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Testimony of Jack Gleason on Communications Satellite Competition and Privatization Act of 1997

September 30, 1997

Testimony of Jack Gleason
before the House Committee on Commerce
Subcommittee on Telecommunications, Trade and Consumer Protection


H.R. 1872
Communications Satellite Competition and Privatization Act of 1997

September 30, 1997

Mr. Chairman, first let me thank you for giving me the opportunity to testify before the Subcommittee today to present the Administration's views on the restructuring of INTELSAT and Inmarsat (the ISOs). The Administration has formed an interagency working group, which includes the National Economic Council, the Office of Science and Technology Policy, the Departments of Justice, State, Treasury and Defense, the National Telecommunications and Information Administration, and the Federal Communications Commission (FCC) among others, to develop the policies which have guided the U.S. government's position during the restructuring negotiations. I am here today on behalf of the Executive Branch agencies involved in these deliberations.

The success of the ISOs has led to the need to examine the future and overall structure of these organizations. This success was not anticipated when those organizations were established. The structure designed for the ISOs recognized the need to spread the financial risk associated with global satellite communications. Indeed, at the time of the ISOs' creation the telecommunications sector was dominated by national monopolies. Very often, those monopolies were state-owned. Accordingly, the structure implemented for the ISOs conformed to that framework.

That structure, today, has become difficult to sustain. New, and for the most part, private enterprises are able and willing to provide the services traditionally offered by INTELSAT and Inmarsat. Thus, we are in the midst of attempting to accommodate the need for change -- the transition to a more competitive market -- without overnight discarding a structure that has served many countries over the past 25 years.

Today, global satellite communications services are expanding and changing at a dramatic rate. New technologies and enterprises are changing the marketplace. These new systems, together with traffic now carried by submarine fiber cables, have been deemed, by the ISOs as a sufficient threat to their future that the ISOs are exploring options for restructuring.

This year, it is expected that a total of 76 commercial satellites will be launched. In 1998, that number should rise to approximately 125 satellites. Over the next ten years about 1,000 new satellites will be launched, three-fourths of them for commercial use. By the end of this century, it is expected that companies will have spent about $50 billion to build and launch new systems. The related technology, antennae, handsets, switches and other equipment may well double that figure.

This increased level of investment provides extraordinary economic opportunities. Moreover, it will bring access to communications to those who now have none -- half the world's population. In the Asia Pacific region most countries today have fewer than two telephone lines per hundred of population; more than 2.8 billion people have access to barely 25 million lines. Worldwide, 80 percent of the households do not have a telephone. Indeed, there are more phone lines in Manhattan than in all of Africa between the Sahara and South Africa.

To fulfill these opportunities and to achieve their potential, new satellite systems must, however, be able to operate in a global, competitive marketplace. Those who hope to succeed must embrace the principles of competition and market access. Implementation of the WTO agreement on basic telecommunications will be important to ensuring market access. As important, opportunities for satellite systems will grow through the legitimate pressures brought on by global deregulation of financial markets -- rewarding efficiency with new and additional capital and financially punishing inefficient monopolies.

In this context, the United States has approached the ISOs' restructuring with a commitment that any restructuring must increase competition -- not diminish it. This, unfortunately, is not the easy task it might appear to be. Many ISO participants still operate in a monopoly environment, both in their domestic and international markets. Many are unfamiliar with or uncomfortable with the concept of competition in telecommunications. Some do not believe that competitive service providers will afford them the services offered by the ISOs. Many countries view satellite-based competition as a U.S. conspiracy to overwhelm them with our technology and our service operators. And, frankly, many ISO participants simply like things the way they are. The old order gives way slowly. But it will give way, and in its place competition will produce economic benefits across the globe that will help fulfill the expectations of the Information Age.

After several years of discussions and negotiations on this issue, it is with something like relief that we are beginning to see what may prove to be a light at the end of the tunnel. This Committee has played a significant role in moving the process forward and its consideration of legislation clearly contributes to this effort.

Mr. Chairman, on behalf of the Executive Branch, let me acknowledge the fine work you, the Ranking Minority member and the Committee and its staff have done in considering this issue. Congress played an essential role in creating INTELSAT and Inmarsat. It is entirely appropriate that Congress play an equally central role as the ISOs contemplate restructuring.

Clearly, both Congress and the Executive Branch share common goals and objectives; that restructuring of the ISOs leads to increased global competition and reduced end user costs while advancing telecommunications technology. Or, as Representative Markey put it -- we want to "combine the best of Arthur C. Clarke with Adam Smith."

As this Committee is aware, our negotiations with other countries have not been easy. Very simply, many of our negotiating partners understand and share Arthur C. Clarke's vision -- but not all subscribe to Adam Smith's views. I cannot report to you today that we will achieve 100 percent of every negotiating element that we sought at the outset. On the other hand, it does appear that we are moving toward an end game with the reasonable expectation that our broad policy objectives will be achieved.

With that background, let me provide some comments and observations on H.R. 1872. First and foremost, let me observe that we find H.R. 1872 a very positive effort. Working with your Committee on H.R. 1872 will help us achieve the shared objectives of ensuring market access for all players through a significantly more competitive global communications environment, thereby producing overdue lower end user costs.

As would be the case in any legislation of this length and complexity, there are some aspects with which we do not fully concur. For instance, in Section 601(2)(b)(1) the FCC appears to have been given exclusive authority to determine the suitability or competitiveness of the outcome of the negotiations. That determination should be made by both the Executive Branch and the FCC. Similarly, in Section 602 certain authority is assigned exclusively to the FCC that should, in the Administration's view, continue to be a shared undertaking.

The Executive Branch is also concerned about provisions in H.R. 1872 that would interfere with the President's foreign policy prerogatives. Provisions such as sections 648 and 661 contemplate Congress having the power to instruct the President on the conduct of diplomatic exchanges and, as such, raise constitutional concerns. The Executive Branch is prepared to work with you to ensure that the bill is free of such concerns. Similarly, we have a broad interest in the issues of foreign policy and national security which are raised by the bill. The Executive Branch is concerned about provisions in the bill which attempt to direct the Administration to take specific positions during multilateral negotiations. Because of the nature of these and other multilateral negotiations, the Executive Branch will want to consider with the members and their staffs the elements which affect foreign policy and national security considerations.

There are other relatively minor points that may need some further attention. For instance, at various points H.R. 1872 outlines the composition of the privatized Boards of Directors. Ultimately, this is a decision that rests with the new enterprises -- if they elect to make unwise decisions in this respect, the market will punish them. Otherwise and given the context of the negotiations that I have outlined above, I would ask that the U.S. negotiating team not be tied to details such as this that could force us to attempt to cross a bridge too far, with little reward on the far bank of that river, assuming we could successfully cross it.

On broader issues of direct access and multiple signatories, we take the view that if and as the negotiations are successful the concept of multiple signatories would be redundant. If we attempt to introduce multiple signatories in the midst of negotiations or during the transition to privatization the likely result will be chaos or worse. If, on the other hand, the negotiations fail or appear to be failing there will be ample opportunity to institute multiple signatories.

Direct access appears to provide a different opportunity. INTELSAT does provide the means to implement a variety of access options. The collective effect of these access options could well be to open the U.S. market for INTELSAT services to some greater competition. In considering direct access, however, we need to examine at least two issues more closely. First, will direct access provide incentives for the new players to reduce their pricing below the high rates presently charged? Second, should we require a "fresh look" at Comsat's long-term contracts with U.S. carriers for telephone service?

If we can be successful in implementing privatization at INTELSAT, there is little reason to be distracted by introducing new access regimes. This is especially the case if, as seems likely, with either direct access or multiple signatories we would be inviting foreign-owned entities to enter the U.S. marketplace thereby reducing further their incentives to support a more general global pro-competitive outcome via INTELSAT privatization. Again, if talks at INTELSAT seem unlikely to succeed or drag on materially, it could be very useful to have the options of direct access and multiple signatories available for use by the Executive Branch. In sum, while we are fully prepared to consider the potential benefits of access options, we must also be alert to exigencies imposed by the very nature of conducting multilateral negotiations.

Finally, it would appear that the criteria of "full competition" incorporated in Section 621 ought to be modified slightly to "substantially competitive." This view is based on the probability that -- like the U.S. long distance market -- some elements of the international satellite service market may never completely rise to the "fully competitive" standard.

We look forward to further discussions with the Committee and its staff in the expectation that we can collectively resolve some of the outstanding matters discussed above, and other issues raised by the proposed legislation, and move forward with a needed and effective piece of legislation.