at the apple, with a cumbersome
approval process that we think is unnecessary.
We question the proposal's handling of subordination.
Putting the first lien in the hand of the Government will
likely be a disincentive for lenders to risk their funds on
creating local-into-local service. If additional financing is
needed, it may be unavailable if the Government does not
subordinate some or all of its interests.
Finally, we do not agree that DIRECTV and EchoStar should
be excluded from any loan guarantee program. Allowing a
consortium that includes either or both of these established
satellite vendors may be the quickest way to solve a host of
problems related to rolling out local-into-local service in
rural areas.
As I close, let me commend the announcement of a public
inquiry by the NTIA on this issue. We look forward to adding
our comments to Assistant Secretary Rohde's worthy undertaking.
Let me also praise your efforts, Mr. Chairman, and those of
your colleagues, as you begin to look critically at local-into-
local service for small markets.
Please accept my assurance that the National Association of
Broadcasters and Benedek Broadcasting look forward to working
with you and the Committee to come up with an appropriate
resolution that provides proper incentive for local-into-local
service and ensures access to local television for all
Americans who use satellite dishes for their television
reception.
Thank you.
Chairman Gramm. Thank you.
Mr. Sjoberg.
OPENING STATEMENT OF RICHARD SJOBERG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SJOBERG'S INCORPORATED, THIEF RIVER FALLS, MINNESOTA
Mr. Sjoberg. Mr. Chairman and Members of the Committee, my
name is Dick Sjoberg. I'm President and CEO of Sjoberg's
Incorpo-
rated, a privately held cable company in northwestern Minnesota.
My family entered the cable television business in 1962. At
that time, our main goal was to bring broadcast signals to
communities that could not receive them.
Today, our company brings 148 channels to approximately
7,400 customers in 33 small rural towns and townships, all of
them connected by fiberoptic cable. Despite low population
densities of 12 to 22 homes per mile of cable plant, we
currently offer half of our customers high-speed Internet
access. The other half will have cable modem service by the end
of the year. Some communities we serve are as far as 200 miles
away from the broadcast stations that we carry on our cable
systems.
My company is committed to delivering new broadband
services to all of our customers, including our schools, and to
ensuring that these services are as good as those offered in
urban areas. To date, my company is the only video service
provider to make any major investments in these rural
northwestern Minnesota communities, where I am a resident,
participate in community events, and pay approximately $30,000
a year in local franchise fees. Moreover, I'm not alone. As the
FCC's report, Broadband Today, indicates, small cable systems
across the country are deploying broadband.
The NCTA supported the Satellite Home Viewer Improvement
Act of 1999, procompetitive legislation that changed the law to
permit satellite companies to retransmit local broadcast
signals into local markets. We are concerned, however, about
proposals that might provide Government subsidies to some
industries -- but not other industries -- in an otherwise
competitive video marketplace.
Small cable operators like myself compete against DBS in
every market we serve. Our satellite competitors already have
certain advantages, like greater channel capacity and lower
marginal costs, in sparsely populated areas. Yet, some of the
proposals for expanding local-into-local service compound DBS's
advantages by having the Federal Government subsidize our
competitors' capacity to provide local broadcast signals, even
though they have market capitalizations of $21 billion and $16
billion and annual revenues ranging from $1 to $6 billion.
As a small cable operator, I already carry all local
broadcast signals on my systems. I raised the money to carry
these signals in the private capital markets. The fear of many
small cable operators is that any rural loan guarantee program
will be interpreted as a congressional mandate to build another
satellite -- at discounted, federally insured rates -- to carry
local broadcast signals into those markets which local
businesses like myself can serve more cost-effectively using
technologies like translators, repeaters, relay stations,
microwave, fiberoptic cable, and wireless systems.
For example, my company has cost-sharing arrangements with
Roseau County and Lake of the Woods County to transport over-
the-air broadcast signals into areas where they would not
normally reach. We do it using a combination of fiberoptic
cable, microwave signals, and translators. In these areas, the
local rural cooperative, which is a selling agent for DIRECTV,
provides its customers with dual antennas to receive both the
satellite signals and the local broadcast signals in direct
competition with my cable service.
If the Congress moves forward with a Federal loan guarantee
program, I would very much like to see it be technology
neutral, giving ``Main Street'' businesses the opportunity to
extend more cost effectively the reach of the local broadcast
signal. The need for such technology neutrality is especially
important since cable companies like mine are providing rural
customers with broadband services and high-speed access to the
Internet, helping to bridge the digital divide.
Any Government funding or loan guarantee program should be
focused on areas with the least local broadcast signal coverage
and should not be used to subsidize DBS service in urban or
suburban markets.
The program should be structured in a manner that creates
the smallest paperwork burden possible, thus encouraging the
smaller businesses to apply and provide cost-effective, local
solutions.
Thank you for your attention. I stand ready to work with
this Committee as it moves forward on legislation to provide
better television service in rural and underserved markets.
Thank you.
Chairman Gramm. Thank you, Mr. Sjoberg.
Mr. Phillips.
OPENING STATEMENT OF B.R. PHILLIPS III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NATIONAL RURAL TELECOMMUNICATIONS COOPERATIVE
THE PLAINS, VIRGINIA
Mr. Phillips. Thank you, Chairman Gramm. I am Bob Phillips,
President and CEO of the National Rural Telecommunications
Cooperative. The NRTC is a cooperative of nearly 1,000 rural
electric and telephone systems that provide services in 48
States. We serve the underserved and the unserved markets with
electric and telephone service.
The NRTC's mission has been to help those members bring the
benefits of advanced telecommunications services to these
unserved markets. We believe so much in this mission that back
in 1992, we raised and invested $100 million with DIRECTV to
launch the Nation's first direct broadcast satellite (DBS)
service. Today, we serve 1.4 million consumers throughout 48
States.
In my testimony today, I would like briefly to address two
prob- lems, Mr. Chairman,
that were not addressed by the Satellite Home Viewer
Improvement Act last year. The first problem is the
unavailability of local TV service in rural America. The second
is the lack of competition to cable. I would like to propose a
satellite solution to both problems, and I would like to
suggest that it will require your assistance in the form of a
Federal loan guarantee.
Last year's bill did pave the way for the satellite
industry to become a meaningful competitor to cable in some of
the Nation's top markets. I brought with me today a map which
shows approximately 40 markets that will be served by DIRECTV
and EchoStar, which is the best estimate we have today for
extension of service.
You will note, I hope, that this leaves out more than half
of the population of America. There are 20 States, in fact,
that have no signal and eight of those States are States
represented by Senators here on the Committee. There is no
reason that these constituents should be left out or
disenfranchised from the benefits of the modern information
age.
Satellite technology can help us resolve this problem.
Satellite technology, unlike other technologies, is ``distance
insensitive.'' Satellites can go places that cable and other
broadcast technologies will never go. In fact, any technology,
I would suggest, other than satellite is going to provide only
a piecemeal or partial, ineffective approach as a tool to
extend service to these remote locations. Furthermore, I would
suggest that every cable customer in America needs a choice of
service providers, and satellite technology can provide that
choice. That's why Congress passed the satellite bill last
year, because satellite holds the promise to serve everyone and
to provide much-needed competition to cable.
Mr. Chairman, last year during this debate, you said that
there are some social goals that are not necessarily met by
market forces. We believe that's true here. There are problems
that cannot be fixed because, in this case, the money cannot be
made in delivering local satellite TV signals to these remote
rural areas.
I would like to suggest that getting this job done will
require a Federal loan guarantee of at least $1.25 billion, and
that will have to be supplemented with additional funds
supplied by the satellite industry.
We also strongly recommend that any loan guarantee program
be implemented on a not-for-profit, and preferably a
cooperative basis. A not-for-profit approach would provide and
ensure that the Federal loan guarantee funds do not enrich any
large corporations or private interests. In fact, the utilities
we work with have used loan guarantees for 30 years to provide
electric and telephone service to these remote areas of the
country and the program administered by the U.S. Department of
Agriculture under the Rural Utilities Service has done a very
effective job over the last 60 years in implementing those
programs.
We also want to urge you to establish some strong criteria
to ensure that any loan guarantee will be repaid. But we should
also offer that preferences should be given to those plans
which will provide the most comprehensive solution to getting
the job done. That way, the Federal loan guarantee has the most
benefit to the broadest number of people.
Mr. Chairman, I want to be clear as well that we believe
this plan is going to require more than just assistance in
terms of financial support. We are going to need satellite
spectrum and satellite orbital locations, as well as some good
industry cooperation to get this job done.
We are committed to that and we believe it is worth the
effort because of your constituents' and our constituents'
desire to have local signals through their satellite systems.
That's why they called and wrote to you last year, and I
believe they are still waiting for that solution.
Mr. Chairman, we want to work with you and the Members of
this Committee to draft a technology solution. We believe
satellites should be chosen to deliver local television signals
to these rural and remote locations, as well as to provide
meaningful competition to cable.
Thank you very much.
Chairman Gramm. Thank you, Mr. Phillips.
Mr. Moskowitz.
OPENING STATEMENT OF DAVID K. MOSKOWITZ
SENIOR VICE PRESIDENT OF LEGAL AND
GENERAL COUNSEL, SECRETARY, AND DIRECTOR
ECHOSTAR COMMUNICATIONS CORPORATION
LITTLETON, COLORADO
Mr. Moskowitz. Thank you, Chairman Gramm, Senators Enzi and
Allard, both of whom we consider home State Senators, and other
distinguished Members of this Committee. Thank you for inviting
me here to testify.
My name is David K. Moskowitz. I am Senior Vice President
of Legal and General Counsel, Secretary, and a Member of the
Board of Directors of EchoStar Communications Corporation,
based in Colorado. EchoStar's founder, Charlie Ergen, had a
vision of a dish in every home, school, and business in the
United States. In fulfillment of that vision, we have launched
five high-power direct broadcast satellites since December
1995, and we have another satellite scheduled to launch this
spring.
Our goal has always been to provide competition to cable so
subscribers have an alternative to the high prices and
historically poor service provided by the monopoly cable
company. Last year, Congress took what is, in my view, a
tentative first step toward giving DBS the right to compete
with cable on a more equal footing when it passed the Satellite
Home Viewer Improvement Act of 1999. The success of the
copyright license given in that bill will turn entirely on its
implementation. If broadcasters are allowed to exploit their
monopoly power in each local market without clear restraint,
the goal of effective competition will not be met.
Although my company will be able to provide over 50 percent
of the U.S. population with all of their local channels by
satellite, the constraints on DBS capacity and prohibitively
high costs make it impossible for EchoStar to carry all 1,600
channels nationwide. We currently offer about 100 television
stations in over 20 markets around the country and plan to
retransmit approximately 70 additional channels over the next
several months, for a total of over 30 markets served by the
end of the first quarter of this year.
Cable TV passes over 90 percent of the U.S. population
today. If the goal of a Government loan guarantee is simply to
provide access for rural subscribers to their local stations,
then only 3 percent of the U.S. population is at issue here.
The bigger problem, however, is the lack of competitive choice.
A substantial percentage of Americans have access to local
channels through their cable system, but they do not have
competitive choice. With the appropriate legislation, and
vigilant implementation of the existing laws by the FCC,
EchoStar can offer true choice for all rural viewers. The rural
funding mechanism should, accordingly, be based on the
fundamental policy of ushering in, and bolstering, competition
to cable, telephone companies, and all other incumbents.
Without choice, cable subscribers in rural areas will surely
become victims of even deeper price gouging and poorer service
by their local cable monopolists, and the ``digital divide''
will deepen.
In that respect, we were disappointed to see in the final
days of the last congressional session that the criteria for
loan guarantees would have included incumbent cable and phone
companies. This would be a mistake, if the ultimate policy goal
is to provide equality for rural and city consumers alike.
One of the primary obstacles Congress faces in providing
equality to rural consumers is the must-carry requirement. No
single provision of the Satellite Home Viewer Improvement Act
hurts rural subscribers more. For every must-carry channel, our
ability to extend local programming to additional markets is
reduced by one channel. While neither EchoStar nor DIRECTV can,
at this time, serve every market, many more of your
constituents could receive local channels absent must-carry
provisions.
To be more specific, for EchoStar, the must-carry
provisions will mean that we serve 33 markets instead of 60.
Twenty-five percent of the U.S. population will miss out on
fully effective competition as a result, a direct result, of
must-carry provisions. When must-carry becomes effective, the
additional 30 channels we will have to carry in New York and
Los Angeles alone will mean that six more markets are deprived
of full competition to cable.
Must-carry is a law that was imposed on cable because of
its monopoly status. EchoStar is not a monopoly. Unless must-
carry is eliminated, your constituents will suffer because of a
law that, in contrast with cable must-carry, does not resolve
any competitive problem.
Now, in addition to legal hurdles, there are technological
issues that must be addressed as well. Some have suggested that
the reason EchoStar and DIRECTV are not serving rural areas is
purely economic. The economics are indeed troublesome, but the
technical hurdles are daunting.
The FCC must identify additional spectrum for the carriage
of local stations. There simply is not enough right now. I will
not bore you with the technical mumbo jumbo, but once spectrum
is identified, the physical location of a satellite to provide
service must be compatible with both EchoStar and DIRECTV as
well.
There is also the issue of encryption. EchoStar and DIRECTV
use different systems, and any solution must address this
issue. We must work with mutual cooperation.
Congress must also tackle the tough question of economic
feasibility that lies at the heart of financial support. From
EchoStar's perspective, there is a very real issue of whether
DBS providers can expect to derive enough revenue from
providing local channels in rural areas to make a return on
their investment. If EchoStar cannot answer this question
affirmatively, the investment community will simply refuse to
finance the construction of additional satellites, regardless
of loan guarantees. Government loan guarantees cannot change
fundamental economics.
The solution to full competition cannot, in our view, lie
exclusively with Government guarantees. Whether the ARC's model
in Alaska or Internet video-streaming models of the future are
an issue, a realistic solution will require creativity as much
as it will require loan guarantees. We challenge the
broadcasters to invest themselves in serving rural customers
and to work creatively on ARC's, Internet, and other solutions
beyond simply spending taxpayer dollars.
Thank you for inviting me here to testify. I look forward
to answering your questions.
Chairman Gramm. Thank you.
Mr. Cox.
OPENING STATEMENT OF STEVEN J. COX
SENIOR VICE PRESIDENT
DIRECTV INCORPORATED, EL SEGUNDO, CALIFORNIA
Mr. Cox. I want to thank you, Mr. Chairman, for inviting me
to appear before the Committee today. I appreciate the
opportunity to present DIRECTV's views on this issue.
DIRECTV has not historically had much business in front of
this Committee, so you may not appreciate how extraordinary it
is for me to say that I concur almost 100 percent with the
comments expressed by my sometimes friend, Mr. Moskowitz, of
EchoStar.
[Laughter.]
DIRECTV has experienced tremendous growth since its
inception 5 years ago, and is today the leading provider of
direct broadcast satellite (DBS) service in the United States
with more than 8 million subscribers.
We're grateful to Congress for passing the Satellite Home
Viewer Improvement Act. While we did not agree with every
provision of that bill, it did allow satellite companies, for
the very first time, to begin offering local broadcast channels
and to begin offering consumers a service which is fully
competitive with cable television.
We have moved quickly to bring the benefits of that
legislation to consumers. We have publicly committed to make
local channels available to at least half of the Nation's
television households --about 50 million households in total.
As of today, we are offering local channels, together with a
national PBS feed, in 19 major metropolitan markets. By the end
of the first quarter, as we continue to add additional markets
to our roll-out, we will have substantially met our 50 million
household commitment.
This hearing today is focused on those communities we are
unlikely to serve with local channels, and the potential role
of Federal loan guarantees in expanding this critical element
of satellite television. From DIRECTV's perspective, our
ability to broaden the delivery of local channels will not be
limited by access to capital, so while the availability of loan
guarantees may create incentives for some entities to develop
local channel offerings, DIRECTV's ability to expand the
benefits of competition to additional communities is being
hampered by more fundamental legislative and regulatory
obstacles. Specifically, the biggest impediment, as Mr.
Moskowitz indicated, to serving additional communities is the
``must-carry'' requirement imposed by the recently enacted
satellite bill. Even absent that constraint, we are ultimately
limited by the spectrum allocated to us by the FCC. I would
like to briefly explain those problems.
The must-carry provision, enacted into law last November as
part of the satellite bill, requires us no later than January
1, 2002, to carry every full-power local broadcast station in
each market in which we offer any local channels. For example,
in both New York and Los Angeles, we could be required to carry
up to 23 stations. The practical implications of this
requirement are clear. By imposing a must-carry obligation, a
policy decision has been made that it is much more important
for us to carry all 23 local stations in New York and all 23
local stations in Los Angeles, than to offer the residents of
communities such as Buffalo, Harrisburg, Louisville, Omaha, or
Providence even a single channel of local content.
For the delivery of local channels by satellite to expand,
the imbalance reflected by that policy decision must be
addressed. Even if we were to get relief from the must-carry
obligation, we would still not have sufficient available
capacity to provide local channels in all 210 television
markets. As a result, we would urge Congress to direct the FCC
to make additional spectrum available to the DBS providers,
which could be used to bring local channels to those markets we
cannot service with our existing limited capacity.
I would point out that more than 2\1/2\ years ago, DIRECTV
filed a petition for rulemaking seeking additional spectrum to
expand our channel capacity. Unfortunately, that petition has
sat at the Commission without action. If that petition were to
be granted, it would allow both DIRECTV and EchoStar to gain
access to additional spectrum which could be used to serve
additional markets with local channels.
As I indicated at the outset, the presence or absence of a
Federal loan guarantee program will not directly impact
DIRECTV's incentive or ability to expand the delivery of local
channels. Should Congress decide, however, that a Federal loan
guarantee program is desirable, I would offer the following
comments. First, we believe that a fundamental premise of the
recently enacted local-into-local legislation is that many
consumers do not find the delivery of local channels via a
separate delivery mechanism, such as an over-the-air television
antenna, to be the equivalent of a single delivery mechanism,
such as that used by cable operators, to deliver both local
channels and national programming. Thus, only the satellite
delivery of local channels, in a manner that is compatible with
the existing DBS services, will meet the expectations of
consumers who are either unwilling or unable to put up an over-
the-air television antenna and will ensure that urban and rural
consumers have equivalent competitive video delivery choices.
Second, to the extent that Congress decides to create a
Federal loan guarantee program, we believe that taxpayer
funding should be used to complement, rather than compete with,
service already being provided without the benefit of taxpayer
subsidies. In other words, we feel the program should be
tailored to ensure that funds are used to provide local channel
service only in markets where the existing DBS providers are
not providing that service.
The ability to expand local channels is a vital factor in
ensuring the continued growth of satellite as a viable
competitor to cable. We look forward to working with Congress
to advance these important objectives.
Thank you again for providing me the opportunity to
testify.
Chairman Gramm. Thank you, Mr. Cox.
What I would like to do, since we have a second panel, is
to get Members to rigidly adhere to the 5-minute rule. If
someone will turn on the green light, I will start by doing
that myself.
First of all, let me thank everyone here for their
excellent testimony. I think it is obvious that there are
issues in the whole area of satellite and television broadcasts
that Congress will be dealing with for a long time. Obviously,
we have a difference of opinion on must-carry. I would have to
admit that it's hard for me to understand, if you have a
station in New York that nobody watches and that nobody is
going to watch even if we put it on every satellite in America,
why I can't get ABC football in a small rural area as a result
of someone else getting some TV station in New York that nobody
watches.
But the point is we are here as the Banking Committee to
deal with the loan guarantee. Let me make it clear that if we
are going to have any hope of passing a loan guarantee, these
are issues that we are going to have to leave to the Commerce
Committee and then, ultimately, to our role as individual
Members of the Senate. Our focus on this bill, at least as it
comes out of this Committee, and hopefully as it is dealt with
on the floor of the Senate, is going to be on the loan
guarantee. Let me ask a few questions about the loan guarantee.
In looking back at the last 75 years of loan guarantees, in
looking at those that have been successful and those that have
been unsuccessful -- and I define success as two things: one,
it achieved the objective that the loan guarantee was written
for; and two, the money was paid back -- there is a pattern to
the ones that work and the ones that don't. I believe it is
clear, at least in beginning to think about this, and I hope to
involve every Member of this Committee and every Member of the
Senate who is interested, that one of the things we want to do,
rather than having a merry-go-round process of numerous new
bureaucracies and Government agencies, is establish an
oversight board.
My thinking is that we should have the Secretary of the
Treasury designate someone from the Treasury whose primary
function is the credit function within the Government, that we
should have the Chairman of the Board of Governors of the
Federal Reserve System, Alan Greenspan, appoint a
representative. I assume that would be another Member of the
Board of Governors. Their role would be to look at the
economics of both the proposal and the repayment of the loan.
You would want a third member on the panel. It's less clear
to me who that should be. I think you could argue that it
should be someone from the Department of Commerce or the
Federal Communications Commission. You might argue that it
should be someone who is involved in some area of Government
that is focused on rural areas, such as the Department of
Agriculture.
I would like to hear briefly from each of our panelists,
starting with you, Mr. Yager, about what agency of Government
the board members should come from. From the point of view of
the legal structure of the board, it would have to be someone
in Government. Within that constraint, let me quickly run
through the panel.
Mr. Yager. I think your suggestions are excellent and I
would heartily endorse the Secretary of the Treasury appointing
someone, the Chairman of the Federal Reserve appointing
someone, and the Department of Commerce appointing someone to
that board.
Chairman Gramm. Mr. Sjoberg.
Mr. Sjoberg. I believe your suggestions are right on
target. The third member of the board should be someone who has
knowledge in all of the different diverse systems that could
provide this service, someone or some agency that would have
knowledge in broadcast television, in DIRECTV and EchoStar DBS
services, someone who has knowledge in cable television, in
translators, and in other alternative methods of providing this
service.
Chairman Gramm. Mr. Phillips.
Mr. Phillips. Mr. Chairman, I believe if this board is to
be appointed and a third party added, the appropriate party in
my mind would be someone under the U.S. Department of
Agriculture, primarily the RUS. They have a 60-year history of
implementing loan guarantees and loan programs to extend
service, which includes telecommunications. They have expertise
in this area. They have a track record of success.
I might add that they also have the administrative staff to
administer the program at the board's direction. I believe
that's very important. It is important that we consider how it
would be administered, as well as who would provide the final
approval.
Mr. Moskowitz. Mr. Chairman, I agree with Mr. Sjoberg, that
the third member needs to be someone with a technical expertise
and knowledge of the broadcast industry, of the satellite
industry, and of how the copyright process works as well.
Chairman Gramm. Mr. Cox.
Mr. Cox. Once again, mirroring Mr. Moskowitz' thoughts, if
one of the key issues you are trying to address, if one of the
key issues you are trying to make sure is addressed by this
program, is economic feasibility and reducing the risks to the
taxpayers footing the bill, then someone is needed who
understands the technical challenges that Mr. Moskowitz alluded
to in his testimony. It could be someone from the FCC. It could
be someone from the NTIA.
I believe there are several agencies that we have spent a
lot of time with over the years addressing this very issue and
the economic challenges associated with it.
Chairman Gramm. Senator Sarbanes.
OPENING COMMENTS OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you, Mr. Chairman. First, let me
say on behalf of my colleagues, I believe there are a few more
Members that will hopefully arrive here shortly so we will be
able to begin the nomination business. I wasn't here at the
outset. I apologize for that. I certainly will review the
testimony of the panel. I simply wanted to make a few
observations.
I believe it is appropriate for the Government to undertake
the burden of working with private sector partners to make sure
that all Americans have access to the latest technology.
Actually, there's a fairly well-established principle of
universal access to new technology. We did that with
electricity, we did that with telephones, and I believe we
should apply the same principle here as we move into an
increasingly electronic age.
Obviously, we are going to have to look at the risk
parameters. We need to be able to assure ourselves that we are
not taking a needless risk and that what we're looking at is a
worthy candidate for guarantees. But I think we need to move
forward. I know for many of my colleagues from the more rural
areas of the country, this is a very pressing issue. I think we
need to address it.
I appreciate the Chairman's commitment to move legislation
out of this Committee, as I understand it, within the next 60
days. We will work through this very carefully, and hopefully
come up with a piece of legislation that everyone can agree
with.
I believe that the least-served areas of our country,
particularly the rural areas, should have access to the same
technologies as the more urban areas. I look forward to working
with my colleagues to achieve that objective.
Thank you very much, Mr. Chairman.
Chairman Gramm. Thank you, Senator Sarbanes.
Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman. Let me try to
find out from the panel here the technical problems that exist.
I had to meet with 40 constituents. That's why I started with
you, left, and came back.
Senator Sarbanes. It wasn't anything you said that drove
him from the room.
[Laughter.]
Senator Bunning. No, it wasn't, believe me.
[Laughter.]
What technical problems are DIRECTV and EchoStar encounter-
ing in adding local broadcast signals to their programming?
I'm in the Greater Cincinnati broadcast area. I have
DIRECTV. They do not cover my local channels, but I can pick my
local channels up by simply placing rabbit ears on my set. If
you move just 20 miles to the south, you cannot do that. Why
can't you pick up the local channels in the same manner? What
technical problems are we looking at in order to be able to
pick up a local signal from DIRECTV or another competitor?
Mr. Cox. I believe there are a few key issues which must be
settled before you could even begin to formulate a plan, the
first of which is clearly access to spectrum. There are 1,600
and some local channels in the United States today. We have
satellites with the capacity to carry a couple hundred
channels.
Even as we advance our technologies and begin to develop
more efficient uses of our spectrum -- such as the spot-beam
satellite, which lets you reuse certain frequencies, if you
will, around the country; adding additional satellites, as both
of our companies have done in the last year; improving the
compression, which, in essence, lets you get more channels out
of a satellite -- even with all of those evolutions, you do not
get in any foreseeable time frame that anyone can predict,
anywhere near the amount of capacity you would need to deliver
those 1,600 channels that essentially blanket the United
States.
The secondary issue ----
Senator Bunning. Excuse me.
Mr. Cox. Sure.
Senator Bunning. That is not what I'm asking. My question
is: Why can't you get on DIRECTV, or a competitor of DIRECTV, a
local channel? In other words, why can't you get the Greater
Cincinnati channels in the area that they now serve? I don't
care that they would be available in California or in New York.
I don't want New York's local channels. I want either
Louisville, Lexington, or Cincinnati's local channels. What are
the technical problems that exist in accomplishing this?
Mr. Cox. Louisville and Lexington coming into Cincinnati is
actually a legislative problem more than a technical one.
Senator Bunning. No, I'm located in Kentucky, but I receive
the broadcast signals of Greater Cincinnati.
Mr. Cox. We can by law only serve channels from a
particular market back into that market.
Senator Bunning. That's fine.
Mr. Cox. If you are in Kentucky, you can get Louisville
stations if we were delivering Louisville. The technical
problem is, at some point after you start serving the top
markets, you run out of capacity to be able to bring channels
into markets that are further down the population scale.
From an economic standpoint, we're obviously motivated to
bring local channels to places where you have the highest
ability to drive the highest number of subscribers as
capacity ----
Senator Bunning. Let me take the top 20 markets. There are
how many channels in each of those 20 markets if we take all
the channels that are available, not counting cable? Counting
just the network channels, how many are available?
Mr. Cox. Counting only the network channels, there is ABC,
NBC, CBS, and Fox in each of those markets.
Senator Bunning. That's four.
Mr. Cox. Then, there are probably as many as 20 additional
channels, and some of those channels that we have to be
prepared to carry in 2002, by virtue of the must-carry
obligation, and anywhere down to ----
Senator Bunning. You are talking about educational
television, public television, and all of the things that are
local?
Mr. Cox. I'm talking about independent stations. It would
be the whole gamut, from foreign language programming to
religious programming to home shopping to any number of things
that we actually carry on a national basis.
Senator Bunning. You still haven't answered my question.
What are the technical problems in picking up four Louisville
stations on DIRECTV and broadcasting them in Kentucky? What are
the technical problems if they already have ABC, CBS, NBC, and
Fox?
Mr. Cox. There is nothing that technically precludes us
from doing that, other than for every four additional stations
we put up, we are either running to the end of the spectrum we
have or taking four other stations down.
I am still not sure if I'm ----
Senator Bunning. You are running to the end of the spectrum
or taking other stations down when you supposedly have 900 or
almost 1,000 channels on DIRECTV?
Mr. Cox. We actually have about 210 channels we deliver on
a national basis and we have now committed close to 100
additional channels for local. In the most aggressive scenario,
900 or 1,000 channels is nowhere on my radar from a capacity
standpoint.
Senator Bunning. No, but you do have that many channels on
your ----
Mr. Cox. We have channel spots on there.
Senator Bunning. Yes.
Mr. Cox. But we do not have the capacity to fill all those
spots today, Senator.
Senator Bunning. But you're having problems with adding
four additional channels?
Mr. Cox. We have problems once we get beyond a fixed number
of channels in that we either have to find new ways to get
capacity or take channels down.
Having launched today in the approximately 20 to 25 markets
we have launched in, we have room to add a few more markets and
then we will ----
Senator Bunning. What are you going to do in 2002 when you
must carry?
Mr. Cox. In 2002, we are building and launching what is
called a spot-beam satellite, which will allow us to more
efficiently use spectrum -- I don't want to get overly
technical -- by taking the frequencies we have and reusing them
in spots around the country, rather than delivering every
channel on a national basis as we do today.
We believe, and we're working pretty hard at it, as you can
imagine, that satellite will allow us to deliver, if we are
required to, the 300 or 350 channels that those 20 markets
represent in 2002, as compared to the 80 channels that are
represented today.
Senator Bunning. Thank you.
Mr. Phillips. Senator, may I add a followup in answer to
your question?
Senator Bunning. Sure.
Mr. Phillips. I think something was missed there. The point
I would like to make is it's not a technical problem. The real
reason behind the problem of providing local channels is the
spectrum that both of these competitors have is being used to
serve those markets where there's more people and both
companies are duplicating the use of the spectrum.
Senator, in regard to the question as to the FCC being a
proper party for an oversight board, I would suggest that it
would be totally inappropriate to have them on the panel for
this reason. As Mr. Cox said, the FCC has not acted on
applications to make more spectrum available. They did not even
act to limit this from happening to make it possible to use the
spectrum to extend service.
The FCC has advocated that a position of competition will
take care of everything. Furthermore, the FCC has regulation
over these competitors for orbital locations and spectrum. They
should not sit on the same board that is going to judge the
loan guarantees. I believe it should be another independent
party.
Senator Bunning. Thank you, Mr. Chairman.
Chairman Gramm. Senator Johnson.
Senator Johnson. Thank you very much, Mr. Chairman. This is
a matter of significant import to my home State of South
Dakota. You only have to look at the map here to understand
why. Of the 214 television markets in the United States, my two
markets are Sioux Falls, 109, and Rapid City, 174. With the
current effort serving only the top 30 markets, this is a
matter of great concern.
I am not particularly wedded to the administrative details
of how to go about this, other than to understand that we do
need a loan guarantee program of some kind and we need to move
expeditiously in that direction.
Mr. Phillips, I was intrigued with your observations on how
to administer this program, whether to have the Rural Utilities
Service, for instance, involved in the administration. Last
year, we were accused sometimes of promoting corporate welfare
and matters of that sort. It would seem to me there is a case,
a strong case, that could be made that the RUS, or even the
NTIA, has greater expertise in rural America and this type of
technology. The RUS currently administers electric and
telecommunications utilities.
I know that you commented briefly to the Chairman's
question to the panel on this. I wonder if you would elaborate
a bit more on the logic about why you believe that would be the
appropriate institution and the disadvantages of other options.
Mr. Phillips. Thank you, Senator. I would be glad to.
The Rural Utilities Service, formerly the REA, has been
administering loan programs and loan guarantee programs since
1935, and has in fact allowed billions of dollars to be
utilized to fulfill the public interest of extending
electricity and telephone services in areas that are
underserved or unserved.
It seems to us that the issue we have before the Committee
here today is exactly the one that was before Congress in the
last decade when we had a challenge of serving unserved
markets. The RUS understands the challenge. They have the
administrative people on their staff, they have the technical
people on their staff, and they have the ability to administer
loan programs and loan guarantee programs. They have a proven
track record.
In fact, they do work in telecommunications and they
understand the interests of broadband technologies that are
land-based versus, say, the benefits of satellite technology.
They have the expertise in those areas as well.
I think the Committee will be hearing from Christopher
McLean and I believe he could add to that as well. I believe
his testimony indicates that there would be no further
administrative burden in having the RUS take on this
responsibility because they're already staffed and able to take
it on.
Senator Johnson. One of the greatest concerns that Members
in general are going to have, particularly Members new to this
issue, is potential defaulting on loans and potential taxpayer
liability.
Are you comfortable that this kind of administration is up
to making certain that this type of liability in fact would not
occur?
Mr. Phillips. Yes, sir, I am. Prior to working at the NRTC,
I worked as an attorney and had the opportunity to work with
the RUS on many of these issues. I had the opportunity to deal
with payment problems where the loans had to be restructured
and other issues like that. I worked with Congress, in fact, to
deal with
issues of subordination and other things that were mentioned her
e.
I'm very comfortable that the RUS has the most experience
and the best track record based on the largest portfolio of
loan guarantees that exists.
Senator Johnson. Thank you. I yield back my time.
Chairman Gramm. Senator Allard.
Senator Allard. One question that frequently comes up on
loan guarantees, no matter what they're talking about, is this:
If you can't afford to do it without the loan guarantee, how do
you plan to pay off the loan?
I would like to have each of the panel members discuss that
question. We will begin with you, Mr. Yager.
Mr. Yager. Thank you, Senator. I believe the real problem
we have here is a short-term versus long-term proposition. In
today's economic climate, investors are looking for very short-
term returns in the commercial markets. We are a highly
leveraged company and when we borrow money from banks or from
insurance companies, the question is always how quick is the
return going to come to us?
I think over a period of time you will find that the rural
satellite program will pay off. It will not have the same rates
of return that they are talking about in the major markets, but
long term, it is a good investment.
Senator Allard. Maybe I should have added this as a part of
my question. In the technology arena, we have people who have
high-tech equipment saying it is outdated in 3 years. You are
talking about long term. How do we assure these loans long term
if we have technology that outdates equipment?
Mr. Yager. I believe long term today is something like 5
years, plus. When I started in this business, long term was 15
years, plus, in technology, but today, long term is 5 years,
plus.
Senator Allard. In any case, that's shorter than the loan pe
riod.
Mr. Yager. Right. I would have to defer to my colleagues
from the satellite industry here, but I think DBS -1 has
another 8 years left on it, and it's been up for 7 years, so
the life of a satellite is about 15 years.
Mr. Cox. Yes, 12 to 15 years these days is not unexpected.
Mr. Sjoberg. My expertise is in land-based systems, cable
TV and translator systems. The building of land-based systems
is very capital-intensive. If you can lower the cost of
capital, you can expand into lower density areas and serve
people with the lower population densities.
What we would look at in our system is being able to expand
into maybe the 7 to 10 range of homes per mile of cable plan. I
believe a very significant benefit to consider is the side
benefit that when cable is extended into these areas, these
people will have access to high-speed cable modems, which will
then allow the growth of some e-businesses and other factors
like that.
In the rural areas that we serve, I believe that's
significant. The rural areas are losing population. People are
leaving the rural areas and moving into the cities for better
jobs. Oftentimes, if they had access to high-speed cable modems
and services like that, they would be able to stay in the rural
areas and telecommute. I believe that's a very significant
benefit.
Mr. Phillips. Senator, I would offer three explanations to
assist. First, I believe there is a group of potential
subscribers in these markets that are not served who have not
bought satellite technology because it does not carry their
local channels. If you would offer their local channels, they
would subscribe and they may also be willing to subscribe to
additional video services. There would be a return there that
would lift and help the economics of the business plan.
Second, as just mentioned, you could add to satellite
technology a common platform that could deliver both video and
Internet or data services. There would be additional benefit to
the business plan for local-into-local perhaps if other
services like data could be offered on the same technology
platform.
Third, a loan guarantee, as I suggested, should probably go
to a not-for-profit entity. The reason for that is if you offer
a loan guarantee to a not-for-profit entity, that entity does
not have to make the higher returns that are expected for
shareholders. The entire loan guarantee can be utilized on a
break-even proposition.
In fact, the gentleman from the broadcast industry
suggested that this might be done on a wholesale level. I agree
with that. A cooperative type enterprise within the industry
could be formed on a not-for-profit basis to do this very cost
effectively and allow the retailing to take place at another
point.
Mr. Moskowitz. Senator, EchoStar would love to see anything
that would help more consumers have their local channels
available by satellite as an alternative to rising cable rates.
But I would be remiss if I did not tell you that we are very
concerned about whether the economics work with or without the
loan guarantees, especially in the smaller markets. I believe
the economics by themselves are suspect. If all you do is pass
a loan guarantee without tackling some of the other issues that
surround this, I think things could come back to haunt us in
the future.
I believe this is going to be an issue which requires
creativity and cooperation. It is going to require
broadcasters, potentially in the smaller markets, to agree to
share time on a satellite, like they do with the ARC's in
Alaska, as opposed to carrying every station in every market 24
hours a day, 7 days a week.
You need to take a hard look at the economics of that and
determine whether the taxpayer is ever going to see their money
back.
Mr. Cox. I would concur with Mr. Moskowitz. We have done a
tremendous amount of looking at exactly this issue -- how do we
take this proposition and expand it as far as we possibly can?
The early results we have received from the markets we have
launched local channels in have been tremendous. Consumers are
extremely excited about it. It actually feels for the first
time as if there is a true competitor to cable, which consumers
have not had in the past.
The very fixed cost that Mr. Moskowitz is referring to, the
cost of getting those signals from a market back to our
broadcast centers, is hundreds of thousands of dollars per
year. The opportunity cost of allocating more and more spectrum
when it could be used for other revenue-generating purposes is
also challenging.
I believe some level of partnership with the broadcast
community will be required in terms of addressing some of the
fundamental ways we have done business together historically. I
believe an examination of some of the issues that I understand
are outside the scope of this hearing is also required: in
general, the regulatory regime under which we operate.
Senator Allard. Thank you, Mr. Chairman.
Chairman Gramm. Thank you, Senator Allard.
Senator Grams.
OPENING COMMENTS OF SENATOR ROD GRAMS
Senator Grams. Thank you very much, Mr. Chairman.
I welcome all of the panelists here today and thank you for
your testimony. In particular, I want to welcome Mr. Sjoberg
from Minnesota. Thank you for taking the time to be here.
I have a lot of questions. I would like to submit most of
those to you in writing, if I could, because there are a lot of
details that we need to know that we won't have time to ask.
As you look at the map, my State abuts both North and South
Dakota. The rural parts of Minnesota face some of the same
problems as do the rural areas of North and South Dakota, and
that is problems obtaining access to their local channels.
Mr. Sjoberg, if Congress were to pass a loan guarantee
program, which I think you advocated should be technology
neutral, how would a cable operator use the available funds to
extend the availability of its local broadcast signal?
Mr. Sjoberg. Well, as I said earlier, the building of cable
facility is very capital-intensive. The Federal loan guarantee
would provide a lower interest rate. That lower interest rate
would lower our capital costs and allow us to go into areas of
lower density.
I also believe, with the loan guarantees in place, there
would be other partnerships, as the partnership I described
with ourselves and Roseau County and Lake of the Woods County.
These are two very rural counties which had explored the
possibility of building their own transport system to bring
these signals, in the case of Lake of the Woods County, nearly
200 miles.
By partnering with us and using our transport system, we
were able to reduce their costs by about 90 percent, at the
same time producing very good coverage within the counties. At
present, we have continued the partnership with them for over
10 years. Their maintenance costs have also been significantly
reduced. They are very happy with the program.
Senator Grams. Mr. Sjoberg, economics is going to dictate
quite a lot of this. Would the small cable operators have
enough of a subscriber base to repay these loans if they
qualify for them?
Mr. Sjoberg. Yes, they would, because they would use the
funds to go into areas which would allow them to reach these
pockets of homes that maybe aren't economically feasible to
reach at market or above-
market rates, the rates that we're paying for capital now.
The combination of that and new services, like high-speed
cable modems, which are coming online, will be an additional
source of revenue for the cable company and also an additional
service for the customer.
Senator Grams. Mr. Moskowitz and Mr. Cox, you talked about
economics. Mr. Moskowitz, you said that economics won't be the
only criteria. Could you tell us, in more detail, what other
things have to be done as far as regulation or whatever to make
it not only economic, but feasible?
Mr. Moskowitz. Thank you, Senator. I would be glad to. I
think at the top of the list has to be must-carry. If we have
to carry 25 or 30 stations in a top market, including the Home
Shopping Channel, which is the same in all DMA's that it's
provided in, then there are fewer markets that we can
economically serve.
I believe, when you look at the detailed economics, the
hundreds of thousands of dollars required to bring the signals
of a small local market back to an uplink facility and up to
the satellite, and the spectrum required to provide those
signals to consumers, results in a price point which is
economically discouraging. In order to have a model that works,
we need to look at some steps we can take, like in smaller
markets having -- again, like the ARC solution in Alaska -- the
ABC, NBC, and CBS station share time each day. You get a
portion of the ABC, a portion of the NBC, and a portion of the
CBS local programming, so consumers can indeed have their local
news, weather, and sports, and locally produced content, but at
a more economically attractive rate. I believe those are the
types of things that need to be considered.
As far as providing loan guarantees to a cable company, the
fact of the matter is that to provide service to small rural
areas, satellite is a much more cost-effective point-to-
multipoint distribution system. I question whether Congress
should be in the business of supporting economically less
viable systems or whether it should merely try to help do
everything it can to assure service for all at the most
economically attractive model.
Senator Grams. I would like to ask all of you, beginning
with you, Mr. Yager, just briefly, what the additional cost is
going to be to the consumer, whether you're in a major market
already receiving signals or in rural areas?
Mr. Yager. Senator, it is my understanding that the charge
to the consumer in New York and those markets that are already
local-to-local is somewhere between $5 and $6. I believe the
charge is actually $4.95 to $5.95. I would anticipate the price
points would be the same for small markets.
Senator Grams. Besides the monthly fee, would additional
equipment have to be purchased? Would there be initial costs?
Mr. Yager. I am sure that there is a set top box that would
be included in the installation fee that would go with it.
Let me just say that in the small- to mid-sized markets, we
do not have 23 stations. We operate a station in Duluth,
Minnesota. As you know, Duluth now has four stations. They just
signed on a Fox station this year. It's a four-station market.
We have a station in Colorado Springs, which is going to be a
five-station market soon with the sign-on of a WB station.
We are not talking about 23 stations in the small- to mid-
sized market. We are talking about a very limited number of
network affiliates that provide local news, local information.
That is what is so important about this hearing, local
television.
Senator Grams. Does anyone else want to briefly answer that
question on what the cost to the consumer would be? We will go
right down the line.
Mr. Sjoberg.
Mr. Sjoberg. In our markets where we're doing the
translator project, it is costing the typical resident of the
county about $10 per year. There is no additional receiving
equipment needed. It is transmitted on UHF, so they only need a
small antenna to be able to receive it. It will work on as many
TV sets as they have and they are able to watch multichannels.
One person in the house can watch ABC. The next person can be
watching CBS. The next person can be watching Fox.
Senator Grams. Mr. Phillips.
Mr. Phillips. The models that we have run look at a cost
per consumer in these remote markets of between $5 and $8. You
have to add to that the cost of the receiving equipment.
Today, that equipment is subsidized by many in the industry
to get the system out there. But we believe to make a common
receiving system so that spectrum isn't wasted as we're doing
today with two competitors duplicating markets, we will have to
have a box and a dish that's designed so that both systems can
work to serve one consumer seamlessly. That probably adds, we
estimate here, an additional $100 to the receiving equipment.
Mr. Moskowitz. Senator, we offer local channels today in
larger markets for $5 a month. We can make a return on our
investment by doing so, although to some extent, it's a loss
leader to simply duplicate the capabilities of cable. That
assumes that we have tens of thousands, and perhaps upward of
100,000 subscribers in each of those markets at $5 a month for
break-even. Capital Broadcasting, Local TV on Satellite,
projects about $8 to $9 a month. Again, that is in the larger
markets.
If you are not amortizing your costs over tens of
thousands, perhaps upward of 100,000 customers, you can't make
the economics work at $5 to $8 a month. I hope that
specifically addresses your question.
Mr. Cox. We're at about the same point. We're at $5.99 a
month and we include a PBS feed as part of that. Similarly, we
think in the larger markets, by a combination of driving a
large number of subscribers to that, plus the additional
revenues we may get from other services once we get a box in
the home of those subscribers, the proposition is worthwhile.
It gets significantly more difficult as you get into the
smaller markets and as you start anticipating the 2002 date of
having to bring three, four, or five more channels into each of
those cities.
Senator Grams. Thank you, Mr. Chairman.
Chairman Gramm. Thank you, Senator Grams.
Senator Reed.
OPENING COMMENTS OF SENATOR JACK REED
Senator Reed. Thank you, Mr. Chairman. I want to thank all
of the panelists for appearing today. I thought the testimony
of our first panel was very enlightening. I look forward to
hearing from our second panel.
Thank you.
Chairman Gramm. Thank you, Senator Reed.
Senator Hagel.
OPENING COMMENTS OF SENATOR CHUCK HAGEL
Senator Hagel. Thank you, Mr. Chairman. I will submit a
statement for the record. This is a very timely hearing. This
issue is very important to people in my home State of Nebraska,
and I appreciate your holding this hearing at this time.
Thank you.
Chairman Gramm. Thank you, Senator Hagel.
Senator Shelby.
OPENING COMMENTS OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman. I have no opening
statement. I would just like to thank all of our witnesses for
appearing today. The testimony of our first panel was very
informational, and I look forward to hearing from our second
panel.
Thank you.
Chairman Gramm. Thank you, Senator Shelby.
Let me thank each member of the panel. It is hard to
imagine a panel that could have done a better job of starting
this discussion in the Banking Committee. I want to thank each
and every one of you for coming.
Let me call our second panel. While they are coming up, I
will introduce them. We have with us Gregory Rohde, Assistant
Secretary for Communications and Information of the National
Telecommunications and Information Administration at the U.S.
Department of Commerce; Christopher McLean, Acting
Administrator of the Rural Utilities Service at the U.S.
Department of Agriculture; William Roberts, who is Senior
Attorney at the U.S. Copyright Office; and Dale Hatfield, who
is Chief of the Office of Engineering and Technology at the
Federal Communications Commission.
Let me thank each of you for coming. I would like to ask
each member of our panel to try to stay within 5 minutes so we
will have plenty of time for questions.
With that, Mr. Rohde, let me call on you.
OPENING STATEMENT OF GREGORY L. ROHDE
ASSISTANT SECRETARY FOR
COMMUNICATIONS AND INFORMATION
NATIONAL TELECOMMUNICATIONS AND
INFORMATION ADMINISTRATION
U.S. DEPARTMENT OF COMMERCE
Mr. Rohde. Thank you very much, Mr. Chairman. It is a real
pleasure to be here. Thank you for holding this hearing.
I would ask that my written statement be included in the rec
ord.
Chairman Gramm. Let me say that everyone's written
statement will be included in the record as if read in its
entirety. If you could summarize your statement, it would be
very helpful.
Mr. Rohde. Certainly. Thank you very much.
I am pleased to be here. In fact, this is my first
opportunity to testify before Congress since being sworn in as
Assistant Secretary for Communications and Information. I
remember well the evening I was sworn in. In fact, I was
watching C - SPAN, watching you and Senator Lott, Senator
Daschle, Senator Baucus, Senator Burns, and others discussing
the unanimous consent agreement, of which the Senate had agreed
to postpone consideration of the loan guarantee proposal until
this year. That very night I walked into Secretary Daley's
office to be sworn into my new position. I remarked to him how
ironic it was that when my predecessor was sworn into the same
job in 1993, there were no operational direct broadcast
satellite systems providing services to consumers. Today, there
are over 11 million consumers who are receiving DBS services.
The Administration strongly supported provisions in last
year's legislation that provided the authorization for
satellite providers to carry local-into-local programming.
Since that time, DBS providers are providing local-into-local
service in over 24 markets and are currently negotiating in 20
more. But the question still remains as to how viewers in the
remaining 200 or more markets are going to receive local-into-
local service over satellite or other technologies.
The Administration believes this debate is quite
appropriate. It is welcoming that Congress is continuing the
pursuit of this question as to how small and rural markets are
going to receive local-into-local carriage of broadcast
signals.
In regard to the loan guarantee proposal in particular, I
would like to highlight three principles which the
Administration would like to see considered as it develops. Let
me emphasize that the Administration welcomes and looks forward
to the opportunity of working with this Committee and other
committees in Congress in considering this legislation.
First, should Congress consider a loan guarantee approach,
it is very important that this approach be technologically
neutral. It's important to keep in mind that different
technologies may best be suited to deliver local-into-local
service in different parts of the country. It is imperative
that any loan guarantee approach or any loan legislation along
these lines is technologically neutral. It's also important
because we want to spur innovation. We want to be able to help
foster private-sector innovation and be open to the possibility
that there are other technologies that could be out there.
Second, any proposal should be one that promotes
competition in the multichannel video market. With the new
authorization for satellite carriers to carry local-into-local
programming, the strength of the DBS providers to become an
effective competitor to cable has been enhanced. As Congress
considers further legislation in this area, we should keep in
mind that one of the objectives should be to promote
competition.
Third, it should be kept in mind that any new program
should demonstrate fiscal responsibility by conforming to
existing Federal credit program policies.
Among the principles that we feel any loan guarantee
proposal should conform with is that we should minimize the
Federal risk to the program. We should also recognize that,
obviously, market-based solutions are the most preferred
solutions, but they may not necessarily solve the issue. I
believe those are very important principles to keep in mind.
Finally, I would like to point out that last week, I
announced that the National Telecommunications and Information
Administration is going to issue a notice in the Federal
Register to solicit public comment on this question. The NTIA
believes that this discussion should not be limited to simply
examining the possibilities of one particular technology, that
we should be looking at other possible approaches. In light of
that, we are going to shortly issue a notice in the Federal
Register to solicit public comments and suggestions as to how
viewers in small and rural markets can receive local broadcast
signals through a variety of technological means, including
satellite.
All of these comments are going to be posted on our Web
site as part of this process. In early March, I intend to host
a roundtable discussion with various stakeholders in this
debate -- policymakers, consumers, industry representatives,
and technological experts -- to consider all of this.
With that, I will conclude my remarks. I see that the
yellow light is on. I would be happy to answer any questions
that you or Members of the Committee may have.
Chairman Gramm. Thank you.
Mr. McLean.
OPENING STATEMENT OF CHRISTOPHER McLEAN
ACTING ADMINISTRATOR, RURAL UTILITIES SERVICE
U.S. DEPARTMENT OF AGRICULTURE
Mr. McLean. Thank you very much, Mr. Chairman. My name is
Christopher McLean. I am the Acting Administrator of the Rural
Utilities Service at the U.S. Department of Agriculture. We are
the successor agency to the Rural Electrification
Administration.
The Rural Utilities Service is a rural development agency.
We administer a $42 billion loan portfolio of more than 9,000
loans for telecommunications, electric, and water and
wastewater infrastructure projects throughout rural America.
Our agency administers the Distance Learning and Telemedicine
loan and grant program as well, and is a leading advocate for
rural consumers before Federal and State regulatory bodies.
For the rural residents of America, access to television
signals has long been a challenge. Distance and geography have
been very significant impediments to the reception of
consistently viewable broadcast signals. While cable television
is available in many rural towns, it does not reach America's
most rural citizens.
The Rural Utilities Service has a 65-year record of
empowering rural America and meeting major infrastructure
challenges. Just this last October, the Rural Utilities Service
telecommunications program celebrated its 50th anniversary. In
those 50 years, our telecommunications program has helped close
the digital divide in rural areas and has maintained an
unprecedented level of loan security over the entire history of
the program. And, knock on wood, we have not had a write-off in
our telecommunications program in that 50-year history.
Since 1993, the RUS has financed more than $1 billion in
fiber- optic facilities and more than $725 million in digital
switching for the telecommunications companies and cooperatives
serving rural areas. In 1999 alone, the RUS has provided nearly
$500 million in financing for rural telecommunications
infrastructure.
The RUS is very fortunate to have an accomplished corps of
engineers, accountants, financial specialists, and rural
infrastructure experts. We also have a program delivery staff
that is both in the field and in Washington, D.C. I'm very
confident that the RUS has the necessary skills to administer
new initiatives that will bring the benefits of the information
revolution to all America.
Access to a full range of news, weather, sports,
entertainment, and information is certainly important to
maintaining and enhancing rural quality of life. But
maintaining expanding access to local sources of news, weather,
and information is also critical to rural public safety. Recent
weather events, such as this months' back-to-back winter storms
in the South and the East, highlight the importance of local
television as a means of disseminating lifesaving information.
Linking local residents to their communities of interest is
also important to maintaining and enhancing the vitality of the
local rural economy, as well as the local rural and civic life.
From both an educational standpoint and one of public safety,
it is in the public interest that rural citizens have access to
local and network programming. Rural America should not fall
into a new digital divide: either as a result of the amendments
to the Satellite Home Viewer Act or the coming conversion to
digital television.
The conversion to digital from analog broadcast signals is
going to raise special problems in rural areas because the
propagation of signals under the digital mode is different than
under the analog mode. Right now, as you move further away from
a transmitter, analog signals will gradually fade out. Digital
signals will generally drop off suddenly. There is a
possibility that in rural America, once digital conversion is
fully complete, rural viewers may lose access to broadcast
signals they now have.
The Rural Utilities Service believes we have the
infrastructure in place. We appreciate the comments of the
Chairman that there is the desire not to reinvent the wheel or
recreate a program delivery system. We believe we have the
expertise available that can successfully administer a program
of the nature discussed by Senator Burns, Congressman Baucher,
and Senator Baucus.
In conclusion, Mr. Chairman, preserving and enhancing
access to local and network television signals is important not
only for rural quality of life, but for rural public safety and
community. Linking rural viewers to more local signals will
also enhance the economics of rural broadcasting and their
rural advertisers. In addition, the infrastructure necessary to
deliver local-into-local services, regardless of mode, can
bring new broadband capacity to rural areas. Just as the Rural
Electrification Administration helped rural America become part
of the national economy, the Rural Utilities Service can
continue to help rural America thrive in the information age.
Thank you, Mr. Chairman.
Chairman Gramm. Thank you.
Mr. Roberts.
OPENING STATEMENT OF WILLIAM ROBERTS
SENIOR ATTORNEY, U.S. COPYRIGHT OFFICE
Mr. Roberts. Thank you, Mr. Chairman. I'm Bill Roberts,
Senior Attorney at the U.S. Copyright Office. I'm pleased to
appear today on behalf of the U.S. Copyright Office to address
satellite retransmissions of television broadcast signals.
Over the next several weeks, this Committee will be
considering legislation to provide a federally backed loan
guarantee program to build broadcast retransmission platforms
in order to bring consumers located in smaller markets in the
United States their local broadcast stations.
The purpose of my testimony is not to present the Copyright
Office's position on the advisability of a loan guarantee
program. We in fact do not have a position because that is not
a copyright matter. The purpose of my testimony is to provide
this Committee with a context in which these proposals have
arisen.
The concept of a loan guarantee program -- to provide rural
subscribers with their local television signals -- is an
offshoot of last year's Satellite Home Viewer Improvement Act.
The Satellite Home Viewer Improvement Act is the third major
piece of legislation governing the copyright licensing of
television broadcasting retransmitted by satellite carriers,
such as DIRECTV and EchoStar, since the foundation of the
satellite home dish industry in 1980.
Indeed, the congressional regulation of the satellite
industry has come principally through our copyright laws. The
copyright licensing regime for satellite retransmission of
television broadcast stations is very similar to the licensing
regime for cable systems. Both cable and satellite have what is
known as a compulsory license, which allows them to clear all
the copyrights to the programming contained on the television
signals they choose to retransmit to their subscribers.
A compulsory license is a Government-created regime whereby
the copyright owners of television broadcasting, such as
sports, movies, and syndicated programs, are compelled to
license their works under fixed terms and royalty fees, rather
than negotiate those licenses in the free marketplace. Both the
cable systems and satellite carriers submit compulsory license
fees twice a year, along with statements of account to the
Copyright Office for subsequent distribution of those monies to
copyright owners of the programming that has been retransmitted
by those satellite carriers and cable systems. There is,
however, one very significant difference between the cable and
satellite compulsory licenses.
For satellite carriers, their compulsory license for
retransmission of network television stations is limited to
subscribers who reside in unserved households. An unserved
household is one that cannot receive an over-the-air signal
from a local network affiliate using a conventional rooftop
antenna. The reason for the unserved household limitation to
the satellite compulsory license is to protect the local
network station from losing viewers in their market who sign up
for satellite and watch a distant affiliate of the same network
via their satellite dish.
The issue of determining when a particular household is an
unserved household and hence, eligible for satellite
retransmission of distant signals, has been troubling through
the years and I'm sure that Members of this Committee have
undoubtedly received angry letters from constituents who lost
their satellite service as a result of the unserved household
restriction. The problems of the unserved household restriction
can be solved through the retransmission of local signals by
satellite carriers. Providing local network signals eliminates
the need to import a network signal of a distant affiliate from
a distant market.
Recently, EchoStar and DIRECTV have announced that they now
possess the technology to deliver local signals to their
subscribers. Unfortunately, they have indicated that they do
not have the capacity to deliver the signals of local stations
to subscribers in all markets of the United States. However,
the copyright licensing regime is in place, and that's due to
the Satellite Home Viewer Act, which created a royalty-free
compulsory copyright license for the retransmission of local
signals. Consequently, as a result of the creation of this
local signal license, all satellite carriers are now eligible
from a copyright perspective to provide local signals to those
people in rural areas of the country. This is why a federally
backed loan guarantee program has been proposed: that is, to
deliver or provide the actual means of getting the signal to
the subscribers.
For a further and much more detailed background on the
Satellite Home Viewer Improvement Act, I would ask you to refer
to my written statement. I would be pleased to answer any
questions that you or Members of this Committee may have.
Thank you.
Chairman Gramm. Thank you.
Mr. Hatfield.
OPENING STATEMENT OF DALE N. HATFIELD
CHIEF, OFFICE OF ENGINEERING AND TECHNOLOGY
FEDERAL COMMUNICATIONS COMMISSION
Mr. Hatfield. Thank you, Mr. Chairman and Members of the
Committee. I greatly appreciate the opportunity to appear
before you today. As you permitted, Mr. Chairman, I will submit
my full testimony for the record and simply summarize some of
the key technological points in the time that I have available.
Before I turn to the substance of my testimony, I want to
emphasize that the views I express here today are my own, and
may not necessarily reflect the views of the agency I
represent, the Federal Communications Commission.
Last November, Congress took a dramatic step to foster
competition in the multichannel video programming distribution
market and increase programming choices for U.S. consumers when
it enacted the Satellite Home Viewer Improvement Act. Perhaps
the key provision for purposes of today's hearing is that
legislation's amendment of the copyright law to authorize
satellite carriers to retransmit local television signals to
all consumers in the station's local market.
As the Committee considers the critical goal of ensuring
that rural America has access to local television signals, I
would stress that this goal presents significant technological
challenges. Local television markets vary greatly in size, for
example, from the whole State of Utah, to much smaller areas in
Laredo, Texas, or Salisbury, Maryland. Terrain varies also from
the appropriately named Great Plains to the ruggedness of the
Rocky Mountains, my home area, and to Appalachia. Different
geographical situations in all probability will demand
different technical solutions.
Fortunately, advances in communications technology provide
a variety of options to address the goal of providing local
broadcast service to rural areas. While no one technology may
be able to solve the entire problem, multiple technologies can
be used in combination to achieve that goal. I would like to
discuss briefly seven such available technologies.
First, existing direct broadcast satellite, or DBS systems,
such as DIRECTV and EchoStar, have begun to retransmit local
programming, but only in the larger markets, as you heard
earlier. Existing DBS systems were not constructed with the
goal of providing local programming. However, and you have
already heard some of this, the good news is that advances in
spot-beam technology may enable future satellite systems to
provide greater local coverage to rural America.
Second, the multichannel multipoint distribution service,
or the MMDS, sometimes referred to as wireless cable, is a
terrestrial fixed wireless service that operates in the 2.5 GHz
range of the radio spectrum.
As suggested by its name, its uses include multichannel
video distribution. Industry consolidation among MMDS
providers, along with digital compression techniques, makes
multichannel video distribution by MMDS providers even more
practical. Nevertheless, many of the new owners of MMDS systems
see Internet access as a more attractive offering than video
distribution, calling into question the direction that the MMDS
is currently headed.
Third, the local multipoint distribution service, or the
LMDS, is a fixed wireless access system that operates in the 28
GHz range of the radio spectrum. Because of the high microwave
frequencies involved, the range of the LMDS is limited to
relatively short distances, a few miles, over unobstructed
paths.
The initial focus of LMDS providers seems to be on serving
urban business users. However, the LMDS may eventually find
applications in smaller communities for broadband services,
including two-way services, and also video distribution.
Fourth, TV translators are used to receive a television
signal on one channel and retransmit it on another channel,
thereby extending the coverage of the originating station into
hard-to-reach areas. These relays may be helpful in small towns
and isolated areas where you have suitable locations for the
translator. You have already heard a discussion about the use
of translators as a means of bringing in signals.
Fifth, we sometimes forget about it, but a better
performing TV receiving antenna system at an individual
residence can be used to get better over-the-air coverage. In
other words, by putting in a higher antenna, a larger antenna,
something called a preamp, and so forth, you can actually
extend the distance over which you can receive other local
stations.
Sixth, there are two ongoing developments in cable
television systems that may enable cable operators to make new
inroads in rural areas. One, cable operators are using
fiberoptic technology to upgrade and extend the reach of their
facilities. Two, cable operators are attempting to transform
themselves into being full-service providers. As the industry
makes this transition and as consumer demand for advanced
communications services grows, cable operators may have new
economic incentives to extend coverage to rural areas.
Seventh, and finally, similar to cable companies, local
telephone companies are also now employing fiberoptic
technology to upgrade their systems, and increased demand for
advanced services may provide comparable incentives for them to
add video distribution to their package of services and to
extend the reach of broadband facilities further into rural
America.
In conclusion, let me again stress that no one technology
holds the key to ensuring that local television signals reach
rural America. Therefore, a policy of encouraging a wide array
of technological options would be well advised, especially in
an era of such rapid technological change.
Thank you for allowing me to address the Committee. I would
be happy to answer any questions you or Members of the
Committee may have.
Chairman Gramm. Mr. Hatfield, let me thank you for giving
us a good summary of relatively complicated information.
Let me begin with you, Mr. Rohde. You talked about the
Administration's three principles, and I would say that I'm in
agreement with all three of them. The first is technological
neutrality. I assume by that you mean that we're not going to
try, in any way, to direct technology in the loan guarantee. We
are not going to try to direct who gets the loan guarantee.
What we're going to do is set up fiscally responsible
parameters and let people apply for the loan guarantee.
The technologies -- whether it's the Internet, satellite,
cable, or whatever, it may be something that we aren't
currently looking at, perhaps something brought forward by the
telephone company --whatever it may be, we let them compete for
the loan guarantee. Let me be sure that's exactly what you're
saying.
Mr. Rohde. It is. What I'm saying is let's not exclude any
technology. Let's make sure that if we structure a loan
guarantee program, it's available to a variety of means,
whether it be satellite, land-based cable systems, or any other
terrestrial wireless systems, such as the LMDS, the MMDS, or
others.
I believe we are in agreement. All I'm saying is we should
not limit our options.
Chairman Gramm. Based on what you said, Mr. Hatfield, I
assume you agree with that.
Mr. Hatfield. Yes, I do, Senator.
Chairman Gramm. Let me get our other witnesses, Mr. McLean
and Mr. Roberts, to comment briefly on that.
Mr. McLean. Yes, sir, we would agree. At the Rural
Utilities Service, we employ almost every type of technology
necessary to get the job done.
Mr. Roberts. We would agree as well, Mr. Chairman. We are
technology neutral when it comes to this approach.
Chairman Gramm. Let me turn, then, to your third principle,
Mr. Rohde, fiscal responsibility. It seems to me, at least in
terms of the contribution of this Committee, that our major
focus has to be on trying to be fiscally responsible, trying to
write a program that will maximize our chances of achieving
what Senator Burns set out to do in his bill, but to try to do
it in a way to maximize the probability that the loans will be
paid back.
Quite frankly, I don't see that as a conflict with
achieving the objective of providing the service. I see a sound
loan guarantee program as a mechanism that helps us choose the
right technologies because if we guarantee less than the full
amount of the loan, which I can assure you we will in our bill,
we force the lender to shoulder some of the risk. That gets the
lender involved in helping to be sure that we make the right
choice.
To the extent that we broaden the assets that have to be
committed, one of the things I intend to try to write very
strong language on, given the concurrence of the majority of
the Committee, is that we want to protect ourselves against
what I would call shell entities -- might be nonprofit, might
be profit -- where people set up an organization that has
almost no assets to get the loan guarantee, so that if it goes
bad, we don't have anything to have recourse on except how they
might have misused our money.
One thing I want to try to do is write very strong language
that says if a group of companies get together to set up this
organization to submit a loan guarantee, they should be
committing their assets to it, not just the assets of this
shell entity -- and I don't mean shell in any kind of
derogatory manner.
I would like to get your response on these basic points. I
would like to hear your response to the commitment of assets,
to guaranteeing less than 100 percent of the loan, those kinds
of things as they relate to what you were calling fiscal
responsibility.
Mr. Rohde. Well, Senator, I was trying to think if there
was anything you said that I could disagree with, and I can't.
I think all the points you raise are very sound and are
consistent with existing credit programs and what the Federal
Government has required in other loan guarantee programs. I
believe you raise a lot of very good points.
The only aspect that I would elaborate on and maybe add to
is I think we want to make sure if there is a loan guarantee
program, it's going to a market that truly needs it. You do not
want to have a loan guarantee program that could be used by an
entity to perhaps subsidize service that they are already
providing in another market. You want to make sure that this is
targeted to the markets that truly need the help.
Chairman Gramm. I would also add that almost anything you
do has a joint use. Let's say that a local television station
wanted to build a bigger tower. It might potentially qualify.
But let's say that 60 percent of the benefit of the tower is
expanding service and 40 percent is improving the service
that's already in the A or B areas. We would then be looking,
it seems to me, at guaranteeing a part of 60 percent of the
loan, not a part of 100 percent of the loan.
I have heard the people from the satellite industry talk
about competing with cable. I am very concerned about this. I
have had cable and I now have satellite. I have had both
services. But there is something that keeps nagging at me.
My hometown has two cable operators -- always has as far
back as I can remember -- who invested their money to bring
signal to our community. I want to be sure that we're not
providing taxpayer money to disadvantage them in competition
for people they already serve.
I'm for competition. I think it's the basic strength of our
system. But, on the other hand, I believe we have to be sure
that we're aiming for the right target and we're reaching
people who either don't have this service or have very limited
access to it. I believe it's going to be very difficult to
write a law that actually achieves that result.
Mr. Rohde. Senator, I would make one comment. If you
recall, contained in the legislation in the conference report
that was then withdrawn, was a provision that any loan
guarantee award not have an anticompetitive effect. I recall a
discussion amongst the authors at the time that required the
NTIA to have a consultative role and, in fact, a certifying
role that it would not have an anticompetitive effect.
I believe that would be helpful. The NTIA can play a role
in this if indeed the loan guarantee program is structured and
is administered by the RUS. You can have an agency like the
NTIA play the role of raising these competitive questions and
providing some consultation to make sure that you are not going
to be disrupting a competitive market, that it will not have an
anticompetitive effect. That seemed to be a decent way to
address that issue.
Chairman Gramm. Let me give everybody a chance to quickly
respond, and then I will go to our other Members.
Mr. McLean. Mr. Chairman, in administering a program like
the Rural Electrification Act or the Rural Water and Wastewater
Program, you have to bring both sound banking principles as
well as a commitment to the statute.
In the legislation that Congress had considered, there were
some very clear directions with respect to the priorities of
Congress as to requirements of insurance, requirements of
covering the costs of the loan program, and making certain that
loan resources are used for their intended purposes and that
they are serving intended beneficiaries. We have to wrestle
with these same priorities a great number of times every year.
We have a $4 billion loan program in water, electric, and
telecommunications, and that is part of the challenge of
running the program. But it's one that is manageable,
particularly if Congress writes very clear ideas of priority as
to the mission of the loan program, as well as the financial
security that the agency can ensure.
Mr. Roberts. Mr. Chairman, I have no comment.
Mr. Hatfield. I'm an engineering techie, and this is
probably a little bit beyond my expertise. Nevertheless, what I
heard you say about fiscal responsibility, especially about
having a program that has unintended anticompetitive
consequences, is certainly, it seems to me, right on target.
Chairman Gramm. Senator Allard.
Senator Allard. Mr. Chairman, I want to repeat my previous
question. I heard the perspective of the first panel. I would
like to hear the perspective of this panel as well.
You have a loan guarantee program out here and the claim is
that you can't make it without the loan guarantees. How is it
that you can then make it and pay off the loan, particularly in
light of the high-technology environment out there where there
is such a short lifespan on how usable that technology remains?
What do you use as collateral?
I would like to hear some comments on that issue. Each of
you, if you would, can comment.
Mr. McLean. I would be happy to answer that. First, the
assets that are collateralized would have to match the life of
the loan. That would be a pretty fundamental issue in
considering the feasibility of any project.
Second, the most important value of a loan guarantee
program is the ability of the program to deliver low-cost
capital. In the equity markets, all of us know that equity
investors are demanding very high returns and getting very high
returns. The same is true in the private lending markets. There
are very substantial costs. You have an infrastructure-
intensive project. Once again, whether it's for local-into-
local, whether it's for water systems, whether it's for
electric systems, whether it's for telecommunications systems,
the cost of capital is a very significant part of the project
cost.
What would be very useful is if an applicant for the loan
program were to take advantage of natural efficiencies, perhaps
a common platform, so that you wouldn't have to duplicate
programming or take advantage of technological efficiencies.
That would help to enhance the viability of the loan.
The easy part of the job at the Rural Utilities Service is
to be able to make loans, to go to ribbon-cutting ceremonies,
and to make speeches, the hard part of the job is to say no to
good people who have good ideas, but projects that just don't
pencil out. We're not afraid to do that. We have to do that
over and over.
Again, depending on what Congress instructs with respect to
the purposes of the loan, we would apply sound financial
principles to that loan in the evaluation, and hopefully be
able to minimize any risk of taxpayer loss.
Senator Allard. Do you want to comment further, Mr. Rohde?
Mr. Rohde. No, I will defer to my friend, Mr. McLean. The
specifics of loan finance are outside of my expertise and that
of my agency. I concur with what Mr. McLean just said.
Senator Allard. Mr. Roberts.
Mr. Roberts. I have no comment, Senator.
Senator Allard. Mr. Hatfield.
Mr. Hatfield. I would comment by reinforcing the notion you
suggest here that the technology is changing very rapidly with
things like streaming video and so forth, where you can
essentially deliver television programming over the Internet.
This is all changing, as we say, at Internet speeds. It should
be something that we are all aware of and concerned about.
Senator Allard. I would like to continue along the line of
your technology comment. I believe we have been missing in this
discussion the Internet aspect of this, where a station could
make its programming available over the Internet.
How far away are we from saying that a TV station could
make its programming available over the Internet, consequently
making that programming available to any household having an
existing phone service?
Mr. Hatfield. I think that question requires a two-part
answer. First, of course, is you're seeing it today, but the
pictures are small and jerky and so forth.
Senator Allard. Yes.
Mr. Hatfield. Of course, the reason for that is the
bandwidth.
Senator Allard. Slow.
Mr. Hatfield. That leads us right back to the issue, again,
of the cable companies, the telephone companies, and others
trying to overcome that problem as quickly as they can by
upgrading the fiberoptics. But the difficulty, of course, lies
in some of these rural areas. These companies are having
trouble getting the speeds up, getting that broadband facility
out there so they can deliver the
streaming video over that broadband facility. That's the challen
ge.
Senator Allard. We certainly want to keep the Internet as
part of the technological choices that would be out there. It
could prove to be more feasible in certain areas, and it seems
it could work us out of our problem with most carriers. A
station, if they want to serve an area, could make their
programming available over the Internet, and people could tune
in on the Internet to watch.
Mr. Hatfield. Absolutely. My comment is that you have to
have the platform there for the Internet to ride on. Getting
the platform, the broadband platform, out where you can stream
at high enough speeds to be able to get a good picture is the
critical issue.
Mr. McLean. Density and distance are the biggest
impediments to having that platform in rural areas.
Senator Allard. I understand that.
Mr. McLean. It is a big infrastructure commitment, one
which we're very much committed to trying to solve.
Senator Allard. Thank you.
Mr. Roberts. May I make one comment, Senator?
Senator Allard. Yes.
Mr. Roberts. The satellite industry and the cable industry
have a compulsory copyright license to retransmit broadcast
signals. The Internet does not. There is currently not a
copyright regime to license Internet retransmissions of
broadcast stations.
Senator Allard. I'm glad you spoke up. Yes, I want to get
that clarified.
Let's assume we have all of the technology in place and
that if someone wants to broadcast programming over the
Internet, they can. A company, a broadcasting station in
Denver, makes the decision to go on the Internet and they do.
They begin to broadcast their programming over the Internet.
Their customers pick it up and bring it into their home. Are
you saying the copyright laws currently prevent them from doing
that?
Mr. Roberts. They do not have a compulsory license to do
it. In order to do that, they would have to negotiate
individually with each of the copyright owners of the
programming that they retransmit, which, if they are
retransmitting broadcast programming, is going to involve ----
Senator Allard. That's almost impossible, isn't it?
Mr. Roberts. It's extremely difficult. There would be
hundreds of copyright owners they would have to execute
separate licenses with.
Senator Allard. That would necessitate a change in our
copyright laws.
Mr. Roberts. Yes.
Senator Allard. Could we do that and still protect
copyrights in a way that would be practical? Is there a
practical solution that you see to that?
Mr. Roberts. That is a difficult question because the
Internet is very different in its potential scope and reach
than cable or satellite. It also has virtually no Government
regulation at this point in time.
The Copyright Office has always been opposed to compulsory
licenses. We always favor a private, free marketplace solution.
Currently, we are opposed to extending a compulsory license to
the Internet.
Senator Allard. Right now, the copyright laws are
preventing the Internet from becoming a viable alternative.
Mr. Roberts. If there is no free marketplace negotiation,
if the copyright owners do not execute licenses ----
Senator Allard. Which you said would be impossible to do.
Mr. Roberts. It is difficult to do. I'm not saying it's
impossible. Copyright owners have always said that they are
willing to create mechanisms, private mechanisms, to deal with
that. But there is currently not a compulsory license to do
that.
Senator Allard. Could that be fractionated? One of the
criticisms I hear from rural areas is that they are unable to
get their local news. Let's say that a local station creates
all the news. They basically own that. Is there anything to
prevent them from saying, well, you can have our news segment,
but you may not have our movie segment or anything else which
may contain some copyright issues?
Could they just place the news segment of their programming
on local television? Could that be worked out?
Mr. Roberts. They could certainly do that, yes, Senator.
Senator Allard. Thank you, Mr. Chairman.
Chairman Gramm. Senator Grams.
Senator Grams. Thank you very much, Mr. Chairman.
Gentlemen, thank you again for being here. Not that it's
ever happened in the past, but I'm very concerned about
excessive regulation and paperwork requirements that the
Federal Government or the agencies could impose in trying to
implement this Satellite Home Viewer Improvement Act.
I would like to know what actions your agencies would take
to help reduce any unnecessary regulation upon the licensees
which could result in a hidden tax being passed on to the
consumer, making it more costly?
Mr. Rohde, what would you do in your role?
Mr. Rohde. Well, in the legislation that was proposed last
year, the administration of the loan guarantee program would be
at the Rural Utilities Service. The proposal was that the NTIA
would play a role of consulting and actually certifying that
there would be no anticompetitive effect. I believe that
legislation contained a 90-day deadline for the NTIA's
consideration.
Obviously, we're very committed to trying to have as
expeditious a process as possible. We would not want to become
a roadblock to any consideration. If, indeed, the legislation
emerged along the lines of what was being considered last year,
I believe the NTIA's role would be more along the lines of just
doing a competitive analysis. It may require some information-
gathering on the part of the applicant, but we certainly would
want to minimize that to the greatest extent possible so we
could have an expeditious decision.
Mr. McLean. We would focus, of course, on the purpose of
the Act and loan security. Those would be the primary issues
for us. We would have to secure sufficient documentation. It
would not be significantly different than what you would engage
in with a private lender.
We are very proud to report that last year, the Rural
Utilities Service received a Hammer Award from the Vice
President for our regulatory reductions. We have a goal of
reducing our regulations year after year, and I think we're
making good progress in doing that. The value of the reduced
interest rate provided by the loan guarantees should not be
eaten up by increased regulatory burden and red tape.
I believe whatever structure Congress would put into place
would be most efficient if it takes advantage of existing
program delivery means. That would enable you to jump right
into it without having to create a whole new application and
review process.
Senator Grams. Much of the regulation would come from the
implementation and how it was spelled out in the law itself.
Mr. McLean. Yes, sir.
Mr. Roberts. I'm pleased to say, Senator, that a loan
guarantee program would not affect my agency at all.
[Laughter.]
The Satellite Home Viewer Improvement Act created a
royalty-free license, so we are not required to administer any
details, to collect any money, or print any forms. That would
have no effect on us at all.
Mr. Hatfield. It is not clear to me what, if any, role the
FCC would have on the loan guarantee. Our involvement would
probably be where an applicant needs a license, to assist that
applicant in getting whatever license they need to be able to
go into business. Of course, we're trying to do everything we
can to streamline that process and make it as quick as
possible.
Senator Grams. It is important that we try to provide
consumers with these services. We are talking now about how to
deliver these services, whether it should be via cable,
satellite, or other means, but what about the broadcasters
themselves? Are there any unintended consequences that they
could face?
I know that providing these services is going to be a
benefit to many. But could there also be some negatives to some
of the broadcasters, to a point where it might make their
operations unfeasible and put them out of business?
I know first-hand, if we're talking about the dairy
industry, how unfair Government laws, regulations, and programs
can be. What about the broadcasters? What is in this to protect
those who originate the program?
Mr. Rohde. I would say, as technology emerges, new forms of
distribution systems will emerge. In the same way that DBS,
which didn't exist 7 years ago, the Internet, and other
distribution systems have emerged, there will be new forms of
distribution systems following. If the local broadcaster
doesn't have access to those distribution systems, I think
their future is more imperiled. If I were a small broadcaster
operating a small station in a very limited population area, in
a rural area, I would be concerned about looking at what's
ahead because you want to have access to these various
distribution systems.
I believe the peril for small broadcasters lies more with
inaction than with regulation. I believe the fact that Congress
is looking at this issue, and also that the NTIA is looking at
various other types of technologies and how local signals can
be carried, is encouraging to local broadcasters.
Senator Grams. What if duplicative programs are brought in
and are in direct competition with me in my area? Could that be
an unintended consequence?
Mr. Rohde. As you know, that has been the perplexing part
of the debate over the Satellite Home Viewer Act. With the
authorization of local-into-local over satellite systems, a
conflict has been created with the local broadcaster who has
been supplying consumers who live in rural areas with a
distance broadcast signal.
If other technologies emerge that have similar types of
authorization, and if we succeed in carrying local broadcast
stations over these technologies, that question becomes
minimized in terms of its complexity and in terms of the
problems that it causes.
Senator Grams. Thank you.
Mr. McLean. Rural broadcasters are going to face a very
major challenge upon the conversion from analog to digital, as
will rural viewers. It could be that the solution suggested in
the Satellite Home Viewer Act and loan guarantees could also
provide a solution to that problem. It could provide both an
affordable means for consumers to receive their local broadcast
signals, as well as a way for rural broadcasters to expand
their market penetration and be able to afford the upgrade of
their systems. I believe there could be a substantial benefit.
Personally, I just received, thanks to the Satellite Home
Viewer Act, the authority to receive local-into-local at my
home. I notice that I do, in fact, watch more broadcast
stations than satellite- delivered stations, just because of
the fact that they are together on the same satellite delivery
system. I believe it's fair to assume that if you're delivering
more eyeballs to a small-town broadcaster, it's going to be
primarily beneficial to that broadcaster to be on the same
platform as other multichannel services, whether it's cable,
satellite, or new wireless technologies.
Mr. Roberts. From a copyright perspective, the Satellite
Home Viewer Improvement Act definitely benefits local
broadcasters by permitting local-into-local retransmissions in
the satellite context. The network broadcasters are already
protected by the copyright laws from satellite carriers
importing distant affiliates of the same network and causing
the local station to lose viewers, so from a copyright
perspective, it's positive.
Mr. Hatfield. I believe the key to, of course, the
broadcasters' success is strong local programming because then,
as has already been stated, the additional distribution
mechanisms provide additional ways of getting that good strong
local programming to additional locations. I agree with the
comments made earlier.
Senator Grams. Mr. Chairman, I have just one final question
for Mr. Hatfield. It deals with section 714 of the 1996
Telecommunications Act which establishes, I believe, Mr.
Hatfield, a telecommunications development fund, by which small
businesses could apply for loans to deliver telecommunications
services to rural, unserved areas.
Mr. Hatfield. Yes.
Senator Grams. What companies could use these funds and for
what local services? Are there dollars already available for
what we're trying to do here?
Mr. Hatfield. I may have to get back to you on that
question, if you would permit me. I am not completely up to
speed on that particular position, but my understanding is that
is a very small program. The last I heard, I believe there was
only something like $25 million in that program.
That program was intended, I believe, to do much more
innovative things on a smaller project basis, rather than
something global or whatever we're talking about here. But it
would probably be best if I were to get back to you with a more
complete answer.
Senator Grams. I am wondering if, in creating a new
program, we should get rid of an old one at the same time so we
don't keep building.
Thank you very much, gentlemen.
Thank you, Mr. Chairman.
Chairman Gramm. Perhaps you're dreaming about a world that
could be, but perhaps never will be.
[Laughter.]
I want to ask a few concluding questions. Let me begin with
you, Mr. McLean.
Obviously, the approach taken by Congress was to create a
loan guarantee specifically targeted toward this objective. Our
objective will be to try to put that program into place. In
that context, we're not simply adding money, a huge amount of
money, to an ongoing program, instead, we're setting up a
program specifically for this purpose.
It would be my intention to have a board that would make
the decisions about the granting of a loan guarantee. As I
mentioned to the previous panel, my thinking is that we should
have the Secretary of the Treasury designate someone from the
Treasury whose primary function is the credit function within
the Government, that we should have the Chairman of the Board
of Governors of the Federal Reserve System, Alan Greenspan,
appoint a representative. I assume that would be another Member
of the Board of Governors. Their role would be to look at the
economics of both the proposal and the repayment of the loan.
For example, our most recent loan guarantee was the steel
loan guarantee. In working with Senator Domenici, I put the
Chairman of the Federal Reserve, the Secretary of the Treasury,
and the Securities and Exchange Commission Chairman, all of
whom complained that they already had a job, to the task of
appointing these individuals. After some pretty extensive work,
we ended up with some designees.
Now, I cannot see moving away from that panel. I believe
that is critical in terms of ensuring the integrity of the
program we're talking about. I don't know who the third member
should be, but I think you could make an argument that it
should be someone from the Department of Commerce, I think you
could make the argument that it should be someone from the
Rural Utilities Service, I think you could make an argument
that it should be someone from the Federal Communications
Commission. I think there are a lot of good arguments that
could be made as to who the third member should be.
Then there is the question of who would administer the
program once they made the loan decision. I would say, Mr.
McLean, at least just beginning to think about it, that your
agency would be a potential candidate for that role. I do not
want to create a new agency to do it.
My concern is about guaranteeing the integrity of the
decision to make the loan. The conditions under which it is
made would be set by the legislation. Within that context, do
you feel comfortable that if we made the decision to have your
agency administer the loan, that once it's made, you would have
no problem doing that within the context of the board making
the loan decision?
Mr. McLean. Assuming that I have the ability to fill vacant
positions at the Rural Utilities Service created by recent
retirements, we would be able to administer a loan program of
the size contemplated by the Burns -Baucher amendment or the
Baucus bill.
I should point out, however, that administration of a loan
program involves a significant amount of work preceding the
decision to make the loan. All of our large loans come to a
senior loan committee at the Rural Utilities Service, chaired
by myself and staffed by the assistant administrators and our
telephone, electric, water programs, and financial services
staff.
Much of the work on the loan comes before that
decisionmaking process. There is a tremendous amount of
expertise required in engineering the loan. There is expertise
required in the analysis of the feasibility and the financial
underpinning of the application. If Congress were to have a
super-senior loan committee to pass judgment on loan
recommendation of the Rural Utilities Service, you would need
more than those four people to do the actual administration of
the loan in preparation of the decision, as well as the
administration of the loan both for the servicing of the debt
as well as for insuring that the Act purposes are maintained.
We don't want to create a loan guarantee program where,
once the loan is made, under the pretense of serving the
underserved communities, there is a change in the management
decision that says we need to put these resources to New York,
Los Angeles, and Chicago. The very purpose of the loan
guarantee would be undermined. To avoid that, continuing
oversight is required.
Again, on the size of the program envisioned by Senator
Burns, Congressman Baucher, and Senator Baucus, I believe we
have the staff resources that could handle that.
Chairman Gramm. If we set up this board and give them the
ability to use the expertise of the various departments,
including yours, to do the due-diligence on the loans, so that
your people, the FCC, and others that have expertise could give
them advice, provide evaluation, and assist in making the
decision on the loan, within that context, do you think you
could make that work?
Mr. McLean. Certainly, we will work with the Congress to
make anything work. I hesitate only because without that super-
senior loan committee that you describe, we alone are making $4
billion worth of decisions a year.
Chairman Gramm. Yes. But what amount of that is in this area
?
Mr. McLean. Obviously, the Satellite Home Viewers Act area
is a relatively new area.
Chairman Gramm. I think that's the point. The Congress
didn't make this decision to simply expand the Rural Utilities
Service. We made this decision to set up a loan guarantee
program to try to expedite getting the local signal to the
local customer.
It seems to me that if you wanted to do this in the most
efficient way possible, you wouldn't create any new Government
agencies to provide staff work, assistance, and administration.
You would have three people whose job it was to make the
decision about the loan. They would draw expertise from the
various agencies of the Government that already work in these
areas, and you would designate an agency to administer the
program once the decision had been made to make the loan. It
seems to me that's the way you would go about it.
I was just simply trying to get your views on the
workability of that basic approach. If we have the FCC looking
at these technical issues, if we have your agency involved in
administering loans that are much smaller, but not dissimilar,
it seems to me that, basically, we are safe with having the
board make the decision by primarily gathering expertise. We
would be protecting the taxpayer's interest in making the loan,
because $1.2 billion, $2.5 billion, is still a lot of money.
Mr. McLean. Yes, sir.
Chairman Gramm. The problem with having the loan defaulted
or having huge amounts of the loan defaulted is we probably,
one, will never get the money back and, two, we won't get the
signal. The only way that we're ever going to get the signal is
to make a successful loan.
Mr. McLean. Yes, sir.
Chairman Gramm. I'm sure that as this debate flows through
the House and the Senate, there will be people who will say,
well, it's one thing to be concerned about the loan being
repaid, but it's another thing entirely to be concerned about
the service actually being provided.
My point is, if the loan is not repaid, that's pretty good
evidence that the service was probably not provided. I don't
see a conflict. Quite the contrary. I see us maximizing our
chances of getting the service by making a good loan to begin
with.
In any case, let me conclude by asking if anyone wants to
make a final remark before we end the hearing.
Mr. Rohde.
Mr. Rohde. The only thing I would add is what I said before
in my testimony, that I would welcome the opportunity to work
with you as you consider this legislation and look at other
options.
Chairman Gramm. Great.
Mr. McLean. We thank the Chairman for the invitation and we
will work with you to make any structure work for rural
America. We are completely committed to preventing a digital
divide in telecommunications and television access for rural
Americans.
Mr. Roberts. Thank you, Mr. Chairman, for the opportunity
to appear.
Chairman Gramm. Thank you.
Mr. Hatfield. Again, thank you very much.
Chairman Gramm. Thank you.
We will hold our second hearing on February 9, 2000.
We stand adjourned. Thank you very much.
[Whereupon, at 12:20 p.m., Tuesday, February 1, 2000, the
hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
Thank you, Mr. Chairman, for holding this hearing on a very
important issue for rural America -- television. If you could see the
volume of mail my office has received over the past 3 years, you would
know how important it is for my constituents to watch their favorite
sports teams and television shows. More importantly, you would know how
important it is for them to get their local weather warnings that could
potentially affect their livelihood -- perhaps even their lives.
I would also like to take this opportunity to welcome David
Moskowitz, Senior Vice President of Legal and General Counsel,
Secretary, and Director of EchoStar Communications, to today's hearing.
EchoStar Communications currently employs several hundred Wyoming
residents at its state-of-the-art uplink facility in Cheyenne and at
its headquarters in Littleton, Colorado. We are very proud to have this
important facility in Wyoming.
Wyoming only has television stations in three of its cities --
Casper, Cheyenne, and Jackson. The rest of the State is served by
either stations from out-of-State or by relay transmitters that bring
the stations to outlying towns. Wyoming has long distances and tall
mountains that make even the best efforts by over-the-air broadcasters
and cable companies more difficult. For the households that are located
in the remote areas of the State -- beyond the reach of cable and
relays -- satellite is the only reliable and cost effective choice. But
until now, satellite has had one distinct drawback, there was no way to
get the news or other local programming that a Wyoming television
station would carry because of the small population of my State. It is
doubtful, without some kind of incentive program, that local television
stations will be available to rural households.
Last November, Congress passed the Satellite Home Viewer
Improvement Act to bring the law governing the direct broadcast
satellite (DBS) industry up to date to reflect the current state of the
industry. As part of that bill, the Congress authorized for the first
time satellite companies to retransmit local stations back into their
local markets. However, due to satellite capacity, the two national DBS
companies, DIRECTV and EchoStar, will only be able to serve the top 50
out of 210 television markets, or 75 percent of the households in the
Nation. That leaves 160 markets or 25 percent of the Nation without
satellite-delivered local television stations. The two media markets in
Wyoming are ranked 197 and 199, meaning that without some sort of
incentive, local television will probably not be available in Wyoming.
The purpose of this series of hearings is to examine ways to
encourage the private sector to provide local television stations via
satellite in rural areas. At the end of the last session, loan
guarantees for not-for-profit corporations to provide this service was
proposed as the solution. Under that language, the Government would
guarantee loans up to a total of $1.25 billion for not-for-profit
corporations to build and launch satellites to provide local television
stations in rural markets. Since that time, there have been calls that
Congress not favor one industry or technology over another to ensure
that all potential providers are allowed to participate in the program.
I am optimistic that the Banking Committee will develop legislation
that will make local television stations available to all rural
Americans.
Thank you, Mr. Chairman. I look forward to working with you and the
Members of this Committee to solve this pressing problem in rural
America.
----------
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Thank you, Mr. Chairman. I want to thank our distinguished
witnesses for taking the time to visit with us on this issue so
critical to rural America. With the knowledge and experience of these
folks, I am confident we can resolve this issue expeditiously. Their
input will be essential as we continue that process.
I think the immediacy of this issue is apparent by the fact that we
are having this hearing so early in the session. I was a cosponsor of
the Satellite Home Viewer Improvement Act, and I strongly supported the
final package produced by the Conference Committee, including the rural
local broadcast provision. This provision will bring hope to over 50
million homes in 150 TV markets who otherwise would not receive local
signals via satellite.
The legislation we passed last year permitted satellite providers
to provide local-to-local coverage. Satellite viewers could receive
their local networks over the dish, much like cable systems provide the
local networks via cable. Unfortunately, this legislation does not
require that all markets be served with local-to-local. Thus, while the
50 - 60 largest markets will be served, the rest of the Nation will not
have access to any network programming via satellite.
Like many of my colleagues, I represent a State, South Dakota, with
rural viewers that should not be left out of the information age. While
everyone in this room will be able to access network programming by
satellite, no one living in Sioux Falls or Rapid City will.
Senators Burns and Baucus have crafted an innovative, fiscally
responsible plan that will ensure that all consumers, especially those
in medium and small markets, have access to local broadcast signals via
satellite. Without this plan, only the very largest television markets
in America will receive local-into-local service authorized by this
legislation. These are the profitable cities like New York and Los
Angeles. Under current estimates, as few as 30 of the 210 TV markets
will have local service via satellite without the rural provision.
South Dakota is one of the 16 States that do not have a single city
among the top 70 markets. Without this loan guarantee, markets like
Sioux Falls and Rapid City will never get local-into-local service.
This proposal is more than just getting sports or entertainment
programming over your local channels. It is a critical way to receive
important local news, storm information, road reports, and school
closing information. Rural Americans need the same opportunity to
access their local networks via satellite. Without the rural provision
to the enacted legislation, they will lose that opportunity. This
approach will spur technologies that will bring news and information
via satellite to consumers who because of distance or geography are not
able to get local TV signals.
Here are a few things to keep in mind about the Baucus bill of
which I am a cosponsor. Only those entities that bring forth a
credible, financially secure plan will be eligible for the loan
guarantees. The Agriculture Department will conduct a rigorous
screening process and consult with several agencies, including the
Treasury Department, the National Telecommunications and Information
Agency, and the Federal Communications Commission, before entering into
any loan guarantee.
This plan is not a giveaway to the large satellite companies as
some have stated on the Senate floor. In fact, these companies are not
eligible for this program. I would not endorse any program that would
jeopardize the Treasury or the American taxpayer. The program is capped
at $1.25 billion and has been crafted to ensure there is no exposure to
the taxpayer. This proposal has overwhelming bipartisan support. It
passed the House last year by a vote of 411- 8.
Again, I thank the witnesses for joining us today, and I look
forward to their continued input as we pursue this equal opportunity
for rural America.
----------
PREPARED STATEMENT OF SENATOR RICHARD H. BRYAN
Thank you, Mr. Chairman, for holding this hearing today on an issue
of great importance to many American consumers.
Mr. Chairman, the issue of satellite broadcasting, and ``local-
into-local'' service, was an issue that we struggled with for many
months last year in the Commerce Committee. I was a strong supporter of
the Satellite Home Viewer Improvement Act. That legislation, enacted
last year, has opened the door for at least one direct broadcasting
system to offer ``local-into-local'' service for thousands of satellite
users in the Las Vegas area alone. Those of us who supported this
bipartisan legislation all shared a common goal -- to allow television
consumers to purchase the television and cable services which best
served their needs.
We have nearly 80,000 households throughout the State of Nevada
that depend on satellite technology. As I am sure many of my colleagues
on this Committee know, consumers living in large rural States, perhaps
hundreds of miles from the nearest metropolitan area, face unique
challenges in their everyday lives -- including their television
viewing options -- that consumers living in small to large cities often
take for granted.
The loan guarantees that were included in the original satellite
legislation were designed to encourage system operators to provide
local-into-local service to rural consumers that do not have access to
local signals, and certainly that is a goal we must continue to pursue.
However, questions have arisen as to whether the technology and
satellite capacity exists to fulfill the promises made by those who
might apply for the loan guarantees.
Clearly, more and more American consumers are choosing satellite
technology for their home television needs, and given the vast numbers
of consumers who will very likely be shut out of local-into-local
service if we do not act, I am hopeful we can come up with a sound
proposal that will indeed encourage providers to develop this critical
service for rural and small-town America.
These are very important issues that should be addressed in these
hearings in the coming days, and I look forward to hearing the
testimony from the distinguished witnesses before us.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF SENATOR JIM BUNNING
I would like to thank all of the witnesses for testifying today,
and I would like to thank you, Mr. Chairman, for holding this hearing.
Obviously, satellite television has become more and more popular
throughout our country. It is very important in States with large rural
populations like Kentucky. In many parts of Kentucky, it is virtually
impossible to receive a broadcast television signal. Cable companies do
not serve many of these rural areas. Many in my State are forced to
rely on satellite television to receive the news of the day, weather
reports, entertainment, and most importantly, University of Kentucky
basketball.
It is very important that we hold this hearing to help decide what
is the best way to ensure that folks in rural areas of Kentucky have
the same access to media that people in Lexington or Louisville have.
I am definitely interested in learning about the new technologies.
I am also very interested in learning the industries' thoughts about
the Federal loan guarantees that caused so much controversy at the end
of the first session of this Congress.
Obviously, we have a big job ahead of us in finding a solution to
this problem that everyone can live with before March 30, 2000. I
believe the testimony of all of our witnesses will help us find an
answer.
Again, I thank all of the witnesses for coming before us today and
I look forward to hearing their testimony.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank the Chairman for holding this hearing today.
As we are all aware, the Banking Committee has the opportunity to
review loan guarantees for satellite television as the result of a
compromise between various Members.
I realize there are strong feelings on both sides of this issue,
and I would like to thank my colleagues for allowing this provision to
come before the Banking Committee. I believe that the committee process
plays a valuable role in the Senate. As a Member of the Banking
Committee, I look forward to the opportunity to review the loan
guarantee provision and to take part in that process.
The issue of a Government loan guarantee program of $1.25 billion
is a very serious issue that merits careful attention. I look forward
to the first in our series of hearings to examine this proposal more
carefully.
Finally, I would like to welcome one of my constituents, David
Moskowitz with EchoStar Communications, to today's hearing. Mr.
Moskowitz, I appreciate you coming from Colorado to testify before the
Banking Committee.
We have a great lineup of witnesses, and I look forward to hearing
from them.
----------
PREPARED STATEMENT OF SENATOR CHUCK HAGEL
Good morning, Mr. Chairman. I would like to thank you for holding
this very important series of hearings.
Last year, we passed the Satellite Home Viewer Improvement Act
(SHVIA), which was included in the FY2000 Consolidated Appropriations
Act. The SHVIA expanded on and extended provisions of the 1988
Satellite Home Viewer Act (SHVA).
One of the biggest changes incorporated by the SHVIA was allowing
satellite companies to retransmit local television network signals back
into the same local market area, known as local-into-local
broadcasting. Unfortunately, the SHVIA does not ensure that all
satellite television consumers will be able to receive their local
television signals. The national satellite companies have announced
that they will only offer local-into-local programming in the top 25 to
40 television markets.
In my State of Nebraska, the largest television market is Omaha,
which is ranked number 73. In fact, out of the 210 television markets,
Nebraska has one of the smallest -- North Platte is 209. Under the
current law, the 248,726 satellite television viewers in Nebraska are
unlikely to see any benefits from the new local-into-local broadcasting
provisions.
There was an attempt last year to include a provision in the SHVIA
that would have established a $1.25 billion loan guarantee to help
ensure that satellite television subscribers in rural areas would
benefit from the local-into-local programming. Under the proposed
provision, companies could qualify for loan guarantees if they provided
local television signals to the smaller television markets not expected
to receive local signals from satellite providers. However, because of
concerns regarding the lack of full consideration by Congress and the
effectiveness of the program, it was not included in the final package.
I am hopeful that Congress will be able to find a solution to help
all television viewers gain access to local programming, including
those in North Platte. It may be that a loan guarantee program is the
best way to get at this problem. There may be other ways to solve this
problem, but we should at least have a better idea on how to proceed
after this series of hearings.
I realize that this process is not going to be easy. There are many
questions that need to be answered, but I am confident that we can find
the answers.
I look forward to hearing from our witnesses, not only today, but
also throughout this series of hearings.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF SENATOR JOHN EDWARDS
I would like to thank Chairman Gramm and Ranking Member Sarbanes
for holding these hearings. I believe we are here today to discuss an
issue of great importance to many Americans -- access to local
television programming. I look forward to hearing from the various
witnesses.
For many months now, I have been hearing from concerned North
Carolinians who want to know why they are not able to see their local
affiliates via their home satellites. Many of these constituents
believed that when we passed the Satellite Home Viewer Improvement Act
they would be able to watch their local channels. And they will, but it
looks like it won't happen any time soon.
This problem is pretty serious in North Carolina. Moreover, while
roughly 3 percent of homes in the United States do not have access to
cable, in North Carolina, that figure is much higher, at 9.5 percent.
Most people believe that both of those statistics should be
significantly higher. Some of these households may have satellite
dishes, so maybe they receive movies and other channels, but these
people are not receiving local programming. Similarly, many North
Carolinians who own satellite dishes and who live within Grade B
contours are not receiving local programming. Even though many of these
people theoretically can get local programming now that the Satellite
Home Viewer Improvement Act is law, the reality is that a great number
of these people will not see local programming for a very long time, if
ever.
I am committed to making sure that rural residents have access to
local programming, sooner rather than later. I strongly believe the
loan guarantee program that we will hear about today is a critical step
we need to take.
Let me tell you why I think this is so important. It's very simple.
People need to know what is going on around them. In North Carolina, we
have recently experienced some of the most catastrophic natural
disasters in the recorded history of the State, and people need to be
able to get local information about weather and emergencies. People
need to know what their local legislators are doing for them. Rural
schools need to have access to educational programs that help keep
their students on par with students in urban areas. Put simply, people
need to know what is going on in their community.
We are going to hear today from the satellite and the cable
industries about how they think we could and should structure a loan
guarantee program to reach the unserved and underserved households in
America. I think we need to listen very carefully to what each side has
to say, because we want to make sure that we proceed carefully. I want
to make sure that my constituents have access to their local programs
and affiliates, and I want to make sure that we do it in a way that
does not expose taxpaying Americans to costly risks.
I look forward to hearing from the various witnesses today. In
particular, I hope to hear about the time frame for providing local
programming to markets such as Charlotte, North Carolina (which is the
Nation's 28th largest market), and to other smaller markets. I also
hope to hear what is being done to address the lack of access in the
more rural areas. With almost 33 percent of households in North
Carolina located in rural areas, I'm extremely concerned that these
people may be faced with a significant wait before they are able to
receive local programming.
I thank the witnesses for being here and look forward to hearing the
ir comments.
PREPARED STATEMENT OF K. JAMES YAGER
President and Chief Operating Officer
Benedek Broadcasting, Rockford, Illinois, and
Joint Board Chairman, National Association of Broadcasters
on behalf of the
National Association of Broadcasters
February 1, 2000
Introduction
Thank you, Mr. Chairman, for the opportunity to appear before the
Senate Banking Committee today. I am K. James Yager, President and
Chief Operating Officer of Benedek Broadcasting, which owns 26
television stations in small markets across the Nation. I also serve as
Joint Board Chairman of the National Association of Broadcasters (NAB),
on whose behalf I appear today. The NAB represents the many owners and
operators of America's radio and television stations. My remarks today
will address the loan guarantee program as proposed by the House and
Senate conferees last year.
The satellite TV industry began as a service primarily targeting
rural Americans who could not receive broadcast television signals over
the air. The passage of the Satellite Home Viewer Act in 1988, which
permitted delivery of network stations to unserved households, led to
vigorous growth of the satellite industry. The recent enactment of the
Satellite Home Viewer Improvement Act (SHVIA) has further enhanced the
competitiveness of the satellite industry vis-a-vis the cable industry
by providing satellite carriers a statutory copyright license to
deliver local television broadcast signals within a station's market.
The NAB applauds the Committee's interest in ensuring that all
Americans, particularly those in rural and small markets, benefit from
the recently passed Satellite Home Viewer Improvement Act. The House
and Senate conferees recognized that the current plans of satellite
carriers did not include delivery of local signals in most smaller
television markets. By example, more than one-half of all stations may
not be available on satellite to local viewers. To address this
concern, they drafted the loan guarantee program in an attempt to
ensure that rural Americans could receive local television signals by
way of satellite. Beginning in 2002, all carriers will be obligated to
carry all stations in any market where they elect to serve with local
signals. Given the rapidly growing popularity of direct broadcast
satellite (DBS), the NAB believes that the vitality of the local free
over-the-air broadcast system that Congress has consistently worked to
preserve may well be threatened if half of the Nation's television
stations (a vital source of local information) are shut out from
satellite carriage.
The State of the Satellite Marketplace
Current trends indicate that satellite companies will in fact
provide local broadcast television signals via satellite only in the
largest markets and not in rural areas. Despite huge capacity (up to
500 channels, many of which are devoted to pay-per-view and other
premium services) and strong demand for local stations, satellite
operators have stated that providing local signals to rural markets is
not feasible at this time. The NAB understands that both DIRECTV and
EchoStar currently provide local signals to approximately 42 percent of
the Nation's television households in 19 and 20 markets, respectively.
EchoStar plans to provide local signals to 60 percent of U.S.
television households by the end of March 2000 (approximately the top
37 markets). DIRECTV plans to add 4 more markets in the next few weeks.
A market-by-market listing as of January 27, 2000 is set forth in Table
A (located at the end of this statement).
For a time, it appeared that Local TV on Satellite, founded by
Capitol Broadcasting and other investors, would provide local-into-
local in all markets. That company, however, appears to have revised
its business plan and now may only provide local stations in the top 68
markets.
In short, the business plans of satellite providers will leave many
rural Americans without access to satellite delivery of the signals of
their local stations, the signals which provide viewers with the local
news, weather, sports, and other informational programming.
The NAB, therefore, strongly endorses the policy objective of the
proposed loan guarantee program, which is to ensure that delivery of
all local stations irrespective of market size by satellite is
economically feasible. Without satellite delivery of rural television
signals, access to 800 of the Nation's television stations that serve
America's smaller communities is at risk if viewers cannot watch local
programming by way of satellite. We are concerned, however, that given
the economic and technical hurdles of delivering local signals by
satellite, the proposed program may be too limited in scope and too
administratively cumbersome to provide the necessary jump start.
Economic and Technical Hurdles to Rural Delivery of Local Signals
The satellite industry historically has faced legal, technical, and
financial obstacles preventing the delivery of local signals. The
passage of the SHVIA eliminated a legal obstacle by creating a
statutory compulsory copyright, but the technical and financial hurdles
remain.
A Limited Rural Consumer Marketplace
Even though one-half of America's television stations are located
in the smallest 154 television markets, only 25 percent of the U.S.
population resides in those markets. Seventy-five percent of the U.S.
population (and the other half of the Nation's television stations) is
located in the largest 60 television markets. Current local-into-local
retail packages marketed by EchoStar and DIRECTV are $4.99 and $5.99
for four or five local stations. In order to compete with cable, any
satellite local-into-local package must remain within this range. At
those levels, we very much doubt that a rural provider could ever hope
to break even.
The Need for a Spot-Beam Satellite Design and an Orbital Slot
Delivering 800 local stations via a conventional satellite from a
single orbital slot is not technically feasible for the following
reasons:
1. LCapacity. Typically, a range of only 250 to 300 channels can be
delivered due to frequency and power limitations.
2. LGeographic Coverage.
Current DBS's located within the 101+ to 119+ orbital arc are able to
deliver the same channels to customers located anywhere in the
continental United States. Although this nationwide coverage is
practical for channels such as CNN, ESPN, and HBO, it is an expensive
and wasteful approach for delivering local television stations that can
legally be viewed only in the station's local market.
Relatively new commercial technology -- a spot-beam satellite -- is
the answer, but spot-beam satellites represent expensive design
challenges. In addition, a company developing a rural plan must lease
or acquire an orbital slot at a potentially very high cost.
The Need To Be a Wholesaler, Not a Retailer
The NAB does not believe that it is practicable to develop a rural
local plan without partnering with DIRECTV or EchoStar. The two primary
reasons are the need to create a consumer-friendly, sellable product
and the need to limit marketing and backroom costs.
The Technical Challenges of Partnering With DIRECTV or EchoStar
A potential relationship between a third party local-into-local
service wholesaler and DIRECTV or EchoStar requires the resolution of
many technical issues. Those issues relate to the location of the
local-into-local orbital slot and the development of an affordable
consumer receiver and dish. Challenges include:
LFinding an orbital slot close enough to the current DBS
slots to allow a one-dish solution;
LDeveloping set top boxes that can receive signals from the
Ku-band, where the DBS providers are located, and the Ka-band (used
by small dishes), the likely location of a third party local-into-
local provider;
LDeveloping technology that will interface with differing
transmission and conditional access systems used by DIRECTV and
EchoStar.
Locating, Building, and Maintaining Numerous Uplink Sites
If a spot-beam satellite is used, local television stations must be
uplinked from a facility located within the footprint of that
individual spot beam. The number of spot beams determines the number of
uplinks. Additional uplinks may be required to comply with legislative
restrictions and to reduce the cost of delivery of the local signals to
the uplink site.
The Overall Expense -- $600 Million to $1 Billion
The NAB estimates that in order to develop and execute a feasible
technical plan to provide all local stations to rural America it will
cost from $600 million to $1 billion, depending on (1) whether the plan
includes a spare satellite and (2) the number of markets planned to be
covered. The cost of building, launching, and insuring a spot-beam
satellite is hundreds of millions of dollars, even without the
redundancy of a spare satellite that prudence might require. An orbital
slot must be acquired or leased. Numerous local uplink facilities must
be located, built, and maintained costing several million dollars each.
Other major costs include a master control center and conditional
access to ensure that consumers are only receiving stations in the
market in which they live.
Is the Loan Guarantee Program an Appropriate Economic Incentive?
Given these challenges, the NAB believes that an economic incentive
of some kind is appropriate, but is unsure whether the loan program as
proposed will meet its important objective. Understandably, the
proposal contains numerous mechanisms to protect the Government against
the risk of default. While the Government needs some security, the loan
guarantee program should not dictate a borrower's business plan.
Likewise, given the lead time necessary to undertake a satellite
project (even if work were begun immediately, a satellite project of
this scale has a lead time of at least 2 years), a borrower's
qualification for the loan guarantee should not be unduly delayed by
multiple layers of bureaucracy.
Cap on Loan Amounts
The conferees' bill contains caps on the amount of the loan
guarantees that are too low to ensure success of the program. The
Government would guarantee one loan not to exceed $625 million, and any
other loan could not exceed $100 million. These caps pose a potentially
serious problem for borrowers and would benefit one borrower to the
exclusion of others.
Cumbersome Approval Process
The proposal also contains several layers of approval, any one of
which is susceptible to delays that could threaten the success of the
program. Prospective borrowers may be unwilling to front the
substantial development costs of planning and structuring a $600
million to $1 billion satellite project without assurance of approval
of the various entities involved: Congress, the Secretary of
Agriculture, the OMB, and the NTIA.
Specifically, the conferees' bill would require Congress to
authorize funds before the Secretary could approve any loan guarantees.
In addition, the bill imposes a broad panoply of consultation
requirements on the Secretary of Agriculture, who will administer the
program. The Secretary must consult with the OMB and an outside
accounting firm within 180 days of enactment, and then must obtain NTIA
certification for each loan application. The NTIA may take up to 90
days, a time period that does not even commence until after the
Secretary submits the application for review. In sum, the variegated
layers of approval could unduly draw out the borrowing process, yet
time is of the essence given the commencement of must-carry
requirements under the SHVIA in 2002.
Priority Lien
The conferees' bill would require the Secretary to take a priority
lien on the borrower's assets. This lien would trump the liens of any
other creditors. Under predecessor loan programs, such as the Rural
Electrification Act, the law very specifically allowed the Government
to take a subordinated interest. Subordination allows borrowers to
secure senior loans, in addition to their federally guaranteed loans,
and reduces equity requirements. In view of the high risks and very
speculative returns of a rural satellite project, subordination may be
necessary to the success of the project. Alternatively, if the
Government is not permitted to take a subordinated lien, the cap on
loan guarantees should be raised to reduce the risk to lenders.
Disqualification of Existing DBS Operators
While satellite carriers are critical to the delivery of local
signals, the language in the bill appears to exclude the two existing
DBS operators. The success of this program may well depend on the
satellite carriers' cooperation since subscribers are likely to prefer
hardware that is inexpensive and interoperable with their existing DBS
equipment. Yet, under this proposal, the satellite carriers with
suitable unused spectrum may not participate in the loan program, and
the NAB understands that DIRECTV and EchoStar, both likely partners in
this process, may have available spectrum. The broad language of the
bill would appear to disqualify consortia even when EchoStar, DIRECTV,
or their affiliates hold only a minority interest. Accordingly, this
limit on eligibility may be counterproductive in achieving the ultimate
goal of delivering local signals to unserved areas.
The Need for Study and Careful Consideration
Given the technical and economic hurdles that satellite carriers
would have to overcome in order to provide local television signals to
rural Americans, and given the complexity of designing an efficient and
effective loan guarantee program, the NAB thanks the Senate Banking
Committee for conducting this hearing, which we assume is the beginning
of a thorough inquiry into alternative incentives. We also applaud the
NTIA for commencing a wide-ranging public inquiry into local-into-local
technology. The NTIA has requested public comment on how to ensure the
provision of local programming by satellite and other technologies to
viewers in smaller communities. Congress, likewise, should take a
careful and thorough look at alternative approaches, such as tax
credits or direct loan programs.
Conclusion
Mr. Chairman, the NAB applauds Congress' recent action in passing
the Satellite Home Viewer Improvement Act and the efforts of Congress
to sustain localism by ensuring that rural Americans will benefit from
access to local signals by satellite. The future of the 800 television
stations operating in smaller markets and access to their signals for
millions of Americans will depend on the success of this effort. And it
must be a joint effort. It cannot happen without the cooperation of the
broadcast, satellite, and banking industries.
The NAB is concerned, however, for the reasons I have discussed,
that the loan guarantee program in its present form will not achieve
this important objective. We look forward to working with this
Committee to design an appropriate economic incentive. Once again, I
would like to express on behalf of the NAB its appreciation for the
opportunity to testify before the Members of the Senate Banking
Committee today.
TABLE A DMA's Served by DIRECTV and EchoStar
January 27, 2000 \1\
----------------------------------------------------------------------------------------------------------------
% of
Rank Market TV Households U.S. DIRECTV EchoStar
----------------------------------------------------------------------------------------------------------------
1 New York 6,812,540 6.854 Yes yes
----------------------------------------------------------------------------------------------------------------
2 Los Angeles 5,135,140 5.167 Yes yes
----------------------------------------------------------------------------------------------------------------
3 Chicago3,164,50 3.184 Yes yes
----------------------------------------------------------------------------------------------------------------
4 Philadelphia 2,667,520 2.684 Yes yes
----------------------------------------------------------------------------------------------------------------
5 San Francisco-Oakland-San Jose 2,368,970 2.383 Yes yes
----------------------------------------------------------------------------------------------------------------
6 Boston 2,186,100 2.199 Yes yes
----------------------------------------------------------------------------------------------------------------
7 Dallas-Ft. Worth 1,959,680 1.972 Yes yes
----------------------------------------------------------------------------------------------------------------
8 Washington, DC-Hager1,956,160 1.968 Yes yes
----------------------------------------------------------------------------------------------------------------
9 Detroit 1,846,950 1.858 Yes yes
----------------------------------------------------------------------------------------------------------------
10 Atlanta 1,722,130 1.733 Yes yes
----------------------------------------------------------------------------------------------------------------
11 Houston 1,665,550 1.676 Yes yes
----------------------------------------------------------------------------------------------------------------
12 Seattle-Tacoma 1,548,200 1.558 yes
----------------------------------------------------------------------------------------------------------------
13 Clevela1,475,820 1.485 Yes
----------------------------------------------------------------------------------------------------------------
14 Tampa-St. Petersburg 1,463,090 1.472 Yes
----------------------------------------------------------------------------------------------------------------
15 Minneapolis-St. Paul 1,457,820 1.466 Yes yes
----------------------------------------------------------------------------------------------------------------
16 Miami-Ft. Lauderdale 1,418,940 1.428 Yes yes
----------------------------------------------------------------------------------------------------------------
17 Phoenix 1,343,040 1.351 Yes yes
----------------------------------------------------------------------------------------------------------------
18 Denver 1,230,440 1.238 Yes yes
----------------------------------------------------------------------------------------------------------------
19 Pittsburgh 1,136,230 1.143 yes
----------------------------------------------------------------------------------------------------------------
29 Raleigh-Durham 834,260 0.839 Yes
----------------------------------------------------------------------------------------------------------------
30 Nashville 811,870 0.817 yes
----------------------------------------------------------------------------------------------------------------
33 Kansas City 802,290 .807 yes
----------------------------------------------------------------------------------------------------------------
Greenville-Spartanburg-
35 Asheville-Anderson 739,850 0.744 Yes
----------------------------------------------------------------------------------------------------------------
36 Salt Lake City 707,070 0.711 yes
----------------------------------------------------------------------------------------------------------------
Total % of U.S. Served 41.701% 42.197%
----------------------------------------------------------------------------------------------------------------
\1\ Source: Nielsen Media Research 1999 Estimates; DIRECTV and EchoStar Company Press Releases.
PREPARED STATEMENT OF RICHARD SJOBERG
President and Chief Executive Officer
Sjoberg's Incorporated, Thief River Falls, Minnesota
February 1, 2000
Mr. Chairman, Members of the Committee, my name is Dick Sjoberg. I
am President and Chief Executive Officer of Sjoberg's Incorporated, a
privately held cable company located in northwestern Minnesota. I serve
as Chairman of the National Cable Television Association's Rural and
Small System Operators Committee and am also a member of the NCTA's
Board of Directors.\1\
---------------------------------------------------------------------------
\1\ NCTA represents cable companies serving more than 90 percent of
the Nation's 68.5 million cable customers and more than 100 cable
program networks.
---------------------------------------------------------------------------
My family entered the cable television business in 1962. In those
early days of the industry, our main goal was to bring broadcast
signals to the communities that could not receive them over-the-air --
especially in rural areas. My company built its own facilities,
beginning with a cable system in Thief River Falls, Minnesota -- a
small town of 8,010 which was approximately 92 miles from the nearest
broadcast station at the time the system was built. Some of our systems
today are as many as 133 to 200 miles away from the nearest broadcast
station they carry.
Today, Sjoberg's Incorporated serves approximately 7,400 customers
in 33 small rural towns and townships, with densities ranging from 12
to 22 homes per mile of cable plant (see attached chart). Since 1993,
we have installed fiber to connect each of these towns. In 1998, we
began offering our customers digital cable service, recognizing that we
needed to provide more channels to compete with DBS. At present, we
offer our subscribers 148 channels of cable and broadcast programming.
As a company, we are committed to delivering new broadband services
not only to our residential customers, but also to the schools in the
rural communities where they live. For example, as part of our
company's commitment to the cable industry's High Speed Education
Initiative and Cable in the Classroom, we have wired all 18 schools in
our service area with cable TV and are currently providing a free cable
modem and high-speed Internet access to five schools. All 18 schools
will have free, high-speed access to the Internet by the end of the
year. We have also interconnected all of the schools in one of our
districts with fiberoptic cable. Furthermore, half of our residential
customers currently have access to high-speed cable modems, while the
rest will have access to broadband services by the end of 2000. We have
invested substantial amounts of private risk capital to bring these
services to our customers and do not rely on public funding.
To date, my company is the only video service provider to make this
kind of investment in these rural Minnesota communities. I am a
resident of the area, participate in community activities, and pay
approximately $30,000 per year in franchise fees to local franchising
authorities. My goal as a local businessman is to ensure that my
customers have access to the same services as their counterparts in
much more populated areas. Moreover, I am not alone. As the FCC Cable
Bureau's report, Broadband Today (October 1999), indicates, small and
rural cable systems across the country are deploying broadband
facilities and services.
My cable company and others continue to deploy digital video and
broadband services in rural America, even though the required upgrades
are very expensive and capital intensive. We are willing to undertake
the risk of deploying advanced networks in low-density, high-cost areas
because of the stable regulatory environment provided by the
Telecommunications Act of 1996 and because we believe that these
services appeal to the rural communities we serve.
The NCTA and many small cable systems supported the Satellite Home
Viewer Improvement Act of 1999 -- procompetitive legislation which
changed the law to permit satellite companies to retransmit local
broadcast signals into local markets, including rural markets. We also
understand this Committee's policy goal of providing improved access to
broadcast signals and are prepared to compete with other video
providers. We are concerned, however, about proposals that might
provide Government subsidies to some industries _ but not others _ in
an otherwise competitive video marketplace.
Small cable operators like myself compete against DBS in every
market we serve, including rural markets. Our DBS competitors already
have certain advantages because they can reach every home without the
high marginal costs that limit a small cable operator's ability to
provide service to less densely populated areas. They also have the
technical capability to provide more channels than a typical small
cable system. Some of the proposals for expanding local-into-local
service compound our competitors' advantages by having the Federal
Government subsidize DBS's capacity to provide local broadcast
signals -- even though these competitors are owned by companies with
market capitalizations of $21 billion (EchoStar) and $16 billion (GM /
Hughes) and have annual revenues of $1 billion to $6 billion.
As a small cable operator, I already carry all local broadcast
signals on my systems. In fact, I am required to do so by the must-
carry provisions of the 1992 Cable Act. I raised the money to carry
these signals and others in private capital markets. The fear of many
small cable operators is that any rural loan guarantee program will be
interpreted as a congressional mandate to build another satellite -- at
discounted, federally insured rates -- to carry local broadcast signals
into those markets which local businesses could serve more cost-
effectively through other technologies.
For example, my company has cost-sharing agreements with Roseau
County and Lake of the Woods County to transport over-the-air broadcast
signals into areas they would otherwise not reach. (I use a combination
of fiberoptic cable, microwave signals, and translators to provide this
service, even though the signals compete with those on my own cable
system.) Note that in these areas, the local rural co-operative acts as
the selling agent for DIRECTV. The rural co-op provides its customers
with dual antennas to receive both the satellite signals and local
broadcast signals in direct competition with my cable service.
If Congress decides to move forward with a Federal loan guarantee
program, I would ask that it adopt one that is:
LTechnology neutral, giving small ``Main Street'' businesses
the opportunity to extend the reach of local broadcast signals in a
more cost-effective way. Small cable businesses and others could
use loan guarantees to extend their facilities to areas that are
not currently economical to serve -- typically areas with fewer
than 10 -12 homes per mile. They could also utilize other
technologies, such as translators, microwave links, repeaters,
relay stations, and new wireless systems, to improve access to
broadcast signals. The need for such technology neutrality is
especially important since companies like mine are providing rural
consumers with broadband services and high-speed access to the
Internet, thus helping to bridge the digital divide.
LNarrowly focused on the unserved or the most underserved
markets. Any Government funding or loan guarantee program should
focus on areas with the least local broadcast signal coverage and
should not be used to subsidize DBS service in urban and suburban
markets.
LSet up in a manner that minimizes the paperwork burden on
applicants. The program should be set up in a manner that creates
the smallest paperwork burden possible, thus encouraging smaller
businesses to apply and provide cost-effective, local solutions.
Thank you for your attention. I stand ready to work with this
Committee as it moves forward on legislation to provide better
television service in rural and underserved areas.
List of Towns and Townships
Served by Sjoberg's Incorporated
Community Population
---------------------------------------------------------------Thief River Falls, MN---------------------------------------------------------8,010-
North Township, MN 150
Rocksbury Township, MN 486
Roseau, MN 2,396
Jadis Township, MN 162
Spruce Township, MN 228
Middle River, MN 369
Spruce Valley Township, MN 9
Greenbush, MN 820
Hereim Township, MN 31
Warren, MN 1,813
Warrenton Township, MN 20
McCrea Township, MN 36
Red Lake Falls, MN 1,481
Red Lake Falls Township, MN 42
Warroad, MN 1,679
Lake Township, MN 1,630
Enstrom Township, MN 61
Cedarbend Township, MN 16
Moranville Township, MN 66
Holt, MN 61
Viking, MN 88
Karlstad, MN 921
Deerwood Township, MN 59
Newfolden, MN 382
Badger, MN 498
Stokes Township, MN 20
Baudette, MN 1,146
Wabanica Township, MN 160
Wheeler Township, MN 211
Gulrid Township, MN 72
Spooner Township, MN 101
Baudette Township, MN 109
---------------------------------------------------------------------------------------------------------------------------------------------------
Total 23,333
PREPARED STATEMENT OF B.R. PHILLIPS III
President and Chief Executive Officer
National Rural Telecommunications Cooperative, The Plains, Virginia
February 1, 2000
Introduction
Mr. Chairman, Members of the Committee, my name is Bob Phillips. I
am President and Chief Executive Officer of the National Rural
Telecommunications Cooperative. The NRTC is a not-for-profit
cooperative association with a membership of nearly 1,000 rural
utilities (550 rural electric cooperatives and 279 rural telephone
systems) located throughout 48 States. Our members provide electric or
telephone service to underserved, low population density areas of the
country.
The NRTC's mission has been to meet the advanced telecommunications
needs of American consumers living in underserved areas. In furtherance
of that mission, in 1992 the NRTC paid DIRECTV more than $100 million
to capitalize the launch of the Nation's first direct broadcast
satellite (DBS) business. In return, the NRTC received program
distribution and other rights to market and distribute DIRECTV
programming services throughout large portions of underserved,
oftentimes rural America. The NRTC, its members, and its affiliates
currently market and distribute DIRECTV programming to more than 1.4
million households (more than 20 percent of all DIRECTV subscribers)
using digital DBS technology. The NRTC also distributes C-band or large
dish satellite programming to some 50,000 subscribers.
In my testimony today I intend to address two problems not
addressed by last year's Satellite Home Viewer Improvement Act: first,
the unavailability of local television service in rural America and,
second, the lack of competition to cable. I'm going to propose a
satellite solution to both of these problems, and it will require your
assistance in the form of a loan guarantee.
Local Service Is Unavailable Throughout America
By authorizing the retransmission of local broadcast signals by
satellite, last year's satellite bill paved the way for the satellite
industry to become a meaningful competitor to cable in some of the
Nation's top markets. But the bill did nothing to close the digital
divide throughout much of the rest of America, where there is no
``profit'' to be made in delivering local service by satellite.
Because of the bleak economics, the for-profit satellite companies
have announced their intention to provide local digital satellite
service only to the top 33 markets out of a total of 210. That means
that more than half of the Nation's households will not have access to
local digital satellite service. At least 20 States will be left out
entirely, including eight of the States represented by Members of this
Committee. That's unfair, and it's contrary to the public interest.
Americans located in these unserved areas will be disenfranchised
from the modern information age simply as a result of where they live.
This is unacceptable to the NRTC. I believe it will also be
unacceptable to your constituents when they learn that as a result of
the satellite bill passed by Congress last year, their urban neighbors
are already receiving service they may never receive.
Satellite Technology is the Only Comprehensive Solution
It is no coincidence that satellite penetration rates in rural
America are six times higher than in urban parts of the country.
Satellite is an ideal distribution technology for the less populated
areas. Unlike other technologies, satellite is ``distance
insensitive.'' At a fraction of the investment, satellites can reach
where cable and other broadband technologies will never go.
Satellite is ubiquitous. It can cover wide, remote spaces that
ground-based technologies will never reach. In fact, any technology
other than satellite will be ineffective and piecemeal as a tool to
bring local service to the unserved areas.
The cable industry will never build out the entire country. More
than 90 percent of the NRTC's 1.4 million satellite subscribers do not
even have access to cable. Why? Because it costs too much to serve
these homes with cable.
It is estimated that in urban areas the capital costs to build out
a cable system are more than $1,200 per subscriber. In unserved and
rural areas with low population densities and rough terrain, these
costs could easily be four or five times as much or more. However, even
with substantial start-up costs, the necessary capital per subscriber
to provide local digital satellite service in unserved areas should be
less than $300. Distance, terrain, and population density are
irrelevant.
We estimate that there are at least 10 million homes that do not
have access to cable. Cablevision, the cable industry publication,
cites statistics from the National Cable Television Association to
verify that there are nearly 9 million households unserved by cable.
How much is the cable industry willing to spend to extend their
lines to serve these unserved homes? Apparently, not much. According to
the FCC, cable companies spent $7.7 billion in 1998. But the great bulk
of that money was for upgrades and rebuilds of existing plant . . . not
for the construction of new plant. Many of the large cable companies
spent more than half a billion dollars each on upgrades and rebuilds.
And while $600 million of the $7.7 billion was spent for new plant, it
was not spent to bring service to previously unserved markets. Their
``new builds'' simply kept pace with the increase in the number of TV
households.
Cable has very little or no economic incentive to build new plant
to serve homes located in more remote, less densely populated areas.
For any given large number of subscribers, satellite is by far a
cheaper delivery technology per household than cable. Compared with any
terrestrial system, wired or wireless, a satellite system has much
greater economic leverage because of its much lower incremental cost in
serving subscribers located anywhere in the United States.
The rural electric cooperative members of the NRTC have a history
of serving remote, rural, and underserved areas. Unlike the cable
industry, they have traditionally constructed electric plant and
brought electric services to areas with 5 or fewer homes per mile.
Their motivation and mission is to bring service to the underserved
areas . . . not to cream-skim the lucrative markets.
Competition to Cable
Mr. Chairman, the NRTC fought the cable industry for nearly 10
years here in Congress to obtain access to programming so we could help
build a digital satellite industry to serve rural America. Throughout
that debate, the cable industry argued in favor of the digital divide.
They testified that rural and underserved consumers should pay more for
their programming because of where they live. We disagreed then, and we
disagree now.
Not only can satellite technology provide local service to the
unserved markets where cable is not available, satellite technology can
also provide competition to cable in the underserved markets where
cable is available. For the satellite industry to provide effective
competition to cable and fulfill the goal of the Satellite Home Viewer
Improvement Act, we need to provide local signals.
Every cable consumer in America needs a choice in service
providers. Satellite technology can provide that choice. That's why
Congress passed the satellite bill last year. But if local digital
satellite service doesn't reach every home in the United States and
cable becomes the only choice in the markets not served by DIRECTV and
EchoStar, cable will never be subject to effective competition. Cable
rates will continue to increase, and additional regulation will be
required.
Mr. Chairman, access to local service should not be driven solely
by concerns of profitability. It's a much bigger issue. All Americans
should be entitled to receive the benefits of the modern information
age . . . even those living on the other side of the digital divide,
where the delivery of local service is not a moneymaker.
To bring local service to unserved areas across the country and to
provide competition to cable, we need to agree on a comprehensive,
universal plan based on the right technology -- not a patchwork of
different and incompatible ground-based systems. Only satellite
technology holds the promise to serve everyone and to provide much
needed competition to cable.
Recommendation
As you said last year, Senator Gramm, ``. . . there are some social
goals that are not necessarily met by market forces. . . .'' That's
true here. The marketplace will not fix these problems because there is
no money to be made in delivering local satellite signals to these
areas.
With your support, we can construct, launch, and operate a
satellite system to provide local digital service to all of those areas
not served by the for-profit satellite companies. Through a common
industry platform, we can solve the problems not addressed by last
year's satellite bill. We can make local service a reality for
consumers across the country and provide meaningful competition to
cable.
Getting this job done will require a loan guarantee of at least
$1.25 billion, to be supplemented by the satellite industry as needed.
We also strongly recommend that the loan guarantee program be
implemented on a not-for-profit, cooperative basis. A not-for-profit
approach would ensure that the Federal loan guarantee is not used to
enrich large, private, or corporate interests.
Not-for-profit, cooperative utilities have used loan guarantees to
deliver electric services to unserved areas since the 1930's. The U.S.
Department of Agriculture, through the Rural Utilities Service, is
intimately familiar with the challenges facing rural and underserved
markets. Rural utilities operating under the RUS program have an
excellent record of Federal loan and loan guarantee repayment. Through
the loan guarantee program, these cooperatives can ensure that these
same areas are brought into the modern information age.
We recognize that an administering body most likely will need to be
created for this purpose. We urge you to establish strong criteria to
ensure not only that any loan guarantee will be repaid, but that
preferences will be given to plans which will provide the most
comprehensive solution and utilize the Federal guarantee in the most
efficient manner possible. In this way, you and the Committee can
ensure that the public interest will be best served by the use of
Federal support.
Mr. Chairman, we also recognize that some of these communications
issues are beyond the purview of this Committee. To accomplish our
goals, we will need the assistance of other committees as well as the
FCC. However, left to its own devices, the FCC will handle this problem
in the very same way it has handled countless others: by relying solely
on ``competition'' to fix it. But as you recognized last year,
competition will never fix this problem, so we will be working with the
Congress, and hopefully the FCC, to obtain the necessary spectrum and
orbital location(s) for this project.
Mr. Chairman, if we can get the Congress' help and approval soon,
we can use satellite technology to bring service to the last mile and
to provide meaningful competition to cable. It's a big job, and we need
to get started.
Thank you.
----------
PREPARED STATEMENT OF DAVID K. MOSKOWITZ
Senior Vice President of Legal and General Counsel, Secretary, and Direc
tor
EchoStar Communications Corporation, Littleton, Colorado
February 1, 2000
Chairman Gramm and distinguished Members of this Committee, thank
you for inviting me here today to testify before you about the
provision of local broadcast signals to rural subscribers via direct
broadcast satellite.
My name is David K. Moskowitz, and I am Senior Vice President of
Legal and General Counsel, Secretary, and Director of EchoStar
Communications Corporation, a direct broadcast satellite (DBS) company
based in Littleton, Colorado. EchoStar was started in 1980 as a
manufacturer and distributor of C-band satellite dishes and grew by the
mid-1980's into the largest supplier of C-band dishes in the world.
EchoStar's founder and CEO, Charlie Ergen, had a vision of a dish in
every home, school, and business in the United States, so that we might
provide true, effective competition to cable for customers nationwide.
In fulfillment of that vision, we have transitioned into the small dish
business and have launched five high-powered, di-
rect broadcast satellites since December 1995, with a sixth to be launch
ed this year.
Our goal has always been to provide direct competition to cable
television so subscribers might have an alternative to the high prices
and historically poor service of monopoly cable companies. Last year,
Congress took, in my view, a tentative first step toward giving DBS the
right to compete with cable on a more equal footing when it passed the
Satellite Home Viewer Improvement Act of 1999. The success of the
copyright license given in this bill will turn entirely on its
implementation. If implemented properly by the FCC, the law will enable
us to provide local signals into the local designated market area (DMA)
from which they originate for a sustained period of time (beyond the
current 6-month phase-in). The lack of local signals has been the
number one reason why consumers, while interested in DBS and displeased
with their cable system, have decided against switching from cable to
DBS. People want access to their local news, weather, and sports, and
the technology of satellites allows us to give them that and more.
Although my company will be able to provide over 50 percent of the
population with their local signals, constraints on DBS capacity and
prohibitively high costs make it impossible for EchoStar to carry all
1,616 television stations nationwide.\1\ We currently carry about 100
television broadcast stations and plan to retransmit approximately
another 65 before yearend. We would like to be able to serve each of
our rural subscribers with their local signals. EchoStar has a
substantial number of customers in rural areas living in C and D
counties, which are rural areas as defined by the Bureau of the Census.
---------------------------------------------------------------------------
\1\ Federal Communications Commission News Release Broadcast
Station Totals as of September 30, 1999 (released November 22, 1999).
---------------------------------------------------------------------------
As you seek to develop, with your colleagues in the Agriculture
Committee, the most appropriate funding mechanism to support the
provision of local signals to rural subscribers, we believe that the
policy goals underlying this program should be clearly articulated, and
the challenges and obstacles involved in its implementation addressed.
What is the Policy Goal?
Cable television passes 97 percent of the population nationwide.\2\
If the goal of a Government loan guarantee is to provide access for
rural subscribers to their local television stations, then only 3
percent of the population would need to be targeted by the loan
guarantee. The larger problem, however, is the lack of true competitive
choice: a much more substantial percentage of Americans, particularly
rural consumers, do not have a competitive choice to cable offered on a
truly equal footing, even though these viewers may have access to local
signals through their cable system. This situation is not satisfactory.
With appropriate legislation, and vigilant implementation of the
existing laws by the FCC, EchoStar can become a true choice for rural
viewers, and a competitor that welcomes the competition from all other
sources. The rural funding mechanism should accordingly be based on the
fundamental policy of ushering in, and bolstering competition to cable
and all other incumbents such as the telephone companies. We believe
the intention of any Federal and congressional efforts should be to
provide subscribers with the same kind of competitive choices that
urban and suburban dwellers could enjoy if the SHVIA is properly
implemented. Without such a choice, cable subscribers in rural areas
will surely become victims of even deeper price gouging and poorer
service by their local cable company, and the ``digital divide'' will
deepen.
---------------------------------------------------------------------------
\2\ In the Matter of Annual Assessment of the Status of Competition
in Markets for the Delivery of Video Programming, Sixth Annual Report,
CS Docket No. 99 - 230 (rel. Jan. 14, 2000), at 12.
---------------------------------------------------------------------------
In that respect, we were disappointed to see in the final days of
the last congressional session that the criteria for loan guarantees
would have made the incumbent cable and phone companies eligible. This
would have allowed them to more deeply ensconce the advantage they have
over consumers with no true competitive choice to cable. We believe
this would be a mistake if the ultimate policy goal is to provide
equality for rural and city dwellers alike.
Technological Obstacles That Must Be Considered
We believe one of the primary obstacles that Congress faces in
seeking to provide equality to rural subscribers is, ironically, the
must-carry requirements passed by Congress in the last session as part
of the Satellite Home Viewer Improvement Act. No single provision of
the SHVIA hurts rural subscribers more. With every channel that we must
carry because of that requirement, our ability to extend local
programming to additional markets is reduced by one channel. While
neither EchoStar nor the other DBS provider would, at this time, be
able to serve the rest of the country absent the must-carry provisions
of the SHVIA, many more of your constituents could receive local
channels without these provisions.
For EchoStar, to be more specific, the must-carry provisions of the
SHVIA mean we serve 33 markets instead of 60. That's the difference
between 56 percent of the population and 72 percent of the population
nationwide.\3\ When must-carry becomes effective, the additional 30 or
so stations we may be required to carry in New York and Los Angeles
threaten to deprive consumers in 6 television markets of an effective
competitor to cable. Moreover, the additional channel space that would
be freed up by not being required to carry the same Home Shopping
Network channel in every market, would mean that even more unserved
markets would receive their local television stations via satellite.
---------------------------------------------------------------------------
\3\ Nielsen Media Research, Local Market Universe Estimates for the
1999 - 2000 Broadcast Season, http: / / www.nielsenmedia.com.
---------------------------------------------------------------------------
Must-carry is a law that was imposed on cable because of its
monopoly status. EchoStar is not a monopoly. Your constituents would be
suffering because of a law that, in contrast with cable must-carry,
does not resolve any competitive problem.
Technological Obstacles to Serving Rural Subscribers
In addition to the legal hurdles, technological issues must be
addressed in the provision of any satellite service that would carry
the local broadcast signals of rural areas.
LAdditional spectrum is necessary to carry all 1,616
television stations via satellite. The FCC must identify spectrum
in a band that can be used easily in conjunction with the current
DBS service, since local signals must be integrated with the other
programming offered by DBS services to be of any value to rural
consumers.
LThe FCC has proposed allocating another 500 MHz of spectrum
in each direction to DBS, but has proposed to defer this allocation
until 2007.\4\ This is an excessively long period given the urgent
need of rural consumers for competition and for service. While this
proposal is consistent with an International Telecommunication
Union timeline for this allocation, there is no reason why the
United States could not implement that allocation earlier for the
benefit of U.S. consumers. In addition, while some of this spectrum
is used by the Department of Defense, we understand that this use
can be reduced or phased out substantially more quickly. Congress
could direct the FCC to allocate that spectrum on a more expedited
basis, subject to appropriate conditions relating to servicing
rural consumers.
---------------------------------------------------------------------------
\4\ In the Matter of Redesignation of the 17.7 -19.7 GHz Frequency
Band, Blanket Licensing of Satellite Earth Stations in the 17.7 - 20.2
GHz and 27.5 - 30.0 GHz Frequency Bands, and the Allocation of
Additional Spectrum in the 17.3 -17.8 GHz and 24.75 - 25.25 GHz
Frequency Bands for Broadcast Satellite-Service Use, Notice of Proposed
Rulemaking, 13 FCC Rcd 19923 (1998).
---------------------------------------------------------------------------
LAssuming that more DBS spectrum could be allocated for
commercial purposes, the orbital location of such a service is key.
There are three full CONUS (continental United States) locations
over the United States and any satellite that plans to carry local
stations for rural subscribers must have location compatibility
with those satellites. This poses a dilemma for a satellite
provider of rural local television stations because there is no one
location for that provider that enables compatibility with both
EchoStar and DIRECTV.
LThen there is also the issue of the method of encryption a
rural satellite service provider might use and its compatibility
with the two main service providers. EchoStar and DIRECTV have
differing proprietary encryption formats that can- not communicate
with one another. A rural local satellite service provider would
either have to find a format that is technically compatible with
both EchoStar and DIRECTV, or choose one of us over the other.
Technological advances may ultimately solve this problem. We
believe any service of rural local signals should be compatible
with both of the main DBS providers.
After addressing these questions, Congress should tackle the real-
life question of economic feasibility that lies at the heart of
determining the appropriate level and type of financial support.
Subject to overcoming these legal and technical hurdles, DBS would
become an excellent conduit for at last bringing local signals and
competition to rural subscribers.
From EchoStar's perspective, there is the issue of whether DBS
providers can expect to derive enough revenue from providing local
signals in rural areas to make a return on their investment. If
EchoStar could not answer this question in the affirmative, the
investment community would simply refuse to finance the construction of
the very expensive additional satellite capacity required to achieve
this goal. Added to the satellite costs are the extremely high costs of
``backhauling'' the signal of each station to the satellite uplink
facility. The initial cost of establishing a local loop of fiber in any
given television market varies widely -- from between $3,000 to $50,000
per local station, depending on the city. It also costs between
$120,000 and $150,000 per station, per year to maintain that feed at an
average range of cost per market of between $480,000 to $600,000. It is
difficult to imagine that in some of the most sparsely populated areas
of the country, a provider is able to gain enough subscribers to secure
a return on its investment.
Summary
We believe service to rural subscribers is an important policy
goal. If Government loan guarantees are made available, they should not
be available to cable companies seeking to further entrench their
monopolies. Clearly, the aim of guaranteed loans should be to both
serve the unserved subscribers and to provide a competitive choice for
those who currently have no alternative to cable. Satellite is the most
efficient method to achieve both universal service and parity for rural
dwellers in their ability to have a competitive choice. There are
several resource, logistical, technical, and economic issues to be
addressed in the building and launching of a satellite to provide local
signals in rural areas and these issues must be addressed before a
provider can move forward. The benefit will come in not only providing
video services for rural subscribers, but in providing them with the
same kinds of advanced services that, increasingly, will be available
via satellite.
Thank you very much for inviting me to testify before you today. I
look forward to answering your questions.
PREPARED STATEMENT OF STEVEN J. COX
Senior Vice President
DIRECTV Incorporated, El Segundo, California
February 1, 2000
I would like to thank you, Mr. Chairman, for inviting me to appear
before the Committee. I appreciate the opportunity to present DIRECTV's
views on the issue of Federal loan guarantees to promote satellite
delivery of local television signals to rural areas.
DIRECTV has experienced tremendous growth since its inception 5
years ago, and is now the leading provider of direct broadcast
satellite (DBS) service in the United States with more than 8 million
subscribers, including those customers subscribing to the PRIMESTAR By
DIRECTV medium-power DBS service. Today, one in every 12 households in
the United States has DIRECTV.
Before I begin, I would like to thank Congress for passing the
``Satellite Home Viewer Improvement Act.'' While we did not agree with
every provision of that legislation, on balance we viewed it as worthy
of our support. Most importantly, the legislation allows satellite TV
companies -- for the first time -- to offer local broadcast network
channels. The ability to deliver local content enables DIRECTV --
again, for the very first time -- to offer consumers a service that is
fully competitive with cable television.
We at DIRECTV have moved quickly to bring the benefits of that
legislation to consumers. We have publicly stated our commitment to
serve at least half of the Nation's TV households -- about 50 million
households -- with local channels. As of today, we are offering local
network stations, together with a national PBS feed, in 19 major
metropolitan markets. Additional markets will be added in the coming
weeks. By the end of the first quarter, we will substantially have met
our commitment to serve half of the Nation's TV households with local
channels.
This hearing today is focused on those communities we are unlikely
to serve with local channels, and the potential role of Federal loan
guarantees in expanding this critical element of satellite television.
I would like to be clear about DIRECTV's position on the specific issue
of loan guarantees. Our ability to broaden the delivery of local
channels will not be limited by access to capital. While the
availability of loan guarantees may create incentives for some entities
to explore expanded local channel offerings, the ultimate deployment of
a widespread, satellite-based local channel solution requires the
reexamination of much more fundamental legislative and regulatory
objectives. Unfortunately, despite the tremendous consumer response we
have already received in the areas where we have launched our local
channel offering, our ability to expand the benefits of competition to
additional communities is being hampered by both statutory and
regulatory obstacles. Specifically, the biggest impediment to serving
additional communities is the ``must-carry'' requirement imposed by the
Satellite Home Viewer Improvement Act (SHVIA). Even absent that
constraint, we are ultimately limited by the spectrum allocated to us
by the Federal Communications Commission (FCC). Let me explain.
Unlike cable operators, which have the ability to increase their
channel capacity indefinitely, DBS providers face very tangible channel
capacity constraints. There are only three DBS orbital slot locations
that are ``full-CONUS'' -- that is, capable of serving the entire
continental United States. All of the frequencies at those three
orbital locations have been licensed by the FCC to DIRECTV and
EchoStar. Using digital compression, today we are delivering about 210
channels of programming to subscribers nationwide. That includes
entertainment programming, such as CNN, A&E, Discovery, Nickelodeon,
and, of course, C-SPAN; sports programming, such as ESPN and regional
sports networks; ethnic programming; public interest programming we are
required to carry; pay-per-view movies; and special events. In
addition, today we are retransmitting more than 75 local broadcast
stations to subscribers in the stations' local markets.
The must-carry provision, enacted into law last November as part of
the SHVIA, requires us to carry every full-power local broadcast
station in a market in which we offer any local channels no later than
January 1, 2002. This means that we have to use our limited satellite
capacity to deliver stations for which, frankly, there is negligible
consumer demand. For example, in both New York and Los Angeles, we
could be required to carry up to 23 stations. Many of these stations
have, based on their ratings, minuscule audiences. Carrying such a
station is a poor use of our limited satellite capacity. The practical
implications of this requirement are clear : By imposing must-carry,
Congress has decided that it's much more important for us to carry all
23 stations in New York and Los Angeles than to offer the residents of
cities such as Buffalo, Harrisburg, Louisville, Mobile, Omaha, and
Providence even a single channel of local content.
In order to maximize the local channel opportunity, we have ordered
a new high-power spot-beam satellite. A spot-beam satellite will enable
us to make the most efficient use of our existing capacity. I can tell
you that we would much rather use that new satellite to extend our
local channel offering to additional, smaller markets than to use that
satellite to deliver little-watched channels in markets in which we
have already substantially satisfied consumer demand for localism.
Even if we were to get relief from the must-carry obligation, we
still would not have sufficient available capacity to provide local
channels in all 210 television markets in the United States. For direct
broadcast satellite to become the full-fledged competitor to cable that
Congress desires, we need more spectrum. To achieve this objective, we
would urge Congress to direct the FCC to make additional spectrum
available to the DBS providers, which could be used to bring local
channels to those markets we cannot serve with our existing limited
capacity. Because of the substantial costs associated with the delivery
of local channels, the only way to make this concept economically
workable is for the additional spectrum to be made available to the DBS
providers at no cost. In addition, the DBS providers must be able to
use the spectrum both for providing local channels, and for other more
financially remunerative services. The hundreds of millions of dollars
required to build, launch, and operate satellites to use the additional
spectrum couldn't be justified if those satellites could only be used
to provide services from which we would never see a profit, or even
break even. But if we were, in essence, allowed to underwrite the cost
of bringing local channels to rural markets by providing other services
with the spectrum, we believe it could be a financially viable
proposition.
I would point out that more than 2\1/2\ years ago, DIRECTV filed a
petition for rulemaking seeking additional spectrum to expand our
channel capacity. Unfortunately, that petition has sat at the
Commission without action. If that petition were to be granted, it
would allow both DIRECTV and EchoStar to gain access to additional
spectrum that could be used to serve additional markets with local
channels.
As I indicated at the outset, the presence or absence of Federal
loan guarantees will not impact DIRECTV's incentive or ability to
expand the delivery of local channels. Should Congress decide, however,
that a Federal loan guaranty program is desirable, I would offer the
following comments. First, I believe Members of Congress should clearly
identify the problem that they are attempting to address. Is it to
ensure that the 3 percent or so of U.S. households that today do not
have access to local broadcast channels either via an over-the-air
antenna or cable can gain access to their local channels? Or is it to
ensure that consumers in rural areas will have the same choice of a
fully competitive DBS provider as their friends who happen to reside in
the most populous cities? The program should be tailored to address the
problem identified by Congress.
Additionally, to the extent that Congress is trying to ensure that
rural and urban consumers have the same choices when it comes to
selecting a multichannel video provider, I would suggest that a
terrestrial or other nonsatellite-based provider of local channels does
not meet that goal. A fundamental premise of the recently enacted
local-into-local legislation is that consumers do not find the delivery
of local channels via a separate delivery mechanism, such as an over-
the-air television antenna, to be the equivalent of a single delivery
mechanism -- such as that used by cable operators -- to deliver both
local channels and cable programming. Thus, only the satellite delivery
of local channels, in a manner that is compatible with the existing DBS
services, will meet the expectations of consumers who are unwilling or
unable to put up an over-the-air television antenna and will ensure
that rural and urban consumers have equivalent video delivery choices.
Finally, to the extent that Congress decides to create a Federal
loan guarantee program, we believe that taxpayer funding should be used
to complement, rather than compete with, service being provided without
the benefit of taxpayer subsidies. In other words, those who obtain
Federal loan guarantees should be permitted to provide local channel
service only in markets where that service is not being provided by the
commercial DBS providers.
We look forward to working with Congress to advance these important
objectives. Thank you again for the opportunity to testify.
PREPARED STATEMENT OF GREGORY L. ROHDE
Assistant Secretary for Communications and Information
National Telecommunications and Information Administration
U.S. Department of Commerce
February 1, 2000
Thank you, Mr. Chairman, for inviting me to testify before this
Committee on providing loan guarantees to providers to carry local
broadcast signals to residents of small, rural local broadcast markets.
The Administration believes that the question of how consumers in small
and rural markets receive local news and information is very important
and deserving of congressional attention.
I can recall well the night the Senate passed the Omnibus
Appropriations Act and discussed a proposal to provide loan guarantees
for carriers to provide local-into-local broadcast coverage to small
and rural markets. I was struck by the fact that when this
Administration took office back in 1993, there were no operational
direct broadcast satellites (DBS) providing service to viewers. In
1993, there never could have been a debate like that which embroiled
the Senate last November over the question as to how small and rural
markets would get local-into-local service over satellite systems.
Today, there are more than 11 million DBS subscribers. DBS companies
are providing local-into-local service in 24 markets and are currently
negotiating for the rights to deliver local-into-local broadcasting in
20 more. The question remains, however, as to how viewers in the
remaining 200 or more television markets obtain access to local-into-
local service.
The Administration strongly supported provisions in the Satellite
Home Viewer Improvement Act (SHVIA) that provided authorization to
satellite providers to carry local-into-local broadcast programming.
The Administration firmly believes that authorizing local-into-local
service not only promotes greater access to local television signals
for all Americans, but also strengthens DBS providers' ability to
provide meaningful competition to cable with comparable program
offerings. Unfortunately, markets in which local-into-local
broadcasting over satellite systems is not offered will be less likely
to enjoy the same competitive benefits. Moreover, in some rural areas,
there is no multichannel video programming supplier offering local
broadcast signals and many of these communities lay outside of the
signal coverage area of their local broadcast stations.
For these reasons, the Administration believes that it is important
to find ways to ensure that consumers in rural and small markets have
access to local broadcast programming. The Administration is prepared
to work closely with the Congress on any proposal to address this
issue, including a loan guarantee proposal. We believe that these three
principles should guide such legislation. First, the Administration
believes that any new program should be technology neutral in
recognition of the fact that different technologies may best be suited
to deliver local broadcasting services to unserved areas in different
parts of the country. Technology neutrality can spur innovation and the
application of new technologies to address this problem. Second, the
program should be crafted to ensure that it promotes competition in the
multichannel video programming market and encourages future private
investment in infrastructure. Finally, the program should demonstrate
fiscal responsibility by conforming to Federal credit program policies,
which minimize Federal exposure to loss and ensure the least expensive,
most efficient financing of federally guaranteed loans.
The Administration also believes that the discussion over ensuring
local-into-local broadcast programming in the digital era should not be
limited to the loan guarantee approach. Thus, the NTIA announced that
it will publish a Federal Register notice to solicit public comments
and suggestions as to how viewers in small and rural markets can
receive local broadcast signals. All comments will be posted on the
NTIA's Web site ( http: / / www.ntia.doc.gov). As part of this effort,
I intend to host a roundtable discussion in early March with various
stakeholders -- consumers, industry representatives, policymakers, and
technology experts -- to explore ways in which small and rural markets
can have access to local programming via satellite and other
technologies. Our efforts in this area are intended to complement the
congressional action and efforts by the Federal Communications
Commission to examine this question as required under the SHVIA. Our
intent is to help raise visibility on this issue and contribute to the
debate.
Extending the reach of local broadcasting and its crucial news and
information has been a longstanding goal of the NTIA. The agency
administers the Public Telecommunications Facilities Program (PTFP),
which provides grants to establish and extend the reach of local public
television and radio stations into unserved areas. Since 1962, the
program has been a major factor in the Nation's success in bringing
local public television stations to rural areas -- through the
establishment of full-power stations, as well as the construction of
television translators and repeaters. The PTFP estimates that
approximately 94 percent of all Americans can receive at
least one free, over-the-
air public television signal from a local PBS member-station.
The preservation of local broadcasting in the digital era is
vitally important and ensuring that viewers in small and rural markets
are included in this new age is critical. The Administration pledges
its support to advance the goal of extending the reach of local
broadcasting to all Americans and looks forward to working with the
Congress on the loan guarantee proposal as well as exploring other
approaches to this issue. We would appreciate the opportunity to
provide comments on any specific legislative proposal.
Thank you very much.
----------
PREPARED STATEMENT OF CHRISTOPHER McLEAN
Acting Administrator, Rural Utilities Service
U.S. Department of Agriculture
February 1, 2000
Mr. Chairman and Members of the Committee, it is an honor to
testify today on the idea of a new loan guarantee program to finance
the delivery of local television programming to subscribers of
satellite television in rural and small markets. The U.S. Department of
Agriculture (USDA) appreciates the Committee's concern, both in the
existing coverage of rural access to local broadcasting and the
possibility that developing technologies can broaden that problem.
The Rural Utilities Service (RUS) is a rural development agency of
the USDA. We administer a $42 billion loan portfolio of more than 9,000
loans for telecommunications, electric, and water and wastewater
infrastructure projects throughout rural America. Our agency also
administers the Distance Learning and Telemedicine loan and grant
program and is a leading advocate for rural consumers before Federal
and State regulatory bodies.
The RUS Record of Success
For nearly 65 years the REA and RUS have been empowering rural
America. Just this last October, the RUS telecommunications program
celebrated its 50th anniversary. In those 50 years, the RUS
telecommunications program has helped close the digital divide in rural
areas. The telecommunications program has maintained an unprecedented
level of loan security over the history of the program.
Since 1993, the RUS has financed more than $1 billion in fiberoptic
facilities and more than $725 million in digital switching for
telecommunications companies and cooperatives serving rural areas. In
1999 alone, the RUS provided nearly $500 million in financing for rural
telecommunications infrastructure. In addition, since its inception in
1993, the RUS Distance Learning and Telemedicine (DLT) program has
provided $83 million in funding to 306 projects in 44 States and two
territories.
The RUS is fortunate to have an accomplished corps of engineers,
accountants, financial specialists, and rural infrastructure experts. I
am confident that the RUS has the necessary skills to administer new
initiatives that will bring the benefits of the information revolution
to all America.
The Need for Local Access
For America's rural residents, access to television signals has
long been a challenge. Distance and geography have been significant
impediments to the reception of
consistently viewable broadcast signals. While cable television is avail
able in many rural towns, it does not reach America's most rural
citizens.
Since its inception, satellite-delivered television and now direct
broadcast satellite services have provided increased access for
communications services to rural residents. Satellite television gave
America's many rural residents first time access to vital sources of
news, information, educational programming, entertainment, and sports.
As good as these services were, satellite services did not connect
rural residents to their local communities.
The amendments in 1999 to the Satellite Home Viewer Act (SHVA)
dramatically changed the dimensions of satellite service by giving
carriers the right to deliver local television signals to viewers via
satellite. However, that legislation limited the ability of these
carriers to deliver distant network programming to consumers.
Since the enactment of the SHVA amendments, satellite broadcasters
have announced significant new initiatives to provide local signals to
viewers. Current satellite carriers are offering ``local-into-local''
service mainly to larger urban markets. There is little evidence that
under current conditions significant ``local-into-local'' offerings
will be made in the markets below the 40 largest markets. The smaller
the market, the more rural residents will be impacted.
Once the amendments to the SHVA are fully implemented, many rural
residents will likely lose their ability to purchase distant network
signals. Many will still be unable to receive a suitable signal via
antennae from their local broadcaster. Given the capacity limitations
of current satellite providers, and the cost of nationwide local-into-
local service, it is doubtful that current carriers will provide local
signals to many smaller markets.
The availability of local programming will become more problematic
as the television industry converts to a digital system of signal
delivery. The propagation of digital signals is different from analog
signals. Analog signals fade out with distance from the transmitters.
Digital signals drop off suddenly. The likely result is that some
current rural viewers of broadcast television may lose their ability to
receive a viewable signal once the conversion to digital is complete.
Without the ability to retain and perhaps expand their viewer base,
rural broadcasters may not have the financial ability to upgrade their
systems. Once digital conversion is complete, the technology will make
it likely that rural viewers will be able to receive fewer channels
over a conventional TV antenna than currently available in analog mode.
Ensuring Public Safety
Access to a full range of news, weather, sports, entertainment, and
information is certainly important to maintaining and enhancing rural
quality of life. But maintaining expanding access to the most local
sources of news, weather, and information is critical to rural public
safety. The 1999 violent tornado season, and recent weather events such
as this months' back-to-back winter storms in the South and East,
highlight the importance of local television as a means of
disseminating lifesaving information.
Linking local residents to their communities of interest is also
important to maintaining and enhancing the vitality of the local rural
economy and civic life. From both an educational standpoint and one of
public safety, it is in the public interest that rural citizens have
access to local and network programming. Rural America should not fall
into a new digital divide: either as a result of the amendments to the
SHVA or the coming conversion to digital television.
Loan Guarantees
The delivery of local signals to rural viewers will require
significant infrastructure investment, regardless of the technology
utilized. RUS loans, loan guarantees, and grants have helped bring
modern electric, telecommunications, and water infrastructure to the 80
percent of America that is rural. This public-private partnership has
been the hallmark of rural infrastructure investment. The RUS is
capable of helping rural America meet this new infrastructure
challenge.
We welcome the opportunity to comment on any specific legislative
language and look forward to working with the Committee. We believe
that legislation should be technologically neutral, should expand
consumer choice, and be consistent with Federal credit policies.
Conclusion
Preserving and enhancing access to local and network television
signals is important not only for rural quality of life, but for rural
public safety and community. Linking rural viewers to more local
signals will also enhance the economics of rural broadcasting and their
rural advertisers. Moreover, the infrastructure necessary to deliver
``local-into-local'' services, regardless of mode, can bring new
broadband capacity to rural areas. Just as the Rural Electrification
Administration helped rural America become part of the national
economy, the Rural Utilities Service can help rural America thrive in
the information age.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF WILLIAM ROBERTS
Senior Attorney, U.S. Copyright Office
February 1, 2000
Mr. Chairman and Members of the Committee, the Copyright Office
thanks you for this opportunity to appear before the Committee to
discuss the provisions of the recently enacted Satellite Home Viewer
Improvement Act. Before discussing the provisions of that Act, it is
useful to provide a brief background on the legal regime governing
copyright licensing for satellite retransmissions of over-the-air
television broadcast signals.
The satellite home dish industry had humble beginnings with the
introduction in 1980 of the home satellite dish. These large C-band
dishes, which originally cost thousands of dollars, were initially
marketed to people in rural areas of the country who did not have
access to cable television and who could receive few, if any, over-the-
air television signals. Owners of these dishes were not required to pay
programming fees because satellite signals at that time could be
received for free. However, as broadcasters became aware of the C-band
dishes, they began to scramble their satellite signals, forcing dish
owners to program packagers who would sell them the programming they
desired in the same way that cable operators sell programming to their
subscribers. These program packagers, who were typically the same
concerns that sold the dishes as well, needed to clear the copyrights
to the broadcast signals that they were delivering to their customers.
In 1986, satellite providers first approached the Congress seeking
creation of a compulsory license under the copyright law, similar to
that enjoyed by the cable television industry, that would allow them to
easily license broadcast programming without engaging in costly face-
to-face negotiations with the copyright holders of each and every
broadcast program.
In 1988, Congress responded to satellite providers' requests by
passing the Satellite Home Viewer Act of 1988. The 1988 Satellite Home
Viewer Act created a 6-year statutory compulsory copyright license,
codified at section 119 of Title 17, U.S. Code, that allowed satellite
providers to clear all copyrights to programming contained on over-the-
air television broadcast stations. This was accomplished through a
semiannual submission of royalty fees and statements of account to the
Copyright Office. Royalty fees were calculated on a per subscriber, per
month basis. The Office took the deposited fees and distributed them to
copyright holders of the programming retransmitted by the satellite
providers.
While the section 119 satellite license provided satellite carriers
with a simple mechanism for clearing copyrights, it did place
restrictions on satellite's ability to deliver network signals to their
subscribers. Because the satellite industry lacked the technological
capability of providing subscribers with their local network
affiliates, satellite carriers were forced to provide their subscribers
with network stations taken from distant markets. Thus, for example, a
satellite subscriber residing in Montana would receive the network
affiliates from Los Angeles and New York, as opposed to network
stations from Montana.
This did not please the local network affiliate where satellite
subscribers resided, because such subscribers would watch the signals
of distant affiliates rather than the local signal. As a result,
Congress limited the section 119 compulsory license for network signals
to only those subscribers who resided in ``unserved households.'' If a
subscriber did not reside in an ``unserved household'' with respect to
a particular network, then a satellite carrier providing a distant
station of that same network was liable for copyright infringement. An
``unserved household'' was a subscriber who, through the use of a
conventional outdoor rooftop receiving antenna, could not receive an
over-the-air signal of Grade B intensity from the local network
station. ``Grade B'' is a measurement of the strength of a television
signal as it arrives at a subscriber's rooftop antenna.
As the satellite industry grew throughout the late 1980's and early
1990's, satellite began to move from rural areas of the country into
the cities. Several factors brought about this occurrence, including
reduction of the costs of satellite service, the greater numbers of
potential subscribers in urban areas, and the introduction of direct
broadcast satellite (DBS) service. With DBS, which provides digital
quality service using small, dinner plate-sized dishes, consumers in
urban areas could subscribe to satellite without the attendant
difficulties associated with the placement of a large C-band dish.
Unfortunately, with the migration of satellite from rural into urban
areas, the potential increased for violations of the ``unserved
household'' restriction of the section 119 license.
Congress addressed this problem in the Satellite Home Viewer Act of
1994. In addition to extending the section 119 compulsory license for
an additional 5 years, Congress implemented a transitional challenge
scheme designed to weed out those subscribers who did not reside in
``unserved households,'' yet nevertheless were receiving the satellite
network service. For a 2-year period (1995 -1996), local network
broadcasters could issue written challenges to satellite carriers who
were serving subscribers with distant network stations inside the local
broadcaster's Grade B contour. A ``Grade B contour'' is the geographic
area in which it is predicted that a consumer with an outdoor rooftop
receiving antenna can pick up a signal of Grade B intensity from the
local network broadcast station.
When a satellite carrier received a written challenge with respect
to a particular subscriber, the carrier had two options under the 1994
amendments. The carrier could turn off the subscriber's network
service, or conduct a test at the subscriber's household to determine
if the subscriber did in fact receive a signal of Grade B intensity.
The cost of the test would be allocated to the satellite carrier or the
local broadcaster, depending upon the outcome (a ``loser pays''
provision). Unfortunately, because of the up-front costs associated
with conducting household tests, virtually no tests were performed, and
many subscribers lost their satellite network service whether or not
they resided within an ``unserved household.'' And many satellite
carriers continued to sign up urban subscribers and provide them with
network signals regardless of their ``unserved household'' status.
These activities prompted certain broadcasters to file copyright
infringement lawsuits against certain satellite carriers. Broadcasters
were successful in these suits across the board (there is still one
pending), and many satellite subscribers lost their network service as
a result of injunctions handed down by the courts.
At the end of last year, the section 119 compulsory license was
again slated to expire, and Congress again had to address the quandary
of ``unserved households'' and when a satellite subscriber should be
eligible for network service. Fortunately, for the first time, there
appeared a technological solution to the problem. Because of advances
in the DBS industry, it was now possible for DBS providers (EchoStar
and DIRECTV) to provide satellite subscribers with the television
broadcast signals they most wanted to see: their local TV stations. But
such service of local signals is not nationwide. Currently, only those
subscribers who reside in large television markets (which, because of
their population, represent the greatest number of potential satellite
subscribers) can receive their local network signals. While these
companies plan to expand their service of local signals in the future,
it may be that neither company will serve all 211 television markets
across the United States with local signals.
Nevertheless, with the potential of local service as a cure to the
headache of the ``unserved household'' restriction, Congress enacted
the Satellite Home Viewer Improvement Act of 1999 and created a new,
permanent compulsory license for satellite carriers, codified at
section 122 of Title 17, U.S. Code, for the carriage of local
television stations. Moreover, Congress extended for another 5 years
the section 119 license for the retransmission of distant broadcast
signals and amended the communications law to prescribe must-carry and
retransmission consent rules for the satellite industry.
Although satellite retransmission of local signals is the long-term
solution to the ``unserved household'' conundrum, it was still
necessary to address the issue of when a subscriber is eligible to
receive distant network stations from a satellite carrier. The
Satellite Home Viewer Improvement Act approaches the problem in several
ways. First, the Act grandfathers until December 31, 2004 those DBS
subscribers who lost their satellite network service between July 11,
1998 and October 31, 1999 as a result of the lawsuits filed by
broadcasters against certain satellite carriers. In addition, those
subscribers who continued to receive satellite service of distant
networks on October 31, 1999 are also grandfathered, regardless of
whether they reside in an unserved household. This grandfathering
provision, however, only applies to subscribers who reside outside the
Grade A contour of the local network station. The ``Grade A contour''
is a geographic area, within the Grade B contour of a station, where a
signal of Grade A intensity can be received by a consumer with a
rooftop antenna. A signal of Grade A intensity is more powerful than a
signal of Grade B intensity, and typically covers the area in and
around the broadcaster's transmitter, as well as the broadcaster's city
of license.
Second, the Act grandfathers all satellite network subscribers
using the old-style C-band dishes, regardless of their location,
provided that the subscriber lost network service prior to October 31,
1999.
Third, the Act directs the Federal Communications Commission to
deliver a report to Congress by November 29, 2000, recommending any
changes to the Grade B signal standard that will improve over-the-air
receipt of television broadcast signals.
Fourth, the Act provides that the ``unserved household''
restriction does not apply to recreational vehicles and certain
commercial trucks.
Finally, the Satellite Home Viewer Improvement Act provides an
avenue of relief for the subscriber who resides in a household that is
predicted to receive an over-the-air signal of Grade B intensity, but
for some reason does not actually receive such a signal (perhaps a
building or stand of trees blocks the subscriber's receipt of a Grade B
signal). Such a subscriber may submit a waiver request, through his or
her satellite provider, to the local network affiliate asking
permission to receive a distant affiliate of that same network from the
satellite provider. Upon receipt of the waiver request, the local
broadcaster has 30 days in which to grant or reject the request. If the
broadcaster does not respond within the 30 days, the waiver is deemed
granted. If the broadcaster rejects the request, the subscriber may
insist that the satellite provider conduct a test at the subscriber's
household to determine if the subscriber actually receives a signal of
Grade B intensity from the local network broadcaster. Like the 1994
Satellite Home Viewer Act transitional provisions, the costs of the
test are borne by the loser of the test (either the carrier or the
broadcaster). However, unlike the 1994 Act, the subscriber has the
right to insist that a test be conducted. It is expected that the
waiver provision of the 1999 Satellite Home Viewer Improvement Act will
provide a real mechanism for determining whether a satellite subscriber
can receive a distant network station or is required to watch the local
over-the-air signal.
The section 119 compulsory license for distant signals, and the
section 122 compulsory license for local signals, comprise the
copyright licensing scheme for the retransmission of television
broadcast stations by satellite carriers. It is important to note that
while the Satellite Home Viewer Improvement Act has created this
elaborate licensing mechanism, copyright owners and satellite carriers
are always free to negotiate their own licensing agreements outside the
compulsory license. In fact, the Copyright Office continues to support
marketplace negotiation of copyright licenses and opposes compulsory
licenses.
We address the other two elements of the Satellite Home Viewer
Improvement Act, must-carry and retransmission consent for satellite,
but only briefly because they are communications, rather than copyright
provisions. The Act imposes a must-carry requirement, similar to that
applicable to the cable industry, on all satellite carriers
retransmitting local broadcast signals on or after January 1, 2002.
Under must-carry, a satellite carrier will be required to retransmit
all eligible local stations to subscribers, and not just network
stations, as is the current practice. The Federal Communications
Commission has until the end of November 2000 to adopt regulations
implementing the must-carry obligation.
The Satellite Home Viewer Improvement Act also establishes
retransmission consent for certain local broadcasters for satellite
retransmissions of their signals. ``Retransmission consent'' is a right
granted to a broadcaster whereby the broadcaster has the option of
deciding whether to allow a retransmission provider to carry its
station. Retransmission consent has applied to cable operators carrying
broadcast signals since 1993 and will become effective against
satellite carriers in May 2000. The Federal Communications Commission
is currently in the process of fashioning rules governing the terms and
conditions under which retransmission consent must be sought and may be
granted.
This is the background and regulation of the satellite industry
from the copyright perspective. We are pleased to answer any questions.
----------
PREPARED STATEMENT OF DALE N. HATFIELD
Chief, Office of Engineering and Technology
Federal Communications Commission
February 1, 2000
Mr. Chairman and Members of the Committee, thank you for the
opportunity to appear before the Committee today to discuss current
Federal communications law and technical and other issues related to
the transmission of local television signals to rural areas of the
country. Before I begin, I want to clarify that the views I express
today are my own, and may not necessarily reflect the views of the
Federal Communications Commission (FCC or Commission).
SHVA Provisions
First, I want to provide an overview of the most relevant,
communications-related provisions of the Satellite Home Viewer Act
(SHVA), enacted in 1988, and the more recent Satellite Home Viewer
Improvement Act (SHVIA), enacted last November.
Congress enacted the Satellite Home Viewer Act to establish a
limited exception to the exclusive programming copyrights held by
television networks and their affiliates. It did so because it
recognized that some households were unable to receive network signals
directly over-the-air. The exception permitted satellite carriers to
transmit local TV signals to ``unserved'' households. The SHVA defined
an ``unserved household'' as one that ``cannot receive, through the use
of a conventional outdoor rooftop receiving antenna, an over-the-air
signal of Grade B intensity (as defined by the Federal Communications
Commission).''
Last February, the Commission provided consumers as well as
industry with a uniform method for measuring the signal strength at
individual locations that was much simpler than the method previously
contained in the Commission's rules. In addition, last February, the
Commission endorsed a computer model for predicting Grade B strength in
lieu of making actual measurements. Known as the ``Individual Location
Longley-Rice'' or ``ILLR'' model, and similar to the point-to-point
predictive model the Commission had established for digital television
(DTV) allocations, the model provided a practical and readily available
methodology for predicting signal intensity at individual locations.
SHVIA Provisions
In November 1999, the Congress enacted the Satellite Home Viewer
Improvement Act (SHVIA) to foster competition in the multichannel
programming video distribution (MPVD) market and increase programming
choices for consumers. The SHVIA amended the copyright law to authorize
satellite carriers to retransmit local TV signals to all consumers in a
station's local market. (This is commonly referred to as ``local-into-
local'' service.) Until May 29, 2000, satellite carriers can deliver
local signals without local broadcasters' permission; after that date,
such permission is required. The SHVIA also requires the FCC to take
all actions necessary to make a determination regarding licenses or
other authorizations that will utilize spectrum otherwise allocated to
commercial use for the delivery of local signals to satellite
subscribers in unserved and underserved local markets, and to issue a
report to Congress by January 1, 2001 on the extent to which such
actions have facilitated delivery into unserved and underserved
markets. The SHVIA also continues to authorize satellite providers to
retransmit distant network signals (i.e., signals originating outside a
subscriber's local television market) to unserved households, and
grandfathers many satellite subscribers who would otherwise not be
eligible to receive distant network service.
The SHVIA continues to link the definition of ``unserved
household'' to the FCC's definition of Grade B signal strength.
However, under the new law the Commission is required to complete an
inquiry to determine whether the Grade B standard continues to be
appropriate for determining eligibility for distant network service,
report its findings to Congress, and, if appropriate, recommend
modifications of the Grade B standard. (Although the statute requires
that this inquiry be completed by November 29, 2000, the Federal
Communications Commission intends to complete this inquiry by June 1,
2000.)
The SHVIA also requires that, by May 27, 2000, the Commission amend
its rules to establish a predictive model for determining whether
consumers at individual locations can receive signals of Grade B
intensity. The SHVIA specified that the Commission should rely on the
ILLR predictive model it endorsed last February, but that improvements
should be made to account for terrain, buildings, and other land cover
variations. The SHVIA further requires that the Commission establish
procedures for continued refinement in applying the ILLR model as
additional data become available. The Commission released a Notice of
Proposed Rulemaking seeking comment on these issues on January 20,
2000.
Technological Options
With this overview of the SHVA's and SHVIA's provisions related to
local-into-local service and of the Commission's role in its
implementation, I want to discuss, first, the various technological
options for delivery of television signals to unserved and underserved
rural areas, and second, some of the economic, technical, or other
barriers or limitations on the viability of those options to provide
service to these areas. At the outset, I want to stress that the goal
of providing local television programming throughout our country
presents significant technical challenges. These challenges stem from
the sheer size of our country, areas of rugged terrain, and sparse and
isolated populations in some regions.
Advances in communications technology, however, provide a variety
of options to address the goal of providing local broadcast service to
rural areas. While no one technology may be able to solve the entire
problem, multiple technologies can be used in combination to achieve
the goal of universal coverage. Local television markets (referred to
as ``designated market areas'' or ``DMA's'' as defined by Nielsen Media
research) vary greatly in size, for example, from the whole State of
Utah to much smaller areas in Laredo, Texas, or Salisbury, Maryland.
Terrain varies also from the appropriately named Great Plains to the
ruggedness of the Rockies and Appalachia. Serving isolated small towns
is a very different problem than serving isolated farms. Different
geographical situations in all probability will demand different
technical solutions.
The existing direct broadcast satellite (DBS ) systems in the 12
GHz band, such as DIRECTV and EchoStar, provide MPVD to nearly the
entire continental United States. In addition, existing DBS providers
have begun to provide local programming, but only in the larger
markets. This is so even though existing DBS systems were not
constructed and deployed with the intention that they would provide
local broadcast programming. Present DBS systems generally cover either
the whole or half of our country. If such a system is used to transmit
a local signal, only users in a very small part of its footprint can
receive the local signal because, under the SHVIA, only users in the
local DMA are authorized to receive the signal, while those outside
that DMA are precluded from accepting the signal. Moreover, because
present DBS systems are not equipped for frequency reuse throughout
their footprints, the power used to transmit to those portions of the
satellite's footprint that are outside of the DMA would be wasted.
While DBS systems can provide 200 or more channels of programming, to
provide all of the local channels in every market throughout the
country would require more channels than is feasible with currently
deployed satellite hardware and existing spectrum.
A new generation of satellites, however, is coming which uses
``spot beams,'' or more focused transmissions from satellite to earth
that cover a much smaller area. With this technology, the same downlink
frequency can be reused numerous times across the country. This not
only increases the capacity of the satellite in terms of the total
number of different signals that can be distributed, but the more
focused beams also reduce the power required per signal. Spot-beam
technology does require larger antennas on the satellite. Thus, what is
now a 90-inch antenna on the satellite must be replaced by one that is
four to five times larger. However, such large antennas are achievable
with today's technology.
The multichannel multipoint distribution service (MMDS ) is the
FCC's designation for a terrestrial fixed wireless service utilizing
the 2.5 GHz band of the radio spectrum whose potential uses include
multichannel video distribution. Some of this spectrum is shared with
educational users, but FCC rules permit sharing by educational and
commercial users and many such agreements have been reached. In the
past, ownership of MMDS channels was fragmented and it was difficult to
assemble a multichannel package that would be attractive to viewers,
but industry consolidation along with significant gains in capacity due
to digital compression techniques now make such packaging practical.
Many of the new owners of MMDS systems, however, see Internet access as
a more viable product than video distribution, so it is unclear in what
direction the MMDS technology is moving.
The local multipoint distribution service (LMDS ) is our
designation for a fixed wireless access system that operates in the 28
GHz range of the radio spectrum. Because we have allocated over 1,000
MHz of spectrum for this service, LMDS systems are capable of providing
a broadband array of two-way voice, data, and video services. Because
of the high microwave frequencies involved, the range of LMDS systems
is limited to relatively short distances (a few miles) over relatively
unobstructed paths. The LMDS is in the early stages of development and
the initial focus seems to be on serving business users in urban
locations. However, over time, the LMDS may find applications in
smaller communities as a way to provide broadband services, including
the distribution of television stations.
TV translators have traditionally been used in rural areas to
extend television coverage. These translators receive a signal on one
channel and shift or translate it to another channel for local
distribution. For example, if an intervening ridge or mountain blocks
reception of a signal, a translator can be placed on the top of the
mountain (where reception is good) and used to relay the signal into
the otherwise shielded area. Some translators are owned by originating
stations, while others are owned by organizations in rural areas.
Translators can be an economical solution to extending coverage in
small towns and isolated areas when advantageous locations can be
found. However, the ongoing transition to DTV complicates the issue of
finding frequencies for new translators, especially in areas bordering
on metropolitan areas. (I will have more to say about the DTV
transition shortly.)
In areas where TV transmission is limited primarily by distance (as
opposed to mountainous terrain) and where population density is low,
the use of better performing receiving antenna systems at residences
may be the most cost-effective method of expanding local television
station coverage. Improved reception can be achieved by using larger
antennas, higher towers, and / or antenna preamplifiers.
Cable antenna television (CATV ) technology is another technology
which has the potential to deliver local television broadcast signals
to unserved and underserved parts of the country. The data available to
us indicate that cable television service is currently available to
about 97 percent of the 100 million television households in the
country. However, because this is a national figure, there are
certainly some rural and other remote areas of the country where cable
service is not as widely available. For example, in some States, such
as Montana, Texas, and Wyoming, that have large rural areas with
relatively low population densities, the percentage of households that
have access to cable service is considerably less than the national
average.
Two ongoing developments may enable cable television operators to
make new inroads in rural and small communities. First, as is the case
throughout much of the communications industry, cable operators are
using fiberoptic technology to upgrade and, in some cases, extend their
facilities. Second, as the cable industry deploys state-of-the-art
technology, it is also attempting to transform itself into a full
service supplier of communications services -- voice and data, as well
as video. As the industry makes this transition and as consumer demand
for advanced communications services grows, cable operators may have
new economic incentives to serve rural and small communities currently
beyond their reach.
As you evaluate the most effective means to deliver local broadcast
service to rural America, it is also important to recall that cable
television operators are the only multichannel video programming
distributors that have a statutory obligation to provide local
television signals to their subscribers. In addition, cable operators
are required by law to provide their customers with local broadcast
service before any other video service.
I would further point out that, like cable companies, local
telephone companies are employing fiberoptic technology to upgrade and,
in some cases, extend their systems to more distant groups of users.
These systems also have the capability of carrying video signals, and
because of increased consumer demand for advanced services, telephone
companies have very similar incentives to extend their coverage into
rural America.
Finally, I would note that several new technologies have been
proposed that hold out the potential to serve rural and isolated areas
of our country. Some of these proposals have been submitted to the FCC
for authorization. The Commission will address these requests in a fair
manner and as expeditiously as possible, bearing in mind the goal we
all share to provide coverage to unserved and underserved areas of the
country.
Digital Television Transition
All of these approaches are somewhat complicated by the ongoing
conversion of television broadcasting from the present analog National
Television Systems Committee (NTSC) technology to digital television
(DTV). During this transition, all stations will continue with their
present NTSC signal. DTV signals will be phased in, starting in the
largest markets, at the same time on different frequencies. Thus, at
the end of the transition now scheduled for 2006, there will be twice
as many signals as at present. Further, the flash cut over to DTV when
the transition period ends could be very disruptive if DTV is not
phased in appropriately. Finally, while the transition is scheduled to
end in 2006, legislation requires that it be extended if certain
milestones related to new DTV receiver sales are not met. This
uncertainty also complicates the selection of options to extend rural
coverage.
Conclusion
In conclusion, I want to express my gratitude to the Committee for
the opportunity to appear before you today. FCC Chairman William
Kennard has consistently advocated the deployment of communications
services in rural America and, in fact, was one of the early proponents
of local-into-local legislation. Chairman Kennard is also committed to
implementing the provisions of the SHVIA in an effective and an
expeditious manner. Indeed, the Commission has already initiated or has
completed two SHVIA implementation proceedings well ahead of the
deadlines called for in the SHVIA statute. The first rulemaking
proceeding proposed rules related to the good-faith standard to
negotiate retransmission consent agreements, and the second proceeding
has already adopted procedural rules to process complaints alleging
that satellite providers have retransmitted signals without
broadcasters' consent.
In sum, the FCC is ready to work with Congress, with the NTIA, the
Copyright Office, the Rural Utilities Service, and others to improve
television service to rural America.
Thank you very much.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMS FROM RICHARD
SJOBERG
Q.1. The primary Federal agency governing the cable industry is
the Federal Communications Commission. However, the loan
guarantee program that was developed last year assigned
responsibility for this program among several agencies
including the Rural Utilities Service (RUS) and the National
Telecommunications Information Agency (NTIA). Are you confident
that these agencies will be attentive to the unique needs of
the cable industry?
A.1. While I do not have a position about which agency is most
qualified to oversee the loan guarantee program, the chosen
agency should be knowledgeable about the cable industry and
sensitive to its economic, technical, and service
characteristics. I'm certain that whichever entity Congress
chooses will be responsive to congressional directives, such as
ensuring that the rural TV loan guarantee program is
technologically neutral.
Q.2. Please respond to satellite companies and others who
suggest that a high percentage of homes passed or served by
cable means that there is less need for cable operators to
participate in the loan program.
A.2. The fact that cable passes a high percentage of homes has
little to do with the problem this bill primarily seeks to
address; i.e., how to bring local broadcast signals to
communities that today have little or no access to them. Cable
operators are well-positioned to use loan guarantees to build
out plant to areas that currently are uneconomic to serve
(typically areas with 12 or fewer homes per mile of plant).
Extending existing facilities may prove to be a much more cost-
effective means of serving consumers, and may also prove to be
a means for these customers to gain access to other services,
like high-speed Internet service through cable modems, which
they might not receive today.
Q.3. You have testified that a Federal loan guarantee program
should be narrowly focused on the most unserved and underserved
markets. The Federal loan guarantee program developed last year
authorized the Rural Utilities Service to give priority to
borrowers based on the population of a market, its terrain, and
the projected cost to consumers, among other factors. What
other factors should be considered when granting loans to
priority borrowers? Is there any one factor that is more
important than others when making this determination?
A.3. In addition to the factors listed above, the administrator
or review board should be instructed to give priority to loans
based on the percentage of the project cost that can be
attributed to providing service to ``unserved'' homes, i.e.,
homes that have absolutely no access to their market's local
broadcast signals.
Q.4. As someone who has accessed capital from private markets,
to what extent do you believe that private capital markets
cannot or will not meet the goals of providing financing to
those who seek to provide local service in smaller, more rural
areas?
A.4. My family has invested substantial amounts of private risk
capital to bring multichannel video services, including digital
cable and high-speed Internet service, to approximately 7,400
customers in 33 small, rural towns and townships. And I am not
alone. Small cable operators across the country have invested
private capital in rural and small towns, all without any
Government funding. In some communities where population is
below 10 to 12 homes per mile of plant, however, the cost of
private capital may make it more difficult to obtain.
Q.5. How can we be assured that a rural television service loan
guarantee program passed by Congress will not have a
substantial adverse impact upon competition between the
satellite and cable industries?
A.5. The best way to assure that competition is not harmed
would be to avoid creating a program that subsidizes
marketplace competitors who do not need Government help. My DBS
competitors are owned by companies with market capitalizations
of $21 billion (EchoStar) and $16 billion (GM / Hughes) and
have annual revenues of $1 billion to $6 billion. This program
has the potential to make these companies the principal
beneficiaries of a taxpayer-supported loan guarantee program to
support the building and launching of a new satellite that
would retransmit local broadcast signals in markets where they
have chosen not to use their existing capacity to deliver
local-into-local broadcast service. My company invested private
risk capital to build out plant to deliver these same local
broadcast signals to consumers.
However, if Congress moves forward with a Federal loan
guarantee program, a substantial adverse impact can be
minimized if the program is: (1) technology neutral, giving
small ``Main Street'' businesses -- whether they are cable,
wireless, or others -- the opportunity to extend the reach of
local broadcast signals; (2) limited, i.e., the loan guarantees
are limited to efforts that focus on un- served or areas with
the least broadcast coverage; and (3) set up in a manner that
minimizes the paperwork burden on applicants.
Q.6. How do you determine the costs consumers will face when
they seek to obtain local-into-local service? Other than
``must-carry'' obligations, what specific regulatory policies
could be repealed or modified that would help to further reduce
the costs of local service to consumers?
A.6. The best way of reducing costs to consumers is to ensure
that the lowest risk means are used to provide local broadcast
service into unserved areas. Opening the bidding to all
technologies and reducing paperwork burdens is critical to
ensuring that the appropriate providers secure Federal loan
guarantees.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM RICHARD
SJOBERG
Q.1. I understand from your testimony that you operate a small
23,000 subscriber, 33 town cable system in northwestern
Minnesota. You state as well that your association, the
National Cable Television Association, supports a technology
neutral loan program meaning that the legislation should not
favor one technology or industry over another. My State is
served almost exclusively by AT&T Cable Services, the Nation's
largest cable company, and they can easily go to the capital
markets, while your company raises capital in the communities
that it serves. Should Congress consider some limit on the size
of the companies that can participate in whatever program is
created?
A.1. If the goal is to deliver broadcast signals to areas that
currently do not get them, Congress may not want to limit the
size or number of players eligible for the loans. However,
those administering the program should ensure that loan
guarantees are not used to underwrite the delivery of broadcast
signals to populated, urban areas or communities where
EchoStar, DIRECTV, and other multichannel video providers
already plan to offer local-into-local service.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMS FROM STEVEN J.
COX
Q.1. What is the current channel capacity for DIRECTV? How many
of those channels are used to carry video programming? How many
of those video programming services are pay-per-view? If there
are any vacant channels, what do you plan to put on those
channels? Do you have any plans to increase the number of
channels you are able to offer? By what means will you increase
the number of channels?
A.1. Channel capacity on a DBS system is primarily a function
of the available bandwidth and the ability to digitally
compress programming. Bandwidth at DBS frequencies is currently
fixed at 32 frequencies (500 MHz) per orbital slot. Advances in
digital compression technologies has increased the number of
video channels per frequency from one in the early 1990's to
eight or more today. Actual channel capacity on DIRECTV is
typically a function of the types of programming carried and
varies from day to day. This ranges from sports programming
that requires more bandwidth due to detail and high action to
movies and news programming that requires less bandwidth to
audio programming that requires even less bandwidth. Added to
this mix are pay-per-view movies and seasonal sports packages
that vary in quantity and bandwidth demands on a daily to
monthly basis. At an 8 : 1 compression ratio, the 46 DIRECTV
frequencies at the 101+, 110+, and 119+ orbital locations could
quite potentially provide more than 350 channels of
programming.
DIRECTV is currently utilizing virtually all of its
capacity at its 101+ orbital position and is quickly developing
its recently acquired 110+ and 119+ orbital capacity. The
vacant capacity at the 119+ and 110+ orbital positions will be
filled with additional national, ethnic, public interest, and
local broadcast channel programming in the coming months.
DIRECTV is continually exploring ways to increase the
capacity of its system. The primary method is through
efficiency increases in video compression. Recent advances in
compression technologies allowed DIRECTV, at the 101+ orbital
location, to offer local channels to nearly 50 percent of the
U.S. television households using existing receiver and dish
hardware. Capacity also can be increased by adding additional
bandwidth. This can be accomplished through licensing of
additional DBS frequencies by the FCC.
Q.2. Under the ``Rural Local Broadcast Signal Act'' proposed
last year, one loan may have been granted for as much as $625
million, while other loans could not exceed $100 million each.
Under this proposal, a borrower could receive a $625 million
loan and decide to serve only a small percentage of the
smaller, more rural markets that are without local-into-local
service. What specific conditions should govern these loans to
ensure that more television markets are served with this
service?
A.2. We believe that to the extent that Congress decides to
create a Federal loan guarantee program, taxpayer funding
should be used to complement, rather than compete with, service
being provided without the benefit of taxpayer subsidies. In
other words, those who obtain Federal loan guarantees should be
permitted to provide local channel service only in markets
where that service is not being provided by the commercial DBS
providers.
Second, satellite is the most efficient and cost-effective
technology for serving numerous markets throughout the United
States. To the extent it is Congress' goal to ensure service to
a large number of markets throughout the United States, it
should consider focusing the loan guaranty program on satellite
technology.
Q.3. How can we be assured that a rural television service loan
guarantee program passed by Congress will not have substantial
impact upon competition between the satellite industry and the
cable industry?
A.3. According to the FCC's most recent (January 2000) report
on competition in video markets, 82 percent of all subscribers
to multichannel video program distribution (MVPD) services
received their programming from a franchised cable operator.
Moreover, the FCC reported that 96.6 percent of U.S. households
are passed by cable. Given the market dominance of cable, as
demonstrated by these figures, it is difficult to envision a
way in which a loan guaranty program could do anything other
than promote competition in the multichannel video market. The
only exception to this is if cable operators are eligible to
receive loan guarantees, which could have the unintended effect
of further entrenching the market-dominant incumbent provider
and ultimately limiting consumer choice.
Q.4. How do you determine the costs consumers will face when
they seek to obtain local-into-local service? Other than
``must-carry'' obligations, what specific regulatory policies
could be repealed or modified that would help to further reduce
the costs of local service to consumers?
A.4. The retail price charged to consumers for local-into-local
service is determined based on a variety of factors, primarily
including the following:
(1) Lthe size of the capital investment that is required to
offer local channels;
(2) Lthe amount of the operating expenses required to support
local channel service;
(3) Lthe marketplace pricing for competitive products and
services; and
(4)
the estimated elasticity of consumer demand for local channels.
DIRECTV is adding local channels to make its package of
services more competitive with cable, thereby attracting more
new customers to the overall DIRECTV service.
The must-carry obligation is clearly the biggest impediment
to providing additional communities with local channels. But
even if DIRECTV were to get relief from the must-carry
obligation, we would not have sufficient available capacity to
provide local channels in all 210 television markets in the
United States. For DBS to become the full-fledged competitor to
cable that Congress desires, we need more spectrum. To achieve
this objective, we would urge Congress to direct the FCC to
make additional spectrum available to the DBS providers, which
could be used to bring local channels to those markets we
cannot serve with our existing limited capacity. Because of the
substantial costs associated with the delivery of local
channels, the only way to make this concept economically
workable is for the additional spectrum to be made available to
the DBS providers at no cost. In addition, the DBS providers
must be able to use the spectrum both for providing local
channels, and for other more financially remunerative services.
The hundreds of millions of dollars required to build, launch,
and operate satellites to use the additional spectrum could not
be justified if those satellites could only be used to provide
services from which we would never see a profit, or even break
even. But if we were in essence allowed to underwrite the cost
of bringing local channels to rural markets by providing other
services with the spectrum, we believe it could be a
financially viable proposition.
Over 2\1/2\ years ago, DIRECTV filed a petition for
rulemaking seeking additional spectrum to expand our channel
capacity. Unfortunately, that petition has sat at the
Commission without action. If that petition were to be granted,
it would allow both DIRECTV and EchoStar to gain access to
additional spectrum that could be used to serve additional
markets with local channels.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM STEVEN J.
COX
Q.1. DIRECTV is [the] largest provider of satellite-based
programming in the Nation with over 8 million subscribers and
is a subsidiary of General Motors. If this Committee drafts a
bill creating loan guarantees, should we make it open to all
companies in the business of providing local television service
regardless of size, or should it be limited to not-for-profit
corporations or smaller companies operating in rural areas?
A.1. Should Congress decide to create a Federal loan guarantee
program, it should be open to all companies in the business of
providing local television service via satellite. The National
Association of Broadcasters concurs. As K. James Yager
testified before the Committee on behalf of the National
Association of Broadcasters, a limit on the eligibility of the
existing commercial satellite TV providers ``may be
counterproductive in achieving the ultimate goal of delivering
local signals to unserved areas.''
Q.2. I understand that the EchoStar platform and the DIRECTV
platform are currently incompatible from the standpoint of
satellite locations and encryption standards. What difficulties
would a third party provider of local stations create for your
customers in rural areas?
A.2. The primary compatibility differences between the DIRECTV
and EchoStar platforms are the digital transmission format, the
encryption format, electronic program guide, and orbital
locations. New hardware (receiver and dish) capable of
receiving either provider's core programming service along with
the third party's local channel service would require the
duplication of critical functions within the receiver hardware
and a larger and more complex dish resulting in more costly
hardware. Additionally, key proprietary information would need
to be shared between all three parties to develop this
hardware. Such a service would not be backward compatible with
existing customers since they would need to purchase all of
this new hardware in order to receive the third party's local
programming.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM STEVEN J.
COX
Q.1. If the existing proposal is adopted, will every television
market receive DBS local-into-local signals and, if so, when?
When could Idaho's markets expect local-into-local services?
A.1. The extent of the service that will be provided will
depend upon the use of the loan guarantees. A loan guarantee
program alone, however, will not ensure the greater
availability of local channels. It will require significant
additional dollars for ongoing operating and marketing costs.
Furthermore, while the availability of loan guarantees may
create incentives for some entities to explore expanded local
channel offerings, the ultimate deployment of a widespread,
satellite-based local channel solution requires the
reexamination of much more fundamental legislative and
regulatory objectives. Specifically, the biggest impediment to
serving additional communities is the ``must-carry''
requirement imposed by the Satellite Home Viewer Improvement
Act (SHVIA). Even absent that constraint, DBS providers are
ultimately limited by the spectrum allocated by the FCC.
The costs of delivering local channels to major
metropolitan markets are not significantly different from the
costs associated with smaller markets, yet the population sizes
vary greatly. As a result, the ability to generate enough local
subscriptions to justify the local costs decreases as the size
of the market decreases.
Among the top 30 U.S. markets, the average population is
1.8 million households. The number of households in each of the
three Idaho DMA's is substantially smaller: Boise (#125,
199,760 households); Idaho Falls / Pocatello (#166, 103,840
households); and Twin Falls (#166, 56,850 households). Under
the existing must-carry regime, and absent the allocation of
new spectrum, it is unlikely that the Idaho markets will
receive local channels by satellite.
Q.2. What has been the cost of developing, launching, and
operating existing DBS systems?
A.2. DIRECTV spent $750 million on the initial launch of the
service and, to date, has invested a total of over $1 billion
on the DIRECTV service.
Q.3. How much has DIRECTV paid for its existing spectrum and
orbital slots?
A.3. The FCC allocated DBS spectrum to DIRECTV prior to the
date on which Congress authorized the FCC to use auctions to
allocate spectrum. DIRECTV pays hundreds of thousands of
dollars in annual FCC regulatory fees, as well as tens of
thousands of dollars in filing fees in connection with various
satellite applications and modifications.
Because of the substantial costs associated with the
delivery of local channels, the only way to make the expansion
of local channel service economically workable is for the
additional spectrum necessary to be made available to the DBS
providers at no cost. In addition, the DBS providers must be
able to use the spectrum both for providing local channels, and
for other more financially remunerative services. The hundreds
of millions of dollars required to build, launch, and operate
satellites to use the additional spectrum could not be
justified if those satellites could only be used to provide
services from which we would never see a profit, or even break
even. But if we were in essence allowed to underwrite the cost
of bringing local channels to rural markets by providing other
services with the spectrum, we believe it could be a
financially viable proposition.
Q.4. Is the cost of developing, launching, and operating a
spot-beam satellite expected to be higher than that of existing
direct broadcast satellites?
A.4. Yes. A spot-beam satellite is technically more complex
(more transponders, more complex antennas, higher power
satellite) than the typical direct broadcast satellite that
provides full CONUS coverage. Additionally, a spot-beam
satellite may require, depending on the number and location of
the spot beams, regional uplink centers, further adding to the
costs of operating the system.
Q.5. What is the anticipated cost of securing spectrum and
orbital slots, as well as launching and operating satellites?
A.5. The ultimate cost would depend upon the process used by
the FCC to allocate spectrum, should it decide to make
available additional frequencies suitable for use by the DBS
operators.
Q.6. How many satellites would it take to deliver local signals
in DMA markets 30 - 210?
A.6. An accurate answer to this question is difficult to
provide since it requires that a detailed technical study be
completed. In the absence of such a study, the following
provides a maximum number based on the use of CONUS satellites.
Markets 30 to 210 represent nearly 1,200 broadcast stations
across the United States. Assuming that each and every one of
these stations is carried, as may be required, up to 2 GHz of
bandwidth would be required. This translates to four equivalent
DBS orbital positions or as many as 12 satellites. (DIRECTV
currently has three satellites at its prime 101+ orbital
position). Using spot-beam technology would reduce the
bandwidth required, although a specific response would require
a substantial technical undertaking.
Q.7. What orbital positions could house those satellites?
A.7. The most logical location to support the delivery of
services to existing DBS subscribers is somewhere along the
101+ to 119+ WL arc, which is the range within which the
existing DBS operators provide service.
Q.8. Would these be full CONUS locations?
A.8. Yes, the locations along that arc are full CONUS.
Q.9. Would viewers be able to view local signals using existing
satellite receivers? If not, how many would be required?
A.9. Conceptually, local channels could be broadcast in a
manner that subscribers to both DIRECTV and EchoStar could
access, although there are substantial technical challenges and
proprietary technology-sharing issues that would need to be
resolved. Such a ``shared service'' would require both a new
receiver (set top box) and a new satellite dish. Existing
customers would need to purchase this new hardware in order to
receive the third party's local programming.
Q.10. Can the existing DBS systems currently provide broadband
Internet access? Do they currently offer broadband Internet
access? Are they expected to?
A.10. Broadband Internet service can be offered via satellite
either as a ``one-way'' satellite service with a telephone-
based return path or as a ``two-way'' satellite service with a
satellite-based return path. Divisions of Hughes Electronics,
DIRECTV's parent company, are offering a one-way broadband
Internet service, DIRECPC', at present and are
currently developing ``two-way'' broadband Internet services
for future launch.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM GREGORY L.
ROHDE
Q.1. Several of the witnesses expressed concern that a new
bureaucracy could result from this legislation. Which agency
would be best suited to administer a loan guarantee program for
providing local stations in rural markets?
A.1. The Administration believes that if a new loan guarantee
program is enacted to promote the provision of local television
service in rural America, it should be administered by the
Department of Agriculture's Rural Utilities Service (RUS). The
fundamental mission of the RUS, successor to the Rural
Electrification Administration, is to promote infrastructure
investment in rural America. The agency certainly has the
expertise and experience to administer such a new loan
guarantee program for rural television service. The RUS manages
$4 billion annually in loan and loan guarantees, and a total
portfolio of more than $42 billion in outstanding loans to
electric, telecommunications, water, and wastewater utilities
serving in rural areas. In addition, the RUS administers the
Distance Learning and Telemedicine loan and grant program.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM WILLIAM
ROBERTS
Q.1. In your testimony you outlined the situation facing
satellite customers and providers prior to the passage of the
Satellite Home Viewer Improvement Act. In your opinion, has the
intent of the SHVIA been carried out by all parties involved
and are you seeing that satellite customers are satisfied with
the work that Congress did last year?
A.1. Given the fact that the Satellite Home Viewer Improvement
Act (SHVIA) is less than 3 months old, and that many changes
made by the Act require implementation through rulemaking
proceedings by the Federal Communications Commission which have
yet to be completed (and, in some instances, have not yet
begun), it is too early to tell if the SHVIA is a success. We
will be glad to inform you of our impressions once the statute
has been allowed to fully operate and we receive input from the
public.
Q.2. What should Congress have included in the legislation that
would have improved the ability of all satellite subscribers to
receive network stations?
A.2. As we stated in our 1997 Report to Congress on the
satellite copyright compulsory license, we are concerned with
the test for determining when a satellite subscriber is
eligible for satellite network service (that he or she does not
receive an over-the-air signal of Grade B intensity) as it is
applied to the individual household. Our past experience has
been that tests were not performed at subscribers' households
because the cost of the test to the satellite carrier exceeded
the potential revenue from the subscriber for network signals.
This left many thousands of subscribers without recourse. While
the improvements made by the Satellite Home Viewer Improvement
Act -- such as the Individual Located Longley-Rice model which
predicts geographic areas where the average subscriber will not
receive an over-the-air signal of Grade B intensity, and the
waiver process which allows a subscriber to petition their
local broadcaster for a waiver to receive satellite network
service -- will unquestionably reduce the total number of
subscribers without any network service, we believe that there
still will be satellite subscribers who cannot get satellite
network service, even though these subscribers do not receive
an over-the-air picture from the local network broadcaster.
The ultimate solution to this problem is more local signals
being offered by satellite carriers in more markets. Any
incentives that Congress can establish -- such as a loan
guarantee program -- to encourage the delivery of local
stations by satellite should certainly be encouraged.
Q.3. One of the solutions offered last year to bridge the gap
between the passage of the SHVIA and the availability of local
stations in every market was a blanket waiver for rural State
households to receive distant signals without having to worry
about whether or not they qualified as an ``unserved
household.'' What are your thoughts on such a proposal?
A.3. In order to apply a blanket waiver, one must still
determine when a geographic area of the country is ``rural''--
i.e., does not receive an over-the-air signal of a network
station. If an area truly is ``rural,'' then the households in
that region are unserved households and can receive distant
network stations. There is no need for a waiver. If the region
can receive an over-the-air signal from a network station, then
it is not ``rural'' for purposes of that television network.
The point of the unserved household limitation is to direct
subscribers located near a network affiliate that can receive
an over-the-air signal to watch the local affiliate, as opposed
to a distant affiliate of the same network provided by the
satellite carrier. The satellite compulsory license is not
intended to threaten the local affiliate's market by permitting
satellite subscribers to gain access to a distant network
station when they are able to receive an over-the-air picture
from the local affiliate. This is true whether the subscriber
lives in a ``rural'' State or an ``urban'' State. Someone who
lives a mile away from the transmitter for KGWC, a CBS
affiliate in Casper, Wyoming, and has no difficulty receiving
the KGWC signal should not be permitted to receive the Denver
CBS affiliate from satellite in lieu of the local KGWC station.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMS FROM DALE N.
HATFIELD
Q.1. Section 714 of the 1996 Telecommunications Act established
a ``Telecommunications Development Fund'' by which small
businesses could apply for loans to deliver telecommunications
services to unserved rural areas. Are companies entitled to use
these funds? If not, should the authority for this fund be
expanded to help facilitate the deployment of local service in
unserved areas?
A.1. The Telecommunications Development Fund (TDF) was
established to promote access to capital for small businesses
to enhance competition, to stimulate new technology, and to
promote training, employment, and telecommunications services.
Since its 1996 authorization as a private corporation, the TDF
has received approximately $25 million in interest paid by
financial institutions.
The TDF established itself as a venture capital fund that
makes equity investments in small, early stage communications
companies. Given the size of the TDF's fund, it anticipates
making approximately 10 to 12 investments in order to ensure a
diversified portfolio, and in accordance with prudent
investment practices.
The purpose of the rural satellite loan guarantee
legislation, however, is to enable satellite or cable carriers
to receive loan guarantees that would enable them to deliver
local television signals via satellite or by some other means
of transmission. Such businesses usually have capital
requirements far in excess of the investment size that would be
prudent for the TDF to make. Therefore, the TDF does not appear
to be an appropriate entity ``to help facilitate the deployment
of local service in unserved areas.''
Q.2. The proposed loan guarantee program included a provision
that prohibited any satellite companies with unused spectrum
that could be used to provide local service from applying for a
loan guarantee. Does this prohibition apply to EchoStar and
DIRECTV? At what point does the spectrum have to be used? Is it
at the point the application is filed, or at the time the
application is granted?
A.2. Although the proposed legislation does not address the
specific points raised by this question, the prohibition would
presumably apply to both EchoStar and DIRECTV if they applied
for the loan guarantee program. Satellite licensees normally
have milestones in which to construct, launch, and operate
their licensed satellites. At the present time, DIRECTV has
utilized all of its authorized DBS orbital locations by
launching satellites. EchoStar, however, has one DBS orbital
assignment that it purchased at auction that is currently
unoccupied. EchoStar's plans to implement that location at 148+
WL were delayed due to some technical problems with one of its
satellites. It has filed a request that the Commission find it
has met its due diligence obligations for that location. In
addition, EchoStar has a preliminary assignment of channels at
175+ WL for which it has requested an extension of its due
diligence deadlines. The current version of the proposed
legislation does not specify when the prohibition would apply.
In addition, both DIRECTV's parent corporation and EchoStar
have interests in Ku- and Ka-band fixed satellite orbital
locations. Those locations are not specifically allocated to
DBS, but could be used for delivery of video programming such
as local signals. Some authorizations at those locations are
currently unused.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM DALE N.
HATFIELD
Q.1. The FCC is the agency responsible for assigning spectrum
and orbital slots. In the past, the Commission has auctioned
off both spectrum and orbital slots to companies wishing to
provide direct broadcast satellite services. Those auctions
involved some of the largest media companies in the world and
the stakes were very high. If the Congress authorizes some form
of a loan guarantee program targeting the satellite industry,
what assurances can the Commission make that the spectrum and
orbital slots will be used to provide local television stations
in rural areas?
A.1. In licensing satellite systems, the Commission has the
authority to impose conditions on operators. If the Commission
were to auction spectrum that would be used by companies
participating in such a loan guarantee program, it could
require that auction participants certify that they would use
any spectrum acquired to provide local television channels in
rural areas and any licenses issued as a result of an auction
could be so conditioned.
Q.2. We have heard from the National Rural Telecommunications
Cooperative about the cost of the spectrum and the orbital
slot. How much do you think it might cost to launch a
satellite-based service to provide local television service in
rural markets?
A.2. The cost to build and launch a spot-beam geostationary DBS
can range from $200 - $300 million. This does not include the
cost of the orbital location or the cost of developing or
purchasing a distribution system.
Q.3. The Satellite Home Viewer Improvement Act authorized
several new rulemakings in the areas of retransmission consent
and signal standards that must be completed by the end of this
year. What additional rules and regulations does the Commission
envision necessary to implement portions of any loan guarantee
program under its jurisdiction?
A.3. The Commission does not envision any additional rules and
regulations to be necessary since there is no portion of ``any
loan guarantee program under its jurisdiction.''
Q.4. Several of the witnesses expressed concern that a new
bureaucracy could result from this legislation. Which agency
would be best suited to administer a loan guarantee program for
providing local stations in rural markets?
A.4. The Commission does not have the financial expertise
required to recommend a particular agency to administer a loan
guarantee program designed to facilitate access to local
television broadcast signals. The Commission, however,
recognizes the benefits of the approach outlined in S. 2097,
which assigns the responsibilities for approving loan
guarantees and administering the loan guarantee program to
separate entities.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM DALE N.
HATFIELD
Q.1. The FCC is expected to issue a determination on must-carry
digital television standard requirements for cable television.
Would this provision apply to satellite broadcasters?
A.1. The Communications Act of 1934, as amended by the Cable
Television Consumer Protection and Competition Act of 1992,
directed the Commission to begin a proceeding to determine
whether changes in our mandatory carriage rules are necessary
to accommodate digital broadcast television signals on only
cable television systems. Thus, the proceeding currently
underway at the Commission does not address obligations of
satellite television providers to carry local digital broadcast
television signals.
Q.2. Is the FCC expected to issue a determination on must-carry
digital television standards for satellite broadcasters?
A.2. Beginning on January 1, 2002, the Satellite Home Viewer
Improvement Act of 1999 requires satellite carriers that elect
to provide at least one local broadcast signal in a market to
carry all other local broadcast stations requesting carriage in
that market. The law requires the Commission, within 1 year of
enactment, to establish regulations to implement the carriage
obligations of satellite carriers. The statute also
specifically directs the Commission to adopt carriage
requirements for satellite carriers that are comparable to
those imposed on cable television operators.
Q.3. Using spot-beam technology, how much spectrum will be
required to serve DMA markets 30 - 210?
A.3. The amount of spectrum needed will depend on a number of
factors, including the frequency band used, the size or the
type of transmitting antenna (this determines the size of
service area of the spot beams), and the quality and type of
service provided (high definition video and sports programming,
for example, may require more spectrum). Taking these
considerations into account, a rough estimate might be that
approximately 2 MHz of spectrum would be required for each
local TV channel. Assuming a frequency re-use factor of 4 (due
to use of spot beams), and assuming there is an average of
seven local TV channels per DMA market, 630 MHz of spectrum
would be required to deliver all of the local channels
(assuming a must-carry requirement) in 180 DMA's (markets 30 -
210).
Q.4. What was the purchase price for spectrum, used by DBS
providers, in the last FCC auction? What was the cost of the
most recent orbital slot acquisition by a DBS provider?
A.4. From January 24, 1996 through January 26, 1996, the FCC
auctioned two direct broadcast satellite (DBS) construction
permits. The first permit, for the use of 28 channels in the
110+ WL, offer- ing full nationwide coverage, was awarded after
19 rounds to MCI Telecom Corp., with a winning bid of $682.5
million. The second permit, for use of 24 channels in the 148+
WL, was awarded after 25 rounds to EchoStar DBS Corp., with a
winning bid of $52.3 million. The 148+ WL offers coverage for
most of the United States with the exclusion of parts of the
East Coast.
Q.5. How many satellites would it take to deliver local signals
in DMA markets 30 - 210?
A.5. Many direct broadcast satellites in service today use 16
transponders, but the number of transponders a DBS licensee
will decide to place on a given future satellite is difficult
to predict. There are many considerations, including power
requirements. Assuming that each satellite will have 16
transponders, approximately four satellites would be needed.
Assuming that each satellite will have eight transponders,
approximately seven would be needed.
Q.6. What orbital positions could house these satellites?
A.6. DBS licensees may choose to move their satellites, and use
a satellite orbit location where they already have an
operational satellite, to provide local channels. The specific
factors relevant to such decisions involve a wide range of
business planning factors that would be difficult for us to
predict. However, there are DBS orbit locations for which we do
not currently have operational direct broadcast satellites on
all available channels. These locations, which could certainly
be used for provision of local television channels, are as
follows: 61.5+ WL on some channels, and at 148+ WL, 157+ WL,
166+ WL, and 175+ WL.
In addition, orbital locations in the fixed satellite
service allocations at Ku- or Ka-band could also be used. The
Ku-band is heavily used at the current time, while the Ka-band
has 14 authorized but not yet operational systems.
Q.7. Would these be full CONUS locations?
A.7. All full CONUS locations in the existing 12 GHz DBS
allocation to the United States are being used. The 61.5+ WL
location is not quite a full CONUS location, but could be used
to serve most of the contiguous 48 States with the exception of
the Northwest United States. The 148+ WL location could be used
to serve most of the contiguous 48 States, but cannot serve the
Northeastern United States. At the satellite locations further
to the west, there is increasingly limited coverage of the
Eastern United States. The 148+ WL, 157+ WL, 166+ WL, and 175+
WL locations could be used to provide service to Alaska and
Hawaii.
In addition, other frequency bands could be used to provide
local TV channels. In the Ku- and Ka-band FSS allocations,
there are both full CONUS and non-full CONUS orbital locations
that would be potentially usable.
Q.8. Would viewers be able to view local signals using existing
satellite receivers? If not, how many would be required?
A.8. Viewers / DBS customers could use a standard DBS receiver
to view local channels. However, if the local channels are
being provided from a different orbital satellite location than
other DBS programming, a consumer may need a slightly larger
receive dish with two (or more) ``feed horns'' in order to
receive signals. Alternatively, a consumer may need a second
receive dish if they wish to receive signals from satellites
that are significantly separated in orbit from the current
CONUS coverage satellites at 119+ WL, 110+ WL, and 101+ WL. In
addition, for a dish receiving from multiple orbital locations,
the viewer will need a new set top receiver. Also, if the local
signals were delivered using a non-DBS frequency band, such as
the Ka-band, a new set top receiver would be required.
LOAN GUARANTEES AND
RURAL TELEVISION SERVICE
----------
WEDNESDAY, FEBRUARY 9, 2000
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 11:03 a.m., in room SD - 628 of the
Dirksen Senate Office Building, Senator Phil Gramm (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PHIL GRAMM
Chairman Gramm. Let me call the Committee to order.
First of all, I want to apologize to everybody. We had
scheduled the hearing for 10 a.m., but we had a Republican
conference this morning and since many of our Members would
have been denied the right to testify, and I would have been
denied the right to hear them, we rescheduled the hearing to
begin at 11 a.m. I want to thank each of you for coming.
We are in the process of putting together a loan guarantee
program that will do everything economically feasible to
encourage investment in a system that will bring local
television signals to every household, to every farm and
village in rural America.
We believe it is important in putting this proposal
together that it be financially prudent and that it protect the
taxpayers' interest. The best check we have to assure that we
actually get the signals to rural America is a requirement that
those who are making the investment be investing their own
money, that they commit their assets, and that we blend
together a loan guarantee with private capital. There is
nothing that so brings the mind to focus on the task in front
of you than having your own capital, your own assets, your own
money at stake.
I want to say here that I have been working very closely
with Senator Burns, the author of this bill. Without his
leadership, we wouldn't be here. He and I are trying to put
together a bill that we can move forward together.
Senator Lugar said it yesterday, and I will repeat it here:
It is exciting to think about rural America having access to
local television. Whatever we can do, consistent with
protecting the taxpayers' interest, we are going to do. I would
add that if the process fails, if loans are defaulted, we end
up with the worst of both worlds. We end up with no
transmission of local signals, and we end up with the taxpayer
losing potentially $1.25 billion.
I am very happy to have our colleagues here today. I want
to welcome each and every one of them: Conrad Burns from
Montana, who is the author of this bill; Tim Hutchinson from
Arkansas; Craig Thomas from Wyoming; and welcome Blanche
Lincoln from Arkansas. Senator Burns, would you please begin.
OPENING STATEMENT OF CONRAD BURNS
A U.S. SENATOR FROM THE STATE OF MONTANA
Senator Burns. Thank you very much, Mr. Chairman. My
statement will be very short today as we look at this issue and
move it along. I want to thank you, for your office and your
staff have been very good to work with. You made the commitment
that we would get this done early in this session of the 106th
Congress, and you have shown your willingness to do that. You
made the commitment to move this along, and I am very
appreciative.
I believe it's going to take a cooperative and
collaborative effort in order to pass a piece of legislation
that, as you stated, protects the taxpayer, but also does some
things in rural America that we sorely need.
Mr. Chairman, when I offered the loan guarantee on the
Satellite Home Viewer Improvement Act, it was apparent to me
that we were only going to get about 40 of the largest markets
in the satellite broadcast industry to fulfill the requirement
of providing local-into-local service. By the way, I offer my
congratulations to you for keeping this technology-neutral.
That is very important because it allows the landscape of
competition, which has been the best regulator over the years
on ingenuity and entrepreneurship to get this done.
But I also would be remiss if I didn't recognize that a lot
of local radio and television stations would be left out as we
passed that Satellite Home Viewer Improvement Act. Rural areas,
especially rural areas where they depend on the local
broadcaster for their news, weather, and information, would be
left out. In the State of Montana, we have the highest per
capita ownership of satellite dishes of any place in the
country. The ownership of satellite dishes is high in many
rural States. I would imagine that Texas has a great
preponderance of people leaning toward satellite broadcast.
They, too, want to receive their local station because that
provides their local news. That is where they get their local
information, farm and ranch news, weather, and so on. They
cannot be left out of this mix.
I initially proposed the rural viewer amendment because I
was concerned that without it, only the largest television
markets in America would receive local-into-local service
authorized by the Satellite Home Viewer Improvement Act. These
would be the big, profitable markets -- New York, Los Angeles,
Chicago -- where the big get bigger, but the small just don't
have the capital with which to compete. Even the most
optimistic local-into-local plans will require 2 - 3 years to
employ and then to only about 70 of the 210 television markets
in the United States.
Like I said, it is very important in this country, in the
movement of information, that we have local broadcasters
fulfilling their responsibilities to those communities.
What about the other 140 markets? In Montana, I have the
smallest market, number 258 on the scale. I am in a State that
is almost as big as Texas, but not quite.
Chairman Gramm. Let's not get carried away, Senator.
[Laughter.]
Senator Burns. Well, if we were to roll it out flat, if we
were to iron it out flat, we would be bigger than you.
Nonetheless, these markets and the folks that live in these
areas should be rewarded by their local broadcasters just the
same as anybody else. The ability to receive local television
signals is more than just having access to local sports or
entertainment programming. It is a critical and immediate way
to receive important local news, weather, and community
information. Of course, we live in an area where weather plays
a big part.
I want to congratulate my colleague from Texas because he
has picked up an interest in this, and we believe it is very
important for the State of Montana as we move this information
forward. I would also thank my friend from Wyoming and my
friends from Arkansas who feel strongly about this. With over-
the-air broadcast signals and cable delivery limited because of
distance or the geography of our States, satellite television
has become very important. I believe how we broadcast our
local-into-local services will be just as important.
I appreciate this opportunity. I will not go through the
bill, but I believe all the makings are there, including the
building blocks that protect the taxpayer. It is technology
neutral, and it is something that the broadcast industry can
work with. They can make it work with just a little help from
the U.S. Government.
I thank you for your efforts on this particular issue. I
thank you very much. I yield the remainder of my time.
Chairman Gramm. Thank you, Senator Burns.
Senator Hutchinson.
OPENING STATEMENT OF TIM HUTCHINSON
A U.S. SENATOR FROM THE STATE OF ARKANSAS
Senator Hutchinson. Thank you very much, Mr. Chairman. I
want to commend Senator Burns for his outstanding work on this
issue, and I am glad to join Senator Thomas and my colleague
from Arkansas, Senator Lincoln, this morning. Thank you for
affording us the opportunity.
Members of the Committee, thank you for allowing me to
speak on behalf of my constituents who will benefit from
satellite companies being allowed to provide local programming,
and a Federal loan guarantee program that will assist the
industry in reaching that goal.
Arkansas, like Montana, is a rural State. The rugged
terrain of the Ozark and Ouachita Mountains means that many
Arkansans are so far removed from over-the-air signal and cable
providers that they must rely on satellite service as their
sole source of television programming.
I have heard from hundreds of Arkansans who are concerned
about their network programming and want local television
signals through their satellite providers. That is why I am
here today. I want to join with my colleagues, not only those
that are here today but all of my colleagues from rural States,
in support of a Federal loan guarantee program whose goal is
providing unserved Americans with local television programming.
I supported the Satellite Home Viewer Improvement Act
because it ensured that our constituents in unserved areas
would keep their network satellite programming and will be able
to enjoy local programming someday. The challenges created by
requiring satellite companies to provide local-into-local
service is another reason why I am here today.
In order to reach our goal, I believe that satellite
technology is an efficient way to deliver that local
programming. However, that is not to say that cable companies
and cooperatives may not be the best medium in certain areas.
We know that the technology and infrastructure needed to
provide rural, unserved Americans with local television signals
is both underdeveloped and expensive. A loan guarantee program
will assist companies in complying with must-carry rules and
expedite the proliferation of technology needed to provide
local programming to rural customers in States like Arkansas.
Rural communities in my State are very close-knit
communities. The local news and weather, as Senator Burns said,
are important to the families living there. Some people may
think that we are going to a lot of trouble to make sure our
rural, unserved constituents have access to local programming.
While it is nice that all Arkansans would be able to watch our
beloved Razorbacks, there are far more important reasons why we
need to continue our efforts.
One of the benefits of providing local channels is the
ability to inform Arkansans of dangerous weather. Like Montana,
we face a lot of serious weather, but tornados in particular. I
know the Senator from Texas will recognize the severity. We
have not only a great deal of property damage every year, but
lives that are lost every year. The ability to respond quickly
to sudden changes in the weather may mean the difference
between life and death.
Another reason I am here testifying today is because I want
my constituents to have access to the very best technology
available, no matter where they choose to live. It is clear
that many rural communities in my home State are not served
because providing them with reliable programming is not ``cost-
effective.'' That is very understandable.
There is precedent, as all of you know, for the Federal
Government helping in rural areas, whether it is helping with
electrification or telephones. I don't know that we can put a
price tag on the opportunities communities are given when they
have technology available to them. I believe we have the
resources to allow Americans living in rural areas to benefit
from the technology revolution. Americans in rural areas should
not be left out.
Mr. Chairman, I appreciate your commitment to writing a
loan guarantee program that maximizes the probability that the
loans will be paid back and your determination to move
legislation prior to the March 30 deadline. I want to commend
you and the other Members of the Committee for what you are
doing to ensure that rural, unserved constituents have access
to local programming.
Thank you for affording me the opportunity to testify
today.
Chairman Gramm. Thank you, Senator Hutchinson.
Senator Thomas.
OPENING STATEMENT OF CRAIG THOMAS
A U.S. SENATOR FROM THE STATE OF WYOMING
Senator Thomas. Thank you, Mr. Chairman. It is always a
great pleasure to testify when you know your fellow testifiers
are well-informed and intelligent because they agree with me.
[Laughter.]
I am basically going to say the same thing. I do want to
lend my support, however, and join with my colleague, Senator
Enzi, in support of this as it affects our State. This proposal
will bring hope to over 50 million homes in 170 television
markets that otherwise would not receive local signals via
satellite.
I want to commend Senator Burns for his work on this
provision. He and I sent out a letter some time ago, and I
believe that letter attracted a broad base of support for this
type of proposal. I also want to commend you, Mr. Chairman, for
what you have done. I was one of the group that gathered when
we had this bill passed last fall to get this part of it done.
I won't repeat what has already been said, but, without
this, under the best-case scenario, only 40 of the 210
television markets will have local service via satellite, none
of which are in my State. You can understand why this is so
very important to us. There is vital information that people
need which can be obtained from television, not only the news
but the weather, school closings, road reports, and so on.
I am with you, Mr. Chairman, in that we want to make sure
this is a sound financial proposition, and I believe it can be.
I believe the USDA's Rural Utilities Service has the expertise
to administer this loan guarantee program. I come from being
Manager of the Wyoming Rural Electric Association, so we have
had some experience in this kind of thing.
In any event, anything I can do to be helpful, Mr.
Chairman, I want to do. I commend you and the Members of the
Committee and hope we can move forward quickly.
Thank you.
Chairman Gramm. Thank you, Senator Thomas.
I want to welcome Senator Lincoln from Arkansas. I believe
we sometimes forget what a rough place the U.S. Senate is. I
remember when Senator Lincoln first came here, she seemed so
young. Now she is walking around with a cane.
[Laughter.]
I hope people take into account the great sacrifice that we
make in being here.
Senator Lincoln.
OPENING STATEMENT OF BLANCHE LINCOLN
A U.S. SENATOR FROM THE STATE OF ARKANSAS
Senator Lincoln. Thank you, Mr. Chairman, and I appreciate
your willingness and genuineness in holding this hearing on a
very important issue. I did just come from the Agriculture
Committee where the surroundings were not quite as easy, and I
did trip on a television cord. I'm telling you, it's tough when
you are aging as rapidly as I am.
Senator Thomas. Satellites work better.
[Laughter.]
Senator Lincoln. But I do thank you, Mr. Chairman, for your
leadership in allowing us to be here and allowing me to echo
the comments of Senator Johnson, Senator Burns, Senator
Hutchinson, Senator Thomas, and others who have taken a
leadership role in seeing that rural satellite viewers are not
left behind.
I do recognize I am the only Democrat in the room, so I
want to assure you that there is a good Democratic support for
this initiative. I worked hard on this issue during the end of
the session last year, and I think we recognize that there were
a lot of Democrats interested.
Mr. Chairman, it seems like it has all been said, but not
everyone has said it. It is now my turn. I guess that's one of
the privileges, which I quite enjoy, of being a new Member of
the Senate. I always get to go last, so I actually have the
last say. I will take just a few minutes. As I look around, I
am delighted to see new faces who have recognized how important
this issue is to all of us across this country. It's good to
see they appreciate the importance of this issue to folks in
Arkansas and the rest of rural America.
I wish we had all gathered together in November when I was
circulating a letter in support of the rural loan provision. We
might have avoided revisiting the issue today. But now that we
are here, I appreciate your interest. I hope that through these
hearings, and those we are holding in the Agriculture
Committee, we can reach a consensus on how to ensure maximum
coverage in rural areas.
I am probably the best example of the consumers out there.
I live in the middle of nowhere. I have had to use both
satellite and cable. It wasn't until about 6 months ago that I
was actually able to get local stations. I live in the eastern
part of Arkansas, next to the Mississippi River, and for quite
some time all I was able to get was Tennessee news. These
issues definitely hit home. I have to station myself so I can
catch the Seattle news, the Atlanta news, and the Boston news
on satellite, then hopefully I will be able to get the Arkansas
news later in the afternoon or evening.
This is an issue that affects the daily lives and access to
information of thousands of my constituents, and I include
myself in that. Since January 1999, my office has received more
letters and phone calls about satellite legislation than almost
any other piece of legislation we have dealt with. More than
500,000 people in Arkansas were left without access to local TV
programming when we adjourned in November without adopting the
rural loan provision in the satellite bill.
Twenty percent of our viewers in Arkansas depend on
satellite, which is 10 percent above the national average. A
loan guarantee is important because current satellite capacity
can provide local-into-local only in the 30 or so top markets.
I am not telling you anything you don't already know. In my
home State, our largest media market, Little Rock, is only
number 57 in the country. Our other local stations are in even
smaller markets. The people who live in these communities
deserve access to the same local news, weather, and programming
that folks in larger cities have.
As my colleague from Arkansas said, we are prone to
tornados. Of course, they sometimes start in Texas or Oklahoma
and pick up speed. By the time they reach us, they are real
humdingers. We need to know about them when you send them our
way.
There is widespread support in the Congress for this
proposal. Last fall, when the Chairman expressed concern over
the rural loan provision, a bipartisan group of 24 Senators
joined me in signing a letter urging the Majority Leader to
file cloture on and proceed to the satellite bill. After we
delivered the letter, there were five additional Senators who
called my office seeking to sign on at that point. Meanwhile,
Senator Burns was circulating another letter among Republicans,
clearly demonstrating bipartisan support for the rural loan
provision.
Local broadcasters provide a valuable service to rural
communities. They provide people with local news and vital
details about storm warnings, school closings, all of what is
going on in those local communities. People in rural
communities need access to this information. It is vital to
their quality of life. They deserve it. I certainly urge
Congress and this Committee to do its part in seeing that we
get it done. I know we can, and I pledge myself with you,
Mr. Chairman, to work hard to make sure that it does get done.
Thank you very much for inviting me.
Chairman Gramm. Thank you very much, Senator Lincoln.
I would like to ask unanimous consent that we invite all of
the Members on this panel to come up and join us when we finish
with this part of our hearing. We have Dan Crippen with us, who
is Director of the CBO. He will be the next witness. Any of you
who would like to participate in that discussion, we would very
much like to have you.
Let me say that our commitment from last year was that we
would report a bill by the end of March. I believe we are going
to prove better than our word and report a bill by the end of
this month. I hope we can move very quickly. I don't see this
as a partisan issue. Even though Senator Burns is going to
flatten his State out to make it as big as Texas, I have more
people who face problems in getting local signals than any
State in the Union, though on a per capita basis, I think at
least two of the States represented here would exceed Texas. I
am not sure about Arkansas; it would be close.
We all have a stake here. The question is: Can we do it
right? Again, I don't see a conflict between writing a bill
that protects the taxpayer and writing a bill that gets the job
done, because the last thing on earth we want to do is end up
with a bill where we spend the $1.25 billion, we don't get the
coverage, and we don't get the $1.25 billion back.
One thing is certain. Anybody that gets this loan guarantee
and repays the loan will have succeeded. It is success that we
want.
Let me yield to Senator Enzi. I know he has been active in
this. He may want to make a statement and ask some questions.
OPENING COMMENTS OF SENATOR MICHAEL B. ENZI
Senator Enzi. I will include some comments with my
questions. I ask that my entire statement be made a part of the
record.
Chairman Gramm. Your statement will be made a part of the
record as if read in its entirety.
Senator Enzi. I want to thank you for holding this series
of very critical hearings. In Wyoming, there probably isn't
anything that I get more correspondence on than this particular
issue.
Now, I appreciate all of the effort that Senator Burns has
gone to. I want to encourage him not to flatten Montana,
although that would mean greater economic development for
Wyoming because then, people would come to Wyoming to see the
mountains. But I am envisioning him moving us a little further
south, and unless Mexico would give on their border, Texas will
be smaller.
[Laughter.]
Senator Burns. I have to work my way through that one.
Senator Enzi. That is just a part of U.S. ingenuity,
probably, and throughout the history of the United States,
there has been a lot of American inventions that have moved
from novelty to necessity. In each instance, usually the U.S.
Government has helped rural areas to have equality of access to
this new necessity. For instance, the U.S. Mail. We now assure
that for 33 cents you can send a letter anywhere in the United
States, no matter how rural or how far from the mainland. That
is a Federal Government initiative. Later, electricity became a
necessity, and the United States helped rural areas, again, to
be sure that they had this new necessity.
More recently, phones have become a health and safety
necessity, and several programs have been put into effect for
rural areas. Today, television is seen as a necessity. People
rely on TV not just for entertainment but, as you have said,
for news and weather and special warnings of impending
disasters. The more rural a person is, the more they need to
have TV for critical information as well as for entertainment.
No one, hardly anyone, outside of this group or the people
that provide television understand ``must-carry'' and the other
lingo that we are using with this whole issue. What rural folks
understand is that ``must-carry'' and the other special lingo
keeps them from having television signals that they know are
available in the air around them. We need to help everyone get
this basic necessity.
I want to again particularly congratulate Senator Burns for
the lead that he has taken through the Commerce Committee and
for bringing this issue to us early last year. I also, of
course, have to thank my colleague for his comments today and
the interest and leadership that he has shown in this issue.
And I would be very remiss if I didn't mention our lone
Congresswoman from Wyoming, Barbara Cubin, who was one of the
early leaders in getting a solution and one who sold a solution
on the House side. She is watching with a great deal of
interest what we do over here.
The emphasis that I am trying to place here is this rural
one, and I am afraid that part of the message is getting lost
in the city competition issue. I am pleased that each of you
mentioned the rural aspect of this. I would be interested in
comments on how much of a priority in your State the
competition in cities of having more than one method of
delivery and the networks would be as compared to the need for
those rural folks to jump to the head of the list, perhaps, and
be able to get access to what the folks in the cities already
have in one way or another.
Senator Lincoln. I would be glad to jump in. As I
mentioned, Little Rock is our major city in Arkansas, number 57
in terms of the size of its media market. I don't believe we
reach the estimates in terms of what the current satellites
could serve. And even if we did, Little Rock would be the only
market that would be serviced through the current satellites.
That is the reason it is so absolutely important for the entire
rest of our State to be able to have access through the
capability of getting those networks up on satellite and
accessible to, as I said, 20 percent of our viewers, 500,000
people in Arkansas who depend on that.
I would echo what the Chairman said, that we want to see
this as a successful piece of legislation, and I think the
success depends on getting the biggest bang for our buck, and
that means covering as many consumers as we possibly can with
the funds that we are going to be using. In my opinion, the
coverage for consumers is going to be one of the biggest
measures of success in this. For us in rural States, where
almost all of our State is predominantly affected, that is
going to be the real key.
Senator Thomas. Senator, I think certainly there are two
aspects to this. One is to provide some competition for cable
so that the prices do not continue to be unaffected. But the
real emphasis at this point clearly is on the agricultural
area, on the rural area, where people can get no service at all
if they are not in the broad-
cast area. As you know, in our State, the emphasis is on the rur
al.
Senator Enzi. Since my time ----
Chairman Gramm. Let's have both Senator Hutchinson and
Senator Burns respond.
Senator Hutchinson. I think that Senator Lincoln has it
exactly right. In Arkansas, the magnitude of the problem in
rural areas is such that any concern about undue competition is
overwhelmed by the sense that we have to provide that service
to the rural areas. I believe Senator Thomas is right as well,
that competition is a healthy thing.
Senator Burns. This Act, the Satellite Home Viewer
Improvement Act, is the result of a lawsuit that was filed and
tried to deal with this must-carry situation. The must-carry
language in the Cable Act was crafted in my office during that
debate. Although people want to see the network news in rural
areas -- the NBC's, the ABC's, the Fox's, all of these
stations -- they were watching Charlotte, North Carolina, New
York, Los Angeles, San Francisco, Denver, or whatever, and it
was really a slap in the face to the local broadcaster who had
the same programming but couldn't get it to them. They had no
reception in, let's say, the B contour. You have an A contour,
the primary, then you have the B. That is what bothered me, and
that is why we had to come up with an idea on how to service
all of the markets, not just a few, on local-into-local. When
we say local, that means local broadcaster to that B and C
contour.
Perhaps I'm using some terms in there that you are not
familiar with on the Banking Committee, but we're very familiar
with them over on the Communications Committee. The emphasis is
on rural. When the Chairman and I were talking about this, we
asked how do we do that? Well, the RUS funds -- and they came
up during that conference -- were our only vehicle.
Yes, it was flawed, the initial thrust was flawed a bit. We
worked it out, and I think we have a better bill, thanks to the
Chairman working with us. We appreciate your efforts on that.
Chairman Gramm. Thank you, Senator Burns.
Senator Bunning.
OPENING STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. May I make an opening statement?
Chairman Gramm. You certainly may.
Senator Bunning. Thank you, Mr. Chairman, for holding this
hearing. Of all the issues in the first half of the 106th
Congress, I received more mail on satellite television, or the
lack of it, and local stations being carried by satellite than
on any other issue. In many parts of my State, like all of your
States, it is virtually impossible to receive any broadcast.
Cable companies do not cover most of the State. Many in my
State are forced to use satellite reception for the news of the
day, the weather, or whatever it might be, and none of it in
Kentucky contains any Kentucky broadcasts. None. The only
reason they pick up a satellite is to see University of
Kentucky basketball games, because they are usually carried on
national television.
It is very important that we hold this hearing to decide
what is the best way to ensure that folks in the rural areas,
not only in your States, but also in Kentucky, have the same
access to the media in Lexington, Louisville, and any other
stations that are home broadcast stations within the State.
In my area, I receive Cincinnati television. That is all. I
don't get a Louisville or a Lexington station in northern
Kentucky. I am able to see the weather and news, but no news of
Kentucky. If I had satellite and I could pick up Louisville or
Lexington, I would be able to know what is going on south of
me.
I applaud my colleagues who have come before us today to
share their ideas on how we best can make sure the citizens of
our States and our country have access to local news, weather,
and entertainment. I am also very interested in hearing your
thoughts about the Federal loan guarantees that caused so much
controversy at the end of the first session of this 106th
Congress.
I would like to know what all of you think we should do. I
know some of us support the bill as presented. Some of us may
have other ideas on how we can guarantee those loans and make
sure that they are paid back and they get the service we are
looking for into our areas.
Should we limit participation? That is what the dish
companies are doing. They are picking the 30 best or the most
populous or the largest television stations and putting them on
my dish whether I like it or not. I don't want to know what is
going on in Seattle or New York. I want to know what is going
on in Louisville or Lexington. They tell me there is a
technical problem of putting enough local stations that carry
local news on the dish. In this day and age, I think that's
baloney. I think we can do it and do it well.
Obviously, we have a big job ahead of us in finding
solutions to this problem that everyone can live with. But I am
sure, as the Chairman has said, we will have a bill on the
floor by the end of February or some time in early March.
I believe that all of your testimony has gone a long way
toward helping us find an answer. I thank all of you for coming
before us. I welcome you to move up here and join us in asking
questions of Mr. Crippen, the Director of the CBO.
Thank you, Mr. Chairman.
Chairman Gramm. Thank you.
Let me thank each of you for coming. Your testimony is
greatly appreciated. Let me remind you, if you have time, we
would be happy to have you come up and join us.
Let me call Dan Crippen, who is Director of the
Congressional Budget Office. Mr. Crippen, I want to thank you
for being here. Obviously, your input is very important, not
only because you are a very distinguished economist, but also
because of the content of the thought and because you will end
up scoring our loan guarantee, and it will be triggered by an
appropriation of that amount. Your input is very important to
us.
As I mentioned earlier, our goal is to have a loan
guarantee program that will in the process encourage private
investment to deal with this problem. We are trying to
structure it in such a way as to minimize the risk to the
taxpayer, but in doing so maximize the chances that we will
actually achieve our objective.
I think it is important to remember that only a successful
loan guarantee where the loan is repaid is one that actually
puts lead on the target by delivering the signal.
Nonetheless, your input is very important. We want to thank
you for coming on fairly short notice and we apologize for
holding you up an additional hour. Let me ask you to proceed.
OPENING STATEMENT OF DAN L. CRIPPEN
DIRECTOR, CONGRESSIONAL BUDGET OFFICE
Mr. Crippen. Thank you, Mr. Chairman. There is a tradition
at the CBO that I didn't know about before I went. When I
walked into the office, not only was the requisite Government-
issue furniture there, of course, but when I opened the top
drawer of my desk, I found a skunk. That apparently gets
passed ----
Chairman Gramm. Was it dead or alive?
Mr. Crippen. Well, it was dead at the time. It had been
deodorized. While I got some of the meaning at the time, now --
looking up at this panel and the previous one -- I fully
understand why the skunk gets passed on from one Director to
another.
I am pleased to be with you this morning to discuss
providing Federal loan guarantees to increase access to local
television services in mostly rural markets that are unlikely
to receive signals through existing DBS companies.
Federal assistance for this venture, we believe, Mr.
Chairman, would be likely to prove costly. The market for
delivering local television signals would be both subject to
competition and relatively small, making it difficult to ensure
that large investments could be recovered, especially in the
near term. The cost to the taxpayers would depend on the size
of the program and how much of the risk was borne ultimately by
the Government.
The budgetary treatment of loan guarantee programs, as you
know and have just cited, is governed by the Federal Credit
Reform Act of 1990. That Act makes commitments of Federal loan
guarantees contingent on the appropriation of enough funds to
cover the estimated subsidy. Under credit reform, the subsidy
cost of a loan guarantee is the estimated long-term cost to the
taxpayers.
The subsidy cost of federally guaranteed loans typically
depends on expected defaults as well as on any recoveries
through collateral and income from fees or other charges.
In the CBO's view, providing local television service in
rural areas is likely to prove financially and technically
risky, with an attendant regulatory risk we have not assessed.
For such services to be economically viable, millions of
households would have to be willing to pay a premium to
satellite or other service providers to receive local
television stations -- even though most households can view
those stations at no additional charge through their over-the-
air antenna or existing cable subscription. Thus, borrowers of
the proposed guaranteed loans might have trouble achieving the
necessary level of market penetration for a new television
service.
In addition, unlike companies that provide rural
electrification or telephone services, these borrowers would
immediately confront competitors in the marketplace. They would
also face numerous technical risks, including the risk that
emerging technologies will allow local broadcast signals to be
delivered to the home through much less costly methods.
As I mentioned, our analysis does not include any
regulatory risk, such as the availability of spectrum and
appropriate satellite slots, if that is the technology, or the
ability of any new entrant to gain licenses for those
resources.
Many options to provide Federal loan guarantees for rural
television service are under consideration, but the CBO has
estimated the cost of only one proposal thus far. Last fall, we
estimated the subsidy cost of the loan guarantee program
initially included in Title II of the conference report on H.R.
1554. We estimated that this program would have a subsidy rate
of about 28 percent of the total amount guaranteed. For a $1.25
billion loan guarantee program, which was included in that
bill, that translates into an estimated subsidy cost of about
$350 million.
To reiterate, the cost of a loan program to the taxpayer is
determined largely by the riskiness of the venture and how much
of that risk the Government will bear. One way to reduce the
cost of a loan guarantee program significantly is obviously to
reduce its size, either by decreasing the total obligation
level or by guaranteeing less than the full value of each loan.
About half of existing Federal loan programs guarantee less
than 100 percent. Some guarantee as little as 50 percent.
Guaranteeing less than the full value can reduce the cost to
taxpayers in two ways: First, it obviously lowers the total
dollar exposure; second, and more important, it can reduce the
default risk by encouraging private lenders, who have more
expertise in analyzing credit risk, to scrutinize their
exposure more carefully.
Modifying the terms of the loan guarantees can also change
the subsidy cost, but for the most part, such technical changes
would have a relatively small effect on the cost of the
proposed program. Other options to reduce subsidy costs include
requiring borrowers to pay fees, protecting the Government's
security in the event of default, and ensuring effective
underwriting criteria.
It is possible to reduce the cost of proposals to guarantee
loans for delivering additional television services, but it is
not possible to eliminate all of the risk or the cost of making
such guarantees. In theory, the purpose of the Federal loan
guarantee is to provide credit for activities that the private
marketplace considers too risky to pursue on its own. Such
support comes at a cost.
The surest way to reduce the cost of proposals like the one
included in H.R. 1554 would be to reduce the size of the
Federal loan guarantee. Other modifications, such as charging
fees or improving underwriting criteria, are unlikely to reduce
the estimated subsidy appreciably because the activities being
financed are fundamentally risky. Options designed to reduce
the cost to the taxpayers could make the program less
attractive to potential borrowers or lenders, which in turn
could reduce the demand for the loan guarantees.
I will end my testimony at this point, Mr. Chairman,
because I am sure there are questions.
Thank you very much.
Chairman Gramm. Mr. Crippen, thank you for your primer on
loan guarantees. I think that what you have said is clearly
true. I would like to ask you four questions.
First of all, one of the concerns I have had is the concern
you raised here that where we assure that if somebody is going
to borrow money there is a loan guarantee -- which, when
converted into plain, simple English, means if they don't pay,
the taxpayer pays --we should require them to put up capital.
One of the things you always face with a loan guarantee is the
potential that, for example, a group of television stations
might get together and say, well, let's form this entity and
apply for the loan guarantee. But that entity may have
virtually no assets.
One of the things we are looking at is requiring that if
there is an entity set up by a group of economic interests
having assets, if that entity applies for a loan guarantee, we
will require that those who own or are affiliated or associated
with that shell company commit their own assets. Obviously, in
the case of the television stations, the assets would be the
stations themselves.
You could have a county or a State set up an entity, for
example, the Utah Satellite Distribution Corporation, as a
State entity with no assets. But if we required the State of
Utah to commit its tax base as an asset, then obviously we have
an asset.
I would like to get your response on the desirability of
requiring real capital to be committed to this process.
Mr. Crippen. Clearly, Mr. Chairman, under any loan
scenario, private or public, the quality of the collateral is
very important, not just the amount of the collateral.
Secondarily -- something we have not yet discussed -- is the
need to make certain that the Federal Government's lien is
superior and not subordinate to private sector liens, so that
any exposure that the taxpayers have would be met first. It is
not just a matter of being first in line but a matter of making
sure that the private entities involved are paying close
attention to the risk they are exposed to.
Chairman Gramm. That was the third question I was going to
ask you. There has been some discussion of whether the
Government would have prior claim. It seems to me that to do it
any other way -- given that no one is proposing that we
guarantee less than 50 percent of the loan so that obviously
the taxpayer is going to be more on the hook than anybody
else -- to suggest that we not give the taxpayer first claim if
the entity that has borrowed the money defaults would be
totally unacceptable. Is that your and the CBO's position?
Mr. Crippen. Yes, sir. ``Unacceptable'' is not a word we
would use, but it would certainly change the dynamic of the
loan dramatically. If you let the private entities -- whether
they are paying 30, 40, or 50 percent -- get first claim, then
the taxpayers are certainly on the hook. There are a couple of
expressions for that which we probably should not repeat here,
but they should not be second in line. Certainly, the taxpayer
should not be subordinate.
Chairman Gramm. In terms of the percent of the loan
guaranteed, obviously to the degree that the Federal Government
doesn't guarantee 100 percent of the loan, that means that
somebody has to convince a private lender that their project is
credible enough they should actually have some exposure.
I take it from your opening statement that you believe it
is absolutely essential that there be a private risk element in
the loan and that we not have a 100 percent loan guarantee.
Mr. Crippen. Certainly, Mr. Chairman, that is the most
effective way to reduce the subsidy. If your goal is to try, as
you and others have stated, to minimize or reduce the risk to
the taxpayers, that is the most effective way to do it.
Chairman Gramm. A final question. Senator Burns was talking
about using the language of television distribution -- and,
Senator Burns, thanks to these hearings and to all of our
meetings, I now know more about this subject than I want to
know -- and one of the things, it seems to me, that we want to
keep a focus on in this Committee, because it is our
responsibility, is that an advantage of requiring real capital,
an advantage of requiring a private element in the loan by not
guaranteeing 100 percent of the loan, an advantage of giving
the taxpayer first claim forces those that are involved to
exercise prudence and due diligence. If, in the end, they have
nothing at stake, if only the taxpayer has something at stake,
I think that breeds, whether people like to admit it or not,
the willingness to take risks that people would not ordinarily
take if they had assets of their own at stake. A lender making
a loan where they have no risk is a very different lender than
one making a loan who faces some risk.
I see doing the things you have outlined -- requiring real
capital, guaranteeing less than the face value of the loan,
giving the Federal Government first claim -- but I think there
is an added benefit, and that is, it reinforces prudence and
due diligence on the people that are borrowing the money and
the people that are making the loan. Do you agree with that?
Mr. Crippen. I do, and I would add that it is prudence and
due diligence by people who are probably much better able to
assess the quality of the loan or the venture itself than any
of us.
Chairman Gramm. Thank you, Mr. Crippen.
Senator Burns.
Senator Burns. Thank you, Mr. Chairman.
Mr. Crippen, do you remember the details of the Chrysler
guaranteed loan program when Chrysler was ----
Mr. Crippen. Probably not well enough to answer your
question, but I will try.
Senator Burns. I believe it would be unfair, but, actually,
I like our approach, the way we are doing this right now. I
also want to caution that when we start into a program like
this, had we taken this same attitude, we would not have
electricity on a lot of our farms and ranches today. There is a
certain amount of obligation that we have toward rural America
that would make the risk a little more palatable to the
taxpayer because we have an obligation to our rural areas that
are very sparsely populated. In other words, in eastern
Montana, we have a lot of dirt between light bulbs, and we
wouldn't have electricity today had it not been for the REA.
As we move along, I appreciate your testimony this morning.
I also appreciate your figures and your view of how we should
structure this thing. I believe the Chairman has it just right.
I like the idea of reinforcing prudence and due diligence and
the responsibility that borrowers have to the taxpayer, to
their own viewing audience, and also to their industry on how
they approach this. I think that is what brings it all
together. It may be the very thing that ties them together that
will make it a success.
I thank you for your testimony this morning. That is all I
have to say. I appreciate your good help.
Chairman Gramm. Thank you.
Senator Enzi.
Senator Enzi. Thank you, Mr. Chairman.
In your testimony today and in a letter that I saw you had
sent, you estimated that there would be, it looks like two
different numbers, a $300 million cost or $350 million cost on
the loan. Can you give me a little more information on how much
of that is up front? Is that spread? Is that an annual cost?
What factors are involved in that?
Mr. Crippen. The way the credit reform requirements are
now, since 1990, the total exposure for the taxpayer is to be
estimated up front as a net present value over the life of the
loan. According to the Credit Reform Act, at least, the $300-
plus million would have to be appropriated in the first year.
It is not an annual cost; it is the total expected cost of the
credit.
The main factors, obviously, are how much of the loan is
guaranteed by the Federal Government and what the risk of any
default might be.
Senator Enzi. What assumptions were made when coming up
with the $350 million cost?
Mr. Crippen. The primary one, of course, is that the
legislation specifies $1.25 billion of loan guarantees and
covers 100 percent of the loans. Also, the default risk is
relatively high, as I stated, because of the technical and
financial risk involved.
Senator Enzi. What would you consider to be the most
significant risk in this?
Mr. Crippen. I don't know that I can say which is most
significant. There is certainly a financial risk in the loan
itself. But more important, is the business a going concern?
Can it get enough subscribers? There is a technical risk not
only in delivering service with current technology, but also in
what new technology might do. And there is a regulatory risk in
whether or not we have slots and spectrum and other things that
would be needed to implement these systems.
Senator Enzi. Do you have any specific suggestions on how
to set up the selection process in ways to minimize the risk
through that selection?
Mr. Crippen. I think the Chairman was talking about how one
can set up the loan program. That is probably the best thing to
focus on, as opposed to trying to regulate the characteristics
or criteria of applicants. It is the nature of the program that
will bring serious folks to the table. If they put up real
assets, that will help to mitigate the risk the taxpayers face.
Senator Enzi. Thank you.
Thank you, Mr. Chairman.
Chairman Gramm. Senator Bunning.
Senator Bunning. Thank you.
Is the risk dependent on the inability to have one specific
entity responsible for the loan? Maybe you can clarify that for
me.
Mr. Crippen. No, it is not. In fact, the legislation we
scored made provision for half of the loan going to one entity,
but having other entities eligible as well.
The one primary issue that drives our estimate is the
economics. Currently, cable passes about 97 percent of all
television households, so there is a 3 percent market, if you
will, as an upper bound of people who can't or don't receive
local television. I say upper bound because some of those 3
percent are receiving it through other, noncable means and over
the air. There is a very small number of households who
currently can't receive local television via another means.
That means there is instant competition in most of the
country. Ninety-seven percent of the country has another
source, in cable, so the competition that would be instantly on
the ground in most places would mean there wouldn't be the
ability to have monopoly pricing or even relatively high
pricing. But it also means there is a very small market, and
with many of these ventures, the fixed capital costs are high
and the variable cost is very low, so it is a matter of volume
and number of subscribers that help make the venture
economically viable.
Thus, it is the current economics of television in this
country that drives these estimates more so than any individual
loan or technology.
Senator Bunning. The fact of the matter that we hear from
so many of these people is because they are, in fact, shut out
of television completely.
Mr. Crippen. Senator, I am obviously not privy to any of
your correspondence. Most of the letters I have seen on this
subject are complaining because people have been cut off from
network programming, and that is because the local broadcasters
can ----
Senator Bunning. They get something that is carried on a
DSH like cable. But they don't get ABC, CBS, NBC, and Fox.
Mr. Crippen. Right. And they don't get that even on their
DSS because the local broadcasters have disallowed the waiver.
That is what many of the complaints that I have seen and talked
to people about focus on -- that they are not getting network
broadcasting as opposed to local broadcasting.
Senator Bunning. I am sure that DSH and DIRECTV, if they
had a minimal fee for the must-carry provision and carried
something in Kentucky or, for that matter, in Wyoming or
wherever, would get enough subscribers to pay down the loan
over a 25-year period. Are you telling me that is the risk we
are taking because technology might overtake the ability to get
that in another way?
Mr. Crippen. Yes, as well as the fact that there is such a
small market in which to gain any market share for this new
service, there are a limited number of subscribers, and
technology may well overcome this need very soon. Thus, there
is a technical risk in addition to the basic financial risk,
which is the primary one.
Senator Bunning. I know the CBO doesn't issue opinions on
this, but we have to deal with it on a daily basis, that the
viability of delivering services where nobody else will go is
the main cause of this thing that we passed last year. For
example, rural electrification and other things that were
considered weren't considered essential at the time, but are
considered very essential now.
How much is that worth in this equation? We have to weigh th
at.
Mr. Crippen. We are not here to say it is worth it or not
worth it. That is not up to us. All we are saying is that the
current technology and private sector are unable or unwilling
to take the risk to do this. Obviously, the intent of this
legislation is to provide some impetus to do it where it is not
going to be done otherwise. That impetus, in our view, will
expose the taxpayers to some risk. It is our duty to tell you
what we think that number might be, but not to say the
legislation is right or wrong.
Senator Bunning. You are telling us it is a high risk.
Mr. Crippen. It is a relatively high risk.
Senator Bunning. What if we were to go ahead with the
guaranteed loan program, but instead of guaranteeing 100
percent of the loan, we were to guarantee 50 percent?
Mr. Crippen. Well, the more you reduce the coverage, the
lower the risk.
Senator Bunning. Thank you very much.
Chairman Gramm. Senator Allard.
OPENING COMMENTS OF SENATOR WAYNE ALLARD
Senator Allard. Thank you, Mr. Chairman.
The thing that bothers me is if a company can't afford to
provide the loan, how are they going to be able to afford to
pay down the loan? Do you have a response to that?
Mr. Crippen. The notion is that the loan guarantee would
allow a lower rate of interest and presumably reduce the
overall cost of financing to tip it over onto the side of the
ledger where it is now viable. It is certainly not ----
Senator Allard. We create an interest subsidy, in fact.
Mr. Crippen. Yes.
Senator Allard. Do you have any idea how many people might
benefit from this?
Mr. Crippen. Of course, you have to define benefit and all
of that, but just looking at the raw data, 97 percent of the
households who have televisions in the country are passed now
by cable, and cable must carry local channels as well as
network broadcasting, so 97 percent of television households
have the ability now to get network and local programming
through their cable. Of those, approximately 67 percent are
currently taking advantage of that. But the point is, if those
people wanted to get local and network programming now, there
is at least one alternative.
Part of the objective, as others said this morning, is to
introduce more competition into some of those areas. But in
terms of people who don't now receive coverage, we believe the
maximum would be about 3 percent of households. We believe that
is a maximum because they may be getting over-the-air signals,
they may be getting signals through microwave systems, or they
may be getting signals elsewhere.
Therefore, the maximum number of folks who can't receive
local broadcasts and network signals is about 3 million
households.
Senator Allard. I apologize for being late, and you may
have answered this question, but how much do you anticipate
this would cost the taxpayers?
Mr. Crippen. A little over $300 million is our number. This
is a unique program. Many of the things we score under credit
reform have thousands if not hundreds of thousands of loans, so
it's much easier to think about in terms of a risk pool and all
of those things. But this is one event, and while the
legislation makes loans available to several entities, it is
still a single occurrence. You might envision a world in which
borrowers pay the loans back, as the Chairman said, and if it
is successful, there would be little cost to the taxpayer. On
the other hand, if they default, there would be a big cost.
Thus, what we are forced to do, and what the law requires,
is to make an assessment of what the factors are and say this
is ulti-
mately the value or the risk to the taxpayer of this particular
loan.
Senator Allard. What is the feasibility of putting maybe a
$1 fee on each person that would benefit? If you did that, you
would pay for the program.
Mr. Crippen. It would take $350 million, and there are only
a few million people, in theory, who would want this service.
Senator Allard. But you said it could be up to 3 million.
Mr. Crippen. It could be. That would be $100 per person.
Senator Allard. To me, $2 or $3 doesn't seem like an
excessive amount if it is a one-time deal, and that is what we
are talking about here, basically, aren't we?
Mr. Crippen. No, it would be closer to $100 per person for
all 3 million people.
Senator Allard. Now, there are some bleak aspects to what
we are talking about here. How realistic do you think it is to
expect private sources to pick up these loans without a full
100 percent guarantee?
Mr. Crippen. I don't know, Senator. In looking at other
Federal programs, the guarantees run from 100 percent all the
way down to 50 percent, and even at the 50 percent level there
are still some willing takers. It will obviously depend on the
individual credit involved, whether the bankers or the other
private financiers believe it is a viable, going concern that
they are dealing with. It depends a lot on the specifics of the
individual deal and on how much the private sector would be
willing to take as risk.
At this point, it looks like they aren't willing to take
the risk standing alone and without this program. That is
obviously the reason for your legislation.
Senator Allard. But can you see where we could make this
attractive to the individual investors with a partial guarantee
at some point there?
Mr. Crippen. Sure.
Senator Allard. Do you have any idea where that threshold
might be?
Mr. Crippen. I don't. Again, it would depend on the
specifics of the deal and on the kind of technology involved.
There are things like regulatory risk that we haven't taken
into account here. Let's say there was a large corporation
willing to do it. Then it would be easier, I am sure, to get
private funding. If it is an unknown new entity, it is going to
be much harder. It depends on a lot of those characteristics.
Senator Allard. Mr. Chairman, I believe he brings up a good
point on regulatory risk. We do have some provisions in our
banking laws where we require banks to invest in their
communities, and I am wondering if somehow the other credit
couldn't be applied to this as an investment into rural
communities. We might give that some thought.
I would also ask unanimous consent that my prepared remarks
be made a part of the record.
Chairman Gramm. They will be made a part of the record.
Before we conclude, I want to go back and touch very
briefly on a few things, Mr. Crippen. The more capital we
require to be put up, the less the cost is going to be, other
things being the same.
Mr. Crippen. Yes.
Chairman Gramm. The more we require private lenders that
are participating to share with the Government some of the
risk, the lower the cost is going to be to the taxpayer.
Mr. Crippen. Correct.
Chairman Gramm. The stronger the claim we give the taxpayer
to claim assets if borrowers default, the lower the cost will
be to the taxpayer.
Mr. Crippen. Mr. Chairman, if the Federal taxpayers were
made subordinate, it might raise the cost to the taxpayer
dramatically as opposed to slightly.
Chairman Gramm. Well, again, it seems to me that what we
are trying to do here is not wish away a problem. Obviously,
there is both a technical challenge and an economic challenge
in what we are trying to do. It seems to me that a well-crafted
loan guarantee basically says that we are willing to incur some
risk to try to encourage this to happen. But if you underwrote
100 percent of the loan and you set no capital standards, you
know the loan will be made, but you have no guarantee
whatsoever that any service will ever be provided.
It seems to me that if you set out a prudent policy, you
enhance the chances that, in fact, you will get coverage to the
people who are going to be paying for that coverage, and in the
process make it possible to repay the loan.
Again, I get back to my point. A fiscally responsible
program not only minimizes the risk to the taxpayer, but also
maximizes the chance that in San Geronimo we are going to get
access to the local programming. Do you agree with that?
Mr. Crippen. Certainly, the less exposure the taxpayer has,
the more likely the success of the loan. That is exactly what
you are saying.
Chairman Gramm. Mr. Crippen, we can't ask you and I
certainly am not asking you to wish away the problem. This is
obviously a difficult problem. We hope to put together a bill
that is going to have less exposure to the taxpayer than we had
before. Obviously, we hope that the projected cost, which we
have to appropriate up front, will be less than $350 million.
All we can do is keep in mind what you have said, write the
bill to the best of our ability, and have you score it. We will
see how the process goes and whether or not we actually achieve
the goal.
No one could ask for clearer testimony than that which you
have provided today, and I want to thank you on behalf of the
Banking Committee.
Mr. Crippen. Thank you.
Chairman Gramm. Thank you very much.
We stand adjourned.
[Whereupon, at 12:10 p.m., Wednesday, February 9, 2000, the
hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
Thank you, Mr. Chairman, for holding this second hearing on loan
guarantees to provide local television service in rural areas.
Throughout the history of the United States we have seen several
American inventions move from novelty to necessity. In each instance
the U.S. Government has helped rural areas to have equality of access
to necessity.
First was the U.S. Mail -- we even assure that 33 cents will
deliver a letter to anywhere in the United States, no matter how rural
or distant from the mainland.
Then electricity became a basic necessity. The Rural Electric
Associations were encouraged to fill a rural need.
Phones more recently have become a health and safety necessity.
Several programs for rural phone service have made phones available to
almost everyone.
Today, television is seen as a necessity. People rely on TV not
just for entertainment, but for news and weather and special warnings
of impending disasters. The more rural a person is, the more they need
to have TV for critical information as well as for entertainment.
No one, especially rural folks, understand ``must-carry'' or any of
the other special lingo that is used to keep them from having
television signals that they know are in the air around them. We need
to help everyone have this basic necessity.
At the last hearing we heard from the parties that are interested
in participating in the program this Committee creates. Now we get to
hear from our colleagues who were working to include a loan guarantee
in the Satellite Home Viewer Improvement Act of 1999. I would like to
especially thank Senator Burns of Montana for bringing to the Senate's
attention the situation faced by rural satellite viewers and I look
forward to working with him to develop a solution that truly benefits
rural America. Senator Burns has provided excellent leadership on this
issue for several years. I am interested in hearing from our colleagues
on this panel their ideas and suggestions for how we can craft a
program that protects the taxpayer and brings local television stations
to rural areas as quickly as possible.
I would also note and thank my colleague from Wyoming for his
interest in our bill. I also want to mention and congratulate the
Congresswoman from Wyoming, Barbara Cubin, for her dedication to this
issue, her early work on solutions, and her ability to sell it on the
House side.
During the last hearing we learned that the satellite programming
companies, EchoStar and DIRECTV, are quickly rolling out local-into-
local service in the top 30 markets but have no plans to serve rural
markets without some sort of Government incentive or mandate. As we
have seen in other industries, regulations and mandates often block
innovative solutions to longstanding problems. I believe that any plan
this Committee develops must be targeted to bring local television
stations to unserved households in Glendive, Montana, and Cody,
Wyoming, not just the top 100 or 150 markets. We should be looking to
serve the unserved first -- maybe providing an incentive for
programming companies to actively work to close the gap --from the
smallest to the largest media markets. I also believe we should take
into account the size and resources of the applicants and consider
limiting the program to companies focusing their operations in rural
areas. We must also ensure once the satellite is in orbit and providing
service to rural America that it not end up serving urban areas due to
economic excuses made by the operator.
I have thousands of letters from constituents who live in the most
remote areas of my State and who use a satellite system to stay
connected to the world. One of the most poignant letters I received was
from a constituent who lives in a rural area near Worland, Wyoming.
Worland is a particularly isolated spot in my State, and this
constituent uses a satellite dish to receive network programming. She
would like to be able to watch Wyoming stations for her news and
weather, but because of distance and geography is unable to do so. I
would like to read some excerpts from her letter expressing her
frustration at not being able to access Wyoming network stations. She
writes:
L We have no local television station, only one local mediocre
radio station, and cable TV is not even considering coming this far out
in the country. Wyoming, as you are only too well aware, is isolated in
its own right. We have no such thing as `next-day' delivery of mail or
Federal Express or Airborne deliveries. . . . For us `out in the
boonies' the satellite system was our only link to the Nation's news,
entertainment, and culture. It provided us a link to the rest of our
Nation and the world.
She goes on to convey her displeasure at her inability to receive
the same types of satellite programming access that the urban areas
receive. I believe people such as this constituent should be the first
to benefit from the loan guarantee program we develop in this
Committee.
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank the Chairman for holding the second hearing
in our series of hearings to examine the issue of loan guarantees for
rural broadcasting more closely. Although it was unfortunate that the
weather forced us to delay this hearing initially, I am pleased to see
that this new date has afforded the Committee the opportunity to hear
from several additional Members.
I'm sure that my colleagues have received a significant response
from their constituents on this issue, just as I have. We all have
constituents who are concerned about being able to receive their local
stations, and I appreciate the opportunity to learn more about the
issue.
As a Member of the Banking Committee, I'm hopeful that we can find
a way to balance the concerns of rural constituents who wish to receive
their local broadcast stations with the concerns that taxpayer money
should be protected. I believe it is possible to formulate a loan
guarantee program that will take both viewpoints into account.
I welcome my colleagues to the Banking Committee, and I look
forward to their testimony.
Thank you very much, Mr. Chairman.
----------
PREPARED STATEMENT OF CONRAD BURNS
A U.S. Senator from the State of Montana
February 9, 2000
To begin with, I would like to thank Chairman Gramm for holding
today's hearing. The fact that this hearing is being held so early in
the session is a clear indication of just how serious this issue is to
both the Chairman and the entire Senate. I would also like to thank the
Chairman for the open and cooperative approach he has taken with me on
this issue.
I am very pleased to report that the Chairman and I have come to an
agreement in principle on a bill that would provide local television
signals to rural America in a fiscally responsible way. I am confident
that the ``Burns - Gramm'' bill will meet this important goal. The
Chairman and I plan to introduce the bill as soon as possible after
today's hearing, taking into account the expert testimony we will hear
from Dan Crippen, the Director of the Congressional Budget Office.
Providing access to local television signals is crucial to rural Sta
tes. With over-the- air broadcast signals and cable delivery limited by
the geography of my own State of Montana, satellite television has been
a staple of our so-called ``video marketplace'' for many years. In
fact, Montana has the highest penetration level of satellite television
in the country at over 35 percent.
I initially proposed the rural viewer amendment because I was
concerned that without it, only the largest television markets in
America would receive local-into-local service authorized by the
Satellite Home Viewer Improvement Act. These are the very profitable
cities like New York and Los Angeles with millions of television
households. Even the most optimistic local-into-local plans will
require 2 - 3 years to employ, and then to only about 70 of the 210 TV
markets in the United States.
What about the 140 other TV markets? There are 16 States --
including my own --that do not have a single city among the top 70
markets. They should not be left out of the information age just
because they are smaller. These 140 markets that would be left out are
more than just remote, unpopulated areas. They include half of the
Nation's State capitals and a dozen cities with nearly 500,000 people
each.
The rural viewer amendment was designed to spur technologies that
would bring news and information to consumers who because of distance
or geography are not able to get local TV signals. It could be the
launch of satellites to serve these 140
``unserved markets'' or it could be terrestrial technologies that delive
r these signals.
The ability to receive local television signals is more than just
having access to local sports or entertainment programming. It is a
critical and immediate way to receive important local news, weather,
and community information. Access to local signals is particularly
critical in Montana, where we experienced severe flooding last fall and
sudden blizzards are always a possibility.
During the conference on the Satellite Home Viewer Improvement Act
last fall, I became very concerned that the bill being considered did
not address the needs of rural viewers. Several of the conferees shared
my concerns and eventually agreed to accept the rural viewer amendment
I offered into the conference report, which was approved by the House
411- 8. The language that was eventually accepted by the conferees went
through literally scores of different versions over several weeks to
make sure it was fiscally sound and administered properly. It would
have created a Federal loan guarantee program to make sure that all
Americans had access to local television signals.
While he agreed with the goal of the amendment, Chairman Gramm
expressed strong objections to its inclusion in the conference report.
Eventually an agreement was reached that the rural viewer amendment
would be taken out of the conference report and given fast-track
consideration before the Senate Banking Committee. The Chairman showed
his good faith by committing to report legislation to the Senate for
floor consideration by March 30, 2000.
Chairman Gramm and I are in absolute agreement that the loan
guarantee program must meet two critical conditions -- the program
should not favor one technology over another and it should not pose a
burden to the taxpayer. I am confident that these hearings will serve
as a constructive base to make sure that the Senate is able to vote out
the best bill possible on this issue.
As I have emphasized to the Chairman during our discussions on how
to draft the bill, I have no pride of authorship about the language I
submitted to the SHVIA conferees. While I am confident that the rural
viewer amendment was the best solution we could have come up with in
the final weeks of session, I know it can be improved -- and improved
significantly. I am not concerned with how this problem is solved but
only that it is solved in the most effective way possible, both for
consumers and for taxpayers. The Chairman has a wealth of expertise in
the financial arena and I welcome his contributions on this issue.
Again, I thank the Chairman for the opportunity to testify today. I
look forward to continuing to work with him and other interested
Members in a bipartisan way to solve this critical problem for
America's rural television viewers.
Thank you very much, Mr. Chairman.
----------
PREPARED STATEMENT OF TIM HUTCHINSON
A U.S. Senator from the State of Arkansas
February 9, 2000
Mr. Chairman, Members of the Committee, thank you for allowing me
to speak on behalf of my constituents who will benefit from satellite
companies being allowed to provide local programming, and a Federal
loan guarantee program that will assist the industry in reaching that
goal.
Arkansas is a rural State. The rugged terrain of the Ozark and
Ouachita Mountains means that many Arkansans are so far removed from
over-the-air signal and cable providers, they must rely on satellite
service as their sole source of television programming.
I have heard from hundreds of Arkansans who are concerned about
their network programming and want local television signals through
their satellite providers. This is why I am here today. I want to join
with my colleagues from rural States in support of a Federal loan
guarantee program whose goal is providing unserved Americans with local
television programming.
I supported the Satellite Home Viewer Improvement Act (SHVIA)
because it ensured that our constituents in unserved areas would keep
their network satellite programming and will be able to enjoy local
programming someday. The challenges created by requiring satellite
companies to provide local-into-local service is another reason why I
am here today.
In order to reach our goal, I believe that satellite technology is
an efficient way to deliver that local programming; however, that is
not to say that cable companies and cooperatives may not be the best
medium in certain areas.
We know that the technology and infrastructure needed to provide
rural, unserved Americans with local television signals is both
underdeveloped and expensive. A loan guarantee program will assist
companies in complying with must-carry rules and expedite the
proliferation of technology needed to provide local programming to
rural customers in States like Arkansas.
Rural communities in my State are very close-knit, and local news
and weather are important to the families living there. Some people may
think we are going to a lot of trouble to make sure our rural, unserved
constituents have access to local programming. While it is nice that
all Arkansans would be able to watch our beloved Razorbacks, there are
much more important reasons why we must continue our efforts.
One of the benefits of providing local channels is the ability to
inform Arkansans of dangerous weather. Tornados damage property and
take lives every year in my State. The ability to respond quickly to
sudden changes in the weather may mean the difference between life and
death.
Another reason I am here testifying today is because I want my
constituents to have access to the best technology available, no matter
where they choose to live. It is clear that many rural communities in
my home State are not served because providing them with reliable
programming is not ``cost effective.''
Can we put a price tag on the opportunities communities are given
when they have technology available to them? Personally, I believe we
have the resources to allow Americans who are living in rural areas to
benefit from the technology revolution. Americans in rural areas should
not be left out.
There is no doubt that reaching the goal of providing rural
customers with local programming is going to take cooperation. It is my
hope that the technologies best suited to provide the local signals to
our constituents will be given the opportunity to do so.
Mr. Chairman, I appreciate your commitment to writing a loan
guarantee program that maximizes the probability that the loans will be
paid back, as well as your determination to move legislation prior to
the March 30 deadline.
I commend the work you and the other Members of the Senate Banking
Committee are doing to ensure that my rural, unserved constituents have
access to local programming. Again, thank you for allowing me to speak
on behalf of thousands of Arkansans who will benefit from the work
being done here.
----------
PREPARED STATEMENT OF CRAIG THOMAS
A U.S. Senator from the State of Wyoming
February 9, 2000
I appreciate this opportunity to lend my support for the rural loan
guarantee provision to bring local television service to small markets.
This proposal will bring hope to over 50 million homes in 170
television markets that otherwise would not receive local signals via
satellite.
I want to commend Senator Burns for his work on this provision.
Like the State of Wyoming, Montana has many small, rural television
markets that will not get any local signals via satellite without the
rural provision. I also want to thank Chairman Gramm for his commitment
to work on this issue and to craft a fiscally responsible plan that
will ensure that all consumers -- especially those in medium and small
markets -- have access to local broadcast signals via satellite. Last
year, I worked with Senator Burns on a letter that attracted a broad
base of support from our colleagues for this type of proposal. I know
this sentiment is shared on both sides of the aisle.
Without this plan, only the very largest television markets in
America will receive local-into-local service authorized by this
legislation. These are the profitable cities such as New York and Los
Angeles. Under the best-case scenario, only 40 of the 210 television
markets will have local service via satellite. None of these markets
are in my State of Wyoming.
Unfortunately, because of distance or geography, not everyone can
get a local TV signal, even with a rooftop antenna. The rural provision
in this legislation will spur technologies that will bring news and
information via satellite to consumers who cannot get a decent over-
the-air signal.
We have very harsh weather in Wyoming and we rely on local channels
as an important way to receive important local news, storm information,
road reports, and school closings.
Some have raised concerns about the potential costs of this
provision to the American taxpayer. I will put my record as a fiscal
conservative up against anyone in the Senate. I am not going to support
any program that will jeopardize the Treasury or the American taxpayer.
I am confident that protections can be written into this proposal that
will ensure that taxpayers will not be left holding the bag.
I also believe the USDA's Rural Utilities Service has the expertise
to administer this loan guarantee program. I am not aware of any
Federal agency that has the expertise and loan experience to bring
vital telecommunications services to rural America as does the Rural
Utilities Service.
I appreciate the opportunity to be here today and look forward to
working with Members of the Committee to craft legislation that will
ensure constituents in rural America are not left out.
PREPARED STATEMENT OF BLANCHE LINCOLN
A U.S. Senator from the State of Arkansas
February 9, 2000
Thank you, Mr. Chairman and Members of the Committee, for allowing
me to echo the comments of Senator Johnson and others who have taken a
leadership role in seeing that rural satellite viewers are not left
behind.
Mr. Chairman, it seems like it has all been said, but not everyone
has said it. I guess that's one of the privileges of being a new
Senator in the Minority Party. I get to go last. I will take just a few
moments. As I look around the witness table, I see some new faces and
I'm glad my colleagues appreciate how important this issue is to folks
in rural Arkansas and rural America.
I wish we had all gathered together to get this done last fall,
when I was circulating letters in support of the rural loan provision.
We may have been able to avoid revisiting this issue today.
But, here we are and it's important that we take this opportunity
to act. I hope that through these hearings, and those we're holding in
the Agriculture Committee, we can reach a consensus on how to ensure
maximum coverage in rural areas.
This issue affects the daily lives and access to information of
thousands of my constituents. Since January 1999, my office has
received more letters and phone calls about satellite legislation than
almost any other issue. More than 500,000 people in Arkansas were left
without access to local TV programming when we adjourned in November
without adopting the rural loan provision in the satellite bill.
A loan guarantee is important because current satellite capacity
can provide local-into-local into only the 30 or so top markets. In my
home State, our largest media market, Little Rock, is only number 57 in
the country. Our other local stations are in even smaller markets. The
people who live in these communities deserve access to the same local
news, weather, and programming that folks in larger cities have.
There is widespread support in the Congress for this proposal. Last
fall, when the Chairman expressed concern over the rural loan
provision, a bipartisan group of 24 Senators joined me in signing a
letter urging the Majority Leader to file cloture on and proceed to the
satellite bill. After we delivered the letter, five additional Senators
called my office seeking to sign it. Meanwhile, Senator Burns was
circulating another letter among Republicans, clearly demonstrating
bipartisan support for the rural loan provision.
Local broadcasters provide a valuable service to rural communities.
They provide people with local news and vital details about storm
warnings and school closings. People in rural communities need access
to this information. They deserve it. I urge Congress to do its part
and see that they get it.
Thank you.
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PREPARED STATEMENT OF DAN L. CRIPPEN
Director, Congressional Budget Office
February 9, 2000
Mr. Chairman, Members of the Committee, I am pleased to be here
this morning to discuss providing Federal loan guarantees to increase
access to local television services. The proposed loan guarantee
program is designed to encourage investment in systems that deliver
local television signals to mostly rural markets that are unlikely to
receive those signals through existing direct broadcast satellite (DBS)
companies. In my statement today, I will provide an overview of some of
the factors that affect the budgetary cost of such loan guarantees. I
will also discuss options that might reduce the cost of the proposed
program to the Federal Government.
Federal assistance for this venture would be likely to prove
costly. Most of the proposals envision large capital investments. But
the market for delivering local television signals would be both
subject to competition and relatively small, making it difficult to
ensure that large investments could be recovered, especially in the
near term. Federal credit programs can shift -- but not eliminate --
the risk of such projects. The cost to the Federal Government would
depend largely on the size of the program and how much of the risk was
borne by the Government.
Factors That Affect the Budgetary Cost of Loan Guarantees
Many options to provide Federal loan guarantees for rural
television service are under consideration, but the Congressional
Budget Office (CBO) has estimated the cost of only one proposal. Last
fall, at the request of Congressman Bob Goodlatte, the CBO estimated
the subsidy cost of the loan guarantee program initially included in
Title II of the conference report for the Intellectual Property and
Communications Omnibus Reform Act of 1999 (H.R. 1554). My testimony
this morning is based on our analysis of that program.
H.R. 1554 envisioned a $1.25 billion loan guarantee program. Up to
half of that amount could be awarded to a single borrower, with the
remainder divided among several smaller borrowers (each receiving no
more than $100 million). The loans would be used to finance the
infrastructure needed to deliver local television broadcast signals --
whether through satellite facilities, cable systems, or other wired or
wireless systems. Although the legislation was written to cover a
variety of possible technologies, key supporters argued that the
program should be used to finance satellite transmission of local
television signals.
The budgetary treatment of loan guarantee programs is governed by
the Federal Credit Reform Act of 1990 (as amended). That Act makes
commitments of Federal loan guarantees contingent on the appropriation
of enough funds to cover the estimated subsidy associated with the
guarantees. Under credit reform, the subsidy cost of a loan guarantee
is the estimated long-term cost to the Government, calculated on a net
present-value basis. Budget authority for the subsidy is recorded in
the year it is provided; outlays are shown in the year in which the
guaranteed loans are disbursed.
The subsidy cost of federally guaranteed loans typically depends on
the extent of any defaults and the degree to which those losses are
offset by proceeds from liquidating collateral and by income from fees
or other charges. (Some loan guarantees also provide an explicit
interest rate subsidy, which adds to the cost.) The credit risk of
existing loan guarantee programs varies widely. Some programs have
average default rates of less than 2 percent; others, between 10
percent and more than 20 percent, net of recoveries. Most existing
programs guarantee a high volume of loans each year, effectively
pooling the credit risk of many individual borrowers. In addition,
fees -- particularly up-front fees -- offset some of the subsidy cost
of most loan guarantee programs.
In the CBO's view, providing local television service in rural
areas is likely to prove financially and technically risky. For such
services to be economically viable, millions of households would have
to be willing to pay a premium to satellite or other service providers
to receive local television stations -- even though most households can
view those stations at no additional charge through their over-the-air
antenna or existing cable subscription. Thus, borrowers of the proposed
guaranteed loans might have trouble achieving the necessary level of
market penetration for a new television service. In addition, unlike
companies that provide rural electrification or telephone services,
those borrowers would immediately confront competitors in the
marketplace. They would also face numerous technical risks, including
the risk that emerging technologies will allow local broadcast signals
to be delivered to the home through less costly methods.
To estimate the subsidy cost of the loan guarantee program for
rural television service, the CBO consulted industry experts and
investment analysts and examined the credit ratings of firms in the
satellite television industry. That information is useful in estimating
subsidy rates because the different credit ratings reflect analysts'
expectations of defaults. For example, a 1999 report by Standard &
Poor's indicated that the cumulative default rate for investments with
a ``BBB'' rating is less than 8 percent; for those with a single ``B''
rating, the default rate is 32 percent; and for those with a ``CCC''
rating, the rate is 45 percent. Based on our review of publicly
available information about the ratings of companies in similar
industries, we anticipate that the credit rating for rural television
projects would be at the riskier end of that range.
We also examined the legislative terms and conditions that might
mitigate such risk. For example, the loan guarantee program in H.R.
1554 would give the Government a superior lien on the assets of a
borrower in the event of default, but it would let the Administration
decide how much collateral to require. Likewise, judgments about the
reasonableness of borrowers' business plans and the total amount of the
loan guarantees would be made by the Secretary of Agriculture. Finally,
H.R. 1554 would authorize the Secretary to levy fees and accept a
payment from a non-Federal source to fund all or part of the credit-
risk premiums.
The CBO estimated that the loan guarantee program authorized by
Title II of the conference report for H.R. 1554 would have a subsidy
rate of about 28 percent of the total amount guaranteed. For a $1.25
billion loan guarantee program, that translates into an estimated
subsidy cost of about $350 million (assuming that the optional fees
would not be charged or collected). Because H.R. 1554 would make
implementation of the program contingent on future appropriation
action, those costs would be discretionary. (A copy of our letter sent
to Congressman Goodlatte about H.R. 1554 is attached.)
Options to Reduce the Cost of Loan Guarantee Programs
As I noted earlier, the cost of a loan program is determined
largely by the riskiness of the venture and how much of that risk the
Government will bear. One way to reduce the cost of a loan guarantee
program significantly is to reduce its size --either by decreasing the
total obligation level or by guaranteeing less than the full value of
each loan. Modifying the terms of the loan guarantees can also change
the subsidy cost, but for the most part, such technical changes would
have a relatively small effect on the cost of the proposed program.
Other options to reduce subsidy costs include requiring borrowers to
pay fees, protecting the Government's security in the event of default,
and ensuring effective underwriting criteria.
Reduce the Obligation Level
The most simple way to decrease the size of the program is to
reduce the amount of loans that the Government is offering to
guarantee. H.R. 1554 would authorize guarantees totaling $1.25 billion.
Lowering the amount of obligations would cause
a proportional reduction in the Government's exposure and thus in the su
bsidy cost.
Guarantee Less Than the Full Value of the Loan
Another way to reduce the potential cost to taxpayers is for the
Government to guarantee less than 100 percent of the value of each
loan. About half of existing Federal loan guarantee programs guarantee
less than 100 percent of insured loans; some guarantee as little as 50
percent of the value of their loans. Examples at the
lower end of the range are the Development Credit
Authority program at the Agency for International Development (AID) and
the Section 7(a) General Business Guaranty program at the Small
Business Administration (SBA).
Guaranteeing less than the full value can reduce the cost to the
Government in two ways. First, it can lessen the Government's direct
exposure for each loan by lowering the dollar amount of the guarantee.
Although that would reduce the cost of the proposed program, it would
run the risk that private lenders might be unwilling to lend enough
funds to meet borrowers' needs. Second, it can reduce the default risk
by encouraging private lenders to exercise much more care in
underwriting loans. The profit motive should push lenders to lend only
to those borrowers most likely to repay the debt. Private lenders also
have more expertise in analyzing business plans, industry trends, and
financing options than their Federal counterparts. However, having some
degree of private financing is not a panacea for eliminating risk --
both the AID and the SBA programs mentioned above have default rates of
about 15 percent.
Require Borrowers to Pay Fees
Most current loan guarantee programs require borrowers to pay
either an up-front fee (when the loan is made) or an annual fee
(collected as the borrower pays off the loan). Up-front fees are more
common and typically range from less than 1 percent to more than 5
percent of the loan amount.
If properly designed, up-front fees can reduce the subsidy cost by
a corresponding amount. Two caveats apply, however. First, there is a
limit to the amount of fees that borrowers would be willing to pay --
and that amount is likely to be far smaller than the subsidy cost of
this program. Second, unless borrowers are prohibited from capitalizing
the fee either directly (by adding it to the loan amount) or indirectly
(by having third parties pay the fee, which would in turn be recovered
through increased costs for equipment or services), their debt-service
costs, and thus the risk of default, will increase. Capitalizing fees
can also result in borrowers' having insufficient collateral to support
the loans.
Many Federal programs, particularly those involving housing and
business loans, impose annual fees. The fees typically range from about
0.5 percent to 0.75 percent of the outstanding balance of a loan. Such
fees can significantly reduce subsidy costs for programs that are
characterized by a low risk of default and by long maturities (between
15 years and 30 years). However, annual fees cannot be collected if a
loan is in default, so they may not significantly reduce subsidy costs
for programs in which the expected default rate is high.
Protect the Government's Security in the Event of Default
H.R. 1554 would make Government liens superior to all other liens
on the assets of borrowers, up to the unpaid balance of the guaranteed
loan. Such priority ensures that the Government would maximize the
amount it could recover in the event of default.
Some parties have suggested that legislation allow the Government's
guarantee to be subordinate to private sector financing. But that would
reduce the incentive for the lender to assess the riskiness of the loan
and increase the likelihood that if a default occurred, the
Government's loss would be very significant. For example, the SBA
guarantees financing to businesses in both the Section 504 Certified
Development Company and the Section 7(a) General Business Guaranty
programs. In the 504 program, the Government's guarantee is subordinate
to that of the lender; in the 7(a) program, the Government's guarantee
is equal in priority. Recoveries from defaulted loans have been
significantly lower in the 504 program, even though it requires
collateral in real estate and equipment and the 7(a) program does not.
Ensure Effective Underwriting Criteria
H.R. 1554 would direct the Secretary of Agriculture to develop
underwriting criteria for the guaranteed loans in consultation with the
Office of Management and Budget and an independent accounting firm.
Although the CBO expects the resulting standards to be consistent with
current Government practice, lawmakers may want to spell out some of
the criteria in law. For example, legislation could require that the
liquidation value of the collateral be equal to the outstanding
principal balance of the loan. Even at that level, however, collateral
alone would not eliminate the subsidy cost of a program because of the
time and expenses associated with care and preservation, liquidation,
and litigation of the collateral.
The criteria for evaluating loans could also be strengthened. H.R.
1554 would allow projections of an applicant's ability to repay a loan
to include the value of collateral pledged to protect the Government's
interest. Collateral provides a basis for recoveries in the event of
defaults; it is not a substitute for cash flow. As a result, it is not
a useful basis for determining whether an applicant's project is
viable.
Conclusion
It is possible to reduce the cost of proposals to guarantee loans
for delivering additional television services to rural areas, but it is
not possible to eliminate all of the risk or cost of making such
guarantees. In theory, the purpose of a Federal loan guarantee is to
provide credit for activities that the private marketplace considers
too risky to pursue on its own. Such support comes at a cost.
The surest way to reduce the cost of proposals like the one
included in H.R. 1554 would be to reduce the size of the Federal loan
guarantee. Other modifications, such as charging fees or improving
underwriting criteria, are unlikely to reduce the estimated subsidy
appreciably because the activities being financed are fundamentally
risky. Options designed to reduce the cost to the Government could make
the program less attractive to potential borrowers or lenders, which in
turn could reduce the demand for the loan guarantees.