U.S. GOVERNMENT PRINTING OFFICE

67–113CC WASHINGTON : 2000

FOREIGN GOVERNMENT OWNERSHIP OF

AMERICAN TELECOMMUNICATIONS COMPANIES

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

SEPTEMBER 7, 2000

Serial No. 106–153

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE, AND CONSUMER PROTECTION

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL G. OXLEY, Ohio,

Vice Chairman

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

BILL LUTHER, Minnesota

RON KLINK, Pennsylvania

TOM SAWYER, Ohio

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

C O N T E N T S

Page

Testimony of:

Bahr, Morton, President, Communications Workers of America ................. 97

Di Gregory, Kevin V., Deputy Assistant Attorney General, Criminal Division, Department of Justice ......................................................................... 33

Dunn, Hon. Jennifer, a Representative in Congress from the State of

Washington .................................................................................................... 17

Fisher, Ambassador Richard W., Assistant United States Trade Representative, USTR ......................................................................................... 47

Hollings, Hon. Ernest F., a United States Senator from the State of

South Carolina .............................................................................................. 10

Kennard, Hon. William E., Chairman, Federal Communications Commission ................................................................................................................. 29

Lipman, Andrew D., Vice Chairman, Swidler Berlin Shereef Friedman,

LLP ................................................................................................................. 148

Noll, A. Michael, Annenberg School for Communication .............................. 166

Parkinson, Larry R., General Counsel, Federal Bureau of Investigations .. 40

Sidak, J. Gregory, Weyerhaeuser Fellow in Law and Economics, American Enterprise Institute, Public Policy ...................................................... 101

Stanton, John W., CEO and President, VoiceStream .................................... 91

Material submitted for the record by:

Donohue, Thomas J., President and Chief Executive Officer, U.S. Chamber of Commerce, prepared statement of .................................................... 180

Fisher, Ambassador Richard W., Deputy United States Trade Representative, USTR, responses for the record ........................................................... 189

Stanton, John W., CEO and President, VoiceStream, letter dated September 15, 2000, enclosing material for the record ................................... 184

(III)

(1)

FOREIGN GOVERNMENT OWNERSHIP OF

AMERICAN TELECOMMUNICATIONS COMPANIES

THURSDAY, SEPTEMBER 7, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 11:20 a.m., in room

2123, Rayburn House Office Building, Hon. W.J. ‘‘Billy’’ Tauzin

(chairman) presiding.

Members present: Representatives Tauzin, Oxley, Stearns,

Gillmor, Cox, Deal, Largent, Shimkus, Pickering, Fossella, Markey,

Gordon, Eshoo, Wynn, Luther, Sawyer, Green, McCarthy, and Dingell (ex officio).

Staff present: Justin Lilley, majority counsel; Mike O’Rielly, professional staff; Robert Simison, legislative clerk; and Andy Levin,

minority counsel.

Mr. TAUZIN. The committee will please come to order. We will

ask all of our guests to take seats and to get comfortable. Members

are on their way back and we should have a larger dais for you in

a minute, Senator.

Let me indeed welcome our first guest and witness, the Honorable Ernest Fritz Hollings, U.S. Senate, one of my dearest personal

friends, probably second only to John Breaux, himself from Louisiana.

Senator HOLLINGS. That is a good close friendship.

Mr. TAUZIN. Fritz, welcome to our hearing. Under our rules, all

written statements of the committee and of our witnesses will be

made a part of the record. The Chair will recognize himself first

for an opening statement, and then members in order, and then we

will be happy to take your testimony, sir.

Let me first point out that the United States has been at the

forefront in bringing about a global telecommunications marketplace, working within the WTO to open up markets, increase business opportunities available to U.S. companies abroad. Foreign

telecom companies have been aggressively penetrating the U.S.

market, which continues to be the envy of the world.

Jennifer, welcome. I welcomed the Senator ahead of you, but we

are also pleased to welcome the Honorable Congresswoman Jennifer Dunn here.

2

These foreign companies are injecting large amounts of capital in

our market, and we all like to see that, frankly. Likewise, U.S.

companies are busily developing and implementing business plans

that include entering and exploiting foreign telecommunications

markets. We all know the benefits of increasing competition. They

include more choices for providers, increasing superior service,

product innovation, hopefully better prices. None of us want to see

this stop.

However, concerns involving foreign government ownership of

the United States telecom carriers have been raised by key policymakers. Thirty senators sent a letter to the FCC urging it to consider national security implications of any foreign acquisition of a

U.S. telecommunications firm. And, in fact, Senator Ernest Hollings of South Carolina, the ranking member of both the Senate

Commerce Committee and the Senate Commerce, Justice, State

Appropriations Subcommittee and our first witness today, has introduced legislation that would forbid any foreign company owning

more than 25 percent—owning more than 25 percent by its government—from taking over a U.S. telecommunications business; as

well as having attached comparable language, I think, in the CJS

appropriations bill that is in the Senate.

Members in the House also have expressed concerns. And while

it is no secret that I personally am a strong proponent of free trade,

I have always felt and think today that the USTR needs to do more

to push, pressure, prod, foreign government-owned telecom companies to privatize in an expeditious manner. And when the foreign

monopolist is also the regulator in a country, there is a perception,

real or not, that they will act in an anticompetitive manner to the

detriment of the U.S. interests.

USTR has to, must, protect the interests of the United States

citizens in that regard.

I think, therefore, this is a timely hearing. Deutsche Telekom,

one of Europe’s largest telecom companies, has just cleared the regulatory hurdle over at DOJ in its proposed acquisition of

VoiceStream Wireless Corporation in an effort to penetrate the lucrative North American mobile phone market.

Today the DOJ let an antitrust review period lapse without opposing the merger. We would like to hear from DOJ about the process by which it arrived at its determination that in fact this merger

does not raise competitive or other concern.

Currently, the German Government enjoys a 58 percent stake in

Deutsche Telekom, and with the consummation of this merger, that

share would be diluted to 45 percent. However, the DOJ’s blessing

is not the end of the regulatory process for this acquisition.

Other U.S. regulators, including the FCC, the Committee on Foreign Investment in the U.S., must also weigh in on this merger.

And I am interested in hearing from the witnesses today as to

whether or not they think the U.S. Government has the tools necessary to condition or deny mergers between companies owned by

foreign governments and private U.S. companies to ensure that our

telecom market remains competitive and, of course, that national

security concerns are always properly considered and addressed.

I want to ensure that the process does not somehow allow foreign

governments and foreign government-owned telecom companies

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that possess monopoly power in their own country to distort the

robustly competitive telecom marketplace that we have all fought

for and continue to fight for in this great United States, and would

never want to see a process that would harm not only that marketplace but the companies that compete so effectively within it.

I yield back the balance of my time and welcome and recognize

the ranking minority member, my friend from Massachusetts, who

is equally worn out as I am, I know, this morning, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much. I thank you

for holding this hearing. I thank Senator Hollings and Congresswoman Dunn and all of our witnesses for helping us out today with

their expert testimony.

This committee has a long history of battling to open up our domestic telecommunications marketplace to ever more competition

in telecommunications services, wireless services, cable, across the

board. We have fought hard to make sure that we created a marketplace where innovation could flourish, jobs could be created, and

prices lowered for consumers.

In addition, the members of this committee do not have to be

sold on the benefits of increased trade, especially in the high-tech

sector. I voted to support NAFTA and GATT because I believed

they gave America a great opportunity to lay the groundwork for

jobs and services in this new economy.

Today we will focus on the job that foreign countries have done

in liberalizing their telecommunications markets and specifically

deal with the issue that many foreign governments continue to own

and control telecommunications assets in their own domestic markets. With respect to our market, consistent with our international

commitments, the American telecommunications market is open for

business. Foreign companies that want to come to the United

States and invest and compete are welcome to do so.

The WTO Basic Telecom Agreement was intended to foster such

investment and global competition among free market, high-tech

companies. It was not designed or intended to foster or encourage

government investment. The agreement was for trade in telecom

services, not trade in government services.

We are trying to foster a dot-com revolution, not a dot-gov revolution. In the new economy of global proportions, governments have

no place competing in the private marketplace. They should not be

both market participant simultaneous with being market regulator.

They should not be permitted to skew capital markets by artificially inflating stock prices through government backing; and foreign government participation in the United States marketplace

also raises thorny law enforcement and national security issues.

The WTO Basic Telecom Agreement is wholly silent on any distinction between foreign investment and foreign government investment, and the agreement appears to have left to foreign governments to decide what privatization means to them. This was obviously a glaring omission from the agreement, and unless the administration starts to get real about its implications, it will turn

out to be a giant loophole for foreign government-backed goliaths

to exploit.

If we truly believe in a free marketplace, we should insist on it.

Privatization should mean totally private. That is what we have in

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the United States and what exists in England, New Zealand and

Canada. Many other countries, however, have not undertaken full

privatization and have significant government stakes in their companies. Australia, Japan, Germany, France, Sweden, Singapore and

South Korea all have government ownership in excess of 50 percent. However, any other companies not owned by the government

in those very same countries are more than welcome to enter the

United States marketplace.

So every other company in every one of those countries could

come to the United States. No problem. We are only talking about

a small handful of companies, the government-owned companies.

Even if we cannot get foreign countries to zero government ownership soon, we should endeavor to limit the competitive unfairness

and security implications by inducing them to dilute sooner. That

is what the legislation is designed to do. It is not protectionist. It

is not driven by xenophobia. It is driven by an ardent desire to

have other countries fully embrace the free marketplace and to accelerate the liberalization of telecommunications markets.

In the absence of such a policy, what are the implications? Foreign government involvement in the United States market obviously will complicate law enforcement and national security efforts.

Foreign governments seeking to establish their companies as global

players may favor their own companies in their domestic marketplace to the detriment of those companies in which the government

does not have a financial stake. In addition, governments with significant ownership stakes can spend their artificially inflated stock

prices and buy their way into foreign markets.

Over time, such purchasing will obviously dilute a government

share of the overall company but it will come at the expense of

other private sector companies who have to go to the capital markets without government backing in order to fund acquisition strategies. That is a patently unfair way to proceed.

We have persevered over many years in the Congress to make

the American telecommunications marketplace the envy of the

world. We welcome foreign investment in telecommunication services from those foreign companies not owned by their governments.

Yet we should not allow free market underachievers overseas to

unfairly compete with government-controlled companies and to

thereby gain all the benefits of our hard work here in the United

States, on the cheap.

It is inconceivable that the WTO, which was set up essentially

to get government out of the way, out of markets, and to foster free

market trade across borders, could be used instead to foster government involvement in the marketplace and government investment

across borders. I don’t think that is what Adam Smith had in mind.

Thank you, Mr. Chairman. I yield back the balance of my time.

Mr. TAUZIN. Who is Adam Smith?

The Chair thanks the gentleman.

Mr. MARKEY. Congressman.

Mr. TAUZIN. Congressman from the South somewhere, I am sure.

The Chair thanks the gentleman. The Chair recognizes the vice

chairman of the committee, Mr. Oxley, for an opening statement.

5

Mr. OXLEY. Thank you, Mr. Chairman. And welcome to our distinguished witnesses, our good friend from the Senate side, Mr.

Hollings, and Representative Jennifer Dunn.

I had the opportunity to confer with Jeff Lange and Ambassador

Barshefsky during the negotiations on the 1997 WTO Basic Telecommunications Agreement, and I must say that I was pleased

with their determination to consult regularly with Congress during

the talks. More to the point at hand, I was deeply impressed by

what was achieved in Geneva in 1997. The agreement covered 95

percent of world telecom revenues, giving U.S. firms unprecedented

access to markets in Europe, Asia and Latin America. The treaty

built upon the principles of competition, deregulation, and market

opening embodied in the 1996 Telecom Act.

The accord included pro-competitive regulatory principles similar

to those of the Telecom Act, allowing new entrants to compete fairly with incumbents, and it ensured U.S. companies could acquire

a significant stake in telecom companies worldwide. This would not

have been possible without a U.S. offer which included unlimited

indirect investment in American telecom firms.

A more restrictive interpretation of Section 310(b) of the Communications Act, which governs international investment and radio license holders, would have resulted in a far less sweeping agreement. The U.S. offer to provide market access and national treatment for foreign telecommunications common carrier service providers was key to securing equivalent commitments from our trading partners in opening the global telecommunications market to

American businesses. The point is to keep looking forward, not

backward.

We should strive to find new ways to lower barriers to investment and promote the free flow of goods, services and capital, rather than second-guessing recent accomplishments. I firmly believe

that in the vast majority of cases, artificial limits on international

investment only harm U.S. firms by denying them access to foreign

capital in foreign markets.

That said, I certainly support the goal of encouraging privatization of national telephone companies abroad. If we can find positive

ways to do that without inviting retaliation from reliable trading

partners, then I can lend my support.

Thank you, Mr. Chairman. I yield back.

Mr. TAUZIN. Thank the gentleman.

The Chair recognizes the gentlelady from California, Ms. Eshoo,

for an opening statement.

Ms. ESHOO. Thank you, Mr. Chairman, for having this hearing,

and good morning to you and to those that have joined us and are

here to speak to the committee.

The technological revolution of the past decade has allowed our

country to achieve grand levels of prosperity; not just great, but

really I think grand and quite sweeping. Today America is enjoying

unparalleled economic success. We are the envy of the world. Economic growth is sustained. Unemployment is low. Inflation has

been kept at bay and the new economy has brought new wealth

and new opportunities to our Nation and its workers. It has also

opened international markets to foreign investment.

6

I think that our newfound prosperity did not result from simple

happenstance, but rather is closely related to the increasingly global economy. For this reason, open markets are important to both

our economy and to our continued leadership around the world.

International trade is a benefit to all that are involved. America’s

policy of free trade has created fierce competition in many of the

world’s telecommunications markets and has sparked innovation as

well.

I have a deep faith in American ingenuity and innovation and resolve, and a continued adherence to a free trade policy I think will

only help our national economy use these inherent characteristics

to take full advantage of international opportunities.

We are looked upon as a leader in free trade, and this credibility

is not something we should take for granted. President Kennedy

said ‘‘economic isolation and political leadership are fully incompatible, but we cannot ourselves stand still. We must adapt our own

economy to the imperatives of a changing world and once more assert our leadership.’’

It was through America’s leadership and determination that the

WTO Basic Telecommunications Agreement was forged in 1997. In

this agreement, we pledged that we will grant favorable trade and

investment treatment to foreign carriers in domestic communications markets.

When 20 percent of all international communications services involve the United States market, and when more than 40 percent

of the world’s multinational corporations are headquartered in the

United States, and when we advocate the liberalization of telecommunications systems around the world, we cannot simply reverse course when it comes the our markets. To do so, I think, undermines our credibility at the least, and at worst exposes our

economy to retaliation. I am concerned that the legislation we are

considering may be inconsistent with our current trade policies and

will be very difficult to reconcile with the pledges we have made

to our foreign trading partners.

Methods to review telecommunications mergers or acquisitions

exist within the FCC’s authority. These existing rules rely on the

expertise of agencies such as the FBI and the Department of Defense when national security concerns exist. I think a more reasonable way of resolving these concerns may be through continued efforts to convince foreign governments to divest themselves of their

holdings in their domestic carriers so that they may realize the

benefits of true competition and avoid trade conflicts.

I share the concerns of some of my colleagues with the FCC

merger review process. Under the Commission rules, foreign-owned

firms from a WTO member country enjoy a rebuttable presumption

that entry or investment in our markets is in the public interest.

Perhaps a modification of this review process could reach the same

end without the potentially drastic ramifications of legislation.

These alternative solutions may outweigh the need for legislation

when considering its potential consequences, which may include

withdrawals from the WTO or retaliatory trade measures taken

against our companies by those countries we pledged to open our

markets to.

7

We stand at the beginning of a new century—we say that over

and over again in this committee and in the Congress—and with

it comes new opportunities. I look forward to learning more about

these issues from our excellent panel of witnesses, with their wishes, and I thank you again, Mr. Chairman, for holding this hearing.

Mr. TAUZIN. I thank the gentlewoman.

The Chair recognizes the gentleman from Florida, Mr. Stearns,

for an opening statement.

Mr. STEARNS. Thank you, Mr. Chairman. Let me also welcome

Senator Hollings and also the distinguished gentlewoman from the

State of Washington, Jennifer Dunn.

Mr. Chairman, thank you for holding this hearing. I see from the

audience it is a very, very popular hearing here. They run around

to the back of the building here. But the genesis of this debate

started in 1934 with the Communications Act, and debates continue.

I remember serving on the Conference Committee on the Telecommunications Act of 1996, of which Senator Hollings was very

active and a participant and was one of the ultimate deciders of

some of the issues. But in today’s telecommunication market, mergers are taking place at lightening speed and the effect is that we

are going into foreign countries, they are coming into ours. I have

letters here from the European Union who have pointed out they

are against your bill, Senator Hollings, as you know, and evidently

the Chamber of Commerce also feels that way, which we will hear

later from today.

Basically, in a nutshell, Section 310 of the Telecom Act already

prohibits companies in which foreign governments’ holdings are

greater than 25 percent from acquiring American telecommunications companies unless, unless, it is in the public interest to approve the merger. Recently it appears that the FCC’s interpretation

is that it is in the public interest to approve the entry of foreign

companies if the country is a member of WTO. Now, that’s the

question, Mr. Chairman, of whether that’s a compromise that we

would go back to the FCC and allow—pass legislation that would

clarify, legislation that would clarify for the FCC what this public

interest equation is, because the committee is well aware the FCC

has relied on that little thing called the public interest as an instrument to carry out its own desires and agenda and we have had

our confrontation with the FCC in that regard.

Let me state that due to the 1996 act, this country has been privileged to benefit from a deregulated and competitive telecommunication marketplace. Proponents of this legislation raise valid concerns in allowing foreign governments owned by companies, government-owned companies, to acquire U.S. companies. The global

economy has reduced barriers to free trade and are major contributors, I think, to our booming economy here. In fact, American telecommunications companies are successfully competing in foreign

markets and bringing competition and lower prices to those nations, even though those countries have telecommunications corporations that are owned by their governments in greater than 25

percent.

However, these American companies do not have the United

States as an active partner and investor and overseas foreign comVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
8

panies compete with American companies, not the United States.

The tables will be turned with foreign government-owned companies competing in the United States with American companies.

Senator Hollings’ legislation is not perfect. Perhaps, Mr. Chairman, we can work with this bill to, as I pointed out earlier, find

what the public interest is. Is it 25 percent? Is it 26 percent? Is it

28? I don’t know, but somewhere during this hearing we should

come up with an answer. And so, again, I applaud you for this

hearing.

Mr. TAUZIN. I thank the gentleman.

The Chair now recognizes the ranking minority member of the

full Commerce Committee, the gentleman from Michigan, Mr. Dingell, for an opening statement.

Mr. DINGELL. Mr. Chairman, I thank you, and I commend you

for holding this important hearing. The question today that we will

address is very simple: Should foreign governments be permitted to

own or exercise control over vital telecommunications infrastructure in the United States? In my view, the answer to that question

is a simple no, and I believe that U.S. law, specifically Section 310

of the Communications Act, already dictates that result.

Unfortunately, the Federal Communications Commission, the

FCC, and the United States Trade Representative hold a contrary

view. Their interpretation has necessitated a fresh look at congressional policies regarding competition and the national security that

underlie this important provision of law. I stress, we are not talking about foreign ownership of American telecommunications facilities; we are talking here about something that I strongly oppose,

and I think most Americans do, and that is foreign government

ownership of American telecommunications equipment.

To clarify any ambiguity, Congressman Markey and I recently introduced H.R. 4903, a competitive measure to that offered by our

good friend, Senator Hollings—and I certainly welcome him this

morning to the committee—to make sure that this longstanding

U.S. competition policy is maintained. I do extend a special welcome to my good friend, the Senator, and look forward to his testimony with interest.

I would also note that Senator Hollings has been joined in this

legislative effort by leading Members of both parties in the Senate,

including Senators Lott and Daschle, leaders of the Appropriations,

Intelligence, and Foreign Relations Committees, as well as a bipartisan majority of the Senate Commerce Committee.

The reason this measure has received such widespread support

is clear. It is just plain unfair to the competitive telecommunications industry in this country, as well as to American workers

and consumers, to permit foreign governments and their monopoly

subsidiaries to compete against private U.S. companies in the hightech sector. Foreign government control of American firms not only

puts our competitors at a disadvantage in all markets, but very especially in our own. It also compounds the difficulties for our companies overseas when that foreign government acts as both a competitor and a regulator in the same market simultaneously.

For the past several decades, the U.S. has worked diligently, notably through the 1984 breakup of AT&T and the 1996 Telecommunications Act, to open its telecommunications markets to

9

competition. In so doing, we have made sure that the safeguards

were firmly in place to prevent historical monopolies from

leveraging their embedded market share to engage in competition

with a brand-new, unfair advantage in new competitive lines of

business.

The FCC has imposed stringent accounting, audit and structural

separation requirements to prevent cross-subsidization and other

anticompetitive practices. Most notably, the Bell companies are

still prohibited from entering the long distance market until their

telephone businesses are sufficiently open to competition. This provision was designed to provide a strong incentive for the Bell companies to open their markets to competitors, and I daresay that the

FCC in its zeal to open markets domestically has held their feet

at the fire at every turn.

So I find it curious that in the international context, the FCC is

far from zealous in applying appropriate incentives to foreign governments to ensure that their markets are sufficiently open for

U.S. competitors. In fact, instead of applying Section 310 to preclude foreign government-owned monopolies from entering the U.S.

market, which would provide ample incentive to privatize, the

Commission has tortured its reading of the law to achieve precisely

the opposite result.

The question, then, is how can we expect foreign governments to

fully privatize their telecommunications industry if they get a free

pass to compete unfettered in the United States? Full privatization

is widely regarded by telecommunications and trade experts as the

optimal way to achieve open market conditions. Yet, inexplicably,

the FCC policy is to simply let them in, regardless of a rational

reading of the law, and hope that full privatization will magically

occur.

Unfortunately, they are joined by the U.S. Trade Representative

in this tortured approach to the law. This approach flies in the face

of both common sense and real world experience. We have to look

very little to find problems. One need only look at the recent attempt by KPN, the Dutch government-owned telecommunications

commission, to buy Telefonica de Espana, a newly fully privatized

telephone company in Spain. The deal was scuttled, mainly due to

Spanish concerns about foreign government ownership. It should be

no surprise, then, that the Dutch government, after being spurned

by Spain, subsequently announced that it would sell down its stake

in KPN to 20 percent. I find 20 percent to still be high, but it does

show that virtue can be induced by intelligent regulation.

I have little doubt that other foreign government-owned companies wishing to acquire American firms would do likewise.

Finally, I would be remiss if I failed to mention another serious

reason to preclude foreign-government ownership of critical telecommunications assets in this country. While globalization can be

a boon to our national economy, it also, however, brings with it

new threats to our national security and law enforcement efforts.

While the Justice Department and FBI are working diligently to

mitigate this threat, they believe the risk is heightened substantially when a foreign government is involved in the transaction.

The Hollings-Markey-Dingell legislation is narrowly tailored to

protect the United States from this most acute risk to our national

10

security. It would therefore free the FBI and Justice to harness

their resources to safeguard American interests put at risk by a

number of transactions involving nongovernmental foreign investment. I repeat, the question before us is not do we allow foreign

companies to buy interests in U.S. companies. It is do we allow foreign governments to assume control of American companies in defiance of what I view as good public policy?

Thank you, Mr. Chairman, for holding this hearing. I look forward to examining the witnesses.

Mr. TAUZIN. I thank the gentleman from Michigan.

Let me just make a point and maybe the members can help me

with this. The Chair is receiving messages from our first witnesses

that they are under an extremely tight schedule, and might we interrupt the opening statements, hear their testimony, and then we

will go back to finalize opening statements? Is there any objection

to that procedure? We will come back and hear your opening statements at that point. I thank you very much.

Let me also remind the members that all the mikes are open, so

if you have to say anything about Mr. Clymer or anybody else in

the audience, be careful.

Mr. TAUZIN. The Chair is now pleased to welcome the Honorable

Senator Fritz Hollings of the U.S. Senate. Mr. Hollings.

STATEMENT OF HON. ERNEST F. HOLLINGS, A UNITED STATES

SENATOR FROM THE STATE OF SOUTH CAROLINA

Senator HOLLINGS. I thank you very much, Mr. Chairman. I

thank you and the distinguished committee for the opportunity to

be heard. And since my statement has been filed, I will just highlight it.

Right to the point, about 2 months ago I was reading The Washington Post and there was an article in the business section, by Mr.

Peter Goodman to the effect that Deutsche Telekom had a $100 billion kitty and all American companies were subject to takeover,

and that he was not going to eliminate any of them, AT&T, MCI,

VoiceStream, Sprint, the whole crowd. And the concluding paragraph in that story said he knew it was not a joint venture that

he was looking to join in in America, but rather he wanted control.

Well, you and I and all of us in this committee have been in this

game now for years, and we know good and well we didn’t get into

deregulation, Chairman Oxley, you and I particularly, back with

Congressman Markey, in 1996 to deregulate from American government control to put it under German Government control. Necessarily, I got alarmed and particularly nettled in the sense that

the next article by the same gentleman said that the trouble with

Hollings was that he was a veteran from World War II and he was

anti-German, and that he was a big protectionist and didn’t understand globalization.

Well, I don’t want to sound like Vice President Gore, but I invented globalization.

I, along with Luther Hodges and all, Mr. Chairman, back when

Uncle Earl was there in Louisiana, I went in 1960, 40 years ago,

and knocked on the doors there in Dusseldorf and Frankfurt, and

today as I testify we have 116 German industries in South Carolina, my little State. We are proud of them. We have the British,

11

the Swiss, the French—Michelin—and all the rest of them. We are

proud of it.

My point is that we don’t object, as Chairman Dingell was talking, about foreign companies. We welcome foreign companies, not

foreign governments, because we are trying—as the distinguished

Chairman said, we are pushing Barshefsky and WTO and our special trade crowd to privatize, not to governmentize.

In that light, I am looking at the handout they gave us yesterday: ‘‘Protectionism is Not the Answer,’’ by my good friend, Congressman Oxley, and good friend, John McCain, the chairman of

our committee. Come on. Protectionism? They live in a life of symbols.

Let me, if you don’t mind, put that in the record, Mr. Chairman,

because they are the ones trying to protect. When we deregulate,

we get the government control out of it.

What does Deutsche Telekom have? Well, everything that I guess

Michael Armstrong would like to get ahold of right now. They have

$100 billion. They just had earlier this year a bond issue for $14

billion. We don’t have any communications company that can get

a bond issue of that kind. But necessarily we all join in it, because

you know the government is not going to allow them to fail, and

you are bound to make a profit on the thing. With that $100 billion

that they have, they can go around, even though their stock is way

down, I think it has gone from 100 down to less than 40. If that

was a private company, I would get ahold of T. Boone Pickens, an

icon, and I would say, Look here, you fellows know how to do it;

I have the idea; let’s go grab that one and pay for it with $100 billion out of the stock easy, and run with the money. You and I know

it. That’s what happens. When you get the government in, it has

got government control and protection, government financing, and

that’s exactly why we deregulated in 1996.

Now, historically, right to move quickly, back in 1995, we have

been talking about this issue for at least 5 years with this administration. The Special Trade Representative, Mickey Kantor, came

and he wanted to change Section 310, to start competition, foreign

competition and otherwise. There was an exchange of letters which

has been in the Congressional Record—we will put it in there—between Senator Robert Byrd and Kantor, but he got ahold of me and

you and the others and everything like that; so in the 1996 act,

during 1995 and 1996 when we were considering repealing the

1934 act, we looked at this very, very closely. During that time, it

came dramatically to our attention because Scott Harris, the head

of the International Bureau at the Federal Communications Commission testified before our committee on the Senate side, and he

said, Wait a minute, Section 310(a) is categorical, it cannot be

waived, and foreign governments can’t be licensed in telecommunications in the United States.

Thereafter, again, during the negotiations, because we all talked

about it, Mr. Harris had left the Federal Communications Commission and in the National Law Journal he wrote the same thing, and

we put that in our letters not only to the FCC and everyone concerned but to Mr. Summers and Deutsche Telekom so they would

understand what the law is; that in 1996 you and I, Chairman

Oxley and all the rest of us, Chairman Bliley, we talked this out.

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We agreed not to change the 1934 act with respect to foreign government ownership.

The law is there. I don’t need a bill. You don’t need a bill or anything else of that kind. We are just trying to clear up, as Congressman Dingell says, the appearance perhaps of an ambiguity. The

European Union knows. Oh, yes, the European Union; this room is

filled up with these arbitragers who think they are educating the

European Union. It amuses me.

In 1999, the European Union stated this in its report, it said,

and I ‘‘Section 310 of the Communications Act of 1934 remains basically unchanged following the adoption of the new Communications Act of 1996.’’ This situation has not changed through the

Basic Telecom Agreement. So all of Europe knows it. Any lawyer

with any sense can read it, and it has never been changed, but you

have got that cabal—the White House, Ambassador Barshefsky,

and Chairman Kennard—and they think they invented competition.

Let me remind them that we have had competition. ITT was

overseas, AT&T was overseas in 1910. That’s why they covered foreign ownership and foreign company ownerships in the 1934 act.

I will never forget, Mr. Chairman, I landed about 10 years ago

in Argentina, Buenos Aires. The Ambassador, trying to make conversation, turned to me in the car coming out of the airport. He

said, Well, your company is doing good, Senator. I said, What company? He said, Bell South. I said, Are they down here?

He said, Oh, yes, they have about 12 to 14 million subscribers

in wireless.

So I went to the record, and prior to the 1996 Act itself Bell

South has been in 12 countries, all over Latin America, Israel and

otherwise.

We find that former Bell Atlantic, our friends at NYNEX,

Verizon they call it now, they are in 9 countries; SBC in 22 countries; AT&T in 7 countries; I could go down the list. But mind you

me, the Special Trade Representative is not starting competition,

nor are the children over at the White House.

The FBI is going to be heard before this committee, and they

submitted their statement and they have already adjusted the

statement over at the White House. You know, they are good at adjustments. And you ought to know about this and watch this crowd

and Kennard, who thinks he is judicial saying, I am to give careful

review. Just read the law. That’s why I put in the bill now.

Spain, when the KPN tried to take over Telefonica, they said no.

They didn’t say since the Netherlands you are a WTO country, like

Ambassador Barshefsky, we made an agreement, we made an

agreement, but the agreement can’t change the law. Only the Congress can do that.

Same with Singapore tel trying to take over Hong Kong Telephone. Hong Kong said no. They are WTO countries. Same with

Italy. When Deutsche Telekom tried to take over Telecom Italia,

Italy said no. It wasn’t, as they are going to argue before this committee, that we made a firm agreement as long as you are a member of WTO then you ipso facto—the public interest is served by

you coming in and having government ownership in the United

States of America.

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And finally, Mr. Chairman, let me just say this about this socalled protectionism that they have got here. This brings it right

into focus. It reminds me of Chairmen McCain and Oxley talking

about protectionism. The young lad who went to the psychiatrist

and the psychiatrist drew some lines up and down on the board

and he said, Now, young man, what does that make you think of?

He said, Sex. He drew some parallel lines. He said, Sex. He drew

some crosses, and the young man said, Sex.

The doctor looked at him and he said, Young man, you are the

most oversexed, depraved individual. ‘‘Me, Doc?’’ the young man

says, ‘‘You are the one drawing the dirty pictures.’’

They are the ones that are asking for protectionism. I am not

asking for protectionism. Chairman Oxley, I ask your support now.

Come on. You and I had this out, and I know you and I are for

opening up markets and we have a wonderful competition going.

Just don’t let the government come in there where they can print

money. Can you imagine coming and running around with $100 billion and your stock down to 40, giving $55 billion? No one has ever

given per subscriber, in all of these mergers, over $12,000 per subscribers, now they come with $22,000; $55 billion. Necessarily my

distinguished friend here, the Congresswoman, she necessarily is

for that. I guess if I was VoiceStream, whoopee, let’s give me the

money. I would get out of the Congress. That’s the way it goes.

I thank the committee and would be glad to answer any questions.

[The prepared statement of Hon. Ernest F. Hollings follows:]

PREPARED STATEMENT OF HON. ERNEST F. HOLLINGS, A U.S. SENATOR FROM THE

STATE OF SOUTH CAROLINA

In June of this year, I, along with a number of my colleagues, introduced legislation to clarify the rules governing the takeover of U.S. telecommunications providers

by state-owned foreign companies. The legislation has been favorably received and

now has 17 co-sponsors, including the majority and minority leaders, the chairman

and ranking member of the Senate Appropriations Committee, the chairman of the

Foreign Relations Committee, the chairman of the Intelligence Committee, and a

majority of the members of the Senate Commerce Committee.

A companion piece of legislation has been introduced by the ranking members of

the House Commerce Committee and its Subcommittee on Telecommunications. I

want to thank Chairman Bliley for asking me to testify at this hearing and I commend Ranking Members Dingell and Markey for their work on this important issue.

It is important to emphasize at the onset that this legislation is narrowly targeted

to prohibit substantial foreign government ownership of U.S. telecommunications

companies. In fact, I am quite proud of the fact that hundreds of private foreign

companies have invested in my State of South Carolina. For example, from Germany alone, there are over 100 companies with a presence in South Carolina.

On a national level, I must also point out that no objection was raised when

Vodaphone (a foreign private company) purchased Airtouch, Cellular Properties located in Silicon Valley. Nor was there any outcry when France Telecom and Deutsche Telekom (DT) sought to acquire a minority 10% stake in Sprint.

Rather, we are troubled by substantial foreign government-ownership of U.S. telecommunications properties that allows foreign governments to hold and operate U.S.

telecommunications licenses. Ours is an effort aimed squarely at privatization.

This legislation is necessary for two reasons. First, it is needed to rectify the

FCC’s misinterpretation of existing law that clearly prohibits foreign government

ownership of U.S. telecom firms. Second, this legislation is justified by compelling

public policy rationale that argues against allowing state ownership of U.S. telecom

assets.

First the law. I believe that any acquisition of a U.S. telecom company by a foreign government owned provider violates Section 310 (a) of the Communications

Act. That section plainly prohibits foreign governments or their representatives from

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purchasing U.S. telecommunications entities. Deutsche Telekom, France Telecom, or

NTT clearly fall within the prohibitions contained in Section 310(a). In 1995, the Chief of the FCC’s International Bureau, Scott Blake Harris, testified

before the Senate Commerce Committee in favor of maintaining ‘‘the general ban, now in Section 310(a), on foreign governments or their representatives owning radio

licenses.’’ Subsequent to the enactment of the 1996 Telecommunications Act, he wrote in the

National Law Journal in October 1996—‘‘Section 310(a) flatly prohibits a foreign government or its representative from holding any wireless license, directly or indirectly. This limitation is not subject to being waived by the FCC.’’ In that article,

he specifically mentioned Deutsche Telekom and France Telecom relative to that

ban.

That brings me to Deutsche Telekom’s takeover of VoiceStream. Deutsche

Telekom is a formerly wholly state-owned company that has been partially

privatized, but remains majority owned by the German government. Under the

plain language of Section 310(a), this transaction appears to be prohibited. This conclusion is not without significant justification in fact, for starters, DT, FT, NTT, and several other international telecom giants are significantly owned by the

governments that regulate them. Using Deutsche Telekom as an example, we know

that the German government owns 58% of DT. In addition, a recent SEC filing

states that 41.3 percent of Deutsche Telekom’s employees are statutory civil serv- ants who cannot be terminated except in extraordinary statutorily defined circumstances.

The VoiceStream-Deutsche Telekom merger agreement reveals that Deutsche Telekom waived its foreign sovereign immunity for service of process in its merger documents. Why do they have this to waive? Only governments have sovereign immunity. Clearly, VoiceStream’s lawyers were worried that Deutsche Telekom could assert that Deutsche Telekom is the government. So, if DT is not the government or its representative as contemplated by Section 310(a), I don’t know who is. Unfortunately, the FCC has read Section 310(a) com- pletely out of the law. They possess no such authority. Nonetheless, some argue that these transactions come under Section 310(b) of the Communications Act. As a bit of background, in 1995, U.S. Trade Representative

Mickey Kantor wrote Senator Robert Byrd that Section 310(b) is regarded by foreign

companies as a barrier to market access in America’s telecommunications marketplace. He went on to indicate that legislative authority was needed before administration officials could ‘‘remove this restraint through international negotiations.’’ As most of you remember, after extensive debate and ’consideration of this issue

in both the House and Senate, the 1996 Telecommunications Act reaffirmed Sections

310 (a) and (b) providing no authority to our trade negotiators. In spite of this, the

U.S. negotiators in the 1997 WTO telecom negotiations reached an executive agreement that violates Section 310.

The FCC, then implemented rules to presume entry into our market, so long as

the acquiring company originates from a WTO member country, without regard to

whether that company is government owned.

The EU itself appears to acknowledge that the FCC order is inconsistent with

U.S. law, stating in a 1999 trade barriers report that Section 310 retains force and

effect notwithstanding the 1997 WTO telecom agreement. specifically, the EU report

states: ‘‘Section 310 of the Communications Act of 1934 remains basically unchanged following the adoption of the new Communications Act of 1996...this situation has not changed through the basic telecom agreement.’’

As the EU correctly recognizes, an executive agreement cannot repeal U.S. statutory law—a principle that brings to mind George Washington’s farewell address, in

which he stated: ‘‘If the distribution or modification of the powers under the Constitution be in any particular wrong, let it be changed in the way the Constitution

designates, for while the usurpation in the one instance may be the instrument of

good, it is the customary weapon by which free governments are destroyed.’’

Having touched upon the law, I will now turn to the policy that justifies prohibiting state ownership of U.S. telecom companies. State ownership is troubling because it is fundamentally inconsistent with America’s domestic telecommunications

and competition policy.

Beginning with the breakup of AT&T, and culminating in the Telecommunications

Act of 1996, the United States has consistently encouraged a free enterprise system

in which competition prevails. Businesses are free to succeed, but they are also subject to the very real threat of failure.

In this ‘‘survival of the fittest’’ system, entrepreneurs and businesses ‘‘build a better mousetrap’’ and are rewarded in the marketplace. Others who don’t quite cut

it are left behind.

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This is the level playing field of the competitive marketplace. Unfortunately, if we permit foreign state-owned companies into the U.S. market we will be facilitating

the entry of new players who don’t participate on a level playing field. Companies that are substantially owned by their governments are not subject to the rigors of

either the competitive marketplace or the financial markets to the same degree as

their private sector counterparts.

Government shareholders have different goals from private shareholders.

As a result, it is simply unfair to allow these state-owned companies to compete against other private companies, both U.S. and private foreign based. I find it constructive to compare two companies—one government owned, and/or one private— to illustrate this point. Deutsche Telekom (DT), which is 58% owned by the German

government, recently completed an unprecedented bond offering where they raised

nearly $15 billion dollars in a single offering—which was larger than any single of- fering by a ‘‘private’’ company in history. DT has also reportedly maintained a store of 100 billion euros, prompting their CEO to boast that no U.S. telecom company

is ‘‘out of reach.’’ These foreign government owned companies operate under a dif- ferent set of rules—written and unwritten—that allow them to obtain favorable financial terms in a manner unavailable to their private sector counterparts.

In the private sector, we know that the financial markets would never permit

companies to hold onto that much capital for an extended period of time. Rather,

they would be required to return it to their shareholders in one form or another or

be subject to a takeover. Recently, AT&T’s stock has significantly under performed the overall stock mar- ket. As a result AT&T’s executives, have been meeting with investment bankers in an effort to raise its share price by discussing various corporate strategies. In fact,

if press reports are to be believed, they too are considering a high profile merger,

perhaps as the target company. Contrast that with Deutsche Telekom, which has seen a similar plunge in its share price in the past three months. Yet, the only reason DT’s executives are meeting with investment bankers is to decide which company they will purchase next.

No matter how low DT’s share price goes, they are unlikely to be a takeover target. Why?—the government could veto the acquisition. Thus, unlike AT&T, DT can hang onto its 100 billion euros and take its time seeking telecom targets without having

to answer to shareholder criticism or demonstrate progress in their next financial

report.

As the August 28th Barrons recently stated, ‘‘Often management is removed at a company the size of DT after such a debacle in the stock price. Will the knives come out here? DT is still controlled by

the German Government, so [their CEO] Sommer’s position is safe.’’ Mr. Sommer is doing exactly what his majority shareholder, the German Govern- ment, wants, by increasing global presence and increasing market share with less

of a focus on profits.

As a practical matter, there are only a few remaining government owned telecom

companies that this legislation would impact. In many ways, those companies represent the last vestiges of a collectivist past when governments, and not markets,

dictated industrial policy.

This legislation establishes all of the correct incentives by narrowly prohibiting

foreign government investment. We encourage these vestiges of the past to privatize

by offering entry into the lucrative U.S. market, provided their government stake

in the acquired entity is lower than 25 percent.

In fact, this approach already has a proven track record. Spain recently rejected

Dutch government-owned KPN’s attempt to purchase Telefonica, a privatized

telecom company in Spain. In response, the Dutch government has reportedly decided to reduce its 43% stake in KPN to approximately 20%. Moreover, the Finnish

government has also publicly signaled its intention to lower its stake in its government-owned provider Sonepa. Just this week, Israel made a similar announcement.

Such government divestment follows closely on actions by other governments to

prevent similar takeovers by state-owned telecommunications providers. To be precise, three WTO member countries—Spain, Italy and Hong Kong—have formally

and informally rebuffed efforts by state-owned providers to acquire domestic telecommunication providers. Moreover, at the urging of Spain, this month the EU will

begin a review of the market distorting effects that are occasioned by the purchase

of a privatized telecom company by a state owned entity.

It is important that these state-owned entities divest for another reason. There

is a clear conflict of interest in the EU’s current merger review process, particularly

when that process examines mergers involving American companies. Many of the

member states that make up the EU in fact own the very companies that compete

with their American counterparts seeking EU approval to merge.

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So, while Worldcom and Sprint barely met the commission’s threshold for reviewing mergers in the first place, the EU recently rejected that merger. And, while AOL

is not the dominant ISP in Europe, and Time Warner has only incidental holdings

in Europe, the EU recently filed several objections to that transaction. Who is the

number one ISP in Europe? Deutsche Telekom’s T-Online. This conflict of interest

is undeniable. If these state-owned companies privatize, however, the appearance of

this conflict should disappear.

I would be remiss if I did not also mention the significant national security and

privacy implications of foreign state ownership of American telecommunications facilities. The technology exists today to surreptitiously monitor virtually every telecommunications medium. In the wireless industry, for example, this monitoring can

include the substance of our conversations and the locations of our calls. We already

are too aware of the threat to individuals’ privacy on the Internet. And in the

wireline telephone industry, current U.S. law mandates that companies equip their

networks to permit surveillance. Do we want a foreign government in charge of such

surveillance? The answer most certainly is no.

Finally, I would like to make a point about the Telecommunications Act. In 1996,

I worked with many of you to deregulate our telecommunications market. It was an

extraordinary effort, and we are slowly beginning to see progress. Our efforts to foster competitors have begun to benefit consumers. These efforts, however, have also

depressed the earnings and stock prices of many U.S. domestic providers. Under

normal circumstances, that would be of no interest to us, but in ‘‘promoting competition’’ here at home we may be facilitating the ease by which foreign governmentowned providers may emerge with key assets.

Opponents of our legislation argue that our concerns are misguided because DT

is making progress in divesting its government stake and that the German market

is more open today than it was years ago. Deutsche Telekom was 74% owned by

the German government in 1996 and is now 58% government owned. I suppose that

represents some progress.

But we did not tell our U.S. companies—‘‘go ahead, make progress, and then we’ll

let you compete by leveraging your market dominance against your competitors.’’

We did not tell Verizon and SBC—who are to be commended for opening their markets in New York and Texas—‘‘go ahead, meet 10 of the 14 checklist points and then

you can enter the long distance marketplace.’’

The market opening requirements that we have imposed on U.S. providers represent the appropriate incentives which have begun to break open the local telephone market. We should impose no less of a standard on foreign entrants that are

government owned. Progress is not good enough. Only divestiture and the consequent competition that will result should suffice.

Contrast that approach with DT’s recent statement in a SEC document from April

that ‘‘DT does not yet face significant competition in the market for local calls for

which an area code is required.’’ DT concedes in the same document that it ‘‘has

not lost significant market share in the market for local calls.’’ In fact, the German

monopoly commission has concluded ‘‘that effective competition in the telecommunications sector does not yet exist.’’

To permit state-owned monopolies to enter the U.S. market flies in the face of the

Telecommunications Act of 1996. We didn’t deregulate telecommunications from

under U.S. government control to put it under German government control.

In conclusion, I would like to read you one final passage from DT’s April filing

before the SEC.

‘‘As long as the Federal Republic directly or indirectly controls the majority of

Deutsche Telekom’s share it will, like any majority shareholder in a German

stock corporation, have the power to control most decisions taken at shareholders’ meetings, including the appointment of all of the members of the supervisory board elected by the shareholders and the approval of proposed divided

payments.’’

While DT argues that corporate acquisitions will reduce the German government’s

stake via dilution, does anyone believe that a 40% or 35% government shareholder

does not exercise significant control?

The issue of foreign government ownership of private U.S. telecom firms is essentially one of privatization. For fifty years, the U.S. government has encouraged privatization around the globe because we recognize that government shareholders are

different from private investors and that markets operate more efficiently than governments. Our legislation does not bar entry into the U.S. market.

It implicitly welcomes foreign private investment in the U.S. and establishes the

appropriate incentives for these remaining vestiges of antiquated industrial policies

to privatize sooner rather than later. Privatization should in turn lead to more open

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markets abroad, and a fuller and freer flow of trade throughout the globe. Its the

American way—and we should demand no less.

Mr. TAUZIN. Senator, would you like another 20 minutes or so?

Senator HOLLINGS. No. Thank you a lot.

Mr. TAUZIN. If you don’t mind, Jennifer, Senator, I have heard

this wonderful story about you and Petsy during the campaign for

President that you just reminded me of. I don’t know if it is true.

Maybe you can verify it for me.

Senator HOLLINGS. Unfortunately, it’s true.

Mr. TAUZIN. Dead tired on the campaign trail one night in one

of these awful little motels you find yourself in as your tromping

around New Hampshire during the early primaries and a reporter

bothered you in the middle of night and Petsy answered the phone,

like 2 o’clock in the morning.

Senator HOLLINGS. No, it was early in the morning, Mr. Chairman.

Mr. TAUZIN. Tell us what happened.

Senator HOLLINGS. What happened was I was to come on at 7

o’clock. We didn’t get in there until 1 o’clock or 2 o’clock in the

morning, out there at Carmel, California. And so calling us at 6

o’clock to make sure I would make that 7 o’clock meeting, Petsy answered the phone and then in a loud voice she turned to me and

said, Honey, is your name Hollings?

Boy, I ran around explaining that to that crowd all the rest of

the meeting.

Mr. TAUZIN. That’s a great story. That is a great story, Senator,

thank you.

We will now hear from the gentlelady.

Ms. DUNN. I will yield you my 5 minutes.

Mr. TAUZIN. Jennifer, I wonder if Senator Hollings showed up at

that fiasco in Seattle to announce that he invent globalization.

Ms. DUNN. It might have worked. It might have been a lot

calmer.

Mr. TAUZIN. Jennifer Dunn.

STATEMENT OF HON. JENNIFER DUNN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF WASHINGTON

Ms. DUNN. Thank you very much, Mr. Chairman. You did not

need to warn us that the mikes are open. I am sure that Senator

Hollings and I would have had only very pleasant things to say

about you.

Mr. Chairman, we still appreciate, though, having the chance to

give testimony on an issue that I think is vitally important. It is

a pleasure to be here and to preview in a way a great citizen of

Washington State, whom you will hear from in one of your later

panels, John Stanton, who is the CEO of VoiceStream Wireless. As

you will discover today, John has been a visionary in cellular technology for many years. In fact, in the early days, he aligned with

another Washington State resident, Craig McCaw. John and Craig

really led the growth of this industry, not just in the Pacific Northwest, but nationally and internationally as well, and I think you

will enjoy hearing from him soon.

Today, VoiceStream, a company that is based in my district, now

employs 8,000 people and it has 2.3 million wireless customers

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around this country. VoiceStream embodies the technological innovation, the quality jobs, and the international leadership that we

have come to believe characterizes the new economy here in the

United States and gives strength to us as we continue in our leadership.

As other high-tech companies in the new economy are discov- ering, however, their desire to innovate and expand their businesses often faces opposition from within their own government.

Today, VoiceStream is poised to expand their business to other

parts of the United States and to bring increased competition and

innovations to customers all over our country. Unfortunately, actions being considered by Congress would arbitrarily negate these

plans, and I believe would send a chill through the new economy

and the high-tech industry, which heavily relies on outside investment to innovate and to bring new products to market. The purpose of your hearing today is to examine the current pro- cedures for the acquisition of a United States company holding

FCC licenses by a foreign company. Under the Communications

Act, as has been mentioned already in your hearing today, if indirect foreign ownership of a United States telecom company would

exceed 25 percent, the FCC must rule that the purchase is in the

public interest and that there is no national defense concern before

the acquisition may be approved. And along that line, Mr. Chairman, I would like to offer for inclusion in the record the testimony

of my colleague from Washington State, the Honorable Norm

Dicks, who has been a member of the Intelligence Committee and

speaks to the security issues that are related to this merger.

Mr. TAUZIN. Without objection, that’s so ordered.

[The prepared statement of Hon. Norman D. Dicks follows:]

PREPARED STATEMENT OF HON. NORMAN D. DICKS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF WASHINGTON

Thank you Chairman Tauzin and Ranking Member Markey for holding this important hearing on the subject of foreign government ownership of American telecommunications companies. As technological innovations continue to make the

world smaller, a discussion about foreign ownership of American companies is very

timely. We must take care that any action we in Congress take regarding this most

vibrant industry help, not harm American consumers and workers, and that any action we take can have unwanted and unforeseen negative repercussions. We would

do well to study this issue carefully and proceed cautiously, making sure first of all

that we understand the consequences of our decisions. This hearing is a first step

toward making an informed decision, and so, again, thank you.

Today, I want to briefly address the merger between VoiceStream and Deutsche

Telekom and explain how it will both serve American consumers and workers and

further our national security interest.

First, the VoiceStream-Deutsche Telekom merger will benefit consumers and

workers. It will do so by enhancing consumer choice, accelerating the pace of technological innovation, providing more competition, and encouraging lower costs.

VoiceStream, which is now the fastest growing, but still smallest nationwide wireless company, will be able to expand its networks and service areas throughout the

United States and thereby better compete with other much larger wireless telephone companies. This competition will provide consumers with more options and

force all companies to increase efficiency, improve service, and lower prices. In addition, the increased competition will accelerate innovation and will soon enable more

Americans to have one phone, with one number, that they can use almost anywhere

in the world. The merger also promises to create thousands of good new jobs for

Americans.

The suggestion has been made that, despite these benefits to American consumers

and workers, the VoiceStream-Deutsche Telekom merger somehow poses a threat to

our national security. Mr. Chairman, we do not need to enact this legislation to proVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
19

tect our national security. Mergers such as the VoiceStream-Deutsche Telekom

merger will be subject to a full review by our national security agencies, through

the Committee on Foreign Investment in the United States (‘‘CFIUS’’).

VoiceStream already has a security agreement with the national security agencies that it agreed to as part of the approval of a previous merger. The national security

issues have been worked out satisfactorily in the past, and there is no indication

that they cannot be fully and adequately addressed here—without sacrificing the consumer benefits and new American jobs that this merger will bring. Second, this merger will promote competition. No U.S. wireless consumer will lose a marketplace choice for wireless service as a result of this merger. In fact, marketplace choices for U.S. wireless consumers will increase as VoiceStream is able to

continue to build out its existing licenses and to fill in the gaps in its nationwide

coverage. In any event, the merger will be subject to tough scrutiny to ensure that

it does not diminish competition. Competition. Specifically, the FCC already has authority to determine whether the public interest would be served by allowing any

foreign corporation—including one with foreign-government ownership—to receive a

common carrier wireless license. This review takes into account factors, such as

competition, consumer welfare, and, in consultation with the Executive Branch, national security, law enforcement, foreign policy, and trade. The Department of Justice also has the authority to review this merger. If it finds that a merger involving a foreign corporation threatens consumers or competition,

the Justice Department has full authority to block it. In fact, it is worth noting that

the WorldCom-Sprint merger began to unravel after the Justice Department (not

the European Commission) filed suit to block the transaction.

In addition, the Exon-Florio Amendment provides a mechanism for blocking an international merger or requiring appropriate restrictions in order to protect national security and law enforcement interests. The Committee on Foreign Investment in the United States (CFIUS), the interagency committee created under ExonFlorio to review U.S. acquisitions by foreign companies that could threaten U.S. national security, includes the Departments of Commerce, Defense, Justice (including

the FBI), State, Treasury, and the National Security Council. In previous telecommunications acquisitions by foreign companies, CFIUS has required limitations

on a foreign parent’s access to sensitive information and authority over sensitive fa- cilities, including imposing requirements that facilities used to manage U.S. domestic telecommunications infrastructure remain in the United States. The CFIUS review—along with the FCC and DOJ reviews—are more than adequate to address

the effects of any international merger on telecommunications competition and to

require the continued maintenance of a secure communications system that meets

national security and law enforcement needs. Finally, concerns have been raised about the potential for the newly-formed com- pany to be controlled by the German government. I believe this fear is misguided.

Deutsche Telekom, which formerly was wholly owned by the German government,

is now an independent, publicly traded company. While the German government

still holds directly or indirectly some 58 percent of Deutsche Telekom shares, it is

reducing its stake as market conditions permit. The proposed merger with

VoiceStream would actually dilute the German government’s ownership below 50

percent to about 44 percent.

Moreover, the German government, even with its current ownership stake, does

not control Deutsche Telekom. The German government holds only one of the twenty seats on Deutsche Telekom’s board of directors, consistently votes with the company’s management and other board members, and has no special veto rights. In

addition, it provides no subsidies or other special preferences to the company.

The VoiceStream-Deutsche Telekom merger clearly furthers our national security

interests for national economic security reasons. The United States has been the

leader in encouraging other countries to open up their markets—in telecommunications and in other areas—to foreign competition. We have pressed foreign governments to decentralize control of former and current state-run industries. We have

done so because we believe in the benefits open markets create and because we have

confidence that American companies can excel in any market where the rules permit

open, fair competition. If we were to close our doors and restrict access to our market in this case, we would undermine every argument for liberalized trade and free

markets that we have made in recent years. Worse yet, we would shut off important

American companies from important sources of capital that they need to create

American jobs and create new, innovative services at better prices for American consumers.

Let us make no mistake about it. Turning our back on this merger will not only

undermine our credibility and ideals; it likely will have real, tangible consequences

for workers and consumers, some of whom have no direct stake in the merger. I am

20

referring to the potential for a trade war. Indeed, ‘‘potential’’ might be an understatement. European Union officials already have informed the United States that

they will face strong pressure to retaliate to any measure, such as the Hollings bill

or Dingell-Markey legislation, that would strictly limit foreign ownership. Whether

they lash back in agriculture, intellectual property, or electronics, the only clear victims will be American consumers, workers, and businesses for whom unfettered

trade has delivered the best available goods at the lowest prices, created millions

of jobs, and opened new markets for business.

Mr. Chairman, this merger is in our national interest. Enacting protectionist legislation and thereby inviting European retaliation is not. I urge the Subcommittee

to reject the Hollings bill, the Dingell-Markey bill, and any other similar attempt

to impose arbitrary limits on foreign competition. They will only result in less robust

and less open markets here and abroad.

Ms. DUNN. Some in Congress are seeking to ensure that no acquisition that would result in indirect foreign government ownership of more than 25 percent should be approved. So the debate

comes down to a very familiar topic: Do we grant the executive

branch discretion to oversee international trade or do we micromanage it here on Capitol Hill?

As a member of the Ways and Means Subcommittee on Trade,

I have always supported granting authority to the executive branch

to negotiate and, after the approval by Congress, to implement

trade agreements on our behalf. I believe this represents the best

opportunity to open markets abroad for United States products.

This is especially true of the Basic Telecom Agreement which was

finalized in February 1997, as an add-on to the Uruguay Round of

the WTO.

This historic agreement is helping United States telecommunications companies to gain a foothold in developed and developing

countries around the world, and it provides us with an enforcement

mechanism through the WTO to ensure compliance.

Make no mistake, however—and I would agree with others who

have spoken today at this hearing on the subcommittee—much

more can be done along this line. The pace of telecommunications

privatization in other countries has been very slow. From Mexico

to Japan to many European nations, our trading partners continue

to have major ownership over their telecommunications infrastructure. Such ownership has proven to be extremely problematic for

United States companies seeking access to markets abroad.

At the same time, we have processes in place through the FCC

and the USTR to force greater concessions on market access. As

part of the Uruguay Round Agreement, which Congress affirmed in

1994, our trading partners approved the FCC procedure for determining public interest and national security in cases of indirect foreign ownership of licenses.

If we were to arbitrarily change criteria for foreign investment

in the United States market, that would be raising serious questions about WTO compatibility, something you need to take a very

close look at.

Most importantly, however, is the fact that the FCC approval

process allows the United States to condition these types of acquisitions on further privatization efforts overseas. Changing the law

would have the ironic effect of reducing our ability to further privatize foreign telecommunications companies.

Arguments about WTO compatibility and market access, although important, are secondary to the true objective of the marVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00024 Fmt 6633 Sfmt 6602 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
21

ket, and that is innovation and competition. In order for United

States consumers to fully benefit from innovative technologies and

increased competition, companies must be allowed to seek investment from around the world.

The current FCC process provides more than adequate protection

against actions that would harm United States businesses and consumers. And let me repeat that, Mr. Chairman, because it is really

the crux of what I believe. The current FCC process does provide

more than adequate protection against actions that would harm

United States businesses and consumers.

As many of you know, I represent an area east of Seattle, Washington, that has benefited greatly from the new economy. It is my

sincere desire that every part of this country is some day touched

by the technological revolution that is taking place in my part of

the country. That will only happen, however, if innovators are allowed to create, if businessmen and women are allowed to market,

and if investors are allowed to seed tomorrow’s technology.

Thank you again for your willingness to let me speak to you

today, and I would be happy to respond to any questions you might

have.

Mr. TAUZIN. Thank you very much, Jennifer. Jennifer, I had a

message you had to leave. Any time you need to depart, you are

certainly welcome, and Senator Hollings the same. Would you like

to take a few questions, sir?

Senator HOLLINGS. I would be glad to try to answer your questions.

Mr. TAUZIN. I think in fairness to the guy who has drawn all

those nasty pictures for you, I think I ought to recognize Mr. Oxley

first. Mr. Oxley.

Mr. OXLEY. Thank you. Welcome, Senator Hollings. Let me take

you back to 1996 and the conference on the Telecom Act.

Senator HOLLINGS. Right.

Mr. OXLEY. If you will recall the Oxley amendment that passed the House dealt with 310(b) and a modified 310(b) to the extent

that it provided for reciprocity in the process; that is, if we were

dealing with a country that was open and allowed American investment, that indeed we would recognize that reciprocally. And unfortunately, because of your efforts, that language was taken out.

I am not sure whether you have second thoughts about that decision, because basically what has happened is that since that time

the FCC and USTR have taken a very good, in my estimation, a

good approach in dealing with 310(b). They don’t even have to consider reciprocity. I am just wondering if you perhaps had another

shot at that amendment whether it might have been a good idea

to put into the bill at that time?

Senator HOLLINGS. No, Mr. Chairman, I definitely would—want

that out. I didn’t have my way. What happened was we had put

in S. 1822, had it all ready, and a filibuster prevented its being

taken up. At that time, I was chairman of the committee. In 1994,

of course, the Republicans took over the U.S. Senate and Chairman

Pressler put in the bill, and we had also that same kind of provision in the Senate bill.

We had a hard time getting that out, and the only reason I think

we got it out, you and I agreed on the ‘‘snap-back.’’ Don’t you reVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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member, we said, Wait a minute, if someone had been allowed in

the country, this foreign country and then under new leadership

they all of a sudden unlicensed the American company, then we

would unlicense their particular things, and we argued back and

forth the snap-back.

But, no, I think the law is sound. The market is dynamic. There

is all kinds of money, and you and I have caused not only competition but companies to be pretty well bloodied and downgraded.

AT&T is trying to compete. We have yet to get the Bell companies

to comply with that 14 points. Thank heavens for SBC down in

Texas and, of course, Verizon up in New York. But the others

haven’t just come around to complying, and that particular monopolistic conduct has failed to really carry through completely. But

while we are trying to get that done and showing how it can be

done, they tried to question the constitutionality, and they took it

to the Supreme Court and everything else of that kind.

They wrote it—the Washington lawyers wrote those 14 points,

not me, because it is all sophisticated communications law, and

they knew about it. But now to come in and get the U.S. Government, in an open market here, and all of a sudden superimpose a

country that can print dollars that is totally inappropriate.

No, I wouldn’t change it, I would say.

Mr. OXLEY. You wouldn’t even take stake the snap-back ? You

wouldn’t go back to the snap-back provision?

Senator HOLLINGS. I would consider snap-back but not governments. Yes, I would do it with respect to private companies.

Mr. OXLEY. Let me ask you—— Senator HOLLINGS. Yes, I like that reciprocity with respect to private companies.

Mr. OXLEY. Do you think the proposed merger with Deutsche

Telekom and VoiceStream will provide more competition in the

telecommunications industry?

Senator HOLLINGS. No, it will stifle competition. Wait a minute,

here comes—they will all of a sudden raise the ante. Everybody is

looking around how much is it really worth? They don’t know. They

are trying to get market share and in comes a foreign government

and jumps it all up to $21,000, $22,000 a subscriber. We can’t—

AT&T can’t print money. In fact, they have lost a good bit of their

ability to finance.

Mr. OXLEY. So you wouldn’t——

Senator HOLLINGS. No. The private market—they all are staying

quiet. They favor what I have done, to a T. In fact, the European

Union—one of you commented that the European Union was

again—no, we have members from the European Union that oppose

this.

You don’t want the government into this open market. I don’t

want the government. Not the U.S. Government and not the German Government or any other government.

Mr. OXLEY. Will the effect of Deutsche Telekom merging dilute

the percentage of government ownership in Deutsche Telekom?

Senator HOLLINGS. That’s Washington lawyer talk, 310(a) still

applies; none of this dilution by 10 percent, 10 percent, 10 percent.

Well, look at it. Wait a minute, all of these other countries have

all of these 10 percents and everything; my interest in ownership

23

has been diluted. Not so at all. In the SEC papers they said that

they would waive sovereign immunity. As John Mitchell, the famous Attorney General said, Watch what we do, not what we say.

Let them get rid of that 58 percent ownership. Get it down to 25

percent or less.

Mr. OXLEY. So in your estimation, this merger will not provide

more competition.

Senator HOLLINGS. Absolutely not. It will start stifling competition, hurt everybody else in the free market here in America.

Mr. OXLEY. Will it provide working capital for VoiceStream?

Senator HOLLINGS. We don’t have any shortage of working capital. This crowd behind me has got it. They have it coming and

going. You and I can’t catch up with it.

Mr. OXLEY. That decision has to be made in the marketplace,

does it not?

Senator HOLLINGS. Sir?

Mr. OXLEY. That decision has to be made in the marketplace as

to whether—VoiceStream obviously thought this was a good opportunity to get capital to be able to build a company.

Senator HOLLINGS. That made in the marketplace in accordance

about the law, but the law categorically, and like Scott Harris said,

it cannot be waived.

Mr. OXLEY. So you don’t think this will benefit consumers in any

way?

Senator HOLLINGS. No, it is not going to benefit consumers. It

will hurt the consumers. It will benefit these individuals. Once they

get their foot in the door in VoiceStream, they will come back and

get—now they are looking at a part of the wireless over in Georgia

that my Bell South has got part of that, and I have been sort of

indirectly told that, wait a minute, if you quiet down, it means

about $400 million more to Bell South so don’t get so wrought up

and that kind of thing. But once they get those two, then they will

come back and get Sprint.

Come on. This is a foot in the door against the categorical prohibition against foreign governments being licensed. That’s 310(a).

That has not been changed. Barshefsky can’t change it, nor can

Chairman Kennard change it. Tell them to read it.

The question before them is not whether it is good or bad. It is

there. And we think it is—I don’t believe you could get a majority

vote in either House right now to all of a sudden start putting governments in it.

Mr. TAUZIN. The gentleman’s time has expired.

Mr. OXLEY. Let me just ask one more question.

Mr. TAUZIN. One more.

Mr. OXLEY. If that is the case then, we don’t need your bill.

Senator HOLLINGS. No, we don’t need the bill. I think 310(a) applies, and I want to say that loud and clear.

Mr. OXLEY. I yield back.

Senator HOLLINGS. I am just making this for the record when it

goes up on appeal.

Mr. TAUZIN. The gentleman’s time has expired.

The gentleman from Massachusetts.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

24

Can we turn a little bit to USTR? Maybe you could give us your

perspective of how they view these issues. They seem to have a

fairly long-term, fairly lenient view of the question of how much a

foreign government has to divest its ownership, and it keeps—it

kind of has a manana mindset. Maybe they haven’t done it yet, but

there is a process; there are discussions that are ongoing that will

lead to the full opening of it. And what keeps coming to my mind

is, what if they were in charge of the domestic American marketplace? Maybe their policy would have been, Well, there are 14

checkpoints and SBC has fulfilled 9, and they seem to be sincere

about doing the other 5 and so we will continue our discussions

with them; but for competition purposes, we will allow them into

long distance right now, even though they haven’t opened up their

own marketplace.

Senator HOLLINGS. That’s right.

Well, your question includes the answer. It is an excellent observation, Mr. Congressman. Actually, what is wrong here is Ambassador Barshefsky is like that famous rooster that crowed in the

morning and thinks it started the sun to rise. I mean, just because

she says now she is for competition—and we all have been getting

on her to privatize—Chairman Tauzin, I have it right here, and

that was the best thing, I didn’t need any testimony, pushed her

to privatize. That’s what the chairman did.

That’s all we are talking about here at this hearing, privatize foreign business. Come on in, but don’t bring your government in and

take control where you can print money.

Mr. MARKEY. What do you think would happen if we allowed Secretary Glickman, for example, to set up his own agricultural company here and then to move to France to begin to buy up all the

farms in France so that we could have a big company to compete

against all the small farms in France? Do you think the French

would welcome that as a WTO?

Senator HOLLINGS. Like Napoleon, he would be banished to Elba,

I can tell you that right now. Couldn’t do it.

We all understand that we have done a real good thing. It has

been hard going and the FCC has been generally very, very good,

but they think—they are getting restless and they think they are

starting the competition, and it is very, very dynamic out there, all

of these mergers and everything, private entities but not the government. Don’t let the government come in that can print money,

as they obviously have done for Deutsche Telekom. I mean, you

can’t get in the Deutsche Telekom market. Look at their SEC filing

and you will see they say we have got a monopoly and we have got

control. Of course, they put down that little paragraph we want to

waive sovereign immunity. I am not talking about legal service. I

am talking about money and control of the market and competition,

not sovereignty.

Mr. MARKEY. What does USTR say to you when you point out the

Italian example and the other examples when they reject it?

Senator HOLLINGS. When I pointed this out to Ambassador

Barshefsky, Chairman Reid Hunt at that particular time just

threw up his hands and said the FCC has no idea of licensing a

foreign government. That’s what Reid Hunt said. That’s why we

had—I had a little amendment on her confirmation, and we just

25

got a minority vote, that’s 15, 17 votes on it, but everybody says

there is no use to cause any further trouble. The Chairman said

he is not going to license any foreign government.

Mr. MARKEY. Thank you, Mr. Chairman.

Mr. TAUZIN. I thank the gentleman. The gentleman from Florida,

Mr. Stearns.

Mr. STEARNS. Thank you, Mr. Chairman.

Senator HOLLINGS. Excuse me, Mr. Chairman. We have a vote at

12:20. I have to run. It began at 12:20, so I will be glad to answer

your question.

Mr. STEARNS. I sort of have a question I think is a softball for

you, because I have a letter here in which you write to Mr.

Kennard, the Chairman. You say, A treaty confirmed by a twothirds vote in the Senate amends a law, not an agreement, and the

Global Telecommunications Agreement was never submitted to

Congress. I can’t emphasize enough that the WTO provision isn’t

absolute, only permissive.

So I guess the question would be, does the FCC inciting public

interest have any reason to do so? And I guess what you are saying

is the bill, the 310(b)4, talks about companies that have 25 percent

interest, so the law is in place but you feel your bill is necessary

because of the FCC taking the liberty to use public interest as a

fulcrum to do something?

Senator HOLLINGS. Well, they are disregarding entirely 310(a), 310(a).

Mr. STEARNS. Okay.

Senator HOLLINGS. You just cannot license a foreign government.

Mr. STEARNS. And the WTO, the people are going to say that we

have an agreement with the WTO and we can’t break that agreement. And your answer was, basically, that that was never confirmed by the Senate?

Senator HOLLINGS. Well, that agreement, if you try to find it, it

is on a little page; and under the heading Restrictions on Indirect

Ownership, ‘‘none.’’ And with that little nuance, they say the law

has been changed; and we have said if you are a member of WTO,

then you automatically have got our public interest in mind and we

are going to license you.

Isn’t that wonderful? I mean, I wish I could change laws like

that. I mean, they haven’t changed the basic law and they don’t

have the power to do so; neither the Ambassador nor the FCC.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Stearns.

Before you leave, Senator, I want to make sure I heard your answer correctly. Did you say that you believe that if a company dilutes its government ownership below 25 percent that 310(a)

doesn’t apply?

Senator HOLLINGS. That’s right, because the license doesn’t go to

them. It goes to whoever has the majority ownership. For example,

they are already into Sprint. They have—Deutsche Telekom this

minute has got 10 percent of Sprint.

Mr. TAUZIN. Okay, Senator. Unless anybody has a quick question, I think we will have to excuse him.

Then, with our thanks.

Mr. Dingell, did you have any quick question you wanted to ask?

26

Mr. DINGELL. Mr. Chairman, I get the message the Chair is

sending and I receive it gracefully.

Mr. TAUZIN. Thank you.

Mr. DINGELL. I would like, however, to welcome my old friend,

the Senator. He is a great leader over in the Senate. He is a great

friend of mine. He has a distinguished record and I am proud to

be associated with him.

Senator HOLLINGS. You are a great friend of mine. You make me

feel at home. Thank you very, very much.

Mr. TAUZIN. With that, Senator, thanks for coming. We really enjoyed it.

Senator HOLLINGS. Thank you, sir.

Mr. TAUZIN. The Chair will now welcome the second panel which

will include—I am sorry. We agreed to go back to opening statements. Let me bring the second panel up. You can get seated and

comfortable. That will include Mr. Kevin DiGregory, Deputy Assistant Attorney General of the Criminal Division, Department of Justice; Mr. Larry Parkinson, General Counsel of the FBI; of course,

our old friend, the Honorable Bill E. Kennard, Chairman of the

Federal Communications Commission. Chairman, long time no see.

Welcome back. And Ambassador Richard Fisher, Assistant United

States Trade Representative, USTR.

We will return quickly to any requests for opening statements

and then take the testimony of our witnesses, beginning with

Chairman Kennard. Are there any other requests for opening statements? The gentleman from Texas, Mr. Green?

Mr. GREEN. Thank you, Mr. Chairman. I won’t read my total

statement. I would like to submit it for the record. But, Mr. Chairman, because of all the other conflicts that are going on today, not

only votes but other committee meetings going on, I may not be

here during the questions; and I would like to make a brief statement and ask a question for our Trade Ambassador, Mr. Fisher,

who I want to welcome today, a good Texan, coming here.

I also welcome on our next panel the Communications Workers

of America president, Morty Bahr. Morty, welcome to the Commerce Committee.

Mr. Chairman, the concern I think a lot of us have is that we

don’t mind the competition, but we do have some concern on this

side of the table from government ownership of U.S. telecommunications companies, particularly foreign government ownership. And

so I think Senator Hollings’ legislation is well thought out and

raises a concern we all have.

My question for Mr. Fisher and maybe all the panelists today is

that we realize that the intended focus is on foreign investment in

telecommunication. However, I have a concern about how U.S. companies are treated when they invest in foreign markets. For instance, if you have seen press accounts of the treatment received

by the U.S. corporation Southern Energy, a constituent of mine trying to do business in Germany. SCI is working to obtain a foothold

in the German utility market and their efforts are being stifled by

the actions of German utilities to prevent an American company

from owning a majority stake in a German utility. Of course, we

are talking about a U.S. company that’s privately owned, and yet

27

these German companies are violating the contractual rights of

SCI.

You know, it is a two-way street, and this is not even a fair two- way street. We are not talking about the U.S. Government trying

to buy a utility in Germany. We are talking about a private company in the United States trying to do what the WTO has said we

can.

My concern is, I don’t mind Deutsche Telekom coming in; I just don’t want them to be government controlled and competing with our industries. But using the SCI’s experience in Germany on util- ity, I would hope that our Trade Representative would realize that

not only in this issue but also our companies are trying to do business with other companies.

Thank you, Mr. Chairman.

Mr. TAUZIN. I thank the gentleman. Further requests for opening statement from any member?

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Thank you Mr. Chairman.

Let me begin by welcoming our two Congressional colleagues, Senator Hollings and Representative Dunn. Welcome to the Commerce Committee.

This morning, we will address a very important issue: foreign government owner- ship of American telecommunications companies.

Almost four years ago, the United States and 68 other countries committed to opening their telecommunications services markets to competition. I supported those

commitments then... and I continue to support them today. The Basic Telecom Agreement has proven to be a good deal for the American con- sumer and American labor.

That should come as no surprise... given that the Basic Telecom Agreement was modeled on the Telecom Act of 1996. The 1996 Act broke down monopoly barriers

to entry... and replaced it with a pro-competitive model.

The results speak for themselves: job creation and capital formation in the United States are at all-time highs. We exported the 1996 Act model when we signed the WTO Agreement. One key aspect of the Agreement was that member countries would establish independent

and impartial regulators. This was a critical piece to the final Agreement... because of the extent to which

most foreign governments literally owned and operated their national telecom monopolies.

That has never been the case here in America. True, we may have lingering mo- nopolies at the local level. But at least the American government never owned and

operated that monopoly. Such is not the case with many of our trading partners. So the Agreement in- cludes strict requirements that WTO members set up independent and impartial reg- ulators. Without regulatory impartiality, there can be no free trade in telecom services.

This, in turn, means that WTO members implicitly committed to privatizing their telecom monopolies. After all, how can the government be ‘‘Impartial’’ if it has a financial interest in the monopoly provider? We all know it cannot be impartial under such circumstances... and we should

not pretend otherwise.

As a result, many of us in Congress... myself included... supported the Agreement with the expectation that WTO members would quickly and fully privatize

their telecom monopolies.

But we now know that full and complete privatization is slow in coming... even

in countries that have industrialized economies. For example:

• the Japanese government still has a 53 percent stake in NTT;

• the German government controls 58 percent of Deutsche Telekom;

• the French government holds 54 percent of the outstanding shares in France

Telecom; and

• the Dutch government still controls 43 percent of its national telecom monopoly

KPN.

28

The process of full privatization is taking far too long... and the various bills

pending in Congress indicate that our patience is running out. The time has come

for governments to get out of the telecom services business. Indeed, I would note to the Administration and the FCC that, on matters such

as this, Congress has demonstrated that it will act if necessary. For example, Congress recently passed legislation privatizing INTELSAT and

Inmarsat... once it became clear that the regulatory process was going nowhere.

Are we at the same point in the area of global telecom services where Congress

needs to act? I hope not, but the answer to that question depends in large part on

what we hear today.

We need to hear from law enforcement as to whether it feels its concerns are

being addressed under existing regulatory processes.

We also need to hear from the FCC. I specifically want to know whether the FCC

believes it has ample authority to address competitive concerns raised by foreign

government control... notwithstanding the presumption for entry by carriers based

in countries that are WTO members.

And finally... and perhaps most importantly . . . we need to know from the Clinton

Administration about what it is doing to push for full privatization.

We invited Ambassador Barshefsky to speak to this critical issue... but unfortunately, she chose not to come. That is unfortunate... because this is one of the most

important matters pending in Congress today.

So we need to hear from USTR about what it is doing today . . . and what it will

be doing tomorrow . . . to push the issue of full privatization.

This is a critical moment for the Clinton Administration. It often points to the

BTA as a landmark achievement, and rightly so.

But now is the time to close the deal. I urge the Administration to do so... rather

than force Congress’ hand.

Thank you, Mr. Chairman, and I yield back the balance of my time.

PREPARED STATEMENT OF HON. TOM SAWYER, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OHIO

This hearing presents an opportunity to vet an aspect of the Basic Telecom

Ageement (BTA) that should have been addressed in 1997. I am referring to the

lack of incentive for foreign entities to privatize under the BTA and because of this,

the unfair advantage that a state-controlled telecommunications entity currently

has in competition with a U.S. private telecommunications entity.

To be fair, if the USTR had attempted to negotiate in 1997 any type of privatization requirements on top of negotiating an open and fair regulatory regime, the deal

would have backfired and the other nations signing the BTA would have walked

away. In order for the U.S. to gain at least marginal access to foreign markets, we

had to give access in return, and the only way to allow that in 1997 was to allow

foreign government-owned telecommunications companies into the U.S. market.

However, that was then, and this is now. U.S. telecom companies are still fighting

regulatory roadblocks in attempting to gain access to foreign markets. On top of

this, it is often difficult for U.S. companies to compete with state-owned firms that

have capital advantages. While approximately 18 of the 69 nations who signed the

BTA have fully privatized their telecom industry, an estimated two-thirds have not.

In order to have free and fair competition in telecommunications, the playing field

should be leveled. The question is how this can be best achieved.

Should there be an outright ban on foreign state-owned telecommunications companies competing in the US? While this would solve the problem of leveling the playing field domestically, this would do little to encourage cooperation and access

abroad for U.S. companies. It is also possible that such an action would result in

the U.S. violating its WTO agreement.

Should the FCC amend its rules to resurrect ‘‘the effective competitive opportunities’’ test (ECO) for foreign state-owned telecom entities? The test was used by the

FCC prior to the BTA to determine whether a foreign-based telecom company could

enter the U.S. market based upon its offering competitive opportunities to American

carriers in the home market.

To re-issue this rule seems to move in the right direction—especially if targeting

only state-owned, not privatized companies. Regardless of the ECO or some other,

new litmus test, it seems entirely reasonable for the FCC to ensure that foreign

state-owned entities who would like to compete in the United States should: a) demonstrate that their markets are fair and open to competition, and b) prove that they

are not subsidizing their U.S. expansion with distorted monopolistic prices back

home.

29

Finally, should the U.S. use the WTO dispute mechanism to address those countries not complying with the BTA? I believe the USTR has already pressed the case

of Mexico, and it is not clear why the U.S. would not press ahead with other nations

that have violated their WTO commitments.

I am interested in the different approaches that each of the witnesses would take

to level the playing field in telecommunications competition, both domestically and

abroad. I look forward to hearing the many views today and hope that we can walk

away with a better understanding and consensus on where to go from here.

PREPARED STATEMENT OF HON. KAREN MCCARTHY, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MISSOURI

Thank you Chairman Tauzin and Ranking Member Markey for holding this hearing on foreign government ownership of American telecommunications companies.

I look forward to the testimony by the witnesses on today’s global telecommunications market and on the national security and competitiveness implications of the

acquisition of American telecommunications companies by foreign companies with

government stockholders.

The global telecommunications market has been changing rapidly in the last 10

years. Many European governments are in the process of privatizing their government-run telecommunications companies and opening their markets to foreign telecommunications companies. This rapid change makes today’s hearing timely for all

concerned, especially consumers.

It is important that we look carefully at our commitments under the Basic

Telecom Agreement of 1997, which spurred the FCC to amend its administrative

process for merger evaluations involving WTO member nations, to ensure that the

U.S. protects its national security and maintains a competitive marketplace in the

emerging global telecommunications market. I am interested in hearing from the

witnesses whether it is necessary to adopt legislation to revise the review system.

When looking at the issue of foreign government ownership of American telecommunications companies, we must look at how such ownership will affect American consumers. Deregulation and liberalization of markets should ultimately benefit the consumer with improved services and lower costs. Consumers all over the

world are beginning to benefit from the increasingly global nature of the telecommunications market. VoiceStream customers in Kansas City can use their cell

phones in cities throughout the world. This type of service was unheard of just a

few years ago.

Preventing the joining of American and foreign telecommunications providers may

stifle new emerging services such as one-stop shopping for customer communications

needs. We must consider what the future may be for the U.S. telecommunications

industry if it is not allowed to join forces with foreign corporations to better serve

the consumer. Will it be at a competitive disadvantage? Will consumers choices be

limited? Will we set a precedent that leads to the restriction of Internet mergers

with foreign companies? These are important questions that I hope we address during this hearing.

Thank you Mr. Chairman, and I yield back the balance of my time.

Mr. TAUZIN. Hearing none, the Chair is now pleased to welcome

our panel. We will begin with the Chairman of the Federal Communications Committee, the Honorable Bill Kennard.

Mr. Kennard.

STATEMENTS OF HON. WILLIAM E. KENNARD, CHAIRMAN,

FEDERAL COMMUNICATIONS COMMISSION; KEVIN V. Di

GREGORY, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE; LARRY R. PARKINSON, GENERAL COUNSEL, FEDERAL BUREAU OF INVESTIGATIONS; AND AMBASSADOR RICHARD W. FISHER, ASSISTANT UNITED STATES TRADE REPRESENTATIVE, USTR

Mr. KENNARD. Thank you very much, Mr. Chairman, members of

the subcommittee. I appreciate the opportunity to testify before the

subcommittee this morning on this very important and timely

issue.

30

I have listened very carefully to many of the concerns that have

been expressed by Members of Congress in both Houses about the

issue of foreign government ownership of U.S. telecommunications

licenses. I want to state at the outset that I share many of these

concerns. We at the FCC believe in open, privatized, competitive

telecommunications markets. We believe that no monopoly or

former monopoly should be allowed to leverage their relationship

as a monopoly or with the government to squash competition. Indeed, that is what we have worked so very hard at at the FCC

since the 1996 act was passed.

We are also very sensitive to your concerns about our critical information and telecommunications sectors and national security

concerns and Defense Department concerns. But my message to the

subcommittee this morning is really simple. I have two fundamental messages. First, the FCC does not prejudge any merger

that is or will be coming before it. As Senator Hollings testified

earlier that you can expect the Chairman of the FCC to be judicious this morning, and I will be judicious this morning because

when you delegated to the FCC the responsibility to review mergers in this area of our economy, you gave us the power to act in

a quasi-judicial capacity. We are acting as the judge and jury on

applications that come before us. That means that the rights of

parties are implicated, the rights of parties to have due process, to

have their questions, whether it is statutory interpretation or questions of policy, decided on an open and comprehensive record.

And we will not be in a position to prejudge the outcome of any

transaction that we have not decided before the Commission, and

I wanted to make that clear.

That being said, I will say today as I have said previously, that

having indicated that I share many of your concerns, we will give

close scrutiny to any merger involving foreign-government-controlled providers. Specifically, whether the proposed merger poses

a high risk to competition or raises national security or law enforcement concerns. This shouldn’t be a surprise to anyone. This

framework for decisionmaking was set forth very clearly by the

Commission in its 1997 framework for determining these foreign

ownership issues.

Second, I want to be very clear this morning that the Commission has and regularly employs all of the authority it needs to conduct a rigorous case-by-case review of every transaction pending

before us. I think it is appropriate for me to dispel the myth that

companies coming before the FCC that have foreign government

ownership, including foreign-government-controlled parties get a

free pass. That is not how it works. Every merger is looked at carefully. We determine all of the relevant facts and we do it on the

basis of an open and transparent record.

In doing so we balance the need of the American consumers to

have more competitive choices in the marketplace against the essential protections for law enforcement, national security and competition in the United States.

I think it is appropriate also for me to outline what the procedure is for merger applications involving WTO countries. In those

cases we exercise what we call a rebuttable presumption that the

investment is in the public interest, but there are two important

31

carve-outs from that rebuttable presumption. One is if there is a

very high risk to competition domestically, we would not approve

such a merger. Second, if there are national security issues involved, we would not approve such a merger. This framework was

laid out in 1997 and it is very, very clear. This rebuttable presumption is tested before the FCC in an open process. If there are public

interest concerns, we determine whether these concerns can be

adequately addressed by safeguards and conditions or whether the

application must simply be denied. On matters of law enforcement

and national security, we defer to expert agencies such as the FBI

and the Department of Defense.

Now, there are three salient features to this process that I hope

the committee will keep in mind. This process is comprehensive. It

is flexible and it is effective. It is comprehensive because the issues

that we look at cover a wide range of public and national interests

and they include the concerns of, in fact, many of the agencies that

are represented here today and are assigned to protect those interests.

Second, the procedures are flexible. They permit us to weigh and

balance, to amend and condition, to keep up with technology and

to remain in harmony with the Nation’s international obligations.

We make these decisions based on a factual record, and I suspect

that if an application like this were to come before us many of the

arguments that you will be hearing today would be presented to

the FCC. Everyone would get a chance to be heard and we would

weigh them carefully before making a decision, and I am confident

that if government ownership presents a competitive issue or a

threat to competition in our country, then we would be able to ferret out the problem and deal with it.

The Supreme Court said some time ago that the public interest

standard is a, ‘‘supple instrument.’’ It has been given to the FCC

to use judiciously and that is exactly what we do. In fact, I don’t

think anyone, particularly the members of this committee, would

ever accuse the FCC under my leadership of not using the public

interest authority aggressively to protect consumers and to impose

conditions where warranted to protect competition.

Finally, these procedures are effective. They have been used to

increase competition both from U.S. and foreign-owned firms, have

not harmed the U.S. market and have actually strengthened it to

the benefit of U.S. consumers.

If you look at the record of FCC decisionmaking in this area

under Section 310, we have conditioned approvals to protect competition, dealing with dominant carriers, dealing with the influence

of foreign governments over foreign-owned firms. So we have a

track record of imposing conditions and safeguards where warranted.

So, in sum, I believe we have the tools we need to do the job.

These tools have worked for nearly three-quarters of a century in

our country, and use of them has allowed the entry of innovation

and capital from abroad while protecting national security in the

interest of American consumers here at home.

So in conclusion, Mr. Chairman, I believe these tools that we

have used have been part of the success story of our Nation’s leadVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
32

1See Rules and Policies on Foreign Participation in the U.S. Telecommunications Market, IB

Docket No. 97-142, Market Entry and Regulation of Foreign-Affiliated Entities, IB Docket No.

95-22, Report and Order and Order on Reconsideration, 12 FCC Rcd 23891 (1997) (‘‘Foreign Participation Order’’), recon. pending.

ership in the development of competitive telecommunications markets, both here and around the world.

Thank you very much.

[The prepared statement of Hon. William E. Kennard follows:]

PREPARED STATEMENT OF HON. WILLIAM E. KENNARD, CHAIRMAN, FEDERAL

COMMUNICATIONS COMMISSION

INTRODUCTION

I am pleased to be here today to address some of the complex and important issues raised by foreign investment in the United States telecommunications market, with particular focus on concerns raised by entities with substantial foreign

government ownership. At home and abroad, the United States has led a worldwide revolution to bring competition to the telecommunications sector. Domestically, this revolution has been

made possible by Congress’s foresight in enacting the Telecommunications Act of 1996, and the Commission’s aggressive implementation of that Act. Internationally, the Commission acted decisively to extend the principles of competition to reform

the antiquated system for delivering international services. A key factor in enabling this revolution has been the Commission’s vigorous de- fense of the public interest as mandated by the Communications Act, including in

Section 310. The Commission has implemented this mandate through its procedures

for reviewing applications for entry into the U.S. market by foreign telecommunications entities. The Commission’s balanced and flexible use of the Communications

Act and the Commission’s procedures has enabled it to both protect the interests

of consumers and national security, and at the same time take advantage of the

stimulus of capital in our economy.

MESSAGE

My message to the Subcommittee this morning is simple:

First, the Commission should not prejudge any application that comes before it.

Prospectively, I can say that we would give close scrutiny to any merger involving

foreign government-controlled providers. Specifically, we would determine whether

the proposed merger poses a very high risk to competition, or raises national security or law enforcement concerns.

Second, the Commission has full and sufficient authority to address the issues of

both national security and domestic competition through the authority granted us

by Congress in the Communications Act of 1934 and the Telecommunications Act

of 1996. Commission policies implementing these statutes provide for a rigorous

case-by-case review of foreign ownership with sufficient flexibility to address the

particular competitive concerns raised by individual transactions.

KINDS OF APPLICATIONS

The bulk of applications before us that raise foreign entry issues request one of

the following:

(1) permission to provide international services under Section 214;

(2) permission to exceed the 25% foreign ownership cap for spectrum licenses under

Section 310(b)(4); and

(3) permission to merge a U.S. firm with a foreign firm, including a foreign firm

controlled partially or entirely by a foreign government.

GOVERNING LAW

The prospect of foreign government control of a U.S. carrier may pose unique concerns. However, the standard we use to review such transactions is sufficiently flexible to take these concerns into account.

The Commission unanimously adopted its framework for analyzing whether entry

into or investment in the U.S. market by foreign-owned firms is in the public interest in the 1997 Foreign Participation Order.1 Under that framework, there is a rebuttable presumption that entry or investment by foreign-owned firms from WTO

Member countries is in the public interest. The Commission undertakes a case-byVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
33

case analysis of all applications; however, to determine whether there are public interest factors that would overcome that presumption and compel the Commission to

deny an application. In particular, the Commission assesses whether a transaction

would pose a very high risk to competition in the United States that cannot be addressed by safeguards and that will thereby harm our domestic communications

market and U.S. consumers.

In some cases, the Commission may determine that a transaction is in the public

interest, but that the application can only be granted subject to conditions that address competitive concerns. In fact, the Commission’s regulatory framework includes

competitive safeguards that apply to firms that are affiliated with dominant foreign

firms. If as a result of its review of an application, the Commission concludes that

these standard safeguards are not sufficient to address specific competitive concerns, the Commission may impose additional, tailored safeguards, or deny the application altogether. In other cases, the Commission may determine that entry cannot be ‘‘conditioned’’ sufficiently to protect the public interest. The Commission will

then deny the application.

In addition to the competition concerns addressed as part of the Commission’s

public interest analysis, the Commission has always had, and continues to maintain, the ability to consider a range of public interest factors in considering whether

to allow entry into and investment in the U.S. market by foreign-owned firms.

These additional public interest factors include national security and law enforcement concerns. On these issues, the Commission accords deference to the expertise

of Executive Branch agencies, such as the FBI and the Department of Defense.

PUBLIC INTEREST FEATURES OF PROCESS

The United States has long welcomed foreign investment as a means of achieving

a specific end: strengthening competition in the U.S. marketplace, to the benefit of

U.S. consumers.

At the same time, the Commission has the tools at its disposal to ensure that foreign investment is in the public interest. The public interest requires that foreign

investment not harm competition in the U.S. market or threaten national security

and law enforcement concerns.

There are three essential features to this process that I hope the Subcommittee

will keep in mind.

The procedures are comprehensive. They cover a wide range of public and national

interests, and they include the concerns of the many agencies assigned to protect

those interests.

The procedures are flexible. They permit us to weigh and balance, to amend and

condition, to keep up with technology, and to remain in harmony with the nation’s

international obligations.

Finally, the procedures work. Increased competition, both from U.S. and foreignowned firms, has not harmed the U.S. market, but has strengthened it, to the benefit of U.S. consumers. Today, U.S. consumers enjoy lower prices and better, more

innovative services.

CLOSING

In sum, we have the tools we need to do the job. Use of them has allowed the

entry of innovation and capital from abroad, while protecting national security and

the interests of American consumers at home.

These tools also have been part of the success story of our nation’s leadership in

the development of competitive telecommunications markets.

Thank you.

Mr. TAUZIN. Thank you very much, Chairman Kennard.

The Chair is now pleased to welcome Mr. Kevin DiGregory, the

Deputy Assistant Attorney General of the Criminal Division, Department of Justice, of course a very timely appearance when the

DOJ has just allowed the time to lapse for rejection of this merger.

Mr. Di Gregory.

STATEMENT OF KEVIN V. Di GREGORY

Mr. DI GREGORY. Mr. Chairman, thank you, and I thank the

members of the committee for the opportunity to be here today. I

will say at the outset, as you noted in your introduction, I am the

34

Deputy Assistant Attorney General in the Criminal Division of the

Department, and I understand that you have concerns about what

the Antitrust Division of the Department did. And please understand, I am perfectly willing to hear your concerns and take them

back, but I will not be able to give you any answers today and I

just wanted to let you know.

I want to, again, thank you for this opportunity to provide the

Justice Department’s law enforcement perspective on foreign ownership interests and foreign government ownership interests in the

American communications infrastructure.

Let me begin by noting that the soaring growth of communications is an engine that drives our developing information economy.

Because our economy depends upon readily available and reliable

communications systems for its most basic functions, we must be

careful not to stifle the growth of communications technology

through undue government action. We must ensure that emerging

communications technologies are as reliable and safe to use for

business, education and entertainment as other methods of communication and we should take a technology neutral approach to the

degree that is practical when considering appropriate governmental

action.

The increasing globalization of communications entities implicates a variety of complicated legal and policy doctrines, including

issues relating to national security, the protection of the privacy of

U.S. consumers and businesses, the integrity of domestic law enforcement operations and public safety. Due to the growing importance of communications, the U.S. Government should ensure that

the communications infrastructure remains safe to use when it is

owned, controlled or operated by non-U.S. entities, especially foreign governments.

The challenges and risks created by foreign ownership interests

and foreign government ownership interests in our communication

infrastructure, as well as those created by the globalization of the

communications infrastructure, will be discussed at greater length

by Mr. Larry Parkinson, the General Counsel of the Federal Bureau of Investigation, in his testimony today. But as Mr. Parkinson

will testify, these challenges and risks are very real and may adversely affect the privacy of our citizens and our obligations to preserve the national security and enforce U.S. law.

As the Federal Government examines the appropriateness of foreign ownership interests, especially foreign government ownership

interests, in our communications infrastructure, we must ensure

that the risks are minimized and that these challenges are met. In

addition, the government must consider the risks posed by the

globalization of U.S. communications infrastructure, especially the

risk that specific activities will destabilize that infrastructure.

These risks must be addressed if law enforcement and national

security agencies are to have the tools and capabilities to enforce

laws against espionage and invasion of privacy, to satisfy our responsibility to conduct effective and secure, legally authorized investigations of criminals who use telecommunications to aid their

illegal activities, to conduct national security investigations, to ensure effective emergency preparedness, and to protect public safety.

35

Our efforts to address these risks have relied thus far upon two

existing fora. Foreign companies investing in U.S. communications

companies may seek approval for their ownership interests at the

Federal Communications Commission and/or may file notice of the

proposed foreign ownership interests for review by the Committee

on Foreign Investment in the United States. These processes allow

the Federal Government to review whether a proposed ownership

interest violates the FCC’s public interest standard or in the case

of CFIUS threatens national security in such a way that the President should on recommendation of CFIUS suspend or prohibit the

transaction.

In analyzing proposed foreign ownership interest in or transfer

of control of U.S. companies, the FCC considers several public interest factors. The factors include the effect of the proposed transaction on U.S. national security, law enforcement, competition in

the U.S., trade, and policy concerns, in determining whether this

transaction is consistent with public convenience and necessity.

There have been several applications at the FCC in the last 2

years that involve foreign ownership interests or other foreign elements that potentially impaired the interests of U.S. citizens. Both

the Department of Justice and the FBI have requested that the

FCC not grant these applications until the companies involved

committed to take certain steps that would protect the American

public. I am quite pleased to say that those companies have worked

with us to find solutions and have entered into agreements with

the Department of Justice, the FBI and the Department of Defense

to reduce the threat that the transaction posed.

The FCC, in turn, has granted those companies licenses and applications on the condition that they comply with these agreements.

We believe it is important to tailor solutions to the relevant concerns. Therefore, in our efforts to formulate these solutions with

these companies, we seek only that which is necessary to preserve

national security, the privacy of our citizens, and public safety.

Let me briefly address one other mechanism that allows the Federal Government to review foreign investment in U.S. telecommunications and Internet companies, that is the CFIUS process. This mechanism empowers the President, for national security

reasons, to suspend or prohibit an acquisition of a U.S. company

by a foreign company or government. As a member agency of

CFIUS, the Department of Justice has raised and will continue to

raise national security concerns that arise out of proposed foreign

ownership interests in our communications infrastructure.

We believe that such vigilance is warranted in order to protect

our national security interests. What protections then are necessary to defend national security, the privacy of our citizens and

public safety? Variations in technology and business structures presented by each foreign investment make it impossible to identify a

single solution for all companies. As a result, we have worked with

individual companies to develop solutions that protect national security, privacy and public safety in manners that are least disruptive to those companies involved.

First, one of our requirements in order to acquire those protections are to ensure that U.S. national security and law enforcement

36

agencies are able to securely and effectively use lawful process to

gather information during investigations.

Second, it is critical that foreign owned and controlled companies

protect the privacy of U.S. communications and customers and not

leave inert the statutory protections of privacy under U.S. law.

Third, we must work to protect the integrity of U.S. law enforcement in national security investigations, foreign control notwithstanding.

We have attempted, along with the FBI, to address these challenges created by increasing foreign ownership interests in U.S.

communications systems and the globalization of communications

systems. In doing so, we always keep in our minds the need to balance the value of a free marketplace, to encourage continuing innovation in communications technologies, with the protection of the

public’s privacy, safety and security. We believe that thus far the

processes available to us have allowed us to effectively address

those concerns.

Finally, I would like to comment on some pending legislation

that we believe is as unintentional by-product could threaten the

framework that we have discussed. The pieces of leglislation are S.

467 and H.R. 4019. S. 467 limits the time within which the SEC

must rule on a transfer of control, while H.R. 4019 eliminates the

FCC’s use of the public interest determination. Those time limits

and that elimination of the public interest determination could severely affect our ability to do what we have been doing in visiting

with these companies and negotiating conditions to agreements—

conditions to FCC licenses in the form of our agreements.

Mr. Chairman——

Mr. TAUZIN. You are referring to bills that affect the FCC’s authority, right, just now, is that correct?

Mr. DI GREGORY. That is correct.

Mr. TAUZIN. All right.

Mr. DI GREGORY. And referring to them only in the way that

they affect our concerns with respect to the national security.

I will sum up by thanking you, again, Mr. Chairman, for the opportunity to present the Department’s view on foreign ownership

interest, especially foreign government ownership interest in U.S.

companies.

[The prepared statement of Kevin V. Di Gregory follows:]

PREPARED STATEMENT OF KEVIN V. DI GREGORY, DEPUTY ASSISTANT ATTORNEY

GENERAL, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

Chairman Tauzin, Congressman Markey, and other Members of the Subcommittee, I want to thank you for this opportunity to provide the Department of

Justice’s law enforcement perspective on foreign ownership interests and foreign

government ownership interests in the American communications infrastructure.

Let me begin by noting that the soaring growth of communications is an engine

that drives our developing information economy. New communications technologies,

including advancements in electronic mail, wireless telephones, and the Internet,

are essential to new methods of business, education, and entertainment. Our economy depends upon readily available and reliable communications systems for its

most basic functions. This has several consequences. First, we must be careful not

to stifle the growth of communications technologies through undue government action. Second, we must ensure that emerging communications technologies are as reliable and safe to use for business, education, and entertainment as the methods of

communication we have used in the past and that are still in use. Third, we must

37

take a technology-neutral approach, to the degree it is practical, when considering

appropriate governmental action.

The increasing globalization of communications entities and facilities has significant consequences. The trend implicates a variety of complicated legal and policy

doctrines, including issues relating to national security, the protection of the privacy

of U.S. consumers and businesses, and the integrity of domestic law enforcement operations. Due to the growing importance of communications, the U.S. Government

should ensure that the communications infrastructure remains safe to use when it

is owned, controlled, or operated by non-U.S. entities, especially foreign governments. We must ensure that individuals and businesses can communicate privately,

and with the expectation that if their privacy or security is harmed through the illegal use of communications, that law enforcement can apprehend those responsible

and bring them to justice. In addition, we must also ensure that globalization does

not hinder our responsibility to protect our citizens by blocking national security

and law enforcement investigations.

The challenges and risks created by foreign ownership interests and foreign government ownership interests in our communication infrastructure, as well as those

created by the globalization of the communications infrastructure, are discussed at

greater length by Lawrence R. Parkinson, General Counsel of the Federal Bureau

of Investigation (‘‘FBI’’), in his testimony today. As Mr. Parkinson testifies, these

challenges and risks are very real and may adversely affect the privacy of our citizens, and our obligations to preserve the national security and enforce U.S. law.

Moreover, as Mr. Parkinson also notes, the President over two years ago in Presidential Decision Directive (‘‘PDD’’) 63 established the national security objective of

protecting US cyber and information networks from attack or disruption. This is an

important goal for the Administration, and the Administration reviews potential foreign acquisitions of both telecommunications and internet providers with PDD-63 in

mind.

As the federal government examines the appropriateness of foreign ownership interests, especially foreign government ownership interests, in our communications

infrastructure, we must ensure that risks are minimized and that challenges are

met. In addition, the government must consider the risks posed by the globalization

of U.S. communications infrastructure, especially the risk that specific activities will

destabilize the infrastructure. These risks must be addressed if law enforcement and

national security agencies are to have the tools and capabilities to enforce laws

against espionage and invasion of privacy, to satisfy our responsibility to conduct

effective and secure legally authorized investigations of criminals who use telecommunications to aid their illegal activities, to conduct national security investigations, to ensure effective emergency preparedness, and to protect public safety.

What protections, then, are necessary to defend national security, the privacy of

our citizens, and public safety? There are many different technologies, business

structures and other factors presented by each foreign investment. These variations

make it impossible to identify a single solution for all companies and all transactions. As a result, we have worked with individual companies to develop solutions

that protect national security, the privacy of U.S. citizens, and public safety in a

manner that is least disruptive to the companies involved.

First, one of the requirements fundamental to preserving national security, the

privacy of U.S. citizens, and public safety is ensuring that U.S. national security

and law enforcement agencies are able to securely and effectively use lawful process

to gather information during investigations. For example, whether we are conducting an investigation of a foreign spy or an alleged drug dealer, we must be able

to conduct court-authorized interceptions, acquire stored communications, obtain

subscriber data, and access any and all records and information when authorized

by law and with appropriate process. The Department of Justice believes that it is

critical to national security and law enforcement investigations that a foreign-owned

or controlled company to ensure that U.S. court orders and statutory authorities are

not rendered ineffective by foreign ownership interests.

Second, it is critical that foreign-owned and controlled communications companies

protect the privacy of U.S. communications and customers and do not leave inert

the statutory protections of privacy under U.S. law. The Department of Justice and

the FBI have worked with providers to ensure that an investing foreign entity will

take appropriate steps to prevent access to equipment and facilities under its control

that could be used to monitor U.S. communications in violation of federal or state

law. We also have worked to ensure that there will be no unauthorized or illegal

sharing of subscriber information and related records regarding U.S. customers as

a result of the foreign ownership interests or foreign-located facilities. Our goal is

to prevent foreign governments, foreign companies and affiliates, or persons abroad

38

1 Even if a company does not file a notice, an agency may notify a proposed acquisition to

CFIUS if the agency believes that the transaction poses national security risks.

from obtaining unlawful access to the communications and information about our

citizens.

Third, we must work to protect the integrity of U.S. law enforcement and national

security investigations, foreign control notwithstanding. For example, we have

worked with companies to find effective means to ensure that classified or sensitive

information is not disseminated. As Mr. Parkinson testifies, when foreign government-owned or controlled companies are those investing in the U.S. communications

infrastructure, we must act carefully to protect our citizens and their privacy. In addition, as our infrastructure gains global capabilities, the risks to the integrity of

U.S. law enforcement and national security investigations is increasing. For example, when emerging technologies such as wireless and satellite communications systems are configured in such a way that the communications of U.S. customers are

processed entirely at facilities located abroad, there is a risk that we cannot protect

our citizens’ communications and privacy. There is also a risk that, when the most

heinous of crimes occur, we will be unable to properly investigate and prosecute the

parties responsible.

The Department of Justice and the FBI, with the Department of Defense, have

attempted to address the challenges created by increasing foreign ownership interests in U.S. communications systems and the globalization of communications systems. In my testimony, I focus on the foreign ownership interests. As ownership interests, mergers, and acquisitions present these issues, we always keep foremost in

our minds the need to balance the value of a free marketplace, to encourage continuing innovation in communications technologies, with the protection of the

public’s privacy, safety, and security. In each case, we use available legal tools to

seek a solution tailored to the specific concerns presented by the foreign ownership

interests presented. We are cognizant that the relevant facts surrounding the ownership interests, business plans, system infrastructures, and technologies can vary

significantly and in material respects. In some cases no action may be necessary;

in other cases, tailored protections can alleviate privacy, public safety, and national

security concerns.

Because of the wide range of possible circumstances, it has not been feasible to

identify a precise and fixed set of criteria that each proposed foreign investor must

satisfy in order to adequately protect the citizens of the U.S. Accordingly, the Department of Justice and the FBI analyze a large number of factors in each instance

where foreign ownership potentially threatens the government’s ability to satisfy its

national security and law enforcement responsibilities to the public.

The factors we consider include, but are not limited to, the following:

• Does the proposed ownership interest create an increased risk of espionage and

foreign-based economic espionage against U.S. companies and persons?

• Does the proposed ownership interest compromise our ability to protect the privacy of U.S. citizens and their communications?

• Will U.S. national security, law enforcement, and public safety capabilities be impaired by the proposed foreign ownership interests?

• Does the company have existing policies for protecting privacy, handling classified

information, and complying with lawful process? Does the company have a good

record of complying with lawful process relating to national security and law

enforcement capabilities?

• What is the degree and nature of the proposed foreign control?

• If the ownership interest is transferred to a foreign entity, do we have adequate

assurances that National Security Emergency Preparedness and U.S. Infrastructure Protection requirements are met?

Analyzing these and other factors, we have been successful in negotiating narrowly tailored solutions to concerns regarding privacy, public safety, and national

security that are presented by the particular foreign ownership interests.

Our efforts to protect these critical values have relied upon two existing fora. In

certain circumstances, foreign companies investments in U.S. communications companies, like domestic acquisitions, are subject to review by the Federal Communications Commission (‘‘FCC’’) and/or the Committee On Foreign Investment in the

United States (‘‘CFIUS’’).1 These processes allow the federal government to review

whether a proposed ownership interest violates the FCC’s public interest standard

or threatens national security in such a way that the President should, on the recommendation of CFIUS, suspend or prohibit the transaction, respectively.

For example, before a telecommunication company may acquire control of facilities

or transfer control of a license under Sections 214 and 310 of the Communications

39

Act, it must first obtain from the FCC a certificate that the transfer or acquisition

is consistent with the present or future public convenience and necessity. The FCC

has the power to issue such a certificate or refuse it, ‘‘and may attach to the issuance of the certificate such terms and conditions as in its judgment the public

convenience and necessity may require.’’ 47 U.S.C. § 214(c). In addition, Section

310(d) provides, in pertinent part, that ‘‘[n]o construction permit, or station license,

or any rights thereunder, shall be transferred, assigned, or disposed of in any manner, voluntarily or involuntarily, directly or indirectly, or by transfer of control of

any corporation holding such permit or license, to any person except upon application to the Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby.’’ 47 U.S.C. § 310(d).

In analyzing proposed foreign ownership interests in or transfer of control of U.S. companies, the FCC considers several public interest factors. The factors include the

effect of the proposed transaction on U.S. national security, law enforcement, competition in the U.S., trade, and policy concerns, in determining whether a transaction is consistent with public convenience and necessity. The FCC has stated it

accords deference to other Executive Branch agencies with respect to the identification and interpretation of issues of concern related to national security, law enforcement, and foreign policy that are relevant for a particular application. See e.g., Amendment to the Commission’s Regulatory Policies to Allow Non-U.S. Licensed Space Station to Provide Domestic and International Satellite Service in the United

States, 12 FCC Rcd 24094, 24171 (1997) (‘‘Disco II Order’’); In the Matter of Rules

and Policies of Foreign Participation in the U.S. Telecommunications Market, 12

FCC Rcd 23,891, 23,935 ¶ 97 (1997). The Commission’s public interest analysis in- cludes input from agencies such as the Department of Justice, the FBI, and the Department of Defense, each of which has unique expertise regarding national security

and public safety. The Department of Justice and FBI take seriously their responsibility to evaluate the national security and public safety concerns that might be present in foreign

ownership applications pending before the FCC, and to work creatively to find solutions. There have been several applications at the FCC in the last two years that

involved foreign ownership interests or other foreign elements that potentially impaired the interests of U.S. citizens. Both the Department of Justice and FBI have

requested that the FCC not grant these applications until the companies involved

committed to take certain steps that would protect the U.S. public. I am quite

pleased to say that those companies have worked with us to find solutions, and have

entered into agreements with the Department of Justice, the FBI and the Department of Defense to reduce the threat of the transaction on the U.S. public. The FCC,

in turn, has granted those companies’ licenses and applications on the condition that

they comply with the agreements. As I noted above, we believe it is important to tailor solutions to the relevant concerns. Therefore, in our efforts to formulate solutions with the companies, we seek

only that which is necessary to preserve national security, the privacy of our citizens, and public safety. The Department of Justice and the FBI recognize the

many—and sometimes competing—interests involved with foreign ownership interests in our telecommunications infrastructure. In fact, we rejected several commitments proposed by companies because those commitments went far beyond what we

deemed necessary.

Before leaving this discussion of the FCC process, I would like to comment on

some pending legislation that, as an unintentional byproduct, threatens the framework I have discussed. Our ability to protect the public interest through the FCC

process has proven to be an effective tool to ensure that foreign ownership interests

in U.S. telecommunications companies do not harm our citizens. Our ability, however, may be adversely affected by legislation pending before Congress. S. 467 limits

the time in which the FCC must rule on transfer of control applications that come

before the agency, while H.R. 4019 eliminates the FCC’s use of the public interest

determination in merger applications. The Administration has opposed both of these

bills because of their severe ramifications on our efforts to protect national security,

the privacy of our citizens, and public safety, and to promote local competition and

universal service. It is critical that we continue to safeguard our national security

and the integrity of our infrastructure. Establishing an inflexible time frame for

FCC action, with little consideration of national security and law enforcement concerns, does not provide a safeguard. Eliminating the public interest standard altogether essentially eliminates any safeguard we might have against the risks posed

by foreign ownership interests in our critical infrastructures. As more foreign-owned

and foreign government-owned companies gain ownership interests in our communications infrastructure, the necessity to protect our citizens and our national security will only increase. The Administration looks forward to working with Congress

40

to protect and preserve national security, the privacy of our citizens, and public

safety, and to promote local competition and universal access.

Let me briefly address one other mechanism that allows the federal government

to review foreign investment in U.S. telecommunications and Internet companies—

the CFIUS process. This mechanism empowers the President, for national security

reasons, to suspend or prohibit an acquisition of a U.S. company by a foreign company or government. See Section 721 of the Defense Production Act (‘‘Exon-Florio’’

provision), 50 App. U.S.C. § 2170. As a member agency of CFIUS, the Department

of Justice has raised and will continue to raise national security concerns that arise

out of proposed foreign ownership interests in our communications infrastructure

that come before CFIUS. We believe that such vigilance is warranted in order to

protect national security interests.

Of course, given the quick-changing nature of the marketplace and technology, the

Department of Justice and the FBI will continue to evaluate and work closely with

companies with pending foreign ownership issues to identify new or different approaches to protecting national security, the privacy of our citizens, and public safety. In particular, the Department of Justice intends to continue to evaluate how specific foreign government ownership interests, as well as other foreign ownership interests, in our communications infrastructure affect these three concerns.

I want to thank the Committee again for asking me to present the Department’s

views on foreign ownership interests, especially foreign government ownership, of

the United States’ communications infrastructure. I am pleased to answer any questions you have.

Mr. TAUZIN. Thank you, Mr. Di Gregory.

The Chair now welcomes Larry Parkinson, General Counsel for

the FBI.

STATEMENT OF LARRY R. PARKINSON

Mr. PARKINSON. Thank you, Mr. Chairman, and members of the

subcommittee. It is a pleasure to be here.

I appreciate the opportunity to talk this morning about the FBI’s

role in this process, as well as our concerns about foreign ownership in this arena.

My comments today will focus on our vital national security and

law enforcement interests that can be adversely impacted by foreign ownership of U.S. telecommunications carriers. These vital interests range from protecting the privacy of personal communications to preserving public safety. I also note that the existing processes are utilized so that foreign ownership can occur without jeopardizing our security and privacy interests.

Telecommunications networks obviously are a critical part of the

Nation’s information infrastructure. They provide the central

means for transacting, through voice, data and video, a vast

amount of personal communications, private commerce and government business. Changes in telecommunications technology, infrastructure and business alignment have, however, transformed the

nature of the industry at an ever accelerating rate and the traditional telecommunications model in which the domestic companies

provide domestic services to domestic companies has increasingly

been replaced by systems and organizations intended to provide

services on an international, if not global, scale.

These systems attempt to serve the largest possible number of

customers from centralized communication and data facilities without regard to where the customer being served is located or without

regard to national boundaries. Business ventures in this industry

often involve technological and contractual arrangement with, or

control or ownership by foreign entities, or both.

41

The transnational nature of these ventures poses substantial

legal, technical and practical challenges to U.S. agencies charged

with enforcing the law or protecting the national security, including the FBI. These challenges range from protecting U.S. communications and data from unauthorized access to preserving the government’s ability to intercept lawful communications routed by satellite to gateways outside the United States, without significantly

impeding the introduction of new technologies, features or services.

Notwithstanding the wide variety of business plans, technology and

infrastructure that those various ventures involve, certain common

characteristics exist and, more importantly, the interests of the

United States in these matters generally remains constant.

I would like to address briefly the risks.

Our primary FBI interest and the most technologically challenging issue is the preservation of our ability to intercept communications and obtain communications transaction data pursuant to

existing legal authorities despite these infrastructure and technological changes. To enforce the law, protect public safety, and preserve the national security, law enforcement and national security

agencies must be able to intercept communications when necessary

and obtain the associated identifying data in a secure, unobtrusive,

and timely fashion pursuant to, of course, and in accordance with

the relevant constitutional and statutory safeguards that we have

in place. The government must also be able to obtain basic subscriber information and other transactional records relevant to the

target communications.

Actions taken to preserve this interest do not expand existing authorities, and that is important to emphasize. Rather, they are designed to ensure that existing lawful investigative tools are not

rendered inoperative by the transnational nature and technological

complexity of a new venture or new technology. This will become

increasingly important as the highly regulated telecommunications

sector converges with the largely unregulated Internet communications industry.

Traditionally, the FBI as well as other Federal, State and local

law enforcement agencies, have principally conducted electronic

surveillance efforts, and obtained interception access and access to

stored communications through those U.S. carriers which offer

local exchange type services, and provide service connections directly to the public. It is vital, therefore, that a foreign-owned and

controlled company, through its carrier subsidiaries, maintain

within the United States interception access, access to the stored

wire and electronic communications of their U.S. customers and

subscribers, and any records and subscriber information relating to

such U.S. customers or subscribers. If such information is unavailable because it is stored beyond the United States’ borders, subject

to restrictive disclosure laws of foreign countries, or technologically

inaccessible, the national security, law enforcement, and public

safety interests of the United States are degraded proportionally.

These requirements are essential to ensure effective, efficient

and secure service of lawful U.S. process; effective, efficient and secure execution of such process; and to protect against any unauthorized disclosure of classified national security and sensitive law

enforcement information related to such process, to foreign powers

42

and companies licensed and regulated by foreign powers. For this

reason, the agreements that the Department of Justice and the FBI

have negotiated over the last several years with foreign-owned

companies contain provisions which address these requirements.

Another significant area of concern is the security of U.S. intercept and data acquisition activity. The implementation of lawfully

authorized national security and law enforcement interception and

data acquisitions increasingly requires the cooperation of the communications service provider. In these cases, the U.S. Government

is required to disclose very sensitive target information and investigative techniques to the service provider in order for it to provide

the assistance required under the court order. Such targets could

be foreign intelligence officers or agents, or could be associated

with criminal enterprises such as international drug trafficking or

terrorist organizations. Without adequate safeguards, the damage

to an investigation would be done almost from the moment the U.S.

serves process on the foreign affiliated carrier.

The foreign affiliated carrier would also immediately become

knowledgeable about the current technological intercept capabilities and the limitations of U.S. law enforcement and national security agencies. The disclosure of such information to a foreign government and its operatives could serve as a guide to how to evade

U.S. surveillance.

Risks associated with the potential for compromise of the interception, unauthorized identification of interception targets, and disclosure of interception sources and methods correspond with the

level of foreign involvement in or control of the entity through

which the intercept is to be executed. Also, law enforcement’s ability to prevent, detect and respond to breaches of wiretap security

are greatly inhibited if the equipment and the personnel responsible for the intercept are located outside the United States.

The FBI and the Department of Justice are charged with preventing, investigating and prosecuting inappropriate instances in

which U.S. communications and data have been acquired or disclosed in violation of our laws. Our ability to detect, investigate and

assert jurisdiction is impeded, if not eliminated, when entire or significant components of the communications systems operating in

the U.S. are located outside our borders.

I want to just touch briefly, Mr. Chairman, on the topic of economic espionage.

Mr. TAUZIN. We would ask the gentleman to briefly do that. His

time has expired. If he would quickly do that for us.

Mr. PARKINSON. Mr. Chairman, I just want to point out that one

of our concerns is also in the area of economic espionage and obviously foreign governments often target our trade secrets, and if

they are in charge of the telecommunications system, any portion

of that system in the United States, we are vulnerable.

Let me close. I will submit, obviously, the final statement for the

record.

Since the business plans, system infrastructures, and involved

technologies in proposed transactions vary significantly in innumerable ways, identifying a precise and fixed set of criteria that

each venture must satisfy in order to adequately protect the interests that I have described is impractical. Instead, we have to anaVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00046 Fmt 6633 Sfmt 6602 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
43

lyze a large number of factors in each case to determine how the

proposal will impact the government’s ability to satisfy its public responsibilities, and we use the tools that Mr. Di Gregory described

in order to do that.

With that, I will close and I am delighted to be here and happy

to answer any questions. [The prepared statement of Larry R. Parkinson follows:]

PREPARED STATEMENT OF LARRY R. PARKINSON, GENERAL COUNSEL, FEDERAL

BUREAU OF INVESTIGATION

SUMMARY:

The increasing globalization of the telecommunications marketplace, while pro- moting competition and stimulating innovative service offerings, increases the risk

that our national security and law enforcement interests will be hampered by control of U.S. communications networks by foreign entities. In anticipation of these

risks, the Department of Justice (DOJ) and the Federal Bureau of Investigation

(FBI) have used the existing statutory/regulatory review processes to negotiate arrangements with foreign owned companies which preserve the government’s ability to protect the safety and privacy of the American public. When control of U.S. communications and data is located outside the jurisdiction of the United States, it becomes increasingly difficult to assert U.S. legal authority.

In some cases, there may be no practical way to conduct lawful surveillance effectively and securely if the facilities that process U.S. communications are located outside of the United States. It is ultimately the safety of the American public that

suffers the consequences of an inability to conduct national security investigations

and prevent and detect criminal activity through effective investigative tools such

as court authorized electronic surveillance and obtaining transactional information

pursuant to lawful process. If these means are rendered useless, either due to the

assertion of foreign jurisdiction, or because there is no assurance that confidential

U.S. information will be secured, the safety and privacy of the American people become more vulnerable to exploitation. These concerns exist regardless of whether

the controlling entity is foreign government owned. Even when the foreign entity

controlling a U.S. communications network is privately held, there is cause for concern that the foreign-affiliated carrier may be subject to the influence and directives

of the foreign government or others to compromise U.S. investigations and carry out

or assist in carrying out intelligence efforts against the U.S. Government or U.S.

companies. On a continuum of risk, however, a service provider that is directly or

indirectly owned or controlled by a foreign government or its representatives falls

on the higher risk end of the spectrum. Many foreign nations dedicate significant resources to gathering intelligence about other governments or elements thereof and to gathering counterintelligence

information to protect against other nation’s intelligence activities. Ownership and control of U.S. communications networks gives a foreign government the capacity

to gain relatively easy access to confidential information about the targets of U.S.

national security and law enforcement investigations, the nature of those investigations, and the sources and methods used, as well as information about the extent

to which the U.S. Government is aware of a foreign government’s intelligence activi- ties. Ownership and control of U.S. communications networks could also provide a

foreign government with the ability to direct key employees to utilize routine monitoring capability to access confidential private communications and data of U.S. corporations and citizens communicating over the network. Although U.S. law prohibits

unauthorized monitoring and disclosure of data, such monitoring by the service provider is difficult to detect. While the risks and likelihood of such problems depend

on the particular situation involved, if a foreign government were to have unrestricted control of U.S. communications networks, the risk increases that it could

exploit such access for its own gain to the detriment of U.S. security.

To address these concerns, the DOJ/FBI have, over the past few years, engaged

in a series of discussions with various companies seeking to deploy global telecommunication systems or to consolidate existing domestic and foreign telecommunication systems. We have carried out these discussions within the existing

statutory and regulatory processes for protecting law enforcement and national security. Please refer to Kevin Di Gregory’s testimony for a further description of

these processes. In each instance, the leverage provided by these processes has allowed us to reach an agreement that preserves law enforcement’s ability to protect

privacy through enforcing the laws and to protect the national security of the

44

1The primary legal authorities governing electronic surveillance of communications content

and associated data include:

1. Interception of real time communications content: 50 U.S.C. 1801 et seq. (Foreign Intel- ligence Surveillance Act); & 18 U.S.C. 2510 et seq. (‘‘Title III’’).

2. Pen Register and Trap and Trace Devices (to acquire in real time certain traffic data) 18

U.S.C. 3121; 50 U.S.C. 1841.

3. Court Orders/Search Warrants (to obtain stored content, transactional data, and subscriber

information) 18 U.S.C. 2703 and 2709.

4. Subpoenas (to obtain basic subscriber information) FRCP Rule 17.

5. Preservation of information (all data) 18 U.S.C. 2703(f).

7. CALEA, 47 U.S.C. §§ 1001-1021.

United States, while facilitating approval of the transaction by the appropriate reviewing body.

Given the wide variety of business plans, technology, and infrastructure that

these various ventures involve, the agreements have, of necessity, been companyspecific. Nonetheless, the interests of the United States in these matters remain

constant. These constants have served to help guide DOJ/FBI decision making, as

well as to serve as a platform for guidance to the telecommunications industry and

other interested parties.

I appreciate the opportunity to appear before your subcommittee to discuss H.R.

4903. My comments today will focus on our vital national security and law enforcement interests that can be adversely impacted by foreign ownership of U.S. telecommunication carriers. These vital interests range from protecting the privacy of

personal communications to preserving public safety. I also note that existing processes are utilized so that foreign ownership can occur without jeopardizing our security and privacy interests.

Telecommunications networks are a critical part of the Nation’s information infrastructure. They provide the central means for transacting, through voice, data, and

video, a vast amount of personal communications, private commerce, and government business. Changes in telecommunications technology, infrastructure, and business alignment have transformed the nature of the industry at an ever-accelerating

pace. The traditional telecommunications model in which domestic companies provide domestic services to domestic customers has increasingly been replaced by systems and organizations intended to provide services on an international, if not global, scale. These systems attempt to serve the largest possible number of customers

from centralized communication and data facilities without regard to where the customer being served is located or to national boundaries. Business ventures in this

industry often involve technological and contractual arrangement with, or control or

ownership by, foreign entities, or both.

The transnational nature of these ventures poses substantial legal, technical, and

practical challenges to U.S. agencies charged with enforcing the law or protecting

the national security. These challenges range from protecting U.S. communications

and data from unauthorized access to preserving the Government’s ability to intercept lawfully communications routed by satellite to gateways outside the United

States, without significantly impeding the introduction of new technologies, features, or services. Notwithstanding the wide variety of business plans, technology,

and infrastructure that these various ventures involve, certain common characteristics exist and more importantly, the interests of the United States in these matters

remain constant.

II. RISKS

A primary FBI interest and the most technologically challenging issue is the preservation of our ability to intercept communications and obtain communications

transaction data pursuant to existing legal authorities 1 despite infrastructure and

technological changes. To enforce the law, protect public safety, and preserve the national security, law enforcement and national security agencies must be able to

intercept communications and obtain the associated identifying data in a secure, unobtrusive, and timely fashion pursuant to and in accordance with the relevant constitutional and statutory safeguards. The Government must also be able to obtain

basic subscriber information and other transactional records relevant to the target

communications. Actions taken to preserve this interest do not expand existing authorities; rather, they are designed to ensure that existing lawful investigative tools

are not rendered inoperative by the transnational nature and technological complexity of a new venture. This will become increasingly important as the highly regulated telecommunication sector converges with the largely unregulated Internet

communications industry.

45

2 E.g., 18 U.S.C. § 2511.

Traditionally, the FBI as well as other Federal, State, and local law enforcement agencies have principally conducted electronic surveillance efforts (and obtained

interception access and access to stored communications and subscriber records)

through those U.S. carriers which offer local exchange-type service, and provide

service connections, directly to the public. It is vital therefore that a foreign owned

and controlled company (through its carrier subsidiaries) maintain within the

United States interception access, access to the stored wire and electronic communications of their U.S. customers and subscribers, and any records and subscriber

information relating to such U.S. customers or subscribers. If such information is

unavailable because it is stored beyond the United States border, subject to restrictive disclosure laws of foreign countries, or technologically inaccessible, the national

security, law enforcement, and public safety interests of the United States are degraded proportionally. These requirements are essential to ensure effective, efficient,

and secure service of lawful U.S. process; effective, efficient, and secure execution

of such process; and to protect against any unauthorized disclosure of classified national security and sensitive law enforcement information related to such process,

to foreign powers and companies licensed and regulated by foreign powers. For this

reason, the agreements the DOJ/FBI have negotiated with foreign owned companies

contain provisions which address these requirements.

Another area of significant concern is the security of U.S. intercept and data ac- quisition activity. The implementation of lawfully authorized national security and

law enforcement interception and data acquisitions increasingly requires the cooperation of the communications service provider. In these cases, the U.S. Government is required to disclose sensitive target information and investigative techniques to the service provider in order for it to provide the assistance required

under the order. Such targets could be foreign intelligence officers or agents, or

could be associated with criminal enterprises (e.g., international drug-trafficking).

Without adequate safeguards, the damage to an investigation would be done the moment the U.S. serves process on the foreign-affiliated carrier. The foreign-affiliated

carrier would also immediately become knowledgeable about the current technological intercept capabilities and limitations of U.S. law enforcement and national

security agencies. The disclosure of such information to a foreign government and

its operatives could serve as a guide to how to evade lawful U.S. surveillance. Risks associated with the potential for compromise of the interception, unauthorized identification of interception targets, and disclosure of interception sources and

methods, correspond with the level of foreign involvement in or control of the entity

through which the intercept is to be executed. Also law enforcement’s ability to pre- vent, detect and respond to breaches of wire tap security are greatly inhibited if the

equipment and personnel responsible for the intercept are located outside the

United States.

If the U.S. Government cannot satisfy itself that the confidentiality of its national security and law enforcement interceptions will be maintained, then it may be denied the use of these investigative tools, degrading of our ability to protect national

security and public safety, even though the interception is clearly authorized by law.

Moreover, once a communications system is considered ‘‘intercept-free,’’ it has the

potential to become a haven for all sorts of unlawful activity. Our agreements with

the foreign owned companies therefore require increased security of lawfully authorized electronic surveillance activities in situations where information about such activities could be accessible from outside the United States, or otherwise readily acquired by a foreign power. The FBI together with the Department of Justice is charged with preventing, in- vestigating, and prosecuting, when appropriate, instances in which U.S. communications and data have been acquired or disclosed in violation of our Nation’s laws.2

Our ability to detect, investigate, and assert jurisdiction, criminally or civilly, is impeded, if not eliminated, when entire or significant components of communication

systems operating in the U.S. are located or accessible through means located outside U.S. borders. Even within the United States, unauthorized interceptions and

disclosures by a service provider are, as a practical matter, undetectable. But the

risk that a service provider might carry out, or assist in carrying out, covert interceptions increases when the entity with ownership, control and influence over company practices and employees owes its allegiance to a foreign government. Related to protecting the security of private communications, is our interest in preventing economic espionage. The theft of trade secrets on behalf of foreign governments, instrumentalities, or agents is prohibited by 18 U.S.C. § 1831; theft of

trade secrets in other instances is proscribed by 18 U.S.C. § 1832. Notwithstanding that an owner may have taken all measures that a reasonably prudent person in

46

the same or similar circumstances may have taken to safeguard his trade secrets,

foreign control of or significant involvement in U.S. communications systems over

which those trade secrets are sent increases their vulnerability to unobtrusive, illegal exploitation.

The operation of or access to telecommunications facilities and services which

originate and/or terminate in the U.S. creates the opportunity for foreign-owned and

controlled carriers and their personnel to engage in or allow espionage and economic

espionage. To the extent that the operation of transnational or global communications systems increase this risk by virtue of their infrastructure, technology, or business plan, law enforcement’s ability to prevent trade secret theft is proportionately

decreased. Perhaps more importantly, if we cannot intercept lawfully the communications of foreign government agents, then we will be at a disadvantage in learning how and when economic espionage is committed. In other words, to combat this

form of espionage effectively, we need to preserve our ability to learn who, when,

and how it is being committed. This is very difficult to do when the government

whose agent may be the subject of the intercept order owns or controls the network.

Finally, the globalization of the communications industry has the inherent potential for threats to the stability of our National communications infrastructure. We

have a responsibility, under Presidential Decision Directive 63, to take reasonable

measures to protect our national infrastructure. To ensure that critical infrastructure protection is achieved and maintained, the Directive provides that ‘‘[t]he full

authorities, capabilities and resources of the government, including law enforcement, regulation, foreign intelligence and defense preparedness shall be available,

as appropriate.’’ (Presidential Decision Directive/NSC-63 on Critical Infrastructure

Protection (May 22, 1998)). Related to this effort, telecommunications carriers are

required to comply in an effective, efficient, and unimpeded fashion with applicable

provisions of (i) all National Security and Emergency Preparedness rules, regulations, and orders issued by the FCC under the Communications Act of 1934, as

amended (47 U.S.C. § 151 et seq.); (ii) the orders of the President in the exercise

of his or her authority under section 706 of the Communications Act of 1934, as

amended (47 U.S.C. § 606), and under section 302(e) of the Aviation Act of 1958 (49

U.S.C. § 40107(b)); and (iii) Executive Order 11161 (as amended by Executive Order

11382). These provisions are designed to ensure an immediate response to U.S. Government telecommunications requirements in the event of a national emergency. If

a carrier’s facilities that process U.S. communications are located outside of the

United States or if the carrier is foreign owned or controlled, there could be a risk

that it could not or would not immediately respond to the U.S. Government’s telecommunication needs in an emergency. The agreements I have previously noted address such concerns by requiring that carrier facilities that are part of, or are used

to direct, control, supervise or manage all or any part of the transmission of domestic U.S. communications, as well as that end of a call that originates or terminates

in the United States, be located at all times within the United States.

III. ADDRESSING THE RISKS

Since the business plans, system infrastructures, and involved technologies in proposed telecommunication transactions vary significantly in innumerable ways, identifying a precise and fixed set of criteria that each venture must satisfy in order

to protect adequately the interests identified above is impractical. Instead, we must

analyze a large number of factors in each case to determine how the proposal will

impact the government’s ability to satisfy its public responsibilities: System size,

technology and infrastructure; location of tangible and intangible assets; business

plan and proposed practices; organizational structure; expected evolution of the communications market and technology; degree and nature of foreign control; national

and international controls over the system’s operations; political risks/reciprocity;

and relevant historical intercept activity. Based on that evaluation, we begin to negotiate with the involved companies to devise and evaluate possible solutions.

In conducting this review, we recognize that every transaction presents some risk

and do not aspire to eliminate every conceivable risk. Rather, we view all transactions as falling somewhere on a spectrum of risk. Some transactions, in short,

present greater risks to law enforcement and national security than do others. At

one end of this spectrum fall ventures involving small communications service providers seeking authority only to resell international service; at the other fall transactions involving the acquisition of large domestic service providers by, or the merger of a domestic service provider’s network into, a global or transnational network

owned or controlled by a hostile foreign government. Most transactions fall somewhere in between. We attempt to husband our limited resources by addressing those

ventures that present a high level of risk to the American public.

47

To this end we are vigilant in requiring only that which is necessary to protect national security, privacy and public safety. While there are certain common characteristics in the measures that are critical to preserving national security, privacy

and public safety, the commitments needed to mitigate our concerns vary depending

on the company’s network and structure. Nonetheless, we strive for consistency in protecting our ability to enforce the laws of the United States and to protect our

national security. This consistency has served to help guide DOJ/FBI decision making, as well as to serve as a platform for guidance to the telecommunications industry and other interested parties in resolving national security concerns in foreign

ownership cases.

I wish to stress that we have taken a number of positive steps to address the concerns discussed in this testimony. As Mr. Di Gregory describes in detail in his statement, in each case we use available legal tools to seek a tailored solution to the specific concerns presented. In that regard, the FBI and the Department of Justice

have relied on two existing fora in evaluating proposed transactions in making our

concerns about such transactions known: the Federal Communications Commission

and the Committee on Foreign Investment in the United States. While I will not

reiterate Mr. Di Gregory’s remarks in any detail, I would, however like to echo his concern about changes to the current processes. To date we have been able to use the existing legal framework and process to reach agreements which appropriately address our concerns. I believe we currently

have a good balance between the need to ensure basic security and the virtues of

supporting a vibrant communications sector. We will continue to utilize existing

processes to protect our national security and law enforcement interests in a consistent and systematic manner.

Mr. TAUZIN. Thank you, Mr. Parkinson. Let me make a general unanimous consent, we always do, that your written statement, as

all written statements, are a part of our record, without objection. Let me ask for order in the committee. Our witnesses are entitled to our attention. We ask for everyone to please quiet the hum

in the room. We thank you very much. We are pleased to welcome now Ambassador Richard Fisher, the

Deputy U.S. Trade Representative to the USTR. Indeed, Ambassador Fisher, your statement is welcome, sir.

STATEMENT OF AMBASSADOR RICHARD FISHER

Mr. FISHER. Thank you, Mr. Chairman, and Ranking Member Dingell. I appreciate being here. Behind me is seated my son, by

the way, whose grandfather was a member of this committee and

indeed, when he was in the minority as a Republican, was the

ranking member of the minority side of this committee, and I know

served with you, Mr. Markey. I am sure my son is delighted to find

out that his father is the least popular man in this room as Deputy

USTR.

Mr. Chairman—— Mr. TAUZIN. Just like at home, we should suggest.

Mr. FISHER. Mr. Chairman, an open and competitive telecommunications market promotes innovation and technological

progress. It rewards the most efficient and well-run businesses. It

reduces the price of services for families and other consumers. This

is what we have experienced here in the United States, as many

of you have eloquently pointed out, and it is what we seek to foster

through our trade policy abroad.

As mentioned by Congressman Dingell, the deregulation of our

telecommunications markets has fostered competition and innovation worldwide, certainly here in the United States, because once

dominated by monopolies, we now have over 300 new competitive

local providers who are bringing advanced services to millions of

Americans, from cell phones and satellite services to high speed

48

Internet access. The direct value of this to our economy is vast and

the associated benefits of reduced costs for our businesses, for our

consumers, our greater convenience in daily life and national competitiveness, is still greater.

However, as the U.S. pioneered deregulation in the telecom sector, as many of you have pointed out, many of the world’s major

markets remained dominated by traditional monopolies and so we

went to work, Mr. Chairman, in your words, to push and pressure

and prod our trading partners to open up telecommunications to

competition from the rest of the world. We have used a variety of

tools to do so: Our domestic laws, our bilateral negotiations, and

negotiations at the WTO.

Central to the advances of the past years was the conclusion of

the WTO Basic Telecom Agreement. This agreement, in our humble opinion, is one of the major trade policy accomplishments of the

past decade. Before it went into force, only 17 percent of the

world’s top 20 global markets were open to U.S. firms, and with it

U.S. companies have now gained access to over 95 percent of global

telecommunications markets, as mentioned by Congressman Oxley.

Since 1998, we have made still more progress. Singapore, Canada, Korea, Japan and India have all unilaterally improved market

access. And China, Taiwan and other economies entering the WTO

have each committed to opening their telecommunications markets.

We have also used Section 1377 to identify and eliminate violations of the agreement and address other telecom priorities in such

markets as Canada, Mexico, the European Union and Japan. Most

recently, Mr. Chairman, in our bilateral trade agreement with

Hanoi we agreed on a substantial opening of the Vietnamese telecommunications market.

A by-product has been the privatization of many of these government monopolies. I know this is a subject that you, Congressman

Markey, care a great deal about and that Congressman Hollings is

intense about. From the beginning of 1997 to the end of July 1999,

$104 billion worth of privatizations were completed. As of 1999, of

the 189 members of the International Telecom Union, 90 have

wholly or partially privatized their incumbent telecom operators

and 18 of these were privatized completely. Of the nonprivatized

operators that are remaining, over 30 are currently planning to privatize, including those in Finland and Egypt and Austria and Algeria, the Chech Republic, Kenya, Kuwait, Morocco, Norway and Turkey. All this has led to lower costs to consumers and businesses

worldwide and to massive new business opportunities for U.S. telecommunications companies and their workers and shareholders.

What American consumers pay for international calls has fallen

sharply. Retail calls across the Atlantic now cost little more than

a domestic long distance telephone call, and even calls to Japan, recently as high as $1 a minute, are now available from major carriers for as little as 15 cents a minute. Overall, the price of wholesale international connectivity has plummeted by as much as 80

percent over the past 4 years. This is a key factor that is feeding

the growth of the global Internet.

U.S. telecommunications firms, with the market access promoted

by the agreement, are now leaders around the world. American

companies hold substantial investments and operate in nearly 40

49

countries. They operate the most extensive pan-European networks. They lead the world in deploying technologies such as cable

and Internet telephony. American firms are now the largest investors in almost every international submarine cable consortium and

global satellite system. They have invested heavily in overseas

wireless operations and they are taking the lead in moving globally

into value added and Internet services.

Let me just give you some specific examples, Mr. Chairman, to

illustrate the breadth and depth of what we have accomplished

abroad. SBC now has stakes in 22 countries. It holds 50 percent

of AUREC in Israel, 42 percent of Tele Danmark, 20 percent of Bell

Canada, 19 percent of TransAsia in Taiwan, 18 percent of

Belgacom, 18 percent of Telekom South Africa and 15 percent of

Cegetel in France. Through Tele Danmark, SBC holds a 42 percent

stake in Talkline, the German cellular service provider and reseller.

MCI-Worldcom now has facilities based in over 20 countries

throughout Asia, Europe and Latin America.

Bellsouth, through various alliances, holds wireless licenses in

Argentina, Brazil, Chile, Denmark, Ecuador, Germany, Guatemala,

India, Israel, Nicaragua, Panama, Peru, Uruguay and Venezuela.

By the way through an alliance with KPN of the Netherlands,

Bellsouth holds 100 percent of E-Plus, a German mobile operator.

Verizon, which was mentioned earlier, has substantial wireless

interests in Mexico and Italy and Greece and the Chech Republic,

Slovakia, Indonesia, New Zealand, the United Kingdom, Thailand,

and the Philippines.

AT&T is involved in joint ventures and alliances in several

places, Canada, Britain, Japan, Mexico, India, and Latin America.

But it is not just the big guys. It is not just the Baby Bells that

have benefited from liberalization. And it is not just companies

that existed before the WTO agreement. Viatel, a company that is

less than 5 years old, has a fiber-optic network of 4,700 kilometers

that links 59 cities and is currently licensed in Austria, Belgium,

Canada, France, Germany, Italy, the Netherlands, Spain, Switzerland, and the United Kingdom.

Level 3, a company that was founded in 1998 and has raised $14

billion in capital during that short time period, is building submarine links to Asia and Europe and is building an intercity network in Europe linking at least 13 European cities. And I could

walk you through Global Crossing and Prime Mass and Global

Telesystems and PSINet. These are companies that are new and

active and exploiting in the most positive way what we have been

able to accomplish.

It is true that, as Senator Hollings pointed out, U.S. firms may

have had significant pre-WTO holdings. In addition to 50 percent

additional holdings post WTO, previous holdings are now subject,

and this is very important, to WTO dispute settlement if U.S. carriers encounter problems in foreign markets.

This is not to say, Mr. Chairman, that our work is done. Much

remains to be done, particularly in fast growing, developing and

newly industrialized countries such as India, South Africa, Korea,

Malaysia, and Mexico. And moreover, broader liberalization of the

service industries, many of which use telecommunications networks

50

as a principal vehicle for exports, is needed to spur growth in the

telecom sector. And this work, by the way, has already begun. The

WTO has agreed on opening a new set of services negotiations and

we are hard at it.

The purpose is to create a virtuous cycle of innovation and growth in our telecom industry and easy delivery of our services to

countries and markets abroad.

The point is this, Mr. Chairman, we have accomplished much.

We have a great deal more to do. I ask you to bear in mind all this

as you contemplate this very important matter, especially given, as

Congresswoman Dunn and Chairman Kennard pointed out, that

we have now in place the apparatus to protect competition and our

national security through the FCC approval process and the ExonFlorio national security review process, as well as Section 7 of the

Clayton Act. These laws and review standards provide us with

strong protection against threats to national security and anticompetitive behavior and, very importantly, they are fully in accord

with our commitments under the Basic Telecom Agreement and

our other WTO commitments, and they enable us to continue the

leadership that Congressman Eshoo spoke of in pushing the envelope, Congresswoman Eshoo should say, excuse me, in pushing the

envelope on opening the global telecom market to our advantage. A perception that the United States is turning its back on our current operating procedure risks halting or reversing the momentum toward liberalization. We have already received strong expressions of concern from the European Union and other trading partners regarding the compatibility of these legislative proposals with

our international obligations in the WTO. If the United States enters the new services negotiations, having instituted measures

countries may perceive as protectionist, some will be tempted to restrict existing opportunities offered to U.S. carriers and resist future liberalization. This could affect billions of dollars in current

U.S. investment abroad and even more further investment. In

short, a shift to restricting our market now could threaten the hard

fought liberalization and growth that we have experienced in

telecom markets around the world and diminish our leadership.

Why would we take that risk? Thank you.

[The prepared statement of Ambassador Richard W. Fisher follows:]

PREPARED STATEMENT OF AMBASSADOR RICHARD W. FISHER, DEPUTY UNITED STATES

TRADE REPRESENTATIVE

Mr. Chairman, Members of the Subcommittee, thank you for inviting me to testify

on our international telecommunications policy.

With the dramatic changes the telecommunications industry is undergoing domestically and abroad, this is a timely topic. Given the time that has elapsed since the

passage of 1996 Telecom Act and the WTO Basic Telecommunications Agreement,

which went into effect in February 1998, this is a useful opportunity to reflect on

the policy choices the United States has made and how they have affected U.S. interests.

WTO AGREEMENT ON BASIC TELECOMMUNICATIONS

American telecommunications trade policy rests on simple and familiar principles.

An open and competitive telecommunications market promotes innovation and technological progress; rewards the most efficient and well-run business; and reduces

the price of services for families and other consumers. The telecommunications secVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
51

tor is a dynamic example of the value of our open investment policy and our leadership in liberalizing markets. This is the type of world market we seek to foster

through trade policy, and the reason is very clear in America’s experience at home.

Once dominated by monopolies, the deregulation of our local telecommunications markets has fostered competition and innovation. We now host over 300 new competitive local providers, who have attracted tens of billions of dollars in new capital

and are bringing advanced services to millions of Americans, from cell phones and

satellite service to video-conferencing, high-speed Internet access, and much more.

The direct value of this to our economy is vast; and the associated benefits of reduced costs for businesses, greater convenience in daily life, and national competitiveness still greater. However, as the United States pioneered deregulation in the telecom sector, in the 1980s and through the 1996 Telecom Act, many of the world’s major markets re- mained dominated by traditional monopolies. This not only posed an obstacle to

their technological development, but was a significant barrier to exports of some of

America’s most competitive businesses, whether across borders or through invest- ment by American firms. Our trade initiatives have thus sought to open world telecommunications markets to competition. In this we have used a variety of policy

tools, including bilateral negotiations, Section 1377 of our domestic trade law, and

negotiations at the WTO. And central to the advances of the past years was conclusion of the WTO’s Basic Telecom Agreement in 1998. This agreement, joining most of the world’s major telecommunications markets in binding commitments to market access and pro-competitive regulatory policies, is

one of the major trade policy accomplishments of the past decade. Before it went

into force, only 17% of the world’s top 20 global markets were open to U.S. firms; with it, measured by annual sales, U.S. companies gained access to over 95% of

global telecommunications markets. Since 1998, we have made still more progress. Singapore, Canada, Korea, Japan, and India have all unilaterally improved market access. As China, Taiwan and

other economies enter the WTO, each of them will implement market-opening commitments in telecommunications. Given the momentum we have established, we

have been able to replicate this standard even outside the WTO—for example, in

our recent bilateral trade agreement with Vietnam. The value of these market-opening commitments is growing in step with the growth of global markets, stimulated in great part by the emerging competition the

agreement unleashed. With sales at $650 billion in 1997, the global telecommunications market is now rapidly approaching one trillion dollars in annual sales. As expected, U.S. firms have taken full advantage of these opportunities. U.S. firms hold substantial investments in operators in over three dozen countries and

on every inhabited continent (e.g., SBC alone has stakes in 22 countries, and MCI

Worldcom has facilities-based operations in over 20 countries as well (Source: Hoovers Online)). U.S. operators (such as Qwest, Viatel, GTS, and MCI Worldcom) now

operate the most extensive pan-European networks and are global leaders in deploying technologies such as cable telephony and internet telephony. U.S. firms are the

largest investors in almost every international submarine cable consortium and

global satellite system (e.g., U.S. firms have ownership interest in over 70% of the

capacity on the recently-laid U.S.-Japan cable, which will provide a quantum increase in trans-Pacific connectivity) and have invested heavily in overseas wireless

operations (e.g., Bellsouth has over 6 million cellular customers in ten Latin American countries, and its international operations account for almost 10% of its revenues (Source: Forbes, March 2000)). Following in the wake of telecom liberalization,

U.S. firms are also taking the lead in moving globally into value-added and Internet

services (e.g., PSINet provides facilities-based Internet access in 29 countries on five

continents).

The benefits of the WTO agreements extend far beyond U.S. telecommunications

firms. U.S. and foreign consumers and businesses are major beneficiaries of the dramatic competition that has resulted from increased market opening: some retail

calls across the Atlantic now can cost little more than a domestic long-distance

phone call, and even calls to Japan, recently as high as one dollar a minute, are

now available from major carriers for at little as 15 cents a minute. With end-toend investment in submarine cables now possible, and massive investment led by

U.S. firms now underway, the price of international connectivity has plummeted by

as much as 80% over the past 4 years (source: ING Barings)—a key factor that is

fueling the growth of the global Internet.

In addition to securing investment opportunities, the WTO Basic Telecom Agreement put into place binding regulatory principles to ensure that regulators enforce

pro-competitive rules. These commitments—ranging from cost-oriented interconnection rates to transparent licensing procedures—are an essential framework for effecVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00055 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
52

tive regulation and have provided a basis for addressing problems faced by U.S. carriers in Canada, Mexico, Japan, Peru, Israel, the United Kingdom, and Germany,

affecting investments worth billions of dollars. Most recently, we have taken advantage of these commitments to reach an agreement with Japan that will lower interconnection payments for U.S. and other competitive carriers by over one billion dollars; and we have initiated proceedings in the WTO to enforce rights of U.S. telecom

service providers relating to over one billion dollars of U.S. investments in Mexico

and affecting the second largest international services market for the U.S. service

providers and consumers.

Despite this progress, barriers continue to exist in these and other markets, and

competition has not yet fully developed in all WTO markets, just as it has not yet

fully developed in the United States. But as we make the global transition from monopoly to competitive markets, the WTO commitments provide one of the most important sets of competitive safeguards on which we can now rely to open foreign

markets and ensure that our trading partners abide by their commitments. Furthermore, the impact of WTO commitments extends far beyond the WTO members

which have undertaken them. These commitments are widely seen as goals for a

much broader range of countries and are a major focus of attention in the International Telecommunications Union (ITU), the Asia-Pacific Economic Cooperation

(APEC), and the World Bank.

To date, success has bred more success. Peer pressure by liberalizing countries

has created a virtuous circle where countries now compete for global investment by

offering more attractive investment opportunities and more effective regulatory regimes. For example, even after entry into force of the WTO Basic Telecom Agreement, Singapore, Korea, Japan and India have unilaterally decided to improve foreign investment and telecom regimes, and many EU and Latin American countries

are substantially reducing interconnection rates. Preserving this momentum is essential if the WTO is to provide a forum for further progress—through implementation of existing commitments and expansion of new commitments.

CURRENT PROPOSALS CAN UNDERMINE THESE BENEFITS

New proposals are under consideration to limit foreign investment in the U.S.

telecom markets by preventing the Federal Communications Commission (FCC)

from licensing certain telecom carriers based on their level of government ownership. Currently, foreign investment in the telecommunications sector is governed by

Section 310 of the Communications Act of 1934. This statute (section 310(a)) prohibits direct ownership of certain categories of telecom licenses by a foreign government or its representative; however, section 310(b)(4) authorizes indirect ownership

of certain telecom licenses by a foreign person, a foreign corporation, or a foreign

government to exceed 25 percent unless the FCC finds that the public interest will

be served by the refusal or revocation of such license. By placing an absolute bar

on certain types of licenses, the legislative proposals seek to remove the discretion

that this statute currently provides the FCC to determine whether an award of a

particular license or authorization is in the public interest.

Competition and national security concerns have been cited as justification for imposing an absolute bar on the participation of such foreign government-owned carriers in the U.S. market. For instance, there have been assertions that foreign government-owned competitors have special privileges in their home market which can

be exploited to distort competition in our market. Questions have also been raised

concerning the desirability of allowing foreign government ownership of U.S. telecommunications assets, which are vital to U.S. national security.

These arguments merit careful review and analysis. The FCC and other Executive

Branch agencies must carefully scrutinize all transactions involving governmentowned carriers to ensure that they do not distort competition in the U.S. market

or undermine critical U.S. national security, law enforcement, and related interests.

However, the Administration does not believe that these concerns justify changing

existing law to prevent a telecom company from participating in the U.S. market

purely based on its level of government ownership. We believe that such proposals

risk undermining the benefits the United States has reaped in the past few years

in the international telecom market. Moreover, the evidence casts doubt on the assumptions underlying proposals to ban government-owned carriers, particularly assumptions that government-owned carriers enjoy special advantages.

Finally and most importantly, the U.S. Government already possesses effective

tools to address the competition and national security concerns raised by any foreign

government-owned carrier wishing to participate in the U.S. telecom market. These

tools are more than adequate to address the concerns that have been raised and do

not create the risks that the proposed initiatives are certain to engender. We will

53

continue to use these tools to address competition, national security, and other concerns that foreign investment in our market may raise.

BACKTRACK FROM INTERNATIONAL LIBERALIZATION

The United States has been the leader in worldwide liberalization of telecom markets, producing tangible benefits for both us and our trading partners. Proposals to

ban government-owned telecom firms from our market would likely diminish our

leadership role in this effort and could cause other countries to believe they could

limit foreign investment in the telecom and possibly other sectors, either in retaliation or for protectionist goals. We would, therefore, be putting at risk the significant

benefits we have derived from years of hard work in opening up these markets.

We are facing many of the same questions that framed policy discussions in the

lead-up to telecommunications negotiations in the WTO in the mid-1990s. At that

time, there was considerable debate over whether the United States could better affect foreign market opening through a unilateral, reciprocity-based approach or

through a multilateral framework in the WTO. The stakes for the United States

were enormous. With approximately one third of the value of the entire global telecommunications market at the time, the United States needed to ensure major concessions from its trading partners in return for offering access to the biggest domestic market in the world.

In the end, the calculus was clear: any broad-based agreement that rapidly

opened up global markets to U.S. firms clearly played to our advantages. While we

were offering other countries access to a market no other country individually could

match, a critical mass of market opening offers would provide opportunities that

U.S. firms were uniquely positioned to exploit, given our broad-based experience

with competition.

As I already discussed, we have fared extremely well. So far, we have led the

world trend in market liberalization and a commitment to competition. Others have

followed, particularly in light of the increased productivity, investment, growth and

consumer welfare that deregulation and competition have produced in the United

States. But any perception that the United States is turning back on that approach

risks reversing the incentives of our trading partners to compete in liberalizing their

own markets, and possibly bolstering pressure to protect vested telecommunications

interests. We have already received strong expressions of concern from the European Union (EU) and other trading partners regarding the compatibility of these

proposals with our international obligations in the WTO.

We expect the telecommunications sector to be a major focus of recently launched

WTO services negotiations, and, as in the last round, we can best take advantage

of these negotiations by demonstrating leadership. Much work remains to be done

to liberalize further global markets, particularly in fast-growing developing and

newly-industrialized country markets such as India, South Africa, Korea, Malaysia,

and Mexico.

If the United States enters these negotiations having instituted measures most

countries will perceive as protectionist, it is possible that many countries will be

tempted to restrict existing opportunities offered to U.S. carriers and resist any further opening in the WTO process. This could affect billions of dollars in current U.S.

investment abroad, and even more future investment. In short, efforts to restrict our

market now could curtail the virtuous cycle of liberalization and growth that we

have experienced in telecom markets around the world.

ASSUMPTIONS REGARDING GOVERNMENT-OWNED TELECOM FIRMS

Much of the concern with foreign government-owned telecom firms stems from the

belief that a government-owned company would enjoy significant advantages in competing with U.S. rivals in the U.S. market. At first blush, this appears to be a compelling concern. However, there is evidence that casts doubt on the assumptions underlying this belief.

Assumption 1: Government-owned firms are able to raise capital more easily than

private firms.

Market data do not demonstrate a conclusive link between government ownership

and access to capital. Although some government-owned firms have accumulated

large cash reserves, presumably to finance acquisitions, any large firm can accumulate cash. What matters is not cash holdings per se, but the ability to finance acquisitions.

Companies raise capital primarily by issuing equity and debt. Most of the major

players in telecom use close to an even split between equity and debt financing. A

review of corporate bond ratings for large telecom firms (privately and government

54

1 Bond ratings—which are determined by independent, private agencies (such as Moody’s and

Standard and Poor’s)—classify firms by the risk level of their debt. As a firm’s debt becomes

more risky, its bond rating falls, and it must pay more to convince investors to hold its debt.

According to Standard & Poor’s bond ratings, British Telecom (BT) (which has no government

ownership) has a higher credit rating than government-owned Deutsche Telekom (DT) and

France Telecom (FT); similarly, privately-owned Bellsouth has a higher credit rating that Korea

Telecom or Telekom Malaysia (both of which have substantial government ownership). Moreover, DT’s rating is no better than those of SBC, Bellsouth, and AT&T. Similarly, a review of

Moody’s recent ratings of major government-owned operators (France Telecom, Deutsche

Telekom, KPN, Telstra, Korea Telecom, Telekom Malaysia) does not cite government ownership

as a factor in its ratings. In fact, Moody’s review of Korea Telecom specifically cites as ‘‘neutral’’ the impact of the impending reduction of government ownership from 59% to 33% and gives

NTT (with 53% government ownership) the same credit rating (Aa1) as NTT DoCoMo (which

is only 35% government owned). 2Standard & Poor’s gives an AAA rating to the government bonds of France, Germany, Japan, and the Netherlands, but gives the bonds of FT, DT, Nippon Telegraph and Telephone (NTT),

and Royal KPN a rating of A, AA-, AA+, and A- respectively. An analysis of recently issued

bonds of these firms shows that their trading values imply yields of between 25 and 125 basis

points above the government bonds in their respective countries. On average, they trade with

yields 50 basis points higher than government bonds with comparable maturities. 3 NTT was subject to a similar review arising out of its acquisition of Verio, as were many

other European government-owned carriers, relating to their third-generation wireless bids.

Telenor (100% owned by Government of Norway) is subject to a possible downgrade arising out

of its investments in Thai carriers. 4For example, Moody’s recent rating of the Australian government-owned carrier Telstra

bases its ratings, in part, on limitations associated with being 50.1% government-owned including inability to access equity markets and intense public scrutiny of cost initiatives.

owned) demonstrates that there is no systematic relationship between bond rating

and the extent of government ownership in a firm.1 In addition, the bonds of all government-owned telecom firms are rated lower than the bonds of the firm’s respective

governments.2

Telecom companies—including DT—have recently issued unprecedented levels of

corporate bonds to finance acquisitions and expansions. Given these high levels of

debt, investors have become cautious, demanding higher yields that have translated

into higher financing costs for companies, both government and privately owned. At

the same time, many of these telecom companies are under threat of credit rating

downgrades. For instance, Moody’s has placed DT under review for a possible downgrade to its credit rating, growing out of its $7 billion pledge for a third-generation

wireless license in Germany, and its $50 billion offer for Voice Stream.3 Such downgrades could have a major impact on certain companies. For example, to secure financing, DT agreed that it would add an extra one-half percentage point to the coupon of its recent $14.6 billion bond issue if its credit rating were downgraded to

below single A. If the interest rate adjustment were triggered, it would cost DT an

additional $73 million a year. As this example suggests, the market is focusing on

the business risks associated with DT’s actions, not its government ownership, as

it determines DT’s cost of capital.

This is not meant to suggest that these government-owned telecom operators do

not enjoy high credit ratings and ready access to debt capital. But, as discussed

above, the reasons do not appear to have a direct relationship to government ownership. Rather, while government involvement may be a factor in credit analysis, so

are other factors, including the competitive environment, the regulatory environment, management strength, management strategy, diversification strategy, funding

strategy, network quality, foreign acquisitions, and a range of financial measures.

In some instances, government ownership is specifically cited by credit rating agencies as a negative factor.4 Moreover, in the context of diversification strategy, foreign

acquisitions may also be a negative factor in a credit rating due to political, currency, or other risks. Accordingly, one could argue that the high credit rating for

firms like NTT derives principally from the dominant position in the domestic market combined with the fact that it has not ventured aggressively outside its home

market.

On the equity side of the balance sheet, companies that earn superior returns on

equity are usually assigned higher price and earnings multiples than are less efficient companies, thus lowering the cost of stock issuance. Looking at the cost of equity alone, Bellsouth, SBC, Verizon, and AT&T (with a cost of equity of 6.82%,

7.42%, 7.10%, and 7.67% respectively) enjoy a lower cost of capital than DT and FT

(with a cost of equity of 7.78% and 7.70% respectively) (source: Bloomberg).

There are other reasons why government ownership might put foreign government-owned companies at a competitive disadvantage in the eyes of equity investors. Government-owned firms are typically less efficient and less profitable than

55

5For extensive reviews, see, Boardman, Anthony, and Aidan R. Vining, ‘‘Ownership and Performance in Competitive Environments: A Comparison of the Performance of Private, Mixed,

and State-Owned Enterprises,’’ Journal of Law and Economics 32: 1B33 (1989); Vining, Aidan

R., and Anthony E. Boardman, ‘‘Ownership versus Competition: Efficiency in Public Enterprise,’’

Public Choice 73: 205B39 (1992); and Dewenter, Kathrin, and Paul H. Malatesta, ‘‘State-Owned

and Privately-Owned Firms: An Empirical Analysis of Profitability, Leverage, and Labor Intensity.’’ American Economic Review, forthcoming.

private firms.5 Government-owned firms are often burdened with high labor costs, extensive universal service requirements, and poor management. Management is

often less prepared to operate in a market-oriented environment, putting such firms

at a disadvantage in responding quickly to growth areas such as data services. Governments may also have found it easier, as owner of the operator, to use the operator as an instrument of flawed industrial policy, imposing long-term burdens

on these firms (e.g., NTT remains burdened with a cost structure in its local exchange markets that is three times higher than that of a typical U.S. Regional Bell

Operating Company, while carrying far less traffic). These inefficiencies can be absorbed where a company is dominant in its domestic market, and that market remains its focus; but such a legacy is likely to be a comparative disadvantage for a

firm looking to expand abroad into competitive markets like the U.S., where efficiency is such a key determinant of success. Combining the cost of debt and the cost of equity to determine the overall cost of capital, it is not clear that companies with significant government investment

have a comparative advantage. The evidence is mixed: DT has one of the lowest

weighted average costs of capital (5.32%), but DT’s rate is not significantly lower

than that of Verizon, (5.46%) or Bellsouth (5.55%). Furthermore, these U.S. firms,

along with SBC, have a lower weighted average cost of capital than France Telecom

(which is 54% government owned) (source: Bloomberg).

In sum, the assumption that government-owned firms have privileged access to

capital may initially seem compelling. However, as discussed above, the relationship

between government ownership and access to capital is inconclusive, and government ownership can impose significant costs on a firm.

Assumption 2: Government-owned firms are more likely to have monopoly privileges

in domestic markets and can subsidize their U.S. operations with revenues generated at home to engage more easily in anti-competitive behavior.

Allegations of monopoly privileges and anti-competitive cross-subsidization are

common in markets with dominant telecom providers. However, just as there is no

systematic relationship between government ownership and access to external finance, there is no certain connection between government ownership and monopoly

privilege and anti-competitive cross-subsidization. The problem that U.S. carriers

face in foreign markets involving issues stems less from government ownership than

from monopoly legacy, and allegations of anti-competitive abuses arise in foreign

markets dominated by a government-owned entity (such as DT in Germany or NTT

in Japan) or a completely privately-owned company (such as Telmex in Mexico). One

could argue that Germany (which owns a substantial stake in Deutsche Telekom)

has a more independent and effective regulator than Mexico (which has no government stake in the dominant operator).

As a result, the relevant question may not be present levels of government ownership but whether the foreign market is more or less open to competition. We have

made tremendous progress in this regard over the past few years, particularly since

the entry into force of the WTO Basic Telecom Agreement. Where this is not the

case and our carriers still face anti-competitive barriers in foreign markets, we have

been vigilant in using our remedies in the WTO and under U.S. trade law (such

as under Section 1377 of the 1988 Omnibus Trade and Competitiveness Act) to encourage our trading partners to open their markets to meaningful competition. Our

recently initiated WTO case against Mexico and our actions under Section 1377 with

respect to Germany, Israel, South Africa, and other countries underscore this resolve.

Finally, U.S. telecommunications firms are already operating—in many cases,

quite successfully—in overseas markets. For example:

• SBC holds 50 percent of AUREC (Israel), 42 percent of Tele Danmark (Denmark),

20 percent of Bell Canada, 19 percent of TransAsia (Taiwan), 18 percent of

Belgacom (Belgium), 18 percent of Telkom South Africa, and 15 percent of

Cegetel (France). Through Tele Danmark, SBC holds a 42 percent stake in

Talkline, a German cellular service provider and reseller.

• Bellsouth, through various alliances, holds wireless licenses in Argentina, Brazil,

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ama, Peru, Uruguay and Venezuela. Through an alliance with KPN (Netherlands), Bellsouth holds 100 percent of E-Plus, a German mobile operator.

• Verizon has substantial wireless interests in Mexico, Italy, Greece, the Czech Republic, Slovakia, Indonesia, New Zealand, the United Kingdom, Thailand, and

the Philippines.

• AT&T is involved in joint ventures and alliances in, among other places, Canada,

Britain, Mexico, India, Japan, Taiwan, and Latin America.

• MCI-Worldcom has facilities-based operations throughout Asia, Europe, and Latin

America.

• Viatel has a fiber-optic network of 4,700 kilometers designed to link 59 cities and

is currently licensed in Austria, Belgium, Canada, France, Germany, Italy, the

Netherlands, Spain, Switzerland, and the United Kingdom.

• Qwest, in alliance with KPN, is building a European network designed to extend

11,800 miles and reach 46 European cities.

• Level 3 is building submarine links to Asia and Europe, and is building an intercity network in Europe linking at least 13 European cities.

• Global Crossing has submarine cables to Europe and Asia and is building gateways for data operations.

• Primus has operations in Japan and Germany.

• Global Telesystems operates the largest European Internet backbone.

• PSINet owns Internet service providers in 29 countries and five continents.

Assumption 3: Competition in the U.S. market has weakened the U.S. industry, making U.S. firms vulnerable to foreign takeover.

The evolution of the U.S. telecom market over the past several years has contributed to an environment that has allowed U.S. telecom companies to flourish. For

example, new Competitive Local Exchange Carriers (‘‘CLECs’’) have thrived due to

competition and deregulation. Their market capitalization of about $85 billion at the

end of 1999 was up from $3.1 billion in 1996. Between 1993 and 1998, overall market capitalization of U.S. telecom firms increased by $800 billion, doubling in value

(source: CEA). Furthermore, stocks of U.S. telecom firms are generally trading today

at earnings multiples similar to those of their European counterparts. As of September 1, the average ratio of stock price to EBITDA (i.e., Earnings Before Interest,

Taxes, Depreciation, and Amortization) (the most commonly used valuation measure

in telecom to measure cash flow) for all U.S. telecommunications firms with market

values exceeding $20 billion was 10.5. The average of the same ratio for BT, FT,

DT, and Telecom Italia was the identical 10.5. Thus it does not appear that U.S.

firms are undervalued relative to their European counterparts.

Assumption 4: Government ownership provides a competitive advantage, particularly

given the favorable regulatory treatment they receive.

The evidence suggests that government-owned firms view privatization as providing the competitive advantage that they currently may lack. For instance, one

of the many incentives to privatize is to better tap global capital markets given

large-scale investment needs that the government cannot meet. This is supported

by evidence that firms are able to increase their capital expenditures significantly

following privatization (Source: D’Souza, 2000).

The evidence also does not demonstrate a conclusive link between government

ownership and regulatory favoritism. Rather, regulatory favoritism can exist wherever an incumbent telecom company wields considerable power and influence. In

fact, we are currently investigating allegations of biased regulation in Mexico of

Mexico’s dominant carrier, Telmex, which is 100% privately-owned. Mexico, like

many of our WTO trading partners, has undertaken obligations in the WTO to ensure impartial regulation. We continue to be vigilant in ensuring that countries live

by these and related obligations regardless of whether their incumbent telecom supplier is government or privately-owned.

If companies truly saw government ownership as a competitive advantage for regulatory or other reasons, there would be significant resistance to privatization by

operators. NTT management’s current campaign to eliminate Japanese government

ownership from its company reinforces this point, as do current privatization efforts

in Finland, Egypt, Austria, Algeria, the Czech Republic, Kenya, Kuwait, Morocco,

Norway, Turkey, etc. Between 1984 and 1996, over $140 billion worth of

privatizations occurred, some of which resulted in firms which are 100% privatelyowned (such as BT). From the beginning of 1997 to the end of July in 1999, an additional $104 billion worth of privatizations were completed. As of 1999, of the 189

members of the ITU, 90 had wholly or partially privatized their incumbent telecom

operators; and 18 of these were privatized completely. Of non-privatized operators,

over 30 are currently planning to privatize.

57

However, it is unrealistic to expect firms to privatize overnight. At the beginning of most privatization programs, national telecom firms in smaller countries have a

potential market capitalization larger than the entire stock market, so it is impractical to sell shares all at once. Even in larger countries, the relative scale of privatization is enormous. For example, three NTT offerings in 1987-88 raised about $80

billion, yet this represented less than 25 percent of NTT’s total equity. Likewise,

DT’s initial first round of privatization occurred in November 1996 with an initial

share offering of about $13 billion, and reduced the government’s ownership stake

from 100 percent to 76 percent. A subsequent offering reduced this stake to the

present 58 percent. For NTT and DT to suddenly meet the levels specified by current legislative proposals to be able to participate in the U.S. market, they would

be required to sell $54 billion and $39 billion worth of stock, respectively, based on

current market capitalization. To put these amounts in perspective, the U.S. market

last year absorbed $51.2 billion in Initial Public Offerings.

TOOLS AVAILABLE TO ADDRESS COMPETITION AND NATIONAL SECURITY CONCERNS

POSED BY FOREIGN GOVERNMENT OWNERSHIP

Proposals to bar telecom companies owned in excess of 25 percent by a foreign government from the U.S. market seek to address the competition and national security concerns presented by transactions involving such companies. However, current law already provides powerful tools that enable the FCC and other Executive

Branch agencies to scrutinize proposed foreign investment to ensure that it in no

way undermines national security or competition in the U.S. market. Although my

colleagues will go into more detail on the role of their agencies in this review process, let me give you a brief overview of these tools and then focus on the activity

of USTR in ensuring that U.S. companies can compete in foreign markets on meaningful terms.

1. Public Interest Test

The FCC’s public interest test allows the FCC—with input from other Executive

Branch agencies—to scrutinize carefully the competition, national security, and other concerns posed by foreign investment in the U.S. telecom market. The Communications Act of 1934 requires the FCC to conduct this analysis in several contexts related to foreign entry. For instance, section 310(b)(4) of the Act permits a

foreign firm or government to acquire or maintain a greater than a 25 percent indirect ownership of certain telecom licenses unless the FCC finds that the public interest will be served by the refusal or revocation of such license. The FCC applies

its public interest test by examining, through public proceedings, whether a particular transaction threatens competition in the U.S. market or implicates national

security, law enforcement, foreign policy, or trade policy concerns. With respect to competition issues, the public interest test establishes a presumption in favor of entry into the U.S. market by an applicant affiliated with a foreign

telecommunications carrier from a WTO member country. However, contrary to certain claims, this presumption is not automatic; it is rebuttable. As part of its public

interest test, the FCC is empowered to ensure, among other things, that a foreign

carrier does not undermine competition in the U.S. market by virtue of its ability

to exercise dominant power in its home or other third-country markets.

In fact, the FCC has put in place a series of competitive safeguards designed to

curb anti-competitive behavior that could result in harm to the U.S. telecom market.

For example, the FCC prohibits any U.S. international carrier from accepting ‘‘special concessions’’ (such as exclusive arrangements) from a foreign dominant carrier.

The FCC also requires certain operators to produce quarterly reports on traffic and

revenues and maintenance of basic service and facilities. The FCC can also require

the U.S. carrier and its dominant foreign affiliate to maintain structural separation

in order to prevent foreign-affiliates from miallocating costs.

In instances where these safeguards would be insufficient to prevent anticompetitive conduct in the U.S. market, the FCC has the authority to impose additional

conditions on the grant of authority tailored to the competitive concerns raised in

a particular transaction, such as applying the ‘‘no special concessions rule’’ or dominant carrier safeguards where the foreign carrier is not dominant in its home market. And where an application poses a very high risk to competition in the U.S. market, and where the FCC’s competitive safeguards or other conditions would be ineffective, the FCC can deny the application.

The FCC’s public interest test also addresses the national security and law enforcement concerns raised by the entry of a particular foreign carrier into the U.S.

market. The FCC specifically accords deference to other Executive Branch agencies

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cerns are adequately addressed. Agencies charged with law enforcement and national security responsibilities will better explain how they have raised these issues

with the FCC and how those issues have been resolved.

Accordingly, the Administration believes that the FCC’s public interest test can

address the concerns raised by an application by a foreign government-owned carrier to participate in the U.S. market. The public interest test ensures that foreign

entry into the U.S. market does not harm competition in the U.S. market and addresses concerns that may arise in foreign markets—such as those relating to unfair

cross-subsidies or unfair home-market advantages—to the extent that they give a

foreign carrier an anti-competitive advantage in the U.S. market. In addition, the

public interest test—as well as the Exon-Florio review discussed in the following

section—ensures that entry of a foreign carrier into the U.S. market will not compromise our national security.

2. Exon-Florio National Security Review of Foreign Investment

The Exon-Florio provision (Section 721 of the Defense Production Act of 1950) provides for a national security review of foreign acquisitions of U.S. companies. Under

the statute, the President may suspend or prohibit an acquisition if he finds that:

a) there is credible evidence to believe that the foreign investor might take action

that threatens to impair the national security; and

b) existing laws, other than the International Emergency Economic Powers Act and

the Exon-Florio provision itself, do not provide adequate and appropriate authority to protect the national security.

The President alone retains the power to suspend or prohibit a foreign acquisition

of a U.S. company, but the President delegated the review and investigation aspects

of the Exon-Florio provision to the Committee on Foreign Investment in the United

States (CFIUS). CFIUS was established by Executive Order in 1975 to monitor the

impact of foreign investment in the United States and to coordinate the implementation of U.S. policy on such investment. CFIUS is an interagency committee

chaired by the Secretary of the Treasury with ten other agencies including Defense,

State, Justice, Commerce, USTR, the NSC and the NEC. In addition, when CFIUS

reviews a foreign acquisition of a U.S. company with businesses of interest to a nonCFIUS member agency, such as Energy or NASA, CFIUS invites that agency to participate in the particular review.

Over the last twelve years, CFIUS has established a record of implementing

Exon-Florio to protect the national security. The prevailing judgment is that ExonFlorio has raised the awareness of foreign investors contemplating acquisitions of

U.S. companies of the importance of national security considerations and has helped

to ensure that foreign investments, including in the telecommunications sector, are

structured in ways to address any of the government’s national security concerns.

In fact, a number of transactions have been restructured precisely to respond to national security concerns that CFIUS has raised.

3. Antitrust Review

Telecommunications mergers are subject to antitrust review by the Department

of Justice under section 7 of the Clayton Act, which prohibits any merger that is

likely to substantially lessen competition in any market in the United States. The

standards for review are the same for all mergers, including those involving foreign

firms or firms owned in whole or in part by foreign governments.

As in a merger of domestic firms, whether a firm involved in a merger has market

power in any given market can be a relevant antitrust issue, and could, depending

on the facts, raise antitrust concerns. If a foreign firm involved in a merger with

a U.S. firm has market power in its home market, and if that market power could

have an effect on a U.S. market as a result of the merger, then that market power

in the home market could raise antitrust issues. It is the existence of the market

power, and the effect on competition in a given market, not necessarily the source

of the market power, that gives rise to the antitrust problem. The source of the market power could flow from any number of factors, such as historical developments,

local regulations, intellectual property rights, government mandates, scale economies, first-mover advantages, or the like. Foreign government ownership of a firm

that is a party to a U.S. telecom merger could be relevant if it implicates the nature

or durability of any market power that creates an antitrust concern. Exactly how

or whether market power in the foreign firm’s home market creates an antitrust

problem in the United States depends on the facts of any particular case.

If the Justice Department concludes that a merger would cause competitive problems in the United States because of market power in a foreign market, antitrust

59

law provides for a range of possible remedies. These can include blocking the merger, or imposing alterations, restrictions, or other safeguards that enable U.S. markets to realize the benefits offered by the merger while guarding against possible

competitive harms. Determination of an appropriate remedy depends on the facts

of the particular case.

For example, in British Telecom/MCI, the parties entered into a consent decree

that tied approval of the merger to opening the British market to International Simple Resale on transatlantic calls, including interconnection in the United Kingdom

for ISR carriers, and also imposed a number of disclosure requirements and restrictions on the sharing of competitively sensitive information to ensure that British

Telecom would not use its market power abroad to injure competition in U.S. or

international markets by discriminating against other competitors. In Sprint/France

Telecom/Deutsche Telekom, the parties entered into a two-phase consent decree, in

which a Phase II similar to BT/MCI was preceded by a Phase I with even more extensive oversight to address discrimination and cross-subsidy concerns until all legal

prohibitions on competitive entry were removed in France and Germany, and competitors were licensed to compete in those markets.

4. U.S. and International Trade Laws

One of the primary missions of USTR is to ensure—by enforcing our domestic laws and our rights in the WTO—that U.S. services and service suppliers can compete robustly in foreign telecom markets. At the heart of the trade policy of this Administration has been a firm determination to enforce U.S. trade laws and ensure

that other governments implement the commitments they made to us under international trade agreements. Vigorous enforcement enhances our ability to get the

maximum benefit from our trade agreements, ensures that we can continue to open

markets, and builds confidence in the trading system. Under Section 1377 of the Omnibus Trade and Competitiveness Act of 1988,

USTR solicits public comment as part of its annual review of the operation and effectiveness of U.S. telecommunications trade agreements and takes action where

U.S. trading partners are not in compliance with their international obligations. In

the past three years alone, USTR has undertaken major initiatives to encourage our

trading partners to implement their telecom trade commitments and open their

markets to competition from U.S. carriers. The annual Section 1377 review process

has led foreign governments in most cases to quickly address complains we have

had regarding implementation of the WTO Basic Telecom Agreement. Some recent

highlights include:

• Canada: During the 1998 Section 1377 review, Canada eliminated restrictions

that prevented U.S.-based carriers from enjoying the same opportunities for

transmitting Canadian international long distance traffic as enjoyed by carriers

based in third countries.

• European Union: U.S. government advocacy, including during the 1999 review,

prevented unnecessary and potentially discriminatory standards-setting and licensing activities by the European Union and its Member States with regard

to third-generation mobile telecommunications services, allowing U.S. suppliers

of competing technologies greater access to European and global markets.

• Germany: During the 1999 and 2000 reviews, the Administration maintained an

intense focus on action by the German regulator (Reg-TP) to ensure that Deutsche Telekom provide non-discriminatory and cost-oriented interconnection

rates to competitive carriers. Certain Reg-TP decisions in 1999 helped to curb

anticompetitive abuses by the Deutsche Telekom. However, we continue to monitor issues identified in the 2000 review related to a backlog of interconnection

requests and concerns about excessive license fees and insufficient regulatory

transparency.

• Israel: During this year’s section 1377 review, Israel committed to remove its discriminatory access fee on calls to and from the United States and Canada by

December 31, 2001.

• Japan: The Administration has successfully ensured more timely and effective

implementation of Japan’s WTO telecom commitments in three reviews since

those commitments came into force. In 1998, we worked to ensure that new

Japanese rules for international service resulted in lower retail prices on the

bilateral route of 50 percent or more. In 1999, Japan eliminated restrictions on

the use of leased lines by new entrants, lowering costs dramatically for NTT’s

competitors in the Japanese domestic and international long-distance and business-services markets, and agreed to eliminate a premium that NTT charged

to competitors for calls to NTT’s ISDN customers that was distorting competition. And most significantly, in July 2000, Japan agreed to slash its interVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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connection rates up to 50% over two years, saving competitive carriers over one

billion dollars in above-cost interconnection fees; and to make its local network

accessible for ensure competition in the provision of high-speed Internet services.

• Mexico: Last month, the United States initiated WTO dispute settlement proceedings against Mexico regarding barriers to competition in Mexico’s $12 billion telecommunications market including: (1) a lack of effective disciplines on

Telmex, which is able to use its dominant position in the market to thwart competition; (2) the failure to ensure timely, cost-oriented interconnection that

would permit competing carriers to provide local, long-distance, and international service; and (3) the failure to permit alternatives to an outmoded system of charging U.S. carriers above-cost rates for completing international calls

into Mexico. Mexican officials have recently been quoted as stating that they

intend to cut interconnection rates substantially and issue dominant carrier regulations. The Administration will examine any concrete steps taken in Mexico

to ensure satisfactory resolution of the problems our firms have encountered.

• Peru: During the 2000 review, the Administration identified high interconnection

charges in Peru as a barrier to market access. The Peruvian telecom regulator

(Osiptel) is currently taking steps to ensure that these charges are cost-oriented, consistent with WTO regulatory principles.

• South Africa: This year, the Administration successfully encouraged South Africa’s dominant carrier, Telkom, to restore access to facilities that competitive

U.S. value-added telecommunications services need to compete with Telkom in

the South African market.

• Taiwan: During the 1998 review, the United States and Taiwan reached an

agreement mandating a three-year transition to cost-based interconnection

rates for wireless service suppliers, strengthening implementation of a 1996

agreement. In discussions under the 2000 Section 1377 review, Taiwan eliminated certain exclusivity rights from three licenses eventually issued to new entrants for fixed-network services.

• United Kingdom: As part of the 2000 review, the Administration urged the

United Kingdom to open its telecommunications market to competition in advanced data services that make high-speed Internet access possible. We continue to monitor the UK’s progress in introducing competition in the advanced

data services market.

These examples highlight our continuing commitment to vigorously utilize our

trade tools—including in the WTO and through domestic trade law—to open foreign

telecommunications markets and ensure that our trading partners abide by their

commitments in this vital and rapidly expanding services sector.

CONCLUSION

In summary, we are now enjoying the benefits of a remarkable era of innovation

and growth in the telecommunications revolution. The United States is the leader

in this field; and we have every reason to believe that by sustaining and deepening

our commitment to an open and competitive world market, American families and

businesses can draw still greater benefits from the telecommunications revolution

than we have to date.

We do not need new legislation to deal with concerns raised by foreign investment

in our telecom market—whether by government-owned privately-owned firms. Our

laws and review standards provide us with strong protection against threats to national security or anti-competitive behavior. At the same time, they ensure that we

remain fully in accord with our own commitments under the Basic Telecom Agreement, enabling us to maintain our leadership in developing a more open international market.

Thank you again for this opportunity to testify.

Mr. TAUZIN. Thank you, Mr. Ambassador. We are about out of

time before this vote. What we will do is we will recess and come

back and question this panel at 2. So it will give everybody a good

lunch break and we will come back at 2. The committee stands in

recess until 2 p.m.

[Whereupon, the subcommittee was recessed, to reconvene at 2

p.m.]

Mr. TAUZIN. The committee will please come to order. Let me ask

guests to take seats and catch the doors.

61

Thank you. When we recessed, we had just completed the testimony of this panel and the Chair now recognizes himself for a

round of questions and members in order.

First of all, Mr. Di Gregory, did your office, you personally or

anyone from your office, interact with, participate in the antitrust

sections, consideration of this merger which resulted in allowing

the time to lapse as of yesterday?

Mr. DI GREGORY. From the criminal division, it is my understanding, no.

Mr. TAUZIN. So you didn’t participate nor contribute in the considerations of the antitrust division?

Mr. DI GREGORY. We did not.

Mr. TAUZIN. I would initiate a letter requesting that division of

the DOJ give us some indications why they allowed the time to

lapse for that action and what was behind their reasoning to do so.

If you would kindly allow them some notice. We will be sending it

today with a timetable. We would like to get it in a week from now,

next Thursday.

Mr. DI GREGORY. I will be happy to do that.

Mr. TAUZIN. Thank you.

Let me turn to Chairman Kennard. The question I have is relative to the testimony we heard this morning, very colorful and interesting testimony from the Senator whose interpretation of the

statute is that section 310(a) is fairly absolute unless and until section 4 is complied with, that is, a company has divested enough

stock so that it is less than 25 percent government owned.

Do you have a different interpretation at the FCC of the statute?

Mr. KENNARD. Mr. Chairman, as you know, statutes are subject

to varying interpretations.

Mr. TAUZIN. We didn’t know that.

Mr. KENNARD. That was just more to remind myself, Mr. Chairman, more than anything.

I think that there are varying reasonable interpretations of this

statute. Clearly when I look at section 310(b)(4), it speaks to government ownership, and it also clearly gives the FCC some discretion in the public interest to grant applications that may exceed

the 25 percent ownership benchmark.

I will note, though, that these questions would be determined

based upon a full and open record before the FCC. These questions

of statutory interpretation would be matters of first impression in

the context of a transaction involving significant foreign government ownership.

Mr. TAUZIN. This particular acquisition is the first time, and it

will be de novo before the full commission?

Mr. KENNARD. Before the full commission. There have been some

decisions at the commission staff level which are similar, but this

would be a case of first impression and everyone who is interested

would have an opportunity to put their views on the record.

Mr. TAUZIN. What are the precedents at the staff level on this

question?

Mr. KENNARD. I am aware of one situation involving some wireless licenses which were owned by a subsidiary of the Finnish Government which were granted on delegated authority by the FCC

62

staff that involved a similar question. That is the closest precedent

I have been able to find.

Mr. TAUZIN. And what was the basis? Give us some idea how did

that come about.

Mr. KENNARD. The FCC staff looked at the transaction and determined that it involved indirect ownership, that is, the licenses

were held by a subsidiary. The parent company was controlled by

the Finnish Government and invoking our discretion under

310(b)(4) of the act, the FCC staff approved that transaction.

Mr. TAUZIN. Now, I take it from your testimony that if I heard

you correctly—and please correct me if I’m wrong—did you say that

mere membership in WTO will not give any government a pass on

this question of government ownership in the interpretation and judicious decisions that the FCC faces on this merger?

Mr. KENNARD. That is essentially correct, Mr. Chairman. In

order to more fully answer your question, I think we have to look

at the history of the way that the FCC has dealt with these issues

of foreign participation in FCC licenses.

In 1995, the FCC established a framework for determining how

to deal with these applications, and that framework looked at reciprocity issues. That is we determined whether a foreign entrant

would allow participation by U.S. companies in the foreign market.

It was a test known as the ECO test. It was essentially a reciprocity test. When the U.S. Government entered into the WTO

agreement, we were able to streamline that test because instead of

looking at the situation in all of the home markets, we were able

to establish this rebuttable presumption in our 1997 Foreign Participation Order.

Now it is very important for me to state, however, that the rebuttable presumption is just that: it is a presumption and it is rebuttable. So anyone who has information that a transaction would undermine competition, threaten national security interests has an

opportunity to present those concerns to the FCC.

Mr. TAUZIN. Let’s talk about that in regard to Mr. Parkinson and

Mr. Di Gregory’s testimony. How does that process come about? I

have just looked at your written testimony, Mr. Parkinson; and I

notice that it got changed a little bit. The original language said

these risks must be addressed to the government to fulfill its responsibilities. Those words are gone, and we have in anticipation

of these risks, the Department of Justice and the FBI have used

existing authority to negotiate. Who made those changes?

Mr. PARKINSON. We went through an ordinary process of editing.

I didn’t personally——

Mr. TAUZIN. Nobody told you to make those changes?

Mr. PARKINSON. I didn’t personally put in the original language

or amended language. We had discussions within the Department.

Mr. TAUZIN. You didn’t receive instructions from somebody higher up to make editorial changes?

Mr. PARKINSON. No, I did not.

Mr. TAUZIN. Obviously, the language as it now appears indicates

that what you are saying is that in the context of what Mr.

Kennard has to now do at the commission, you are prepared to negotiate to protect these interests. How is that going to work among

your agencies?

63

Mr. PARKINSON. Just briefly, I think not only are we prepared to,

we have done that. We have had now roughly about a 4-year history of this since we have been involved in these kinds of transactions. We have done it nine to 10 times.

Mr. TAUZIN. But are you going to negotiate directly with the parties or through the FCC? How does this work?

Mr. PARKINSON. Normally, we negotiate directly with the parties

and keep the FCC informed along the way, but it is usually a direct negotiation where we sit down with the parties and their counsel, and we describe to them what conditions and arrangements we

think are necessary to protect our law enforcement national security interests, and then we negotiate.

Mr. TAUZIN. So if I got your testimony correct, Mr. Di Gregory,

you had some comments about some other legislation we have, setting some timetables on the FCC. It seems to me that you like to

use the FCC authority to hold up something until you get stuff negotiated the way that you want it; is that right?

Mr. DI GREGORY. We believe that the FCC’s statutes do give us

the authority to let the FCC know when someone applies for a license that we have concerns, and we have asked the FCC

through——

Mr. TAUZIN. But your objections to the timetable seem to say we

want to hold people up until we get the FCC to give us what we

want. Is that what goes on?

Mr. DI GREGORY. I don’t think that is an appropriate characterization.

Mr. TAUZIN. Characterize it for me.

Mr. DI GREGORY. This is a negotiation, and there is give and

take. We try to tailor the agreements based upon the circumstances

of the business transaction and the circumstances of the operation

of the telecommunications companies.

Mr. TAUZIN. But the commission gives you leverage if it wants

to? Doesn’t it, Mr. Kennard?

Mr. KENNARD. I would be happy to answer that question.

We recognize at the FCC we are not expert on issues of national

security, so we defer to the Justice Department on these questions.

Mr. TAUZIN. As long as you are not on the clock and the parties

know you can just wait forever to give them a decision, that is leverage for these other agencies to get what they want negotiated;

is that right?

Mr. KENNARD. I would not use the term ‘‘leverage.’’ I would say

that we are exercising our responsibility to the American public to

protect the national security.

Mr. TAUZIN. You may be using your leverage for good purposes,

but it is leverage.

Mr. KENNARD. It is good leverage, Mr. Chairman.

Mr. TAUZIN. We will talk about that later.

Let me turn to Ambassador Fisher quickly. You have seen the

two pieces of legislation, Mr. Ambassador. Do you or the tradeoffice

have an opinion as to whether or not either one of these two bills

would violate our trade agreements?

Mr. FISHER. Mr. Chairman, I would have to see what the final

formulation of those bills are.

64

Mr. TAUZIN. The way that they are written now. Assume that

they pass just like they are, would they cause us problems in terms

of violating any agreements our country signed?

Mr. FISHER. We have received notice from Mr. Lamin, who represents the European Union, that it is their opinion that—— Mr. TAUZIN. Let’s not concern ourselves what somebody else

thinks. What does your agency think or what is your opinion as to

whether either one of these two bills as currently drafted would offend our trade agreements?

Mr. FISHER. First, Congressman, as I testified, I don’t think that

they are necessary.

Second, I think they would certainly precipitate a suit, as we

have so been notified.

Mr. TAUZIN. That is not what I asked you.

Mr. FISHER. I understand that.

Mr. TAUZIN. Answer the question that I asked you.

Mr. FISHER. As they are presently presented, I would want to see

them in their final form.

Mr. TAUZIN. But as they are presently presented, would they, in

your opinion, or agency opinion, violate a trade agreement that we

have signed?

Mr. FISHER. I believe that they would undoubtedly lead us to a

suit which we would have to defend.

Mr. TAUZIN. What is your opinion?

Mr. FISHER. It would present problems.

Mr. TAUZIN. Does it violate a trade agreement in your opinion?

Mr. FISHER. My personal opinion, Mr. Chairman, is that this

would run counter to the commitments to the WTO in the basic

telecom agreement.

Mr. TAUZIN. Do they speak to government ownership at all?

Mr. FISHER. No.

Mr. TAUZIN. How can it violate the agreement then?

Mr. FISHER. At the time we entered into the agreement, almost

all franchises were government owned, some 100 percent.

Mr. TAUZIN. My time is up, but I want to make one point. A

number of you quoted words that I used: push, prod, cajole. But the

more you did that, the more your office worked to ensure that we

didn’t have this problem before us, the less likely it would be that

Congress would make a decision that would cause you those problems. Is government ownership trouble?

Mr. FISHER. In some cases yes and in other cases no. If I may

take a second on that——

Mr. TAUZIN. Is it in this case?

Mr. FISHER. There are some assumptions being made that government ownership is an asset and not a liability. For example,

with the cost of money, if you look at the cost of debt, British

Telecom, which has become 100 percent privatized, has a higher

credit rating that Deutsche Telekom or France Telekom. If you look

at Korean Telecom or Malaysia Telecom, Bell South and SPC have

the same credit rating as France Telecom.

If you look at the cost of equity which is very important and very

few people have discussed here—and I notice by the way, with all

due respect to Senator Hollings, he talked about these people able

to print money—Bell South, SPC, AT&T, have a lower cost of eqVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
65

uity; that means a higher price earnings multiple than Deutsche

Telekom.

Mr. TAUZIN. Is it a priority of your office to push, cajole, convince, any way you can, pressure, to bring to bear the weight of the

spirit of those agreements toward as much privatization of those

government-owned entities who wish to participate in a competitive

marketplace globally and here in the United States as possible?

Mr. FISHER. Yes, sir. We agree that is the objective, and we believe that we have made progress on that front. We will continue

to push, prod, and pressure.

Mr. TAUZIN. I need to move on, but I would ask you to submit

for the record evidence of what you have done in that regard because we would like to test it.

Mr. FISHER. I have tried to do that in my statement, but I will

do it better.

Mr. TAUZIN. Indeed. Thank you, Mr. Ambassador. Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Mr. Fisher, I think what I heard you say is that sometimes the

government owning private sector company is a good thing and

sometimes it is a bad thing; it all depends upon the circumstances.

One of the things that your father-in-law taught me, Jimmy Collins, who was a great Congressman on this committee, a Harvard

Business School graduate, although he hid it when running for

election from Texas, he told me and everyone else on the committee

that government in the private sector is bad.

I tried to learn from this great man, and I admit I arrived here

as a full blown regulator in 1976 when I got elected, but over the

years I came to believe that to the extent that the government had

a role, it was to ensure that the government wasn’t protecting industries from competition. And in that way you didn’t really need

the government because obviously it was a free market.

My question I guess is this: Back in 1997 or so, whenever you

were negotiating this basic telecom agreement, did you not as a negotiating point distinguish between government ownership and

nongovernment ownership coming from these other countries? Or

did you try to make that point and then lose and allow Germany

and others to maintain this government ownership position? Which

was the position that the American Government took in the negotiations?

Mr. FISHER. Again, Congressman, first I wasn’t part of that negotiation; but if my memory serves correctly, first of all the vast majority of telecommunications franchises outside of this country as I

referred to in my testimony were government owned. That is what

we were dealing with at the time.

Second, the effect of what we have done, as I testified, has led

to significant privatization worldwide; and I think the realities of

competition that they face from those and those that are privatized

like British Telecom and others is that very few governments seek

to maintain their government franchise.

Mr. MARKEY. Our position was not to try to set firm timetables

or deadlines for privatization; we allowed other countries to set

those timetables for themselves. Is that correct?

Mr. FISHER. We did not deliberately set those timetables. We did

not.

66

Mr. MARKEY. That is important to understand.

Now, let me go to this Italy case: Italy blocking the German telephone company from moving in and in Spain them blocking the

Dutch company from coming in because they contend that the takeover companies were government owned. Was Italy in violation of

the WTO when they blocked that deal, and was Spain in violation

of the WTO when they blocked that deal?

Mr. FISHER. First of all, some countries do have reservations and

also——

Mr. MARKEY. See, we are kind of ignorant in terms of the language that is used to deal in international forum. Do they have the

right to say no or not to say no and not be in violation of the WTO?

Mr. FISHER. If I may walk you through both cases quickly, in

Spain you are right, Telephonica rejected a bid by KPN, which is

the Dutch carrier. Similarly, in Italy Telekom Italia rejected a bid

by Deutsche Telekom. Both governments used what they call their

golden shares. These are—— Mr. MARKEY. Do we have a golden share in the United States?

Mr. FISHER. No. This golden shared allowed those governments

to veto strategic operations for certain public services like telecom

and were at the time scheduled into their WTO agreement.

Now, here is what has happened since. The European Commission announced on July 5 that it will take Spain to the European

Court of Justice regarding the compatibility of that golden share

with EU law. In a related action against Italy, the Court of Justice

ruled on May 23 that Italy was unjustified in its ability to block

such transactions. The European Commission has similar actions

pending against other member states.

I noticed also that Senator Hollings mentioned Hong Kong and

the Singapore telephone attempt which failed. The reason that it

failed is that they were out-bid by somebody else.

Mr. MARKEY. I don’t want to know about Hong Kong. I want to

know about Italy and Spain. Who will win that case? Is there a

good case that can be made that they can’t block the takeover of

the telephone companies within those countries, in your opinion?

Mr. FISHER. First, in terms of Italy, that reservation that I referred to expired on January 1, 2000. Second, I don’t know how the

European court will run this all of the way through, but the point

is that the European Court of Justice has taken them to task for

this as a violation of the EU law, and I can’t predict the outcome

of that case.

Mr. MARKEY. I can predict the outcome of the case, which will

be that regardless of how the court rules the Italians will not allow

their telephone company to be taken over by the German Government; and I think the same thing I can say with great certitude

by the Spanish telephone system. I don’t think that anyone is going

to give up their sovereignty.

Interestingly, in the SEC filing that Deutsche Telekom has to

make, they actually have to waive their sovereign immunity in the

SEC filing that they have made as part of this merger. Now,

doesn’t that, Mr. Parkinson, indicate quite clearly that the government controls this company and that the German Government ultimately has the ability to make the decisions with regard to this

telephone company and all of its activities around the globe?

67

Mr. PARKINSON. Certainly I think it reflects the fact that they

are starting from majority government ownership or they wouldn’t

have to waive sovereign immunity.

Mr. MARKEY. So the issue is clear in your mind that the German

Government owns this company. And I think the issue for us, Ambassador Fisher, is one that goes back to 1997. I was assured personally by our trade representative at the time that I wouldn’t

have to worry, that no government-owned telecommunications company would be taking over American companies. Other Members of

Congress were given the same assurance.

Now we are at a point in time where there is a merger pending.

We are not being given assurances that the German telephone company will have to have its government share reduced down to 25

percent or 20 percent ownership by the German Government, notwithstanding the promises that were made to us back in 1997.

So I feel a little bit like Charlie Brown with Lucy holding the

football for me—and there is a legal term for it, detrimental reliance—but I think Charlie Brown understood it quite well when he

wound up on his behind. This committee feels like we are on our

behind. We were given promises. We don’t see the strong actions

that are being taken in Italy and Spain to paradox the Germans

and to let them know how much they are interested in cross-country competition but not with governments leading the charge.

I don’t understand why our own government, which is the leader

in opening up its markets, isn’t trying to paradox the Germans into

giving up its government control at this critical juncture and allowing them to take advantage of this enormous economic opportunity

which VoiceStream offers to them and other companies of the

United States but only if their government is not part and parcel

of it.

The real nub of this issue is identified by the FBI and the Justice

Department having to sit here. They don’t want this deal approved

until they are happy. They wouldn’t be quite comfortable if this

deal were already approved and now they have to get the concessions from the German Government. We have to make sure that

we get our marketplace, our competition concessions before the

deal is okayed, and we don’t see that as part of our government

strategy at this point in time.

Mr. TAUZIN. The gentleman’s time has expired. The gentleman

may respond, Ambassador Fisher.

Mr. FISHER. The point that I was making in my testimony was

that we have the tools available to us presently to make sure that

our national security and competition interests are met. I cannot

tell you whether this transaction will be approved or not from my

perspective. Again, I think Chairman Kennard made a similar

point. The point that I was simply trying to make was that we

have in place procedures here that obviously reflect our interest in,

a, preserving national security; and, b, enhancing or ensuring and

encouraging competition. And I cannot draw the conclusion that

the tools that we have are adequate to the task.

Mr. TAUZIN. An even more ominous Charlie Brown story is Charlie sitting on the curb with his face in his hands feeling very

gloomy after losing a game, and Lucy walks by and says, ‘‘Cheer

up, Charlie Brown. You lose some, you win some.’’

68

And he looked up and he said, ‘‘That would be nice.’’ Mr. Oxley.

Mr. OXLEY. Thank you, Mr. Chairman. I assume from all of your

testimony that you all agree, a, the current system is working and,

b, that the Hollings bill is unnecessary? Can I assume that from

your testimony? Okay. Let’s go on then.

Chairman Kennard, I want to ask you about testimony from Senator Hollings in which he indicated that the threshold issue here

dealt with section 310(a) and that 310(a) should be the controlling

statute. As I read 310(a), it appears to me that it deals with broadcast licenses, not common carriers. It says the station license required under this act shall not be granted or held by any foreign

government or representative thereof. Then we go to 310(b), no

broadcast or common carrier, et cetera, et cetera. So it is clear from

the use of the language here and the legislative intent—in the case

of 310(b) we are talking common carrier, but in (a) we are talking

about broadcast license. Is that a fair reading of that statute?

Mr. KENNARD. Well, I think an interpretation that many people talk about and have written about is that section 310(a) deals with

direct ownership. That is if a foreign government or the representative of a foreign government were to come to the FCC and apply

to own a license directly, 310(a) would be invoked. 310(b) on the other hand, and (b)(4) in particular, deals with indirect ownership, that is ownership of the license through a subsidiary. So we have not drawn the distinction in the word ‘‘station

license.’’ In fact, many people read station license to mean under 310(a) to include things broader than a broadcast license.

Mr. OXLEY. But that is not what it says. I think I took this is

in law school in terms of understanding legislative intent. Why

would the Congress and this subcommittee use the term station license in (a) and then talk about broadcast or common carrier in

(b)? Had we been referring specifically to common carrier, why

would it not appear in (a) and I think I would feel very comfortable

arguing that before a court of appeals or any other appeals process

in the land.

Mr. KENNARD. Well, that is certainly one interpretation. I want

to underscore that this statute has been interpreted variously by

many people over the years, and if we were to make a definitive

determination in the context of a transaction, we would do it based

on a written record where we would have briefs filed.

I would only note that under 310(a), I think it can be read fairly

broadly because it says that the station license required under this

act. Licenses required under the act even in 1934 when this was

written included not only broadcast licenses but also other wireless

licenses that could be deemed nonbroadcast licenses.

Mr. OXLEY. If that is the case and we are to believe Senator Hollings, it is over. This whole thing is over because all you have to

do is read (a) and it says a license required under this act shall

not be granted or held by any foreign government, in this case

more than 50 percent is being held by a foreign government, and

it is over. So I would suggest that this interpretation—dangerous

interpretation in my estimation, and totally wrong—ought to be wiped out and that we ought to be talking about 310(b) because

that is the issue that we had in the 1996 act, that is the issue that

69

we took to the conference committee. We thought we had an agreement dealing with reciprocity, and it fell apart at the end and was

taken out of the conference report to my never-ending frustration;

but I have to tell you that because the FCC and USTR I think have

adequately and fairly interpreted this provision, we haven’t had

any train wrecks, we haven’t had any problems.

Mr. MARKEY. Would the gentleman yield?

Mr. OXLEY. Yes.

Mr. MARKEY. In the telecommunications act they begin under

general provisions and definitions, definition number 42 is station

license and it reads thusly: ‘‘the terms station license, radio station

license or license means that instrument of authorization required

by this act or the rules and regulations of the commission made

pursuant to this act for the use or operation of apparatus for transmission of energy or communications or signals by radio, by whatever name the instrument may be designated by the commission.’’

I think Senator Hollings correctly has interpreted it as a very

broad interpretation and reiterated by the chairman of the commission today.

Mr. OXLEY. I am fortunate Ed Markey is not on the Court of Appeals. I still will argue that there is a reason why common carrier

was used in (b) and not (a), but let’s not quibble over that any

more.

I asked the question to Senator Hollings would the VoiceStream/

Deutsche Telekom merger bring more competition and he answered

no. What is your opinion on that?

Mr. FISHER. The effect—would it bring more competition. This is

an extremely dynamic market. I don’t draw the conclusion that it

would lessen competition.

Mr. OXLEY. I will take that, okay.

More capital. More foreign investment capital, yes or no?

Mr. FISHER. As I tried to show in my testimony, this is a dramatically expanding marketplace. Companies that didn’t exist 3

years ago are active and are pursuing economic activity, which is

to the benefit of their shareholders and the benefit of the countries

that they represent as well.

Mr. OXLEY. So the answer is yes?

Mr. STEARNS [presiding]. The gentleman’s time has expired.

Mr. OXLEY. And benefits consumers——

Mr. FISHER. The more competition there is, the better.

Mr. STEARNS. The gentleman from Michigan, Mr. Dingell, is recognized for 5 minutes.

Mr. DINGELL. Mr. Kennard, I am told Deutsche Telekom has a

monopoly in radio, television distribution, telephone and cable and

that they are the second biggest in Internet; is that true?

Mr. KENNARD. I don’t know. I have not studied the German market.

Mr. DINGELL. Did you ever consider those questions when you

made the presumptive finding that this was a regular acquisition?

Mr. KENNARD. I have not made any finding, presumptive or

other, with respect to Deutsche Telekom because there is nothing

before us.

70

Mr. DINGELL. You are going to presume this to be an appropriate

acquisition by Deutsche Telekom over this VoiceStream company;

is that right?

Mr. KENNARD. No, it is not. I tried to make clear in my testimony, Mr. Dingell, that there is no application before us involving

Deutsche Telekom. If and when one is filed, we will carefully consider all of these issues.

Mr. DINGELL. You will consider it.

Do you concede that Deutsche Telekom has monopoly on radio,

TV, telephone and cable and they are the second biggest in the

handling in Internet inside Germany?

Mr. KENNARD. I won’t concede that because I haven’t looked at

the figures.

Mr. DINGELL. Section 310 does not apply according to you on the

Deutsche Telekom/VoiceStream deal. And that is because the government is not to be the license holder. The license will be held by

a wholly owned American subsidiary, a shell company; is that

right?

Mr. KENNARD. What I am saying is that we would have to evaluate this under section 310. It deals with all transfers, and what I

was saying earlier is that section 310(b) is what we look to when

we look at indirect ownership through a subsidiary.

Mr. DINGELL. Does 310(a) apply?

Mr. KENNARD. We don’t have a transaction before us. I don’t

know exactly how it would be structured.

Mr. DINGELL. Let’s look here. In DT’s merger documents, which

were filed with the SEC, Deutsche Telekom agreed to waive sovereign immunity with regard to the transaction. I note that applies

only to government. Apparently VoiceStream at least believes that

DT is either government or a representative thereof. What are your

feelings on that?

Mr. KENNARD. I am not going to prejudge a transaction which

has not been filed. I assume that these issues will be presented and

debated.

Mr. DINGELL. DT’s pre-1995 liabilities are guaranteed by the government. Over 40 percent of Deutsche Telekom employees are statutory civil servants, and DT said in its SEC form 20(f) filing, ‘‘As

long as the Federal republic directly or indirectly controls the majority of DT’s shares, it will, like any other majority shareholder in

a German stock corporation have the power to control most decisions taken at shareholders’ meetings, including appointment of all

members of the supervisory board elected by the shareholders and

the approval of proposed dividend payments.’’ What does that tell you about Deutsche Telekom here? Does it

tell you that they are a government entity? The government owns

58 percent of the stock.

Mr. KENNARD. What it tells me is that there will be factual allegations like this presented to the FCC.

Mr. DINGELL. You are going to pass on the question of whether

or not this takes place. What steps are you going to be able to take

to assure yourself that there will be any independence in the license holder, the license holder will have all of its officers appointed by the shareholders, principal shareholder and total control

will be in Deutsche Telekom? How are you going to know that you

71

will have any control over the affairs of that corporation and in ensuring that its licenses and any conditions which are attached

thereto will be carried out and that you will have access to information and documents which will be important to you in your decisionmaking?

Mr. KENNARD. Well, the first thing we will do is determine what

the facts are related to the ownership of this company. I will say

that, as I have said before publicly, that we would be very concerned about a relationship between Deutsche Telekom or any

other company proposing to come into the U.S. market and their

relationship with the government. This is something that we would

be sensitive to.

Mr. DINGELL. Fifty-eight percent is owned by the government

and you have a company which is going to have total control over

all of the actions of the license holder through the annual meeting

process and through the power to appoint all of the officers and directors and so forth of the company.

How will you either know what is going on inside that company?

How will you require the production of books, papers, and records?

How, if you find that they have done something which is inappropriate either under antitrust laws or relative to national security,

how will you take steps to compel Deutsche Telekom to produce the

information that you need to make the necessary judgment?

Mr. KENNARD. We will use the tools that we use in every merger

transaction, Mr. Dingell, which involves developing a record, determining what the facts are.

Mr. DINGELL. Suppose they say—tell you to go to the devil. What

are you going to do about that?

Mr. KENNARD. Then they would not get through the FCC. That

is not an appropriate response.

Mr. DINGELL. They would already have the licenses approved

and the mergers approved. How will you unscramble the egg?

Mr. KENNARD. That is an interesting question. When we impose

conditions on any licensee, whether it has foreign ownership or not,

the company is on notice that they have an ongoing obligation to

ensure that the conditions are enforced. In many cases we have

gone back and——

Mr. DINGELL. But that goes to U.S. corporations, not Deutsche

Telekom.

Mr. KENNARD. It goes to the company that we have jurisdiction

over, which is the U.S. corporation.

Mr. DINGELL. It goes to the U.S. company.

Mr. KENNARD. We have jurisdiction over the U.S. licenses. If they

violate a license condition in the United States, we take appropriate enforcement action, just like a domestic——

Mr. DINGELL. How do you?

Mr. STEARNS. The gentleman’s time has expired.

Mr. DINGELL. How do you address the merger which you have already approved?

Mr. KENNARD. Again, there is ongoing enforcement and monitoring of merger conditions.

Mr. DINGELL. Just one question. If you were to have a company

which was like Deutsche Telekom in the United States, let’s say

72

one of the Baby Bells were to have this kind of situation, would you

allow them in long distance?

Mr. KENNARD. I don’t even know how to answer that question.

The long distance requirements are so radically different than anything we are considering here.

Mr. DINGELL. Let’s just say Ameritech had that kind of situation,

would you allow Ameritech then into long distance?

Mr. KENNARD. I don’t know what situation you are talking about.

Mr. DINGELL. If they had a total monopoly on radio, television

distribution, telephone, cable and they are the second biggest Internet distributor?

Mr. KENNARD. Mr. Dingell, we let no Bell company into long distance until they have demonstrated that their market is open.

Mr. DINGELL. Then why are you—why are you so quick to

take—— Mr. STEARNS. Mr. Dingell, your time has expired.

Mr. DINGELL. Thank you, Mr. Chairman.

Mr. KENNARD. May I respond?

I want to state for the record once again that the FCC has not

made any decisions with respect to a bid by Deutsche Telekom to

buy any U.S. licenses. Indeed, none is before the FCC at this time,

so we have made no determinations in that regard.

Mr. STEARNS. Mr. Fisher, I will recognize myself for 5 minutes.

In your discussions with Mr. Tauzin earlier, you indicated, I believe, that foreign ownership by governments—foreign ownership

by the government is bad. In other words, the German Government

owning a large portion that wants to buy an American company,

you are saying today that is bad, aren’t you?

Mr. FISHER. I am saying certainly the way that the world has

moved, it doesn’t provide you with a comparative advantage. There

are a lot of drawbacks in having government ownership in telecommunications companies.

Mr. STEARNS. A lot of Latin American countries, particularly

Chile, and even Russia, sold off their telecommunications companies, so the world is moving toward not having the government

have large ownership. What does USTR—what ability do you have

to make sure these foreign companies, foreign governments lower

their ownership in these private companies? Do you have any kind

of stick? What do you do? Because you seemed to indicate earlier

when you talked to Mr. Tauzin that you were now trying to get

these foreign governments to lower their ownership. What are you

doing? It seemed like if you were doing your job, we wouldn’t be

talking about this legislation.

Mr. FISHER. Again, we have had, for example in the case of Germany, numerous complaints against the Germans on a range of

issues that competitive carriers have encountered in trying to enter

the German market. We have complained about unreasonable

interconnection rates and access to billing and collection services

and very high licensing fees.

Mr. STEARNS. What have you done specifically to try and convince the German Government to reduce their stake? Or are you?

Is that a priority for you folks?

Mr. FISHER. It is a priority, and we are not satisfied. We have

taken them to task interconnection——

73

Mr. STEARNS. You are saying in this committee that German

ownership is a problem?

Mr. FISHER. I am saying that our work is not done. What I am

saying, Congressman, very respectfully, whatever my colleagues

are handing me over my left shoulder, is that we have available

presently the tools to effect—— Mr. STEARNS. You do have the tools to do this. What are these

tools, and what is the German government’s response—and give me

specifics—when you use these tools?

Mr. FISHER. Well, we have our own processes under our 1377 review of telecommunications trade agreements. We have filed petitions against the Germans year after year in terms of that annual

review.

Mr. STEARNS. Processes, you mean you file a document somewhere?

Mr. FISHER. Yes.

Mr. STEARNS. What, specifically, do you do and what has the

German response been? Can we see copies of the documents or is

there anything that—— Mr. FISHER. I would be happy to submit documents at your convenience. I would be happy to have our office—— Mr. STEARNS. So you sit down and raise this issue of government

ownership. Can I assume that you are doing this recently, this

year?

Mr. FISHER. Yes. You can assume that we have taken them to

task in terms of, again, as I mentioned earlier, their interconnection rates, their collection services, very high licensing fees.

Mr. STEARNS. Staff is telling me that is a different issue. How

about ownership? Specifically we are talking about ownership.

Mr. FISHER. Again, they have taken the steps to reduce government ownership of Deutsche Telekom. In terms of the specificity of

the requirements of what we agreed to in the WTO—— Mr. STEARNS. I am getting just jargon. I am asking you dealing

with ownership, what did you say to the Germans, and what did

they say back, and what is the leverage that you have, and what

is the possibility that they are going to do what you say? If you

have nothing, just say nothing.

Mr. FISHER. The point is that—— Mr. STEARNS. You are dealing with ownership now.

Mr. FISHER. Yes, sir. We have been making progress in terms of

the liberalization of that market, the ability of our operators and

other operators to participate in the market. Germany has 350 licensed carriers. It is not just one giant company.

Mr. STEARNS. This specific case we are talking about, ownership.

Mr. TAUZIN. Would the gentleman yield?

Mr. STEARNS. I would be happy to yield to the chairman.

Mr. TAUZIN. Mr. Stearns has asked what did you tell the German

Government in regards to ownership in this case and how did they

respond, and what leverage, what is going on. Why don’t you simply answer his question rather than giving him information about

how well we are doing all over the world.

Mr. STEARNS. Reclaiming my time, have you or Ms. Barshefsky

personally talked to the Germans and when?

Mr. FISHER. We have constant interaction with——

74

Mr. STEARNS. That is too vague. When and what did you say,

and when did you say it?

Mr. FISHER. Sir, it might be easier for me to answer that in writing so I can give you specific dates. But again, within the context

of this general process, the German market has made progress in

liberalization. Are we satisfied? No. Do we have further items on

our agenda? Yes.

Mr. STEARNS. We are talking about ownership, not generalization.

Mr. FISHER. I would be happy to respond at length in writing to

your question.

Mr. TAUZIN. Let me ask again, if you want to say that you would

rather not answer that question, say so. But the question is very

simply put. Did you discuss with the German Government the

question of ownership? Did you ask, did you try to encourage them

to reduce the level of government ownership in this case, and what

was their response? If you would rather not answer it, say that.

Mr. FISHER. We have not specifically addressed the matter of

ownership with the German Government.

Mr. STEARNS. You have not talked to them. Is that your final answer?

Mr. FISHER. It does not present them with a comparative advantage, Mr. Chairman.

Mr. STEARNS. Obviously, the question is why haven’t you.

I think my time has expired here.

Mr. TAUZIN. The gentlewoman from Missouri is recognized for 5

minutes.

Ms. MCCARTHY. Thank you very much, Mr. Chairman. I have

been in and out with various distractions, but I feel like we are

back in the cold war era, and I am not sure who the boogie men

are any more. I do know this. I was sitting in Kuwait working on

the peace process there a few months ago, and I was meeting with

some entrepreneurs and business people at lunch on a different

matter—how could we work together on joint business efforts and

trade and other concerns—and we got to talking about high tech

and I said wouldn’t it be great if I could use my cell phone here

and they said you can’t and I said no, I can’t. They said we can

use our cell phones and we can use them when we come to your

country, too. I was stunned. And of course that is what

VoiceStream does. Kuwait is one of the countries where if I wanted

to I could get a phone from them and use it in their country and

mine as well.

I guess my question to any of the panelists who want to address

it, I thought section 310 in the telecommunications law covered

concerns about foreign ownership, and I have listened as much as

I could in the time that I was present to the questions and concerns of my colleagues, all of whom I respect very much; but would

you please give me your thoughts on what, if anything, more we

must do as a legislative body that perhaps we didn’t think to do

in section 310 or the original law? Or in short what is broken and

what do we need to fix so that I can use my phone all over the

world? Thanks.

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Mr. KENNARD. Well, I would prefer not to answer the question

of when you will be able to use your phone all over the world. That

is a subject for another hearing, I believe.

But on the question of the legislation, obviously it is Congress’s

prerogative to legislate whenever they need to. I wanted to be here

today, and I appreciate this opportunity to be able to tell you all

that the FCC has tools at its disposal which it has used in the past

to deal with many of the concerns that have been raised in the

wake of the spector of this transaction by Deutsche Telekom. And

what I have attempted to do is outline for you the range of remedies that could be imposed in order to protect competition in this

market.

We have worked very, very hard at the FCC to implement the

1996 act and to promote competition in this marketplace. And I feel

sitting here today that I am truly a veteran of the telecom wars

of the last 4 years, and I want to assure you that we will do nothing that will reverse the momentum that we have made to promote

competition. If anybody wants to come into this market and threaten the progress that we have made, we will not permit it, and I

believe we have the tools; and I think we have demonstrated the

resolve in the past few years to use those tools as necessary to protect American consumers and give them more choice in services.

Ms. MCCARTHY. If time permits, does anyone else wish to comment? Because I am curious. Are we going to do this to the Internet companies as well? Where are we going to stop if we go down

this path?

Mr. FISHER. Congresswoman, you had addressed me. Let me just

say again there is no foregone conclusion here. The argument that

we are making is that the current procedures and processes are

adequate to the task. We are living in a world that is changing dramatically in terms of pushing the envelope on telecommunications

and data communications and so on, and we have met with much

success but our task is not done. Again, I think there is a tone in

this room that it is a foregone conclusion that this has already been

a pre-approved transaction.

What I believe the chairman and I and the other witnesses have

presented here is that the tools that we presently have are adequate to the task, and the expansion or explosion of what we have

had so far in terms of our interests abroad, while not complete, has

been significant, and the system works. That is the point, I believe,

we have tried to make in summary. Thank you.

Ms. MCCARTHY. So if it ain’t broke, don’t fix it. Thanks.

Mr. TAUZIN. I thank the gentlelady.

The gentleman from Illinois, Mr. Shimkus, is recognized.

Mr. SHIMKUS. Thank you, Mr. Chairman.

I just have a brief question that I think goes back to Senator

Hollings and his comment, and you may or may not be able to comment. Is there a national security concern in the entrance of foreign-owned companies into the U.S. market? I know it probably

should be directed to one person, but I am going to ask all of the

above to see what their opinions are.

Mr. DI GREGORY. Well, the simple and direct answer is, yes,

there is always a national security concern when you are talking

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about a foreign-owned company, a foreign- government-owned company, coming into the American market.

Mr. SHIMKUS. Explain that. And I don’t come as a lightweight to

national security, being an old Army officer, but with technology,

competition, choice, how is the entrance of a competitor in a highly

competitive market a national security concern?

Mr. DI GREGORY. It is a concern because what we need to do in

order to assure the national security is be able to effectively and

securely effectuate court orders that we obtain for intercepts,

whether those intercepts are pursuant to FISAs that we obtain or

whether those intercepts are pursuant to criminal process and we

obtain those—whether or not we obtain those orders through Title

III, which is the wiretap statute, as well as other methods of lawful

electronic surveillance that we conduct.

It is a national security concern because of the potential that foreign government-owned corporations, foreign-government-owned

telecommunications corporations, may be in a better position to influence the people who are managing and operating the—whether

it is a wholly owned U.S. subsidiary or not, managing and operating—they may be able to influence those folks who are managing

and operating. To the extent that data that American companies

store with those foreign telecommunications concerns or those U.S.

subsidiaries that are owned by foreign governments, that data may

potentially be in jeopardy; and that data could be related to trade

secrets and, therefore, be subject potentially to economic espionage.

Mr. SHIMKUS. Thank you.

Mr. DI GREGORY. Those are just at least a couple of those.

Mr. SHIMKUS. That is fine.

Mr. Parkinson?

Mr. PARKINSON. I will just echo what Mr. Di Gregory said. I

think the short answer to your question is, again, yes. We assume,

particularly when you are talking about a foreign government, any

foreign government control of a basic part of our telecommunications infrastructure is a risk, and it raises concerns for us, and

it raises concerns on several different fronts, most of which Mr. Di

Gregory touched upon.

We have a role in protecting that infrastructure. There are still

nation states out there. Nation states act in their own national interest, and sometimes their national interest involves attacking us,

and I use that term—put that term in quotes, but you can attack

somebody, another nation state, in lots of different ways. It may be

in their interest to engage in economic espionage. It may be in

their interest to engage in more traditional espionage. It may be

in their interest to try to find out what we are doing on the counterintelligence side of the house. And while we don’t want to seem

unduly alarmist or paranoid about this, I think the way we approach it is there are legitimate concerns any time the government—a foreign government is involved.

Mr. SHIMKUS. Okay. If I can—I think I got it, and I want to

make sure I give Chairman Kennard a chance to answer.

Chairman Kennard, would you in the licensing process—I think

you have testified, but I just want you to reiterate—you would take

into account and into consideration testimony from the FBI and the

Attorney General’s Office, would you not?

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Mr. KENNARD. Absolutely. We have a process in place where we

defer to their expertise on these areas, and we coordinate closely.

And the last thing that I would want to do, as chairman of the

FCC, is to vote to grant an application if there were significant concerns from the FBI and the Department of Justice. I wouldn’t do

it. It is not done.

Mr. SHIMKUS. And just as—I don’t know, Ambassador Fisher, if

you wanted to add to this. You may. If not, I can yield back my

time.

Mr. FISHER. No, sir.

Mr. SHIMKUS. Mr. Chairman, I yield back.

Mr. TAUZIN. I thank the gentleman.

The Chair recognizes the gentleman from Georgia, Mr. Deal.

Mr. DEAL. Thank you, Mr. Chairman.

I recognize, Mr. Fisher, at the outset that we are here to deal

with telecom, but you heard in the opening statement from Congressman Green his concern with regard to a private competition

issue relating to electrical utilities by his constituent and mine,

and Congressman Bart Gordon has the same concern, for Southern

Energy, Incorporated’s ability to penetrate into the German electricity market. That is being hampered by some of their own domestic utilities.

And I would just like to have a commitment from you that you

would be willing to pursue that issue so that we can be certain that

our private companies that are attempting to penetrate the German market are not being treated unfairly.Could we have such a

commitment from you?

Mr. FISHER. Sir, I will look into that and report back to you.

Mr. DEAL. Thank you very much.

Let me walk through some things, because I think there is some

confusion, at least on my part, about where we stand. I suppose,

Mr. Fisher, I would start with you by, first of all, asking, is there

anything in the basic telecom agreement that we entered into that

addressed the issue of foreign government ownership? Or was that

just silent?

Mr. FISHER. At the time, Congressman, most of these foreign governments had significant ownership. There has been a move, as I

testified, toward liberalization in many, many cases, and it is an

increasing pace of liberalization.

Mr. DEAL. But the ITA itself, did it address that to require that

they move toward this privatization or was it silent on that issue?

Mr. FISHER. The effect has been that they have moved toward

privatization. In terms——

Mr. DEAL. But not mandated by that agreement?

Mr. FISHER. No, but by forcing and allowing competition that has

been the effect.

Mr. DEAL. Is there anything in WTO rules that address the issue

of government ownership in this area?

Mr. FISHER. Not directly, sir. Again, what we insist upon in the

rules is impartial regulation.

Mr. TAUZIN. If the gentleman would yield for a second?

Mr. DEAL. Certainly.

Mr. TAUZIN. Doesn’t an independent, impartial regulator imply

privatization? How can you be independent and impartial if you are

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the government that is regulating your own government-owned

company?

Mr. FISHER. Well, again, this is why the effect of this agreement

has been the movement toward increasing privatization, as I testified earlier. On the other hand, in some cases where we seen 100

percent privatization we would argue it hasn’t lived up to our expectations and indeed has not allowed for more competition. Let me

give you a signal example.

Mr. TAUZIN. I understand. That is a different issue.

Mr. FISHER. Telemex in Mexico. So moving to privatization, Congressman—— Mr. TAUZIN. That is a different issue. You are saying that even

with impartial, independent regulatory structures you might not

have enough competition. That may be true, but how can you have,

under the agreement, impartial, independent regulatory structures

unless you have privatization?

Mr. FISHER. If the governments are interested in competing

internationally, they are moving or should be moving their governments toward enhancing competition through more competition.

Mr. TAUZIN. So the agreement does indirectly support, in fact demand, privatization?

Mr. FISHER. We believe that is the effect.

Mr. TAUZIN. I thank the gentleman for yielding.

Mr. DEAL. So therefore, I assume, that since it is either only implied and certainly not explicitly addressed that the reverse side of

the coin would be true, that those who are arguing that we should

statutorily impose a percentage prohibition of government ownership in an entity would not violate either the ITA or anything

under WTO?

Mr. FISHER. I am sorry, sir. Could you kindly repeat that?

Mr. DEAL. If ITA does not address the issue, those who are arguing that we should impose the 25 percent rule to do so would not

violate the ITA nor the rules of the WTO, would it?

Mr. FISHER. It would certainly, I think, violate the agreement

that we have in effect right now, and I believe it would——

Mr. DEAL. Which agreement is that?

Mr. FISHER. Well, when we talk about, again, the subject of this

hearing, but the—I am not sure what your point is, Senator—excuse me, Congressman.

Mr. DEAL. Thank you.

Mr. FISHER. Could you kindly repeat it for me? I apologize for

promoting you.

Mr. DEAL. My question is, if we are talking about whether or not

we should pass legislation that imposes a limitation of no more

than 25 percent government ownership as a condition for telecommunication ownership here, then it does not—to do so would

not violate anything under the ITA nor under the WTO rules?

Mr. FISHER. Well, again, the basic premise here is that we

agreed to open our market in return for limitations on foreign government ownership. That is been the trade that has taken place,

and that has been the effect of this in the short period it has been

in place.

Mr. DEAL. Okay. And I realize that there is some disagreement

about the interpretation of section 310(b)(4) in particular.

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Mr. FISHER. Right.

Mr. DEAL. But has any foreign government raised that provision

of the Telecommunication Act as being in violation of any WTO

rules, or the BTA?

Mr. FISHER. I don’t believe so, but I will double-check for you, sir.

Mr. DEAL. Has there been any case, Mr. Kennard, where this

section has come in to question—up to this point, has there been

any case that has questioned the application of this subsection?

Mr. KENNARD. If by ‘‘case,’’ you mean any—— Mr. DEAL. Any application.

Mr. KENNARD. There have been applications, certainly, where we have invoked our discretion under section 310(b)(4). We have never

been presented at the commission level—putting aside actions by

the commission staff on delegated authority, we have never been

presented with a transaction quite like the one that is being talked

about today, where you have a major transaction by a company

that has majority foreign government ownership.

Mr. DEAL. Have you had—Mr. Chairman, would you indulge me?

I would like to ask this one question.

Mr. TAUZIN. The gentlemen is granted an additional minute,

without objection.

Mr. DEAL. Thank you, sir.

Have you had cases up to this point where a license has been

granted to an entity where there was foreign government ownership in excess of the 25 percent, where you have made a finding

that the public interest was served by granting that license, which

is your discretion under subsection (b)(4)?

Mr. KENNARD. I don’t believe that we have had one at the commission level. I know I have not considered one since I have been

chairman of the agency.

We had a similar situation involving a recent case involving

Intelsat, but that is really distinguishable because Intelsat has— it is a unique animal, and it has multiple governments with ownership in that entity. So it is really—that is really not an appropriate

precedent to use here.

Mr. DEAL. Thank you very much.

Mr. TAUZIN. Before the gentleman yields back, I want to clarify

something.

Mr. Fisher, Ambassador Fisher, did we not have a reservation in

the WTO for the public interest? Is that not de facto a reservation

for section 310(b)(4)?

Mr. FISHER. We did reflect 310 in our WTO commitments, yes,

sir.

Mr. TAUZIN. Okay. The Chair recognizes the gentlelady from

California, Ms. Eshoo.

Ms. ESHOO. Thank you, Mr. Chairman, and good afternoon to all

of the gentlemen at the table.

I have really soaked up a lot of what you have said, including

your opening statements, but apologize for having to come and go

from the hearing room. So if the questions I ask are somewhat repetitive, please bear with me.

Chairman Kennard, it is always good to see you here.

Mr. KENNARD. Likewise, thank you.

Ms. ESHOO. I hope your baby is doing very well.

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Mr. KENNARD. He is. Thank you.

Ms. ESHOO. We need to bring things in. Since the Ambassador

spoke about his son, we can mention your baby.

Let me ask you about the following: Can the FCC require a foreign government to divest below the 25 percent ownership? Maybe

that was on the tail of the conversation that you were just having—you know, below the 25 percent ownership level before it approves a merger. And under what circumstances—have there been

circumstances that have arisen or under what circumstances— what would you apply in terms of a yardstick? And then I would

like to ask Ambassador Fisher a question as well, and then hopefully get to the other two gentlemen. But if you could maybe enlighten us on that.

Mr. KENNARD. The answer is, yes, but the threshold question

that we would have to consider is what is the harm. Really, imposing a condition as you have outlined is a remedy; and in order to

get to that point we would have to establish what the harm is. And

there we would look at a range of factors. We would look at the

influence of government over the applicant. We would look at the— whether the relationship between the applicant and the regulator

gave an advantage that would depress competition in our domestic

market.

We really focus principally on preservation and enhancing competition in the U.S., so we would have to determine whether there

is a link between that situation and the extent of foreign government ownership. If there is a link, then I think we have a very

wide range of tools, including conditions that we could impose to

deal with it.

Ms. ESHOO. I have seen this before on some of these really highly

complex issues and then the remedies that we examine here, that

this is like trying to get socks on an octopus. I mean, I still don’t

know what is broken here that we are trying to repair.

It is a highly emotional issue when you present it to the American people. Do you want foreign interests in their government in

your telecommunications? Well, guess what most people are going

to say? That doesn’t taste so good to them. But then when you say,

well, what’s the harm? Let’s examine the harm. What’s the solution? You really start going down a slippery slope.

Would either Mr. Di Gregory or Mr. Parkinson, can you tell us

are there situations where the flag has been raised in either one

of your departments where national security or other kinds of

issues in terms of our Nation are raised, where your eyebrows have

been raised by what has happened? Are you alarmed? Are you worried?

Mr. PARKINSON. Let me start, Congresswoman. The answer is,

yes. I wouldn’t say that we got carried away in raising the flag.

Ms. ESHOO. Oh, you have had that?

Mr. PARKINSON. We have weighed in on any number of occasions.

It is now approximately 10 over the course of the last 4 years, not

necessarily because a specific transaction posed some imminent

threat of some kind, but it—it was a transaction that had some

sort of technical arrangement or other kind of structure that

caused us to be concerned about our ability to carry out our duties,

particularly on the law enforcement side where we have to effect

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our intercepts in an appropriate fashion, our lawful intercepts. And

we have weighed in, for instance, and said that when you are processing—you, a telecommunications carrier—are processing a U.S.-

to-U.S. phone call, the phone call has to come down from the sky

someplace in the United States so that we have the ability to access that and also to preserve the privacy of the phone call.

Ms. ESHOO. But that does not really speak to the question of a

percentage of ownership, though, does it? You just want to be able

to intercept. You are not talking about how much they own.

Mr. PARKINSON. That was just one example of a particular condition that we have talked about.

Ms. ESHOO. Well, usually the first one is a big one, but maybe

Mr. Di Gregory has—— Mr. PARKINSON. Just one shorthand, and I will turn it over to

Mr. Di Gregory.

Ms. ESHOO. The red light is on, so you need to finish up.

Mr. PARKINSON. This is always an assessment of risk, and it varies depending on who the country is, depending on what their particular arrangement of the transaction is.

Ms. ESHOO. I appreciate that.

Mr. DI GREGORY. I just wanted to give you what could be a specific example of a concern, of a national security concern, that

might develop. If a foreign-government-owned telecommunications

company or a foreign-owned telecommunications company is providing service and we are conducting a counterintelligence investigation and during the course of that counterintelligence investigation we obtain lawful court process to conduct an intercept and the

intercept must be conducted over facilities owned by the foreign

corporation or owned by the foreign government, it would give us

pause and we may have a tremendous concern about effectuating

that intercept even if the intercept doesn’t involve a citizen of that

particular foreign country.

We may choose not to conduct the investigation or not to conduct

that portion of the investigation because of our concern about the

security of the information related to the investigation that we are

conducting and related to that particular intercept that a court has

permitted us to do.

Ms. ESHOO. But to date that hasn’t happened. You are worried

about the future. You are saying that if this happened this is what

would raise our hackles; we are concerned about that if it were to

happen.

Mr. DI GREGORY. I am saying that we are concerned about it

now, and we are trying to do everything we can to keep it from

happening.

Ms. ESHOO. But it hasn’t happened, though. That is what I am

saying.

Mr. DI GREGORY. Well, I can’t say absolutely that—all I can tell

you is that we are concerned about that now, and we are doing everything that we can do by virtue of these agreements that we

have been negotiating to avoid that situation from occurring—to

prevent that situation from occurring.

Ms. ESHOO. Thank you, sir.

Mr. Chairman, I would like to ask for a unanimous consent request for an additional minute.

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Mr. TAUZIN. Without objection, the gentlelady has an additional

minute.

Ms. ESHOO. I feel good to get these for ourselves. We don’t stand

in the way of others getting them.

Ambassador Fisher, even if the passage of this bill didn’t violate

any WTO basic agreement because it is not treaty, are there other

considerations that should be placed on the table? I mean, what

possible ramifications do our markets face?

Mr. FISHER. Well, we have been—Congresswoman, we have been

extremely active here in activity abroad. I believe it is for the benefit of the shareholders of the companies and a benefit for U.S. interests, as I tried to explain in my testimony. And I think we run

the risk here that other countries put up roadblocks to our activity

on behalf of U.S. shareholders and U.S. employees and U.S. interests elsewhere around the world. I am not sure it is necessary— my point, Congresswoman, it is not necessary to do this.

Ms. ESHOO. Well, I have kind of quickly come to that view.

I think that we need to examine the flip side of this, and that

is, would other countries and companies retaliate? I mean, we are

thinking of our own retaliation for a whole variety of reasons, and

maybe it is not so pretty to dress it up as retaliation but I think

it is a form of retaliation or could be considered one. Wouldn’t there

be retaliation on the part of others if we did this?

Mr. FISHER. Well, I would say this: We have seen a significant

but insufficient liberalization abroad. That is, we would like to see

more. We want to keep it moving in the right direction.

U.S. economic interests have, in our opinion, been the beneficiaries of this process; and I do believe that at the very least other

countries would stop listening.

We are—and we take the high spot, we are the preachers of free

trade. We may be imperfect and not satisfactory to others, and certainly we have justifiable critics within our own government and

elsewhere in the world, but it is very hard for us to take the high

ground if indeed we say that basically a process that we negotiated,

agreed to, and a very short time ago that we now are going to

change this and shift the playing field. As I tried to point out in

my testimony, we have made significant progress in terms of our

economic interests around the world. It is not perfect. It is not

done. It is not complete. But I do believe that we run the risk of,

if not reversing the process, bringing it to a screeching halt.

Mr. TAUZIN. The gentlelady’s time has expired.

Ms. ESHOO. Thank you.

Mr. TAUZIN. We just don’t like preachers who sin too much by

omission.

The Chair recognizes the gentleman from Oklahoma, Mr.

Largent.

Mr. LARGENT. Thank you, Mr. Chairman.

Mr. Di Gregory, you are the Deputy Assistant Attorney General

of the Criminal Division?

Mr. DI GREGORY. One of five, yes.

Mr. LARGENT. Okay. Is the Child Exploitation and Obscenity Section under your bureau?

Mr. DI GREGORY. No, I am not the supervisor of that section.

Mr. LARGENT. But is that under your bureau?

83

Mr. DI GREGORY. That is in the Criminal Division. That is correct.

Mr. LARGENT. I would just like to state real quickly that on May

23rd we had some questions of that particular agency within the

Department of Justice. We are still waiting for the responses to

those questions. If there is anything you can do to expedite that,

we would appreciate it.

Mr. DI GREGORY. I will do my best.

Mr. LARGENT. I know the chairman and I both have sent letters

in the last 3 months to get those responses.

Let me get back to this. I would like to ask Mr. Fisher, is it the

goal of the German Government to eventually have zero percent

ownership in their telecommunications company? You said you

were in regular contact with the German Government.

Mr. FISHER. I can’t answer the specific numerical goal that they

have, but I would imagine like, any other government, their goal

is to be competitive and to allow their economy to flourish. We live

in the information age.

Mr. LARGENT. The German Government goal is to be competitive?

Mr. FISHER. In order to allow their economy to flourish, yes, sir.

I believe that would be their goal. That would be my goal if I were

a member of the Bundestag or the Bundesstaat.

Now, are they up—are they moving in that direction? The answer is yes. They have 350 licensed carriers in Germany. I could

walk you through some of the data or be happy, Mr. Pickering, to

submit data for you.

I am sorry. Let me change that. Let me restate my statement.

Mr. LARGENT. We all look alike.

Mr. FISHER. Congressman, I would be happy to submit that for

you for the record.

Mr. LARGENT. Okay.

Chairman Kennard, I would like to ask you, has the FCC ever

denied a merger because of public interest based upon foreign government ownership?

Mr. KENNARD. No, I don’t believe so. But to put it in context, the

FCC has never been presented with an application for a foreign

government ownership on a controlling basis, that is a large controlling interest, to my knowledge.

Mr. LARGENT. Okay. All right.

Mr. Di Gregory, I want to ask you another question. Legislation

proposed in the House by Mr. Dingell and in the Senate by Mr.

Hollings of South Carolina would effectively block all communication company transactions involving companies with greater than

25 percent foreign government ownership. In your opinion, is this

legislation necessary in light of the existing approval process?

Mr. DI GREGORY. In my opinion, we currently have processes—

thus far, the processes that we currently have used with respect to

foreign-owned telecommunications companies in their acquisition of

American firms—— Mr. LARGENT. Are you making that distinction between foreignowned versus foreign-government-owned?

Mr. DI GREGORY. Yes, I am making that distinction. Because we

haven’t yet dealt with a transaction where foreign government

84

ownership in the telecommunications sphere, acquiring a U.S. telecommunications company, has occurred. But the only thing that I

was going to say was that we believe thus far these processes have

enabled us to satisfy our national security and law enforcement

concerns.

Mr. LARGENT. Okay. Mr. Parkinson, can you respond to that

question? Is this legislation necessary under the current process?

Mr. PARKINSON. Congressman Largent, with respect to the specific question about specific legislation I will defer to Mr. Di Gregory on that. I will echo what he just said. We have found that the

processes currently in place have been appropriate and useful and

successful in us negotiating appropriate conditions on these licenses.

Mr. LARGENT. Mr. Parkinson, I have another question. We talked

about the risk of espionage with a foreign government owning a

wireless telecommunications company. Do you have to own a wireless company to spy?

Mr. PARKINSON. No.

Mr. LARGENT. And does owning a wireless communication company enable you to participate in espionage that would be impossible without it?

Mr. PARKINSON. It might.

Mr. LARGENT. Like what?

Mr. PARKINSON. Obviously, any kind of communication system or

communication network might be, in a particular situation, important to your espionage activity. If you had the ability to control

that information or communication network, obviously your task

would be easier.

Mr. LARGENT. So controlling a wireless communication network

would allow you to participate.

What kind of espionage could you do with a wireless company

that you couldn’t do without it? That is what I don’t understand.

I mean, technically what could you do?

Mr. PARKINSON. Well, I think the ability to communicate is critical to any insidious activity, whether it is espionage or other kind

of criminal activity. If you have the ability to control the network,

to keep law enforcement out of that network, to conceal what you

are doing, I think it facilitates your actions.

Mr. LARGENT. So do you believe that a wireless company doing

business with the United States would have the ability to keep the

FBI out of its records?

Mr. PARKINSON. Potentially, and that is one of the conditions

that we typically negotiate with the companies in these arrangements, is where are the records going to be kept, who are the personnel that are going to work with the system.

Let me give you a concrete example that would cause us concern

on the espionage side, and that is you controlled the—you are foreign-government owned. You control the communication network.

We had a counterintelligence investigation under way, and we decide—we went to the Court, the Foreign Intelligence Surveillance

Court, and got a court order to go up on a particular phone, and

the number that we had targeted, or the person that we had targeted, is in the hands of a foreign government. That would cause

85

us a great deal of concern, and it would certainly facilitate the foreign government’s espionage program, if it had one.

Mr. LARGENT. Okay. Mr. Chairman, I yield back my time.

Mr. TAUZIN. I thank the gentleman. His time has expired.

I want to submit one question on behalf of Mr. Dingell to Admiral Fisher—Ambassador. Excuse me, I keep calling you Admiral— Ambassador Fisher. Would you please provide an analysis of

whether section 310(a) would apply to a transaction such as the

one described by DT and VoiceStream through their FCC filing? If

your analysis concludes that section 310(a) does not apply, please

explain whether section 310(b)(3) would apply to the transaction.

Mr. FISHER. May I do that in writing, Mr. Tauzin?

Mr. TAUZIN. Yes.

Mr. FISHER. Thank you.

Mr. TAUZIN. Yes, absolutely do that in writing.

Mr. FISHER. Thank you, sir.

Mr. TAUZIN. The Chair yields to Mr. Markey, who has another

question.

Mr. MARKEY. Thank you. And this will be my final question.

Again, Ambassador Fisher, we are trying to get back to this

interaction between the trade negotiator and the German Government on this question of ownership and how constrained you feel

in having any conversations with the German Government about

this issue. You are saying that you personally have not had any

conversations about this ownership issue with the German Government, is that correct?

Mr. FISHER. Yes, sir, that is correct. But that is because my portfolio is Asia, Latin America, Canada and Mexico. So that may be

the reason I haven’t.

Mr. MARKEY. Who has that job?

Mr. FISHER. Well, our telecommunications negotiators and Ambassador Esserman, who handles Europe.

Mr. MARKEY. Shouldn’t he be here today, I mean, honestly?

Mr. FISHER. I have responsibility, sir, for most of these cuttingedge negotiations, for example, with the Mexicans, the Japanese

and others.

Mr. MARKEY. I understand, but this is a specific case that we are

dealing with. You are saying that you don’t have any specific responsibility for this particular case?

Mr. FISHER. I am not sure exactly what the question is.

Mr. MARKEY. The question is, do you have any decisionmaking

power with regard to the Deutsche Telekom/VoiceStream issue? Or

is that in another person’s portfolio in the Trade Representative’s

Office?

Mr. FISHER. Well, the overall authority is Madam Barshefsky,

but I believe—isn’t the question with regard to Deutsche Telekom’s

percentage of German Government ownership?

Mr. MARKEY. Ownership, yes.

Mr. FISHER. And the answer to the question, sir, is that again

this level of ownership, given the fact that when we negotiated this

agreement very few other countries had the kind of liberalization

that we have had, in and of itself is not the issue in terms of

the——

Mr. MARKEY. I understand that. I understand that.

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Here is the problem, Ambassador Fisher. When you started your

testimony today, you told us about all of these wonderful companies from the United States that have just been created in the last

3 or 4 years who are now descending upon the European market.

Mr. FISHER. Yes.

Mr. MARKEY. Now the reason those companies exist, of course, is

that the FCC, pursuant to a law that we passed in 1996, made it

possible for them to be created because we took on government-protected monopolies. And so, yes, now they have this huge amount

of capital, level 3 and other companies that you might have mentioned, heading across Europe. That is great. In fact, even

VoiceStream itself is as a result of a U.S. Government policy to create more competition in the marketplace.

The paradox here, of course, is that the Germans have created

an analogous monopoly in terms of this Deutsche Telekom situation, looking at the relationship between them and their regulators,

which is hard for us from a distance to be able to decipher. So we

are looking for you to tell us why it is—why insisting on full privatization is—can it be a requirement that we put on the books or is

it a violation simultaneously for us to request that? Which is it?

Can we request it or is it a violation for us to request it?

Mr. FISHER. My answer to you, sir, is that it is moving in that

direction. If you will bear with me for just 1 minute, let me walk

you through what the situation is in Germany.

Mr. TAUZIN. We don’t have time for a big walk-through.

Mr. MARKEY. In your comments—we are going to miss a roll call,

Mr. Fisher. Can you ask—can your office, not you personally, because it is not your responsibility—but can your office ask the German Government to reduce its ownership? Can you do that without

violating the WTO?

Mr. FISHER. We have seen the effect of these efforts result in a

reduction of Deutsche Telekom’s government.

Mr. MARKEY. Okay. You are not going to answer the question.

Thank you.

Mr. TAUZIN. He won’t answer the question. And let me close out.

Ambassador Fisher, let me express some extreme disappointment

with your testimony today before we close. We went through difficult questioning to get you to say whether or not you talked to

the German Government, and you did not—you said, I did not, but

you did not say but I am not the guy who would have talked to

them anyhow. We had to find that out later. That is a bit disingenuous.

Now, let me say this is a serious question. I think you got the

flavor of that. If you think there is an uneasiness in this room, you

have an uneasiness with what you hear in this room, we have an

uneasiness with what we are hearing from you. And if you think

this committee is not serious about our concerns that the ITA

impliedly requires privatization for competition in this country,

then rest assured we are definitely deeply concerned about that.

We believe, while it doesn’t say it in the kind of language sometimes we say things, that to say an independent and separate, impartial regulatory authority is necessary, clearly says these governments are supposed to be privatizing; and to pretend otherwise is

just not right.

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Second, we will be very interested in getting some answers from

those in your office who do have in their portfolio the obligation to

talk to the heads of these governments to find out whether they are

talking to them or not, and we will follow up with some questions

in that regard. But I am deeply disappointed in the way in which

you have avoided answering directly the questions of the members

of this committee.

You may respond, but I am going to have to go vote, so do it

quickly.

Mr. FISHER. Well, I apologize to you, Mr. Chairman, if I have disappointed you. I have made my best effort to answer your questions. I would be happy to follow up in writing to the questions

that have been posed to me.

I have made, I think, one basic point, and that is that we presently have in place the tools to deal with this application. And I

have made my best effort, sir, to answer your questions; and I will

do my best to answer whatever questions I didn’t answer in writing

to you. Thank you.

Mr. SHIMKUS [presiding]. Let me now move to my colleague and

friend from California, Mr. Cox, and recognize him for 5 minutes.

Mr. COX. I thank the chairman.

I would like to address myself, if I might, to Mr. Kennard and

Mr. Di Gregory, to ask you, for starters, the degree to which you

parse a distinction between foreign ownership on the one hand and

foreign government ownership on the other hand. Because we have

got two competing legislative provisions. One is current law, which

speaks in section 310(b)(4) of a 25 percent foreign ownership cap,

and the other is our colleague in the other body who is using the

same figure but applying it to foreign government ownership, and

at least facially it strikes me that the two are dramatically different. I would be interested in your views.

Mr. KENNARD. Well, Mr. Cox, we are guided, first and foremost,

by the statute itself, section 310; and section 310 speaks in terms

of ownership by aliens, by representatives of a foreign government,

or by a foreign government. So if you look at the operative statute

here, section 310, all of those types of owners are subsumed within

that provision.

Mr. COX. And the first, aliens, includes private citizens?

Mr. KENNARD. That is right, foreign nationals.

Mr. COX. And I understand that. That was a premise to my question, so I hope I wasn’t baiting my question. I think not.

Given that, do you distinguish between foreign government ownership on the one hand and foreign ownership on the other hand

in making these decisions and in formulating your policy?

Mr. KENNARD. Yes, certainly there are distinctions that can be

drawn as a policy matter, and we heard some of those distinctions

drawn out today at hearing. That is, when you have foreign government ownership, you have a unique set of competition challenges—

the relationship between the government and the company, whether there are cross subsidy issues, tax incentives, other issues like

that that could cause us to have concern about competition in this

country.

So, yes, we would look at those issues when they are presented

to us in the context of a specific transaction.

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Mr. COX. Mr. Di Gregory?

Mr. DI GREGORY. They are distinguishable for us, Mr. Cox, in

terms of our assessment of the risk involved to national security

and law enforcement concerns. The risk is heightened when it is

a foreign-government-owned corporation, although there are risks

still attendant to simply foreign corporations acquiring U.S. telecommunications providers.

Mr. COX. Now most of your testimony was directed to security

concerns, but I wonder if I can’t look through the other end of the

telescope and see also equally valid competitive concerns and see

those concerns even if I withdraw the adjective ‘‘foreign’’ from government. Because in my mind this is so distinguishable from the

foreign ownership issue that we can even take the word ‘‘foreign’’

out of it altogether and just talk about government ownership.

We have a policy in this country—it is Clinton administration

policy, it has been continued since President Eisenhower—of discriminating against government ownership of commercial enterprises, and it is stated in circular A-76. And it is stated—in fact,

I think I have some—‘‘the government should not compete with its

citizens.’’ That is Clinton administration policy. That is Bush administration policy, Reagan administration policy. It goes a long

way back. But that circular has been renewed as recently as 1999.

The government should not compete with its citizens. The competitive enterprise system characterized by individual freedom initiative is the primary source of national economic strength.

So if we took ‘‘foreign’’ out of this equation, we just ask ourselves

whether we wanted to have a policy that discriminated against

government ownership of telecommunications, we have answered

that question in this country.

Our view is that government ownership is not what we are after.

We are after private ownership, and I believe for a couple of reasons. One is that governments are uniquely in a position to create

their own regulatory environment, and you don’t have an arm’slength relationship between the regulated entity and the regulator

if you do that. Another is that governments, being run by politicians, oftentimes make decisions for other than economic reasons,

for noneconomic reasons. Instead of supply and demand being the

principal basis for resource allocation decisions, you have a lot of

political decisionmaking.

So it isn’t just a question of whether the U.S. consumer might

be getting the benefit of a stupid subsidy by some foreign government. It is also the question of whether or not we don’t experience

all sorts of opportunity costs because resource allocation decisions

are being made for political reasons instead of economic ones.

I wonder whether the Department of Justice has an interest in

these things as well.

Mr. DI GREGORY. There may be another division in the Department of Justice that has an interest in these things.

Mr. COX . Well, I know there is a department.

Mr. DI GREGORY. And I don’t know that I can speak to those concerns because of the role that I play and because of the focus that

I have with respect to this issue on national security and law enforcement issues.

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Mr. COX. Let me go back to Mr. Kennard and try and put myself

in the shoes that I occupied 15 years ago when I was Reed Hundt’s

law partner.

Mr. SHIMKUS. Is that for the record?

Mr. COX. For the record, I was, yes. It is even a matter of Federal Election Commission record that he contributed to my campaign.

But when I was representing private clients and when my concern was the shareholders, the executives of the firms I represented and so on, I could easily see, were I there today, that their

interests would be maximizing the number of potential buyers for

their securities, giving them the greatest liquidity opportunities

possible, the most buyers, the most potential angels.

And because some of the firms here that we are talking about

are rather large, including governments in that universe, it is probably a good thing, more buyers. And yet from a regulatory standpoint the picture is a little bit different; and I wonder whether you

wouldn’t, A, think it natural that most of the shareholders, officers,

executives and so on of the firms involved here would be in favor

of including government in the bidders on the one hand and also

whether that is something that should be at least partially discounted as you do your policy analysis?

Mr. KENNARD. That is an interesting question and one that I am

sure is—I am sure a lot of people in this room are calculating

whether they are going to be a competitor or a seller, and that is

going to determine which side of this issue they are on. But from

my perspective it is not something that we really need to worry

about because, first and foremost, our responsibility is to American

consumers and not necessarily creating buying or selling opportunities for anyone as a primary matter.

Going back to your initial comment about privatization, I just

wanted to underscore that we believe fervently at the FCC in

privatized competition. Every opportunity I have to meet and talk

to my counterparts in independent regulatory agencies around the

world, I always make this argument. It is our probably most important public policy export, if you will, which is promoting privatized

competition.

The question that is being raised in this hearing today is what

is the best way to get to that point? Is the market going to drive

companies to ultimately privatize or not? And in the meantime,

when transactions like this arise, are there competitive issues that

we have to deal with before companies are fully privatized?

I guess my main message today is that we are prepared to deal

with those hopefully interim market issues until we get to, hopefully soon, a world where all competitors are fully privatized.

Mr. COX. Well, let me, since I am here without competition myself, nonetheless yield because the panel has been very indulgent

with all the members here.

I would just like to conclude by saying that in my view, for what

it is worth, allowing private citizens and both privately and publicly held commercial entities to invest in U.S. telecom markets,

even assuming these are foreign private investors, foreign private

companies and so on, is indisputably beneficial. It is a good thing

for our economy to inject new competition. It reduces prices.

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But I do think that there are fundamentally different issues; and

we haven’t had a chance to get in a lot of them—sovereign immunity, for example, which, having read through the SEC filings of

Deutsche Telekom, are, you know, front and center. They have

done their level best, it appears, to waive them in the context of

their filings, but, you know, whether or not in the clinch that satisfies everyone is something else. It is just a different beast altogether if you are talking about a foreign government compared to

talking about foreign competition.

I am just sorry that much of the debate here, such as it was

today, seemed not to focus on that distinction so much as foreign

versus not. I don’t think that there is any xenophobia or protectionism or anything that is latent on either side of the aisle here.

I think we are all fairly enlightened that way, but I do think that

you are wise to be very chary about the distinction between governments coming in and buying whatever the heck it is.

We happen to be doing telecommunications today on the one

hand and private firms and individuals on the other.

I thank the chairman.

Mr. SHIMKUS. Thank you. And the Chair will note that there has

been strong debate on government intervention and I would suggest some xenophobia discussed in the hearing about this issue

raised by really members on both sides of the aisle. So it is probably another issue to address.

Mr. COX. You can say that now since they are gone, right?

Mr. SHIMKUS. I have been here the whole time.

Mr. COX. The xenophobes are at least gone.

Mr. SHIMKUS. I want to thank the panel, too, for being patient.

And hearing no other questions, no other members being present,

I would like to dismiss this panel, again thank them and call the

third panel.

Panel three will consist of Mr. John Stanton, CEO and President

of VoiceStream; Mr. Morton Bahr, President of Communications

Workers of America; Mr. Gregory Sidak, Weyerhaeuser Fellow in

Law and Economics; Mr. Andrew Lipman, Vice Chairman of

Swidler Berlin Shereef Friedman; Dr. Michael Noll, Annenberg

School for Communication; and Mr. Thomas Donohue, President

and CEO, U.S. Chamber of Commerce.

If I can get our guests in the gallery to expedite their process out

of the hearing room and take seats and close the doors, we would

like to begin as soon as possible.

I have been informed that Mr. Donohue will not be able to testify.

Before I go to the opening statements, I would like to remind the

panel that their written testimony is already going to be submitted

into the record, so this committee likes to ask witnesses to summarize. I am going to try to be a little bit stricter on the time. Give

us the high points. We will move through the testimony and then

we will have time. Members will be rotating back from the vote to

follow up with questions.

With that, I would like to welcome Mr. John Stanton, CEO and

president of VoiceStream. You are recognized for 5 minutes.

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STATEMENTS OF JOHN W. STANTON, CEO AND PRESIDENT,

VOICESTREAM; MORTON BAHR, PRESIDENT, COMMUNICATIONS WORKERS OF AMERICA; J. GREGORY SIDAK,

WEYERHAEUSER FELLOW IN LAW AND ECONOMICS, AMERICAN ENTERPRISE INSTITUTE, PUBLIC POLICY; ANDREW D.

LIPMAN, VICE CHAIRMAN, SWIDLER BERLIN SHEREEF

FRIEDMAN, LLP; AND A. MICHAEL NOLL, ANNENBERG

SCHOOL FOR COMMUNICATION

Mr. STANTON. Thank you, Mr. Chairman. Mr. Chairman, members, Mr. Cox, I very much appreciate the opportunity to testify today. I will follow your admonition and be

quite brief. I have entered comments for the record.

Our message to consumers in our business, as articulated by our spokeswoman, Jamie Lee Curtis, is to get more. What we mean by

that is we give our consumers the opportunity to get more from our

product, and we give our employees an opportunity to get more employment opportunities. I would like to speak briefly to the message that I have articu- lated in the statement and briefly introduce the business. Our message today really is threefold. Our agreement with Deut- sche Telekom benefits our consumers, benefits our employees and

benefits our business as a whole.

The approval process that we must go through, in our opinion, works today. The proposed legislation is a categorical ban on our

transaction and, as a consequence, will deprive our employees and

our customers the benefits of the deal.

Let me briefly introduce the business. In telecommunications

terms, we are a veritable new kid on the block. The business was

founded by my wife Theresa and I, 6 years ago. The business has

had the opportunity to compete, but we had to compete in a very

different way in order to succeed. We built an all-digital network

using licenses that we purchased through the FCC auction process

for new personal communications auctions. We have competed very

aggressively by offering what we call the best value in wireless,

and frankly what that generally means is we are the lowest price

in the marketplace.

Since we have launched our services, we, as well as other new

competitors, have seen the average price per minute of wireless

services drop by approximately 57 percent in under 5 years. That

is down to an average price per minute, according to FCC records,

of 24 cents. Our average price per minute is approximately 12

cents, or half the industry average, and our customers used an average, as of last quarter, of over 450 minutes of use per month,

which is twice the national average.

We have built our business by raising money, both domestically

and internationally. Today, approximately one-third of our equity

is held by foreign companies and approximately two-thirds is held

by American individuals and companies.

In 5 years, we have managed to build a business adding 2.5 million customers and adding 8,300 employees all over the country. So

why do we need more money? Why do we need the deal with DT?

We are now licensed to provide services in about 90 percent of the

United States. We have to get the last 10 percent of those licenses.

We only serve, however, about 45 percent of the licenses in the

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United States. In other words, we are still in the process of building out the licenses that we have acquired.

In the meantime, we have seen our competitors get much larger,

particularly companies like Verizon that have grown by acquiring

many other businesses. We need additional capital with which to

compete. It is imperative for us to build out that national footprint

in order for us to succeed. In order to do that, we need to raise capital. We went through a prolonged process to find that capital and

we identified what we believed to be the best possible transaction,

that which we have signed with Deutsche Telekom, which we believe benefits both consumers and our employees.

I can tell you, having raised money both domestically and from

foreign companies and having merged or acquired a number of

companies over the last nearly 20 years, that the review process,

which in this case includes the Securities and Exchange Commission, the Department of Justice, the Committee for Foreign Investment in the United States as well as the Federal Communications

Commission, works and works well.

We will be thoroughly scrutinized in a process that will be very

time consuming. But the reviews are done on a case-by-case basis,

and the conclusion will be reached based on the merits of our applications.

The proposed legislation is simply a categorical ban on our transaction and as such would deprive our consumers and, frankly, the

consumers that utilize our competitor’s services of the benefits of

other prices and our employees and our future employees the benefits of the capital and the additional jobs we would create.

As a consequence, I ask you and urge you to reject the proposed

legislation.

[The prepared statement of John W. Stanton follows:]

PREPARED STATEMENT OF JOHN W. STANTON, CHAIRMAN, DIRECTOR, AND CEO,

VOICESTREAM

I appreciate this opportunity to testify about VoiceStream’s experience with foreign investment in U.S. telecommunications companies. In our view, current U.S.

policies on foreign investment in telecommunications companies like VoiceStream—

including investment by companies with government ownership—are sound. American consumers, American companies, and American jobs would suffer if Congress

were to categorically shut off investment in American companies by companies with

more than 25% foreign government ownership.

Our current system for regulating foreign and foreign government investment

strikes the right balance for American consumers and American workers and gives

the United States government full authority to protect our country’s legitimate interests in national security, trade, and fair competition. By contrast, pending legislation that would change the current system, including Senator Hollings’ amendment

to the Senate Commerce-State-Justice appropriations bill and the freestanding bills

(S. 2793 and H.R. 4960), strikes the wrong balance. This legislation would unnecessarily and harmfully prohibit investment in U.S. companies that boosts competition,

job growth, and consumer welfare.

There are five points that I want to emphasize in my testimony today.

First, VoiceStream is a foreign investment success story. We demonstrate the tremendous benefits that foreign investment can bring to American consumers and

workers. VoiceStream is the fastest growing wireless company in the country, and

it is the newest nationwide wireless company. But VoiceStream would not be a nationwide wireless carrier today and an aggressive new market entrant if we had

been barred from raising significant investment capital from abroad.

Second, VoiceStream’s merger with Deutsche Telekom, which we announced on

July 24, 2000, will permit us to become an even more vigorous U.S. wireless competitor by accelerating our nationwide buildout, and by allowing us to bring improved

93

service to consumers. DT will give us the financial backing we need to become a

leader in delivering next-generation, broadband wireless to American consumers. Third, the big winners from our merger with Deutsche Telekom will be American consumers and American workers. Our customers will benefit directly, but all consumers win when there are numerous strong competitors. As this merger strengthens VoiceStream, it will force the five larger nationwide wireless carriers to work

harder, too. And unlike many mergers, this merger will create American jobs—good, high-skill, high-paying jobs. Fourth, legislation to prohibit companies with more than 25% foreign government ownership from indirectly owning a U.S. wireless telecommunications company simply isn’t needed to protect U.S. national security and competition interests. We know from recent first-hand experience that our existing process is thorough and

complete. The mergers of VoiceStream, Omnipoint, and Aerial were scrutinized by

competition authorities at the Department of Justice and the FCC, and by national

security agencies, because of the significant investment by Hutchison Whampoa, a

Hong Kong company. We know that these agencies’ review of our merger with Deut- sche Telekom will be equally rigorous. Fifth, the proposed legislation’s inflexible ban on investment by companies with more than 25% foreign government ownership would needlessly jeopardize American

trading and investment interests. Let us review each of these points in more detail.

First, VoiceStream’s story shows how foreign investment benefits American con- sumers and workers. I founded VoiceStream as a subsidiary of Western Wireless in 1994. And since that time, we have enjoyed phenomenal success as a result of our

hard work. Western Wireless spun off VoiceStream as an independent company just

last year. VoiceStream is today the fastest growing, most dynamic nationwide competitor in the wireless marketplace. As of the end of June, we serve 2.5 million subscribers

and employ over 8,300 people nationwide. Our phenomenal subscriber growth promises even more job growth in the months ahead as we build out and expand our

service areas. Moreover, VoiceStream recently reached an agreement to acquire

PowerTel, Inc., which operates a wireless network spanning 12 states in the southeastern U.S., in areas where VoiceStream currently does not market wireless services. As a result of the PowerTel acquisition, VoiceStream or its affiliates will hold

licenses reaching 90% of the population of the United States, including 24 of the

top 25 U.S. cities.

We have received industry awards and have been recognized for our innovation. Our e-notes service allows customers to send and receive short e-mails directly from

wireless phones. Our InfoStream product allows subscribers to receive customized

messages, such as sports scores, stock alerts, news headlines, and weather updates,

all through wireless phones. Our customers are able to tailor the information they

receive, based on their own needs and interests.

VoiceStream did not become the country’s fastest-growing wireless company

through government largess. Nor did we rely on local telephone, long distance or

cable services communications businesses to generate large cash flows that could finance our growth. In 1994, we convinced private investors to risk their capital by

investing in VoiceStream so that we could acquire licenses in FCC-conducted auctions. In the last year, we combined with smaller wireless companies including

Omnipoint, Aerial Communications, and now PowerTel. Over the past five years, we

had to raise capital to build out and operate these licenses. We raised money in the

public and private, debt and equity markets in the United States but we could not

meet all of our capital needs in the U.S. We also raised foreign capital from those

willing to invest in our new network and assume these risks. Sonera, the Finnish

telecommunications company that is majority owned by the Finnish government, invested nearly $1 billion, and Hutchison Whampoa, a Hong Kong-based telecommunications company, invested $1.2 billion.

Quite simply, without these foreign investments, VoiceStream would not be the

substantial innovative, competitive presence in the U.S. wireless markets that it is

today. VoiceStream’s history demonstrates that foreign investment in the United

States creates jobs and benefits American consumers.

Although we are proud of our successes, we never lose sight of the fact that we

are a relative newcomer entering a brutal marketplace. More often than not, we are

the sixth or seventh competitor entering markets to battle established carriers with

significant brand identification and financial backing: Verizon Wireless, SBC/

BellSouth, AT&T, Sprint, and Nextel. We succeed in signing up new customers

every day. To stay competitive, we must constantly innovate, expand our service

areas, and roll out more features at prices consumers demand, which requires more

capital to expand our services areas and service offerings.

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As a consequence, we arrive at my second point—the VoiceStream/DT merger makes sense for both VoiceStream and DT. First and foremost, VoiceStream and DT

have a unique synergy. GSM technology has become the global wireless standard,

but VoiceStream is the only nationwide U.S. carrier to use GSM. The merged company will be the first to offer state-of-the-art GSM technology in a seamless, worldwide network. One phone, one number, with worldwide service.

Despite our potential, VoiceStream is today an adolescent among adults—we have

to raise money to buy more licenses, build more systems, and market our services.

To be competitive, we need to own and operate a national wireless network. When

completed, the PowerTel acquisition will fill one significant hole in the Southeast

after which VoiceStream will be licensed to serve nearly 90% of the American people. We still need to purchase licenses to serve the remaining 10%, primarily in

California and the Carolinas. With DT’s backing we can compete effectively to ac- quire the licenses that will allow us to achieve nationwide coverage. Over the past 5 years we have built nearly 10,000 cell sites and today offer service in about half of our licensed markets (including PowerTel). We need to continue to

build and finish our build-out. DT’s capital will enable us to complete our national

build-out. To be competitive, we also must be a major player in the rollout of next

generation, broadband wireless systems. Standing alone, we simply did not have the

financial resources and scale of our competitors—who are this country’s largest pro- viders of local and long distance telephone service and cable service. Our merger

with DT now gives us the resources to compete with these carriers.

DT’s worldwide scale will give us the resources needed to introduce next genera- tion broadband wireless services and will make us a stronger competitor in the U.S.

We will not be alone in our ability to draw upon the lessons of Europe—Verizon undoubtedly will benefit from Vodafone’s European experience and the BellSouth/SBC

wireless venture will benefit from their extensive international investments.

In turn, this transaction allows DT to fill a hole in their worldwide network. Without us as its partner in the U.S., DT would be at a competitive disadvantage in Europe, where Mannesmann/Vodafone/AirTouch—which serves the U.S. market

through Verizon Wireless—is one of DT’s biggest competitors. Third, the big winners from the VoiceStream/DT merger will be American con- sumers and American workers. American consumers will enjoy the benefits, as VoiceStream becomes a stronger, quicker, more efficient competitor. The merger will

speed our buildout and accelerate the introduction of new mobile data applications,

forcing our competitors to respond with better services of their own. Consumers will

also benefit from global roaming, unified billing, and worldwide customer service,

which we now will be able to offer them. VoiceStream is today the best value in

wireless. The more we expand, the more Americans can benefit from the lower

prices we offer.

Additionally, consumers will benefit from a new source of broadband Internet access as we introduce next-generation services. Today consumers have only two

choices for broadband Internet access in their homes—monopoly telephone lines and

cable modem service. Next-generation wireless will be the third high-speed Internet

access alternative, which will expand the choices, and we would expect lower prices

to consumers for high-speed Internet data service. This merger will accelerate the

deployment of the broadband Wireless Internet and give consumers a true choice

among providers of high-speed data.

Our accelerated network buildout and introduction of new services will spur job

growth among American workers. The 8,300 jobs at VoiceStream today (which will

rise to 10,900 after the PowerTel acquisition closes) are jobs that did not exist before

VoiceStream and its predecessor companies built this new wireless network. We estimate that we will hire 2,000-3,000 more workers to expand our networks and increase our sales, marketing and customer-service support facilities to keep pace with

this expansion. And these jobs will be in the U.S. Unlike automobile or textile manufacturing jobs, wireless operations are inherently local. Leadership, marketing,

sales, network operations, and customer service staff all must be locally knowledgeable and available.

Fourth, the proposed legislation to change U.S. foreign ownership law is a solution

in search of a problem. National security and competition are well protected under

current laws, and there is no need to enact a categorical ban on investment by companies with foreign government ownership.

I know from personal experience that we have national security safeguards in

place. VoiceStream has been through this process before, and has entered agreements with various national security agencies to preserve U.S. interests. The ExonFlorio Amendment to the 1988 Trade Act is the centerpiece of our current process

for protecting our national security in the case of mergers involving foreign companies, whether or not foreign government ownership is involved. Under this law, the

95

1Kreditanstalt fur Wiederaufbau (‘‘KfW’’), a public bank that is a private corporation under

German law, also has a single seat on the board.

Committee on Foreign Investment in the U.S. (‘‘CFIUS’’) reviews foreign mergers, and mergers that raise national security concerns can be blocked or conditioned.

Agencies involved in the CFIUS review process include the Departments of Commerce, Defense, Justice (including the FBI), State, Treasury and the National Security Council. In the past year, VoiceStream negotiated a national-security agreement. That agreement also was made a condition of our licenses under the FCC’s review and

approval process. As a consequence, our failure to abide by those agreements would

subject us to FCC fines or even license revocation. Since we cannot operate our business without these licenses, we have this additional strong incentive to comply with

our national security commitments. Other safeguards are in place today to address competition concerns. The Clayton Act requires the Department of Justice’s Antitrust Division to review a merger such as VoiceStream/DT, to negotiate consent decrees to resolve anti-competitive problems, and to block the merger if any problems with the transaction cannot be remedied. The FCC must also approve the transfer of control of VoiceStream’s wireless

licenses, and reject it if it finds that the merger is not in the public interest. Our previous mergers were thoroughly reviewed by both agencies, and VoiceStream will soon file for FCC approval of the PowerTel acquisition and the DT

merger. As was the case with our previous mergers, the FCC will provide interested

members of the public with the opportunity to express their views. The FCC will

examine these comments, and will review our proposal for its effects on consumer

welfare, national security, law enforcement, foreign policy, and trade. The FCC can

deny or condition mergers that do not meet its public interest test. Based on past experience, the government’s review of the VoiceStream-DT merger will be detailed and rigorous, and will focus on the facts of this case. I am confident

that these agencies will uncover no substantial issues of national security that have

not already been substantially addressed by our existing agreements, and that they

will conclude that this merger is overwhelmingly pro-competitive. In my opinion, a

case-by-case review is the appropriate approach. The proposed legislation, on the

other hand, would create a rigid, categorical percentage threshold that would tie the

hands of U.S. governmental officials. They would be left with no discretion to approve a specific transaction even if the facts showed it to be a good deal for the

American people.

With that background, I will address some of the facts concerning the VoiceStream/DT merger. The VoiceStream/DT merger is pro-competitive. It will

strengthen the smallest nationwide wireless carrier and allow VoiceStream to enter

new markets and provide new services. The merger will not concentrate market

share among existing operators in the same local markets, as DT and VoiceStream

have no overlapping service areas. It will not reduce service offerings in the U.S.,

in Europe, or anywhere else—in fact, it will increase them. The VoiceStream/DT

merger simply makes VoiceStream a stronger competitor in the U.S. wireless marketplace.

Even though the German government will have a significant ownership stake in the combined company, it will not exercise de jure or de facto control over

VoiceStream. DT is a private corporation organized under German law, not an agency of the German government. The German government does not manage DT, and,

in fact, holds only one of twenty seats on DT’s board of directors.1 The German gov- ernment has consistently voted with DT’s management and other board members, and holds no special right to veto corporate decisions. The German government’s directly-held share of DT has fallen from 100% in 1995, to 75% in 1996, to 43.2%

today (with another 15% held in trust by a German public bank for sale as market

conditions permit). If this merger closes, the German government will directly hold

only 32.7% of the new company, with another 11.3% indirectly held by the bank.

In fact, this type of merger is the quickest way for the government to reduce its

ownership share of DT. To reduce the German government’s stake to 25% via stock

sales would require an IPO four times larger than AT&T’s record-setting wireless IPO last spring. DT is not backed by government credit, government subsidies, government guar- antees, or government tax preferences. There is also no objective marketplace evidence of any implicit credit guarantee. According to Standard & Poor’s, DT’s credit

rating is identical to BellSouth’s, SBC’s and AT&T’s, and lower than British

Telecom’s. Based on work undertaken for VoiceStream by Goldman Sachs, DT’s cost

of borrowing is greater than that of AT&T, Worldcom and BellSouth—all of which

are smaller than DT. As a publicly traded corporation, DT is audited regularly and

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subject to all EU and German corporate laws. Indeed, the receipt of favorable government treatment would violate DT’s corporate charter, as well as EU and German

laws.

Even if DT were somehow aided by the German government—which it is not—

it would be impossible for DT to harm competition in the U.S. by cross-subsidizing

VoiceStream. The U.S. wireless market is highly competitive and VoiceStream is

tiny when compared with the other nationwide wireless networks—all of which have

very significant financial backing and resources. Even if it were somehow possible

to engage in cross-subsidization in the U.S. (which it is not), German market conditions and German regulations preclude DT from charging monopoly prices to generate money for such efforts.

DT faces substantial competition in German wireless markets, where DT is not

even the largest wireless provider (Mannesmann/Vodafone is larger). BellSouth is

another major wireless competitor in Germany through its investment in E-Plus. In

the long distance market, in which many U.S. companies actively compete today,

DT has lost 40% of its market share. In local telephone services, DT is subject to

stringent regulation, both by the German government and by the European Union.

T-Mobile International (‘‘TMO’’), the DT subsidiary that VoiceStream would join

after the merger, is a structurally separate entity from DT’s wireline local telephone

operation. Under German law, TMO must maintain a separate set of accounts from

the wireline operations. Moreover, TMO is subject to rules that require arm’s length

transactions and structural separation which creates transparency of financial relations and enables German and European Union regulators to detect cross-subsidies

easily.

In sum, there are simply no unfair competitive advantages created by the DT/

VoiceStream merger. This merger is overwhelmingly pro-competitive and pro-consumer.

Fifth, the Hollings Amendment would needlessly jeopardize American interests

abroad. Under the WTO Basic Telecom Agreement, the U.S. made a commitment

to open international investment and competition. VoiceStream has relied on those

commitments as it has sought to raise the financing necessary to fill in gaps in its

national service areas, to complete its U.S. build-out, and to make the investments

necessary to bring next- generation broadband wireless services to market. Changing the rules of the road after the race has started is simply unfair.

More broadly, this legislation endangers all U.S. companies’ foreign investment

opportunities, because we believe that the proposed law would violate U.S. WTO

commitments. The U.S.’ WTO commitment was explicit and unequivocal: when addressing whether there would be limitations on indirect foreign ownership of common carrier wireless licenses, the U.S. stated simply ‘‘None.’’ The Congressional Research Service has concluded that the proposed legislation is likely to violate U.S.

market-opening commitments under the WTO and will subject us to a challenge

under WTO rules. This legislation would undoubtedly undercut efforts by U.S. trade

negotiators to encourage other countries to liberalize their foreign investment and

trade laws.

VoiceStream is not alone among American interests in opposing this unnecessary

and unwise legislation. Other opponents include groups as disparate as the U.S.

Chamber of Commerce and the Communications Workers of America. Harris Miller,

President of the Information Technology Association of America put it succinctly:

‘‘[The legislation] is a protectionist measure, which could hamstring the robustness

of our digital economy. The idea just doesn’t connect with the reality of the global

marketplace...’’

Conclusion. The VoiceStream/DT transaction will benefit American consumers by

offering them lower prices and better services, and will create new American jobs.

Categorically banning investment in the U.S. telecommunications sector by companies with more than 25% foreign government ownership will hurt American consumers, American workers, and American companies at home and abroad. The current process by which mergers of this type are reviewed by CFIUS, DOJ, and the

FCC provides ample means to protect fundamental U.S. interests in national security and fair competition. We look forward to working closely with these agencies

during this review process, and we look forward to fulfilling our potential as a

strong new competitor in the marketplace.

Thank you for this opportunity to testify on such an important public policy issue.

Mr. SHIMKUS. Thank you very much.

I will now turn to Mr. Bahr, president of the workers communications of America. Again, welcome; and you have 5 minutes.

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STATEMENT OF MORTON BAHR

Mr. BAHR. Thank you, Mr. Chairman. I really appreciate this opportunity to address this issue, perhaps from a different perspective than what we have heard during the

day. We believe there is ample room in the U.S. telecommunications market for competition from foreign-owned firms, including

firms partially owned by foreign governments without jeopardizing

U.S. jobs or our national security. This conclusion is based on three factors: First, telecommunications is already a global market. Foreign firms have competed in

the U.S. market since the break-up of the Bell system in 1984, and

U.S. firms are entering foreign markets at an astonishing rate. Our

policy should support these trends. Second, the European Commission has demanded that European

Union countries open up their local phone networks by the end of

this year. Germany has already done so. France, Italy, Spain and

Sweden plan to do so by the end of the year. This proposed legislation could well invite retaliatory reaction from the EU just at a time when we are on the threshold of making

a major breakthrough in Europe. Third, the national security implications of foreign ownership are given sufficient scrutiny and protection under already existing regulations, as has already been testified to. Finally, Mr. Chairman, the principles which should guide deci- sions about whether a firm should be permitted to do business in

our country must be whether that firm meets high standards for

the delivery of quality universal service, whether it will contribute

to building the Nation’s communications network through invest- ment and job growth, and whether its employment practices reflect

respect for workers’ rights. These standards should be applied in all merger and take-over

situations, regardless of the firm’s ownership status.

Mr. Chairman, in a competitive telecommunications market telecommunications policy should support success in the new competitive global market that is based on superior technology and excellent service. Achieving these goals does not depend on whether a

competitor is partially government-owned or not. Indeed, we have

much to learn from foreign corporations.

For example, the German system of co-determination creates a

corporate culture that protects the interests not only of shareholders but also of workers in their communities. It is a far more

democratic culture than ours, one that has created restrained and

reasonable compensation packages for top executives and one

which provides for worker participation at the highest levels of the

corporation’s supervisory structure.

In the telecommunications industry, the presence of Deutsche

Telekom in our marketplace would yield substantial benefits for

workers and consumers. DT is a good employer and good corporate

citizen, serving the public interest while providing outstanding

service and quality products. DT recognizes the rights of workers

to form and join labor unions and honors its collective bargaining

agreements and enjoys a positive relationship with a union that

represents its workers. Our union welcomes DT to the U.S. and believes it will create a positive, competitive dynamic in our market.

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I also want to point out that the German Government’s share of

DT will decrease over time by design. Deutsche Telekom, as we understand it, is undergoing a transformation to a 100 percent privately held stock corporation. And if the concern of the proposed

legislation is primarily with corporate governance as opposed to

ownership, then there is even less cause for concern.

Representatives of the German Government hold only two seats

on DT’s 20-member supervisory board and none on the management board. The union holds 10 of the 20 seats. They, in turn, appoint the management committee. The shareholders play no role in

the selection of the supervisory board or the management committee.

So, in conclusion, I believe the U.S. telecommunications market

has much to learn and much to gain from foreign competition, regardless of ownership. Business and consumers will benefit from

expanded choice and access to the global market. Workers will benefit from the fusion of U.S. technology, outside capital and respect

for workers’ rights evident in many foreign corporations. Policymakers should take care not to exclude from our market foreign

corporations who provide excellent models for future progress solely

because they happen to be partially owned by a government.

Thank you, Mr. Chairman.

[The prepared statement of Morton Bahr follows:]

PREPARED STATEMENT OF MORTON BAHR, PRESIDENT, COMMUNICATIONS WORKERS

OF AMERICA

Good afternoon, Mr. Chairman. I am Morton Bahr, President of the Communications Workers of America, AFL-CIO. Our union represents 650,000 workers in a variety of communications jobs, including telephone, wireless, broadcast and print. We

also represent tens of thousands of public sector, health care and airline workers.

Thank you for inviting me to speak today on the issue of foreign investment in U.S.

telecommunications companies.

We hold that there is room in the U.S. telecommunications market for competition

from foreign-owned firms, even firms owned by foreign governments. This conclusion

is based on three factors. First, telecommunications is already a global marketplace;

foreign firms have already landed on U.S. soil and in our airwaves, and U.S. firms

have entered foreign markets at an astonishing rate. Second, protectionist legislation at home could provoke retaliatory measures that would impede our progress in

the global market. Third, the national security implications of foreign ownership are

given sufficient scrutiny and protection under already-existing regulations.

Finally, the principles which should guide decisions about whether a firm should

be permitted to do business in our country must be whether the firm meets high

standards for the delivery of quality, universal service, whether it will contribute

to building the nation’s communications network through investment and job

growth, and whether its employment practices reflect respect for workers rights.

These standards should be applied in all merger and takeover situations, and should

be met, regardless of the ownership status of the owner, foreign or otherwise.

Mr. Chairman, I’d like to say a few words about each of these points.

As I mentioned before, today, telecommunications is a global marketplace. Foreign

firms have acquired large US communications companies with US government cooperation. The IRS waived US tax rules to facilitate the acquisition of AirTouch by

UK-based Vodafone. Frontier Communications was acquired by Global Crossing of

Bermuda. Teleglobe of Canada acquired Excel Communications. Telmex, which was

previously government owned, acquired Comm South Companies based in Dallas,

Texas, and Topp Telecom Inc. based in Miami. All these foreign acquisitions of

American companies occurred in 1999. Deutsche Telekom and France Telecom have

long owned 20% of Sprint Corporation and each company has a member on the

Sprint Board of Directors.

Not only have foreign firms come to the U.S., but virtually all major U.S. telecommunications companies have expanded abroad. For example, AT&T has operations in Britain, Canada, China, Japan, Luxembourg, Spain, and Germany, to

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name a few. In addition, most companies have direct investments in foreign government controlled or previously foreign government owned communications companies.

For example, SBC and government-controlled France Telecom have a joint investment in Telmex. Verizon has ownership interests in dominant telecom companies

and cellular properties in Mexico, Italy, Greece, Czech Republic, Slovakia, Indonesia

and New Zealand, properties that previously had been government-owned. The transformation of telecommunications into a borderless, global market has ac- celerated in the last few years. A 1997 World Trade Organization accord, to which

the U.S. is a signatory, helped spur the evolution. We, along with the other signatory nations, agreed to open our telecommunications markets to foreign companies,

including government-owned companies. FCC rules which had restricted transfer of

broadcast and common carrier licenses to foreign-owned entities were relaxed to

allow foreign investments when the transaction is in the public interest. Proposals to prevent foreign government-owned companies from investing in U.S. telecom companies fly in the face of this agreement. The European Commission has

already made clear that our failure to honor the accord could result in retaliatory

moves by other countries and the World Trade Organization to block US companies

from entering foreign markets. Such restrictions imposed against U.S. companies

could limit their ability to gain a foothold in the global marketplace, and curtail

their ability to gain the scope and size necessary to compete globally. The concerns about national security that underlie the proposed legislation are honorable, but there are sufficient safeguards in place already to protect national

security and assure a level playing field for competitive telecommunications. The

Department of Justice and FBI are required to review the purchase of US telecommunications firms by foreign entities to determine whether the purchase agreement would affect national security or law enforcement concerns. They can make

modifications to such agreements, if it is deemed necessary to protect the national

interest. The Department of Defense may also participate in the process. The FCC

is required to give special scrutiny to any telecommunications purchases by foreign

countries to determine if they pose a risk to competition or to public interest. In addition, the Committee on Foreign Investment in the United States (CFIUS) is required to conduct a separate national security review of US acquisitions by foreign companies. CFIUS includes representatives from the Treasury Department,

The Departments of State, Commerce, Defense, and Justice as well as other governmental agencies. Just two weeks ago, CFIUS cleared Japan’s Nippon Telegraph and Telephone Cor- poration (NTT) bid to take over Verio, Inc., an internet company. Japan’s federal

government owns more about 53 percent of NTT. As part of the CFIUS review, NTT

agreed to strengthen Verio’s handling of law enforcement requests for access to its networks. In addition, in accordance with world trade agreements, the Japanese

Ministry of Finance will offer up to 1 million NTT shares to reduce its stake to

about 46.7 percent. This recent experience demonstrates that current procedures are

sufficient for assuring national security and for accommodating the needs of competitors in the global marketplace.

Our experience convinces us that the telecommunications market is already global, and recent developments demonstrate that procedures are in place to assure national security. Therefore, policy makers and law makers should focus their attentions on the key remaining issues relevant to an advancing telecommunications

market—service and product quality and worker rights.

In a competitive telecommunications market, public policy should require that

competitors within the market operate in ways that advance the nationwide telecommunications system and enhance employment opportunities within it. This is

what CWA has long espoused. Telecommunications policy should promote quality,

universal service, encourage network investment, assure competitive neutrality and

provide for the growth of good union jobs. Policy should support the notion that success in the new competitive global market should be based on superior technology

and service, not on depressed labor costs or neglect of service quality. The achievement of these goals is not dependent upon whether a telecommunications competitor

is government-owned.

As a matter of fact, preventing foreign government-owned companies from entering the U.S. market could deny U.S. consumers the benefits of quality competitors.

U.S. consumers, workers and shareholders could gain from the cross-pollinization of

some characteristics of foreign markets.

For example, while U.S. corporations generally have a single board of directors

responsible for managing the affairs of the corporation, German law governing corporate legal structures requires corporations to have a two-tier system of governance. There is a supervisory board and a management board. The supervisory board

is the larger of the two. Under German law, one half of the supervisory board memVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00103 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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bers are elected by employees to be worker representatives and one-half are elected

by shareholders to represent those interests. The management board has responsibilities for all management decisions and negotiations with third parties. The supervisory board, including the worker representatives, appoints members of the

management board and has the authority to remove them. The supervisory board

monitors the management board’s activities, receives regular reports from the man- agement board, and can require prior approval of some business decisions. The German system of co-determination has given rise to a corporate culture that protects the interests not only of shareholders, as is the case in the U.S. business

environment, but also of workers and their communities. It is a more democratic

culture than ours. For example, among the differences between U.S. firms and foreign firms is the level of executive compensation. According to Business Week’s an- nual survey, the average CEO of a major corporation made $12.4 million in 1999,

up 17 percent from the previous year. That’s 475 times more than an average blue- collar worker. According to another executive compensation report conducted by the

consulting firm of Towers Perrin, German CEOs make 13 times what the average

manufacturing employee makes. In Japan, the CEO-to-worker pay ratio is just 11-

to-one. There is no doubt in my mind that the egalitarian culture of foreign corporations, with the oversight by worker participation on supervisory boards and through

works councils, has resulted in more restrained and reasonable compensation packages for executives.I believe the U.S. corporate culture could be vastly improved by

borrowing some of these characteristics of markets from abroad. The recent merger

of Daimler-Chrysler will provide a first hand look at the marriage of different cultures. The 10 labor members of that company’s 20-member supervisory board will include one representative from the United Auto Workers. In the telecommunications industry, the presence of Deutsche Telekom (DT) in our market place could yield some substantial benefits for workers and consumers.

Deutsche Telekom is a good employer and good corporate citizen, offering corporate

strategies and programs that serve the public interest in Germany. If Deutsche

Telekom successfully enters the U.S. market, it will create a positive competitive dynamic in the US telecommunications industry. DT has spear-headed a very low fee structure for educational institutions in Ger- many, and has enabled every school there to be wired for internet access. DT is committed to making new technology available to everyone. Thus, DT is committed

through action and practice to principles of universal service and to closing the digital divide. The worker voice on the DT supervisory board helped to set the corporate compass in this positive direction.

DT recognizes the rights of workers to form and join labor unions and honors its collective bargaining agreements. As a result, the company enjoys a very positive

relationship with the union that represents its workers. This is in stark contrast

to major telecommunications carriers like AT&T, WorldCom and Sprint, each of

which has an active program to fight worker attempts to organize. If the boards of

U.S. telecommunications companies were structured along the lines of Deutsche

Telekom, I believe we would spend less time fighting for the rights of union workers

to jobs in emerging technologies and more time building a cutting edge telecommunications infrastructure.

However, U.S. consumers and workers would be denied the benefits offered by

such a desirable firm if recent legislative proposals are enacted. These proposals

would prohibit a foreign-company with more than 25 percent government ownership

from merging with or purchasing a U.S. telecommunications company. Currently

the federal government owns about 60 percent of the share capital of Deutsche

Telekom. Thus, under proposed legislation, it would be blocked from purchasing any

U.S. telecommunications firm. Since Deutsche Telekom has recently made an offer

to buy Voicestream, this is a very relevant issue for workers and consumers in the

U.S.

In fact, though, the German Government’s share of DT will decrease over time

by design. Formerly 100 percent government-owned, Deutsche Telekom is undergoing a transformation to a totally private stock corporation. If the concern of the

proposed legislation is primarily with corporate governance, as opposed to ownership, then there is even less cause for concern. Representatives of the German Government hold only two seats on DT’s 24 member Supervisory Board, and none on

the management board. Their votes and voice count no more than the worker representatives on the board.

In conclusion, I believe the U.S. telecommunications market has a lot to learn and

a lot to gain from inclusion of foreign-owned companies. Consumers could benefit

from the expanded choice and access to the global market. Workers could benefit

from the fusion of U.S. technology and resources with the truly democratic governing structures and respect for workers rights evident in foreign corporations. PolVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00104 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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icy makers should take care not to exclude from our midst firms who may actually

provide excellent models for progress.

Mr. SHIMKUS. Thank you, Mr. Bahr.

We will next move to Mr. Sidak—— Mr. SIDAK. Sidak.

Mr. SHIMKUS. [continuing] Weyerhaeuser Fellow in Law and Economics. Again, your written statement is already in the record, and

you are recognized for 5 minutes.

STATEMENT OF J. GREGORY SIDAK

Mr. SIDAK. Thank you.

I would like to tailor my remarks to some of the points that Mr.

Cox and others were making a few minutes ago about the need for

some kind of framework for analyzing the effects of investment by

firms that are partially government-owned on producers and consumers in the United States and to talk about how the government

ownership issue affects that.

The first and I think biggest question to ask is, does the consumer benefit of direct foreign investment in telecommunications

not obtain when the investing company is partly owned by a government? We have heard from Mr. Stanton what some of the benefits would be. I would add that when you have a company the size

of Deutsche Telekom coming in and competing against incumbent

American wireless companies through its investment in

VoiceStream there will be a substantial impact in terms of price

competition and quality competition.

Does the ownership stake of the German Government and the

German reconstruction bank in Deutsche Telekom negate any of

those consumer benefits? Obviously, they do not.

So then we move on to the next question. Does that investment

in some way have an effect on U.S. producers? Yes, it does. It clearly benefits some interests of American producers. So even if our

concern is not consumers but rather, then, producers, we need to

ask what are the effects on those different producer constituencies.

Well, certainly for VoiceStream and its shareholders it is a clear

benefit; and I would argue so is the case for other carriers that look

like VoiceStream that might be potential candidates to fill out the

footprint of GSM service in the United States so that it can be

matched with the footprint in Europe and elsewhere.

A second constituency are large business users of telecommunications services. If there is the downward price effect on services,

then I would predict clearly big users of telecommunications services like banks, insurance companies and so forth would benefit.

A third group is U.S. manufacturers of wireless telecommunications equipment. They are a very good proxy for consumer welfare. When prices go down and output expands, you need to sell

more handsets, more switches, more base stations; and that means

more sales, more profits, more employment for those equipment

manufacturers.

Finally, the fourth category of producers in the U.S. that would

be affected are incumbent wireless carriers. Clearly, they are not

going to benefit from a large new competitor coming into the market. Is that something to complain about? Well, not under the

American ethic of free enterprise. We revere competition, and the

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reduction in the profits of incumbent wireless carriers because they

would face greater competition is not something that they have

good standing to complain about.

There is another issue involved here, and that is there will be

upcoming auctions for additional spectrum, for third-generation

and other spectrum. The entry of Deutsche Telekom through the

investment in VoiceStream will make it a more robust bidder for

the spectrum that the FCC will sell, and that means more revenues

for the U.S. Treasury. If you are an incumbent wireless carrier in

the United States, you would wish not to bid as much for your new

spectrum. That is clearly a benefit of this kind of investment.

Now, is there any potential negative effect on incumbent wireless

providers on their profits as a result of this kind of foreign investment, something that would be anticompetitive? We have heard

about possible theories today. They have not been too specific, and

I would like to address a couple and set to rest certain misconceptions. One, is there some kind of strategy that VoiceStream

through the investment that Deutsche Telekom will bring to it

could engage in that would rely on its having subsidized capital?

Here the facts clearly say no.

In my prepared remarks in table 1 on page 12, I list the credit

ratings for various global telecom companies as well as the credit

rating of the German Government. The German Government gets

a triple A rating from Standard & Poor’s. Deutsche Telekom gets

an AA minus, a considerably lower credit rating, one that is identical to Verizon, for example. That is evidence that there is not a

credit subsidy.

A second piece of evidence that confirms that there is no credit

subsidy is on page 14, table 2 of my prepared testimony. Here I

have calculated the weighted average cost of capital for various

major telecom companies and they are in descending order, and I

also include the percentage government ownership as of September

2000 for all of those companies. Two things should be drawn from

the table. No. 1, Deutsche Telekom at a weighted average cost of

capital at 12.8 percent is higher than Sprint, SPC, AT&T, Bell

South and Verizon. It is not lower; it is higher.

Second, if you look at the column of government ownership, there

is absolutely no correlation between the cost of capital and the percentage of government ownership. So if there is a theory there, it

is not borne out in this evidence.

So I think we can set to on side any theory of anticompetitive

behavior that is predicated on subsidies to capital.

We have also heard that because Deutsche Telekom is currently

in the process of privatization, that its regulator may not be as aggressive as it should be. I have summarized on page 20 and 21 in

table 3 of my testimony key elements of the market entry conditions and the regulatory conditions in both the United States and

Germany so they can be compared side by side. I won’t go into

them now—they are far too detailed—but every picture is worth a

thousand words, and so I ask you to look on page 22 at figure 1.

Mr. SHIMKUS. We need to summarize.

Mr. SIDAK. It shows the decline in the marketshare which Deutsche Telekom has experienced since 1997 compared with the decline in the long distant market share that AT&T experienced beVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00106 Fmt 6633 Sfmt 6602 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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tween 1984 and 1997. It took AT&T 31⁄2 years to get to a 70 percent market share. It took Deutsche Telekom 1 year in terms of the

opening of the market. It took 9 years for AT&T to get to 60 percent and 2 years for Deutsche Telekom.

These are anecdotal pieces of evidence that tend to elaborate on

this question of how open the German market is. I will stop at that

point and invite questions. Thank you.

[The prepared statement of J. Gregory Sidak follows:]


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Mr. SHIMKUS. Thank you very much. Next is Mr. Andrew Lipman, vice chairman of Swidler Berlin

Shereff Friedman.

STATEMENT OF ANDREW D. LIPMAN

Mr. LIPMAN. Thank you, Mr. Chairman.

I have had the benefit of extensive experience in assisting competitive telecom clients enter previously closed local long distant

markets in both the U.S. and abroad.

As the former senior vice president of legal and regulatory affairs

for MFS Communication, at the time the country’s largest competitive local exchange carrier, I obtained on behalf of MFS’s Frankfurt

network the first competitive carrier authorization ever issued in

Germany.

Mr. COX. Could the gentleman put the mike closer. Thank you.

Mr. LIPMAN. After, incidentally, several years and many frequent

flyer awards. Last year Germany generated over $45 billion in telecommunications services and represents the largest and the most

attractive market opportunity for competitive carriers operating in

Europe. Indeed, there are several dozen carriers owned, controlled,

financed, and operated by U.S. firms which are seeking to compete

in Germany against the incumbent government-controlled carrier

Deutsche Telekom or DTAG.

I am here today on behalf of the leading German competitive carrier association, VATM, which is comprised of more than 50 companies, many of whom are American who have experienced firsthand

the trials and tribulations of trying to establish a competitive foothold with DTAG. Our simply stated message is that DTAG should

be allowed to invest in the U.S. telecom market if it satisfies two

preconditions which will help serve to pry open the German market

to competition and in turn eliminate the unfair advantages that

DTAG would have if allowed to compete in the U.S. market.

First, DTAG must make specific binding commitments to cease

immediately its anticompetitive practices such as artificially creating bottlenecks for interconnections, forcing competitors to accept

burdensome interconnection roles, chronically exceeding provisioning intervals for collocation space, impeding billing and collection services, and pursuing predatory pricing.

Second, DTAG’s regulators and the relevant ministries must

commit to enforce these commitments in a manner which no longer

displays favoritism toward DTAG. As recently as 1998, the U.S.

telecom industry was enthusiastic about the prospects of entering

Germany as a result of the WTO basic telecommunications agreement. After some initial inroads in the form of a monopolistic German telecom sector, U.S.-backed competitive carriers have faced increasingly onerous barriers that prevent them from achieving competitive traction in Germany. In an effort to prop up the value of

its investment, the German Government is highly protectionist of

the state-owned and -controlled incumbent DTAG and seeks in

many ways to micromanage and suppress competition.

In the face of announced acquisitions of U.S. telecom carriers by

DTAG, these developments in Germany have rightfully caught the

attention of key Members of Congress as well as others. In this regard we particularly want to compliment Senator Hollings as well

149

as members of this subcommittee for leadership in this area and

for shining a spotlight on these practices in Germany. While problems of anticompetitive practices may exist elsewhere, my testimony today focuses only on particular experiences in Germany.

DTAG’s anticompetitive practices are well documented, in particular, its predatory pricing tactics and its refusal to provide reasonable and timely interconnection. The USTR has been unsuccessfully seeking redress from the German Government for these kinds

of practices for more than a year. In the meantime these anticompetitive practices have actually accelerated. The German ministry and the regulatory authority RegTP have been passive and

accommodating on these issues, such as matters involving DTAG’s

predatory pricing and price squeeze tactics.

While the government should instead be aggressively seeking to

eliminate these barriers and where appropriate impose stiff penalties on DTAG, the ministry has recently announced that it intends to roll back several competitive safeguards previously implemented by the regulator, including price control. DTAG and its government-sponsored directors have calculatedly and deliberately

made it oppressive and unduly expensive for U.S.-based carriers to

invest in the German market. It is difficult enough to compete

against a muscle-bound DTAG with all of the advantages of a

former monopoly; it is especially unfair when the German Government not only dominates DTAG’s side of the playing field, but is

also the referee, umpire, and official scorer. They should shake off

their bodyguard of German Government investors, managers, and

overly sympathetic regulators and compete fairly in the marketplace with privately owned competitors.

In conclusion, DTAG, we would submit, must make the following

commitments to U.S. policymakers necessary for competition both

in the German and U.S. telecom markets: timely publish and monitor provisioning intervals, accept state-of-the-art ordering and

benchmark systems for electronic bonding, contractual penalties for

provisioning and service deficiencies, make available planning data

for new provisioning, and significantly reduce the inflated fees for

bundle loops.

If DTAG is prepared to make these commitments and if the German regulators and ministry represent to the U.S. policymakers

that they will enforce them, then DTAG should be allowed to invest

in the U.S. telecom market. Thank you.

[The prepared statement of Andrew D. Lipman follows:]

PREPARED STATEMENT OF ANDREW D. LIPMAN, SWIDLER BERLIN SHEREFF FRIEDMAN,

LLP

Thank you Mr. Chairman and Members of the Subcommittee for inviting me to

testify on this timely topic. As Vice Chairman of the Washington D.C. law firm

Swidler Berlin Shereff Friedman, LLP, and head of the Firm’s Telecommunications

Practice Group, I have had extensive experience over the past two decades in assisting our competitive telecommunications clients enter previously foreclosed local and

long distance markets in both the United States and abroad. In addition, as the

former Senior Vice-President of Legal and Regulatory Affairs for MFS Communications, (at the time, the country’s largest competitive local exchange carrier), I and

my team obtained on behalf of MFSI Frankfurt Fiber Optic Network GmBH the

first competitive carrier authorization ever issued in Germany.

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1See Appendix 1 (VATM List of Members) attached hereto.

I. INTRODUCTION

Last year, Germany generated over $45 billion in telecommunications services and represents the largest and most attractive market opportunity for competitive

telecommunications carriers operating in Europe. Indeed, there are now several

dozen telecommunications carriers—owned, controlled, financed and operated by U.S. firms—which are seeking to compete in Germany against the incumbent gov- ernment-controlled carrier Deutsche Telekom AG (‘‘DTAG’’). I am here today on be- half of the German competitive carrier association: Verband der Anbieter von

Telekommunikations-und Mehrwertdiensten e.V. (‘‘VATM’’), which is comprised of a

large number of these firms 1 who have experienced first hand the trials and tribulations faced when trying to establish a competitive foothold against DTAG. VATM

is Germany’s most significant competitive carriers’ association, representing more than 50 telecommunications and multimedia companies which have entered the

German market in competition with DTAG. Many of VATM’s members are financed,

operated or controlled by U.S. interests. Our simply-stated message is that DTAG should be allowed to invest in the U.S. telecom market if it satisfies two preconditions which will serve to help pry open

the German market to competition. First, DTAG must make specific binding commitments to cease immediately its anti-competitive activities such as artificially creating bottlenecks for interconnection; forcing competitors to accept burdensome

interconnection rules; chronically exceeding provisioning intervals for collocation

space; impeding billing and collection services; and pursuing a strategy of predatory

pricing in emerging telecom markets. Second, DTAG’s regulators and the relevant Ministries must commit to enforce these commitments vigorously, promptly and in

a manner which displays no favoritism toward DTAG. As recently as 1998, the U.S. telecommunications industry was enthusiastic about the prospects of entering the German market as a result of the WTO Basic Telecommunications Agreement. After a period of initial inroads into the former monopolistic German telecom sector, U.S.-backed competitive carriers have faced and continue to face increasingly difficult, and in many instances singularly burdensome,

obstacles that prevent them from achieving competitive traction in Germany. In an

effort to prop up the value of its investment, the German Government is highly protectionist of the state-owned and controlled incumbent DTAG, and seeks in many

ways to micromanage and suppress competition. In the face of announced acquisitions of U.S. telecommunications carriers by DTAG, these developments in Germany have rightfully caught the attention of key

members of both the House and Senate, as well as the USTR and the FCC. While

problems of anti-competitive practices may exist with government controlled telephone monopolies in certain other countries as well, my testimony focuses on my

competitive carriers clients’ particular experiences in Germany. Over the past several years, DTAG has not only striven to defend its traditional markets by unfair means, but also has blocked competitors from entering emerging

markets such as DSL and advance wireless services. DTAG’s anti-competitive actions are well-known, in particular its predatory pricing tactics and its refusal to

provide reasonable and timely interconnection. The USTR has been unsuccessfully

seeking redress from the German Government for these types of practices for more

than a year. It is particularly troubling that these anti-competitive practices have

been accelerating over the last few months.

The German Federal Ministry of Economics and Technology (the ‘‘Ministry’’) and

the German regulatory authority (the ‘‘RegTP’’) have generally adopted an overly

passive and accommodating stand on issues such as DTAG’s predatory pricing (e.g.

voice telephony, DSL lines and Flat Rates for Online-Services) and price-squeeze

tactics vis-a ́-vis competitors (in particular having extremely low retail prices while

charging competitors high pre-product prices for the individual elements constituting those services in sectors such as interconnection, unbundled local loops and

local access leased lines). The Ministry and the RegTP should instead be aggressively seeking to eliminate these barriers and, where appropriate, imposing stiff

penalties on DTAG—powers that the German government has under the German

Telecommunications Act. On the contrary, the Ministry has recently announced that

it intends to roll back several competitive safeguards previously implemented by the

RegTP. For example, the Ministry stated that it will partially release DTAG from

the current price control mechanism, which was initially adopted to encourage competition. The Ministry also artificially redefined smaller relevant geographic and

product markets in order to make it easier for DTAG to escape dominant carrier

regulation. In light of DTAG’s continuing abuses of its market power, however, now

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2Shortly before the conclusion of the negotiations, the U.S. negotiators of the Basic Telecom

Agreement were met at a briefing of U.S. industry with signs saying ‘‘wildly enthusiastic’’. See

Laura B. Sherman, ‘‘Wildly Enthusiastic’’ About the First Multilateral Agreement on Trade in

Telecommunications Services, 51 Fed. Comm. L.J. 61, 62 n. 6 (1998). 3See Fourth Protocol to the General Agreement on Trade in Services (WTO 1997), 36 I.L.M.

354 (1997).

is not the time to even be thinking of releasing DTAG from these important domi- nant carrier safeguards. DTAG and their government appointed Directors have calculatedly and delib- erately made it onerous and unduly expensive for U.S.-based carriers to invest in

the German market. It is difficult enough to compete against a muscle-bound DTAG

with all the advantages of a former monopoly. It is especially unfair when the German Government is not only ubiquitous on DTAG’s side of the playing field, but is also the referee, umpire and official scorer. DTAG should shake off its bodyguard

of Government investors, managers, and overly sympathetic regulators and compete

fairly in the marketplace with privately owned competitors. At a minimum, DTAG should make the following binding commitments to U.S. policy-makers that the German telecom market is open to fair competition. DTAG

should commit to:

• timely publish and monitor its provisioning intervals on a monthly basis; • accept a state-of-the-art ordering and benchmark system via electronic bonding as

well as severe contractual penalties and other prompt and predictable enforcement action for provisioning lapses and service deficiencies; and

• make available its internal planning data for loop provisioning and significantly

reduce the inflated fees for unbundled local loops.

If DTAG makes these commitments, and if the German regulators and Ministry

represent to enforce these commitments, then DTAG should be allowed to invest in

the U.S. telecom market.

II. MARKET SITUATION IN GERMANY

1) Impact in Germany of the WTO Agreement on Basic Telecommunications

Only a few short years ago, the U.S. telecommunications industry was ‘‘wildly enthusiastic’’ about the successful conclusion of the negotiations resulting in the World

Trade Organization’s (‘‘WTO’’) Fourth Protocol to the General Agreement on Trade

in Services (‘‘Basic Telecom Agreement’’) that entered into force on February 5,

1998.2 At that time, U.S. negotiators committed to open the U.S. telecommunications markets to foreign carriers from WTO member countries, including carriers

owned by foreign governments. U.S. carriers were enthusiastic about the prospects

of entering the previously closed markets, particularly in Europe. Of all the countries announcing market-opening commitments, none generated as much excitement

as Germany. As the largest telecom market in Continental Europe, Germany has

been a magnet for many multinational companies, and the prospects that U.S. based

and financed carriers could capture a part of this multinational telecom business in

Germany were great considering these carriers’ vast technical, marketing, and operational expertise and their valuable experience gained in the emerging U.S. competitive telecom market. Over the last several years, however, competition has not flourished as expected in Germany, and the benefits of the WTO Agreement have not

materialized for U.S. based and financed carriers venturing into the German

telecom marketplace. A large part of the blame can be attributed DTAG’s anti-competitive activities and the German Government’s refusal to take the necessary steps

to reign in DTAG and enact and enforce laws that promote competition.

Detailed below is a snapshot of the state of competition in Germany, and a catalogue of problems encountered by U.S. based and financed carriers seeking to compete in that market. This list is not intended to be exhaustive, but merely sufficient

to capture the essence of the difficulties competitive carriers face and how Germany

has failed to live up to the commitments it made as part of the WTO Basic Telecom

Agreement.

As the centerpiece of its WTO commitment, Germany agreed to provide to carriers

from other WTO Member countries non-discriminatory access to and use of the German public telecommunications network. Germany also committed to abide by the

principles found in the Reference Paper associated with the Basic Telecom Agreement.3 Under the Reference Paper, Germany must provide interconnection with

DTAG’s network on an unbundled, non-discriminatory, cost-oriented and transparent basis, at any technically feasible point in the network. Germany also committed to make publicly available its licensing criteria and apply competitive safeguards when necessary to prevent anti-competitive conduct by DTAG. As demVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00155 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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4 VATM Position Paper (‘‘VATM Report’’), p. 3, The VATM Report is attached hereto as Appendix 2. 5 Id.

6Klaus-Werner Schatz, Liberalization in the telecommunications sector (in German), IWK,

publication 255 (1/2000). 7DTAG 20-F filing with SEC for 1999, p. 68.

onstrated below, these commitments have not been fulfilled. Therefore, at the end

of this statement is a list of specific commitments DTAG must make if Germany

is to be truly open to competition as promised in its WTO commitments.

2) DTAG’s Overwhelming Market Share for Local Services Remains Unchallenged.

DTAG continues to dominate the German local services market. Given the current

regulatory regime and lack of effective enforcement procedures to deter DTAG anticompetitive practices, 4 a customer switching to a competitive carrier encounters a complicated and expensive process. Therefore, it does not come as surprise that

DTAG’s market share on the local level is 97%.5 A recent study on the liberalization of the German telecommunications market published by the renowned German

think tank ‘‘Institut fu ̈ r Wirtschaft’’ /Cologne (‘‘IWK’’) finds that:

(1) DTAG remains the de facto monopolist for local traffic. (2) DTAG can readily cross-subsidize its local services because approximately 90% of the revenues generated by competitors in the long distance market flow back

to DTAG in the form of excessive interconnection charges and billing and collection fees.

(3) For the short and medium term, competitive carriers must continue to rely on

DTAG’s network to reach end-users because it is prohibitively expensive in most cases for competitors to install their own lines to end-users. Alternative access

technologies such as Wireless Local Loop (‘‘WLL’’) or connections via television

cables or energy lines, will not likely soon challenge DTAG’s existing local infra- structure because they face high installation costs, and traffic volumes on the

local level are expected to be relatively low.6

In the emerging DSL market, DTAG is attempting to foreclose competition from obtaining traction by adopting a parade of anti-competitive practices and through

manipulation of its role as the dominant local service provider. These measures include setting self-serving standards which favor its own services and inherently disadvantage competitors. These practices also include leveraging its dominant market

position by failing to provide necessary provisioning and operating support services

to competitive DSL providers who must necessarily rely on DTAG unbundled loops,

provisioning and service coordination. Similarly, DTAG frequently exercises its

dominance to thwart competitors’ attempts to provide Value Added Services such as

entertainment services, weather forecasts and, most importantly, payments for

Internet shopping via the telephone, by simply refusing to provide competitors billing services for e-commerce and innovative tariffs. For instance, selling movie tickets over the phone and charging them through DTAG’s telephone bill is not possible

if an alternative carrier operates the service platform.

III. THE GERMAN GOVERNMENT UNFAIRLY PROTECTS DTAG

1) Intermingling of Interests Between the German Government, RegTP and DTAG

DTAG’s anti-competitive practices are buttressed and in many instances sanc- tioned by the majority ownership and control exercised by the German Government.

In numerous overt and subtle ways, the German Government seeks to fashion laws

and policies to protect its significant investment in DTAG and keep competitors at

leash.

In its annual report for 1999, DTAG candidly admits: ‘‘As long as the Federal Republic directly or indirectly controls the majority of

Deutsche Telekom’s shares, it will, like any majority shareholder in a German stock corporation, have the power to control most decisions taken at shareholders’ meetings, including the appointment of all of the members of the Su- pervisory Board elected by the shareholders and the approval of the proposed

dividend payments.’’ 7

In addition to its undisputed control at the shareholder level, DTAG’s corporate

structure ensures that the German Government exercises close supervision over

DTAG’s business. DTAG’s Board of Management (‘‘Vorstand’’) is controlled and directed by a Supervisory Board (‘‘Aufsichtsrat’’) which consists to a large extent of representatives of the German Government and of the German trade unions. The

Aufsichtsrat appoints, for instance, DTAG’s top managers, determines the long-term

goals of the Company and approves DTAG’s general strategy and major transactions. Further, a significant share of DTAG’s personnel consists of former governVerDate 10-JAN-2001 09:55 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00156 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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8Position Paper of the Federal Government on ‘‘Competition on the Telecommunications and

Post Markets’’ (in German), August 16, 2000, p. 4 to 6. (download available at www.bmwi.de) 9DTAG 20-F filing for 1999, p. 71 and 106.

ment civil servants, who, with the support of their trade unions, endorse DTAG government ownership.

There also are a myriad of different ways for the Government to pave the way

for DTAG indirectly. Many of the personnel in the regulatory authority overseeing

the telecom sector, the RegTP, have been recruited directly from government officials of the former Federal Ministry of Posts and Telecommunications, whose primary mission used to be to supervise and protect the activities of the former Federal

Post and Telecommunications Monopolies. The RegTP is supervised by the Federal

Ministry of Economics and Technology (the ‘‘Ministry’’) and, consequently, vulnerable to political pressure. Therefore, competitive carriers have observed that in

many instances—especially since the change in government in 1998—the RegTP has

not been able and sometimes unwilling to take an aggressive stand, let alone initiate enforcement action, against DTAG.

2) German Ministry of Economics and Technology Interferes Directly to Protect

DTAG.

In connection with its WTO commitments, Germany committed to establishing an

independent regulatory body, the RegTP, to oversee the telecommunications market.

Recent events, however, bring into question the full independence of the RegTP and

consequently its ability to effectively regulate DTAG. So long as the German Government stands to gain economically from its ownership and control of DTAG, the

incentives will remain great for the German Government to enact rules and policies

that favor DTAG vis-a ́-vis its competitors. For instance, it is a matter of concern

that the Ministry recently released a Position Paper in which it announced that the

RegTP ‘‘without undue delay’’ must refrain from reviewing DTAG’s prices for domestic and international routes before they enter into force. The Ministry also mandated that business decisions by DTAG should ‘‘not more than necessary be restricted.’’ The Ministry further reasoned that for business end-users, the prior approval procedure of DTAG’s end-user prices must be abolished completely by 2002/

2003 because new access technologies ‘‘bear the potential’’ for intensifying local competition on the local level.8 Although competitors maintain that there is no support

for these propositions, several DTAG petitions to remove prior RegTP price control

are already pending before the RegTP.

This direct interference of the German Government into the day-to-day affairs of

DTAG is inconsistent with the German Telecommunications Act and European law,

under which the RegTP was intended to be established as an independent body (See

Sec. 66 German Telecommunications Act). The Position Paper is a clear sign that

the German Government intends to steer the telecommunications market into another direction, while overruling the well-established rules and competencies of the

RegTP and the German Federal Cartel Office, both of which are under the supervision of the German courts.

3) Recent UMTS Auction Benefits DTAG Because of German Government Ownership.

The German Government also supports DTAG financially in many ways that impair competitors. Well beyond the aspirations of competitive carriers, DTAG has access to funds and guarantees that allow it virtually unlimited financial freedom to

expand its networks and operations in ways that its competitors cannot begin to

even dream. According to DTAG’s Annual Report for 1999,

‘‘Pursuant to applicable law, all liabilities of Deutsche Telekom outstanding as

of January 2, 1995, the date of Deutsche Telekom’s registration in the Commercial Register (Handelsregister), became guaranteed by the Federal Republic.

This guarantee replaced the Federal Republic’s obligations with respect to Deutsche Telekom’s liabilities when it was a state-owned special asset. Liabilities incurred after January 2, 1995 are not guaranteed by the Federal Republic . . . As

of December 31, 1999, EUR 31.8 billion of Deutsche Telekom’s liabilities were

guaranteed by the Federal Republic.’’ 9

DTAG’s government financial backing indirectly has helped DTAG to succeed in

the recent auctions for the German universal mobile telecommunications service

(UMTS). This auction made international news as six companies bid nearly $50 billion for licenses to offer a new generation of wireless communications in Germany.

In addition, each of the future operators is expected to invest approximately US$

4 billion to rollout its UMTS network. It is unclear when or whether at all UMTS

will become profitable and who will survive the stiff fight for market share. The

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10 RegTP Annual Report 1999, p. 12. 11 USTR 2000 National Trade Estimate Report on Foreign Trade Barriers, at p. 118.

amounts at stake are tremendous, however, and only those players with vast financial resources were able to participate.

Most privately-owned competitive companies simply could not afford to participate

in the auctions. Government-owned companies such as DTAG, however, could participate because of their vast government-backed resources. In essence, these carriers have a government created safety net and therefore enjoy artificially inflated

credit ratings. DTAG, for instance, holds a Standard & Poor’s Single A rating. There

is little dispute that DTAG will be able to raise the funds for the UMTS worldrecord spectrum license fees. After the auction, the other consortia heavily criticized

DTAG for unnecessarily inflating the bidding up by several billion dollars.

IV. IMPORTANT MARKET ENTRANCE ISSUES REMAIN UNRESOLVED.

1) Exorbitant Administrative Fees Render Competitors’ Entrance Difficult.

In a number of European countries, competitors finance the regulatory authority

through fees that are split among the licensees. In Germany, the license fees are

exorbitant and represent a clear barrier to entry. A national voice license costs US$

1.6 million and a national infrastructure license costs US$ 5.6 million. Moreover,

these fees must be paid up-front. Fees for regional or city licenses are also exorbitantly high. Due to this high hurdle for market entrance, of the 305 entities that

hold German infrastructure or a voice licenses 10, many of them only cover small regions or individual cities.

The following chart published by the European Commission clearly demonstrates

that German license fees are out of scale, compared to other EU Member States:

Survey of the European Commission on administrative fees (numbering/licensing) for the first

year of operation (nationwide provision)

EU Member State First Year Fees

Voice 1 in Euro

First Year Fees

Infrastructure 2

in Euro

Belgium .................................................................................................................................... 130,000 21,000

Denmark ................................................................................................................................... 295,000 0

Germany .................................................................................................................................. 2,048,000 5,419,000

Spain ........................................................................................................................................ 143,000 17,000

France ...................................................................................................................................... 366,000 800,000

Ireland ...................................................................................................................................... 51,000 6,000

Italy .......................................................................................................................................... 124,000 165,000

Luxembourg .............................................................................................................................. 290,000 20,000

Netherlands .............................................................................................................................. 58,000 2,000

Austria ..................................................................................................................................... 0 5,000

Portugal ................................................................................................................................... n.a. 20,000

Finland ..................................................................................................................................... 342,000 0

Sweden ..................................................................................................................................... 600 600

U.K. .......................................................................................................................................... 18,000 64,000 max.

1 Chart 38 of EU 5th Report (Fifth Report on the Implementation of the Telecommunications Regulatory Package, November 1999), Annex

4.3.3.1: Total fees for the first year of operation for nationwide provision of voice telephony services (numbering and licensing fees) , not including the operation of the network, for 1,000,000 telephone numbers and 1 International Signaling Point Code (ISPC), and 4 National Signaling Point Codes (NSPC). 2 Chart 41 of EU 5th Report, Annex 4.3.3.2.

Accordingly, two U.S. competitive telecommunications associations have already

filed formal complaints concerning the German licensing fees as part of the USTR’s

annual review of telecommunications trade agreements under Section 1377 of the

Omnibus Trade and Competitiveness Act. In one industry report on Foreign Trade

Barriers submitted to USTR, Germany’s fee structure was listed as one reason to

place Germany on the list of countries that lack full or satisfactory implementation

of commitments under the WTO Basic Telecommunications Agreement.’’ 11

2) Interconnection and Unbundled Local Loop Problems with DTAG

Equally egregious to the licensing fee barrier to entry are the myriad problems

competitors face in obtaining access to essential facilities and interconnection. In

virtually all instances, competitive carriers must rely on interconnection by DTAG

to reach end-users. Alternative networks, such as WLL technologies, have yet to be

implemented to provide an alternative to DTAG’s ubiquitous network.

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12 Id. at p. 119.

In its 2000 National Trade Estimate Report on Foreign Trade Barriers, the USTR stated: ‘‘The competitors to DTAG operated in considerable contractual uncertainty

throughout 1999, after DTAG cancelled existing interconnection agreements in

December 1999. On December 23, 1999, the German telecommunications regulatory agency (RegTP) finally approved new interconnection tariffs. These tariffs

will remain valid until February 28, 2001. Competitors largely welcomed the

rates, but noted that RegTP had still not ruled on a number of other important

rate-related issues. In particular, DTAG has sought to impose numerous additional—and in the new entrants’ view arbitrary and unsubstantiated charges for

carrying competitor’s traffic.’’ 12

One of the main reasons for the continuous struggle on interconnection issues be- tween DTAG and its competitors in Germany (with dozens of complaints filed every

year with the RegTP) is the fact that it is DTAG which still dictates unilaterally

the rules and conditions for interconnection, not the RegTP—as it should be under

EU law. The RegTP has yet to develop, together with all competitors and with the

aim of truly well balanced non-discriminatory interconnection conditions, its own

binding and fair Reference Interconnection Offer as required by EU law. Competitors have developed alternative draft interconnection agreements in an attempt to

improve this long-lasting unsatisfactory situation in Germany. These draft interconnection agreements, however, have in fact been ignored by DTAG during negotiations. Therefore, DTAG continues to force competitors to accept new interconnection

rules and proposals or risk having their interconnection agreements terminated. The

RegTP tolerates in principle this situation and only takes action, albeit in a modest

way, if there are large injustices at stake.

USTR, in its on-going investigation of Germany under Section 1377, noted that

interconnection is a key significant barrier to entry into the German market by competitive U.S. companies. As USTR noted, several new entrants reported that DTAG

was not providing interconnection in a timely fashion, on terms and conditions and

cost-oriented rates that are transparent and reasonable. For many U.S. competitive

carriers seeking to do business in Germany, the interconnection difficulties are

reaching the boiling point. Serious backlogs remain for obtaining from DTAG points

of interconnection for competitors, particularly in bottleneck metropolitan areas.

VATM recently initiated a survey among its members that covers approximately

1,500 orders for collocation space under the Local Loop contract, placed by 15 different carriers. The results are as follows:

1) Preparing an offer

(a) In 86.3% of all cases DTAG exceeds the stipulated interval for Preparing an

Offer for collocation space (the interval is supposed to be 20 days according to

the agreement between the Competitors and DTAG, approved by the RegTP)

(b) In 50.69% of the cases mentioned under (a) DTAG exceeds the interval for Preparing an Offer for collocation space by 250% (50 days or more).

2) Provisioning of collocation space

(a) In 77.02% of all cases, DTAG does not comply with the provisioning intervals,

which is 16 weeks from the receipt of the final order by DTAG.

(b) In 32.77% of all cases DTAG exceeded the stipulated interval for providing collocation space by 12 weeks or more (more than 75% of the stipulated time).

This number is expected to increase because DTAG has not even processed

many orders.

(c) In 171 cases, DTAG did not provide the requested collocation space at all, particularly when DTAG’s Central Office was located in an attractive commercial

area. This is happening on an increasing basis.

(d) The situation of placing offers and the provision of collocation space is particularly burdensome in the metropolitan bottleneck areas Essen, Du ̈ sseldorf, Stuttgart, Munich, Hamburg, Cologne, Karlsruhe and Freiburg. In addition, competitors observe increasing serious provisioning delays with DTAG in smaller cities,

such as Hagen, Gelsenkirchen and Krefeld.

VATM concludes:

‘‘Even after the RegTP decision rendered on June 7, 2000, DTAG seriously obstructs competition on the local markets as the survey clearly demonstrates, not

only in individual cases, but systematically by artificially created bottlenecks. In

particular, new market entrants in the local markets suffer from DTAG’s obstruction policy.’’

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13 VATM Report at 3. 14 Id. at 4. 15 Id. 16 Id. at 2.

Due to the backlog in obtaining interconnection capacity from DTAG and pressure

from the U.S. Government, the RegTP published last year a ranking scheme for

processing competitors’ orders. However, DTAG still refuses to make public information on the availability of interconnection lines for each point of interconnection and

will not publish the ranking of each carrier for those lines. Consequently, competitive carriers cannot efficiently plan when interconnection and the ensuing number

of lines will become available at a certain point of interconnection. Further, additional delays result from DTAG’s deliberate strategy to retire relevant technical personnel and to outsource the provisioning of interconnection services to sub-contractors who are not familiar with DTAG’s network.13 Additional artificial obstacles,

such as DTAG’s refusal to let competitors share standard collocation space or to provide data on DTAG’s network planning 14 exacerbate this situation.

In the Unbundled Local Loop (‘‘ULL’’) sector, DTAG typically does whatever it can

to delay the entrance of competitors. DTAG almost never delivers to new entrants

within the stipulated timeframe the key prerequisite for establishing service, i.e. the

collocation space at the Central Office. Consequently, competitors’ network planning

and deployment speed are significantly delayed. Problems with the delivery of

unbundled loops also are commonplace, in particular if DTAG must visit the customer or transfer a customer’s access number to complete the unbundling. For instance, DTAG’s actual ULL contract does not contain binding provisioning intervals,

so DTAG does not suffer any consequence for exceeding these intervals. In addition,

switching of business customers during off-peak periods is only offered on a limited

basis. Fortunately in one of these cases the RegTP did intervene. Last June, the

RegTP imposed binding provisioning intervals on DTAG but unfortunately no penalties in case of non-fulfillment.

Finally, with regard to the quality standards that DTAG provides to its competitors, DTAG does not treat its subsidiaries and competitors on an equal footing. For

instance, DTAG refuses to make automatic alternative overflow/emergency routing

available to its competitors, while at the same time offering it to its subsidiaries.15

3) Restrictions on Billing and Collection Services by DTAG

DTAG, with the confirmation of the RegTP in the case of innovative Value Added

Services (in particular, e-commerce), tries to impose such onerous requirements on

its competitors as to refuse for all intents and purposes to provide necessary billing

and collection services. In its most recent offer, for instance, DTAG not only raises

its charges for these services by up to 600%,16 but also requires each individual competitor to submit to DTAG written direct debit authorizations individually for every

single customer in order to be eligible for billing and collection services. If the authorizations are not submitted, DTAG charges the competitor a penalty for each cusVerDate 11-MAY-2000 15:25 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00160 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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17 Id. at 8.

tomer. It is not only extremely burdensome to provide these written statements for

up to 48 million German households, but also impossible to provide in those cases

where a carrier does not have a nexus with their end-users, such as dial-around carriers and carriers with specific Value Added Services. In addition, as already mentioned, DTAG is not obliged, due to a recent regulatory decision, to provide billing

and collection for innovative Value Added Services (e-commerce) of its competitors.

4) DTAG’s Proposed New Network Structure is Unfairly Burdensome for Regional and National Competititve Carriers.

Currently, DTAG’s interconnection tariffs are based on a 4-tier structure: ‘‘City’’, ‘‘Regional (50 km)’’, ‘‘Regional (200 km)’’, and ‘‘National’’. During the last year, the RegTP has studied a network element-based system for interconnection rates similar to the rate structure in other European countries (‘‘local’’, ‘‘single transit’’, ‘‘double transit’’). Yet, DTAG has submitted a proposal that, if adopted, will fundamentally change the interconnection regime in Germany, to the distinct disadvantage

of competitive carriers. In particular, DTAG intends to impose a requirement of

1,000 local points of interconnection (‘‘POI’’) on any competitive carrier that seeks

local interconnection tariffs for the entire territory of Germany. If approved, this

new model is expected to become effective in 2001. Due to the size of the ‘‘City’’

areas, a competitor is currently allowed to cover, for instance, the City of Berlin

with only one POI and is eligible for ‘‘City’’ interconnection rates. Under DTAG’s

proposal, a competitor covering the same Berlin area would have to interconnect at

46 local POIs to reach all end-users at the local rate. Consequently, competitors are

compelled to invest heavily into network planning to mirror DTAG’s inefficient network and may be forced to write-off parts of their investment in infrastructure.

Once again, this measure serves no useful purpose and is designed simply to raise

the bar (and ensuing costs) for competitive providers. This is especially true for the

many U.S. companies with nationwide activities in Germany that relied on the

RegTP’s ruling last year that they only needed a minimum of 23 POIs to cover Germany. These companies are now faced with the burden of making a huge new investment in POIs if they don’t want to lose considerable ground. Under the new network-element based structure, these competitors would be severely punished for

their streamlined national network structure on the basis of 23 POIs because DTAG

would charge them the double tandem-tariff to terminate the calls. This extremely

unfair situation was not at all foreseeable for them previously, and therefore makes

obsolete their existing business cases.

In addition, the new network concept may inevitably lead to increasing predatory

pricing by DTAG because the RegTP cannot use its unwritten principle that there

should be a margin of at least 25 % between DTAG’s end-user prices and the underlying costs of a competitive carrier (calculated by using only interconnection fees,

no switches, no backbone, marketing, customer care, billing, etc.) necessary to provide the same services to its end-users.17 The interconnection charges structured

along network elements cannot be put into this oversimplified model anymore. A

more sophisticated model will need to be developed.

5) The RegTP’s Regulatory Decisions Lack Transparency.

In contrast to the United States and most other European countries, there is considerably less transparency in the decision-making of the RegTP. The RegTP’s

website does not generally make the text of the RegTP’s decisions available to the

public. When tariff applications and decisions are made available to competitors,

data is often heavily redacted to protect alleged ‘‘business secrets’’ of DTAG. This

practice is considerably less open than the U.S. system or that of many European

regimes where cost information of competitors is more readily available in order to

determine whether access and other charges made by dominant carriers are in fact

cost-based.

6) The RegTP’s Regulatory Decisions Are Not Sufficiently Enforced.

As important as having clear industry standards and provisioning intervals is the

ability to enforce these standards against incumbents swiftly and predictably. Experience in Germany with interconnection shows that the RegTP is extremely reticent

about implementing a regulatory decision on this subject. Regulatory procedures are

often long and burdensome, which lag naturally tends to benefit incumbents. Last

June, the RegTP rendered a decision on some disputed ULL issues, such as splitting

the costs for moving collocation space to another location and imposing binding provisioning intervals on DTAG for the delivery of ULL access. However, bowing to political pressure the RegTP refused a U.S. competitor’s requests to impose automatic

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18 Id. at 10. 19 Handelsblatt 07/25/00, Press Conference of RegTP President Scheurle. 20 VATM Report at 5.

penalties on DTAG for violating the provisioning standards. In its decision, the

RegTP—for the same reasons—also refused to introduce a process that automatically monitors DTAG’s provisioning intervals, similar to the systems used in Texas

and New York, which would automatically calculate damages for under-performance

of DTAG. With little explanation or justification, the RegTP argued that implementing a benchmark system would be much too difficult and expensive.

Given the market inequality between DTAG and its competitors, and DTAG’s incentive for delay, this process will not succeed on its own accord. In effect, if DTAG

fails to meet the binding provisioning intervals for collocation space and lines, each

competitor is forced to lodge individual complaints for every line or collocation space

with the RegTP in order to challenge each particular delay. Otherwise, the competitor has to sue DTAG in court for each delay. This is not only burdensome and expensive, but also causes additional backlog and delay due to an overload on the regulator’s docket. So far, the RegTP has not yet imposed significant penalties on

DTAG.

Not content with the current regulatory situation, the Ministry seeks to further

clip the RegTP’s wings. As already mentioned the Ministry’s Position Paper places

even more restrictions on the ability of the RegTP to effectively regulate DTAG. The

Paper determines that the RegTP should approve DTAG’s prices ‘‘for at least one

year’’ in order ‘‘to avoid unnecessary bureaucracy putting a burden on the market,

in particular on DTAG.’’ 18 Sadly, the RegTP appears to not recognize the need for

changes in any of these policies in order to promote competition. The RegTP recently

applauded DTAG’s plans to acquire telecommunications companies in the United

States because of the ‘‘background of the liberalized German telecommunications

market’’ 19 in which U.S. carriers are investing. For these reasons, I am not sanguine that the German Government will take any action to increase competition in

the German telecommunications market.

V. DTAG’S ANTI-COMPETITIVE BEHAVIOR IS NOT KEPT IN CHECK BY THE REGULATOR.

As most recently evidenced in the Ministry’s Position Paper, the RegTP, although

established under German Telecommunications Act as an independent body, has

come under increased pressure from the German Government to protect DTAG’s interests and financial well being. As a result, even though the RegTP touts the

‘‘achievements’’ of liberalization of the German telecommunications market, its regulatory practices prove increasingly otherwise.

1) DTAG Is Not Prevented from Engaging in Cross-Subsidization.

In Germany, the Ministry has publicly declared that it wants to lift the longstanding ‘‘ex ante’’ price control in certain sub-markets, meaning the RegTP will no

longer review DTAG’s prices before they enter into force. This measure will almost

certainly encourage DTAG to engage in below cost pricing for special customer

groups, which will lead to a customer migration from the competitors back to DTAG.

There is no control over DTAG’s prices because the Ministry and the RegTP are not

advocating accounting separation of DTAG to the extent that markets (both regional

and products) under price control are separable from markets without price control.

This is particularly true if the German market will be divided into several regional

markets, as suggested in the Position Paper.20 According to the Paper, DTAG may

be released from the price control regime in several of these markets, even though

it is within the purview of the German Cartel Office and the RegTP, not the Ministry, to determine the relevant markets. Without proper cross-subsidization control

through separated accounts, this measure will allow DTAG to reinforce its dominant

position in these markets. This is especially the case because DTAG has not been

forced to compete through bifurcating its local network and other local and long distance services. Among other things, DTAG may be able to cross-subsidize its international business if it penetrates the U.S. market by imposing high access and local

charges in Germany.

This behavior is encouraged by the RegTP’s practice of determining price caps for

DTAG’s access charges. Currently, the RegTP only differentiates between residential

and non-residential services, and curiously places international, national long distance, local and access services into the same basket. Consequently, DTAG is in the

position to comply with the price cap by offering low rates for its long-distance and

international services, where competition is emerging, and by keeping the prices for

its local access services (where competition is embryonic) artificially high. The end

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21 Id. at 3.

customers using DTAG’s local services, and the competitive carriers, will end up

bearing the burden of this regulatory policy.

2) DTAG is Following a Strategy of Strategic Pricing in New Markets.

From a traditional point of view, strategic pricing prevents competitors from entering into a field because a dominant company can artificially keep prices low until

the competitors are driven from the market, after which point the prices for the

products concerned are raised. Over the past several years, the RegTP has not sufficiently discouraged behavior that has elements of strategic or predatory pricing. The

most recent example is the RegTP’s conditioned approval of a DTAG flat rate (making calls and surfing the Web on Sundays). Bowing to Government pressure, the

RegTP approved this DTAG service over the strenuous protests of DTAG’s competitors. Most recently, the RegTP did not seek to suspend DTAG’s offer to provide DSL

services to residential end-users for less than $5 a month. This price, in the view

of many competitors is clearly predatory and is much lower than in the United

States where the DSL equipment is already significantly less expensive.

By engaging in this strategic pricing, DTAG seriously impairs competitors from

entering the promising DSL market. It is true that strategic pricing may not work

if a company is required to raise the prices for these specific products after a certain

time period to finally cover its costs. However, a Party may decide to raise the prices

for related products such as content if it has a dominant position in the means to

access these products. Therefore consumers may pay less for access to the content,

but much more for the content than in a competitive market situation without strategic pricing in the developmental phase of the market.

The following gives two concrete examples of DTAG’s strategic pricing.

(a) The RegTP has allowed DTAG to provide a rebate to a customer who is already an ISDN customer and subscribes to the flat rate of DTAG’s Internet provider

‘‘T-Online’’ (for $ 41 per month). The ISDN connection ‘‘AktivPlus’’ (including a 50%

rebate for voice telephony) currently costs DM 54.88 (US$ 27) per month. In total,

Internet via ISDN amounts to DM 133.88 (US$ 68). If the same customer subscribes

to DTAG’s new T-DSL service as of September 1, 2000, the customer will only be

charged:

• DM 54.88 for the ISDN connection AktivPlus

• DM 14.89 (T-DSL)

• DM 49 (Flatrate T-Online DSL)

TOTAL: DM 118.77 (US$ 55) including the high speed and higher bandwidth of a

DSL line.

(b) The RegTP recently issued an order permitting DTAG to introduce a flat rate

XXL (DTAG’s first flat rate offer) for a test period of 7 months beginning on June

1, 2000. This is good for Sundays and holidays only. Accordingly, DTAG’s ISDN customers may choose to accept an increase in their monthly fee of DM 14.89 ($8) in

order (without additional costs):

(1) To have unlimited surfing of the Internet via DTAG’s provider T-Online; and

(2) To make unlimited telephone calls within Germany.

Further, customers may not be preselected to a competitor to use this service.

Also, prior to this order DTAG was only permitted to charge for its services on a

per-minute basis.

Competitors widely criticized this rate package unsuccessfully arguing that it materially increases the price squeeze between DTAG’s interconnection charges (calculated on a per-minute-basis) and its end-user charges. Significantly, DTAG did not

offer competitors comparable flat-rate services (such as interconnection) to enable

them to offer their own flat rates. Competitors expect significant customer migration

as a result of this pricing policy. The offer also blurs the line between DTAG’s fees

for voice telephony, where the RegTP’s prior price approval is required, and Web

communication, where this is not the case. It is already foreseeable that the XXL

flat rate will lead to further congestion on DTAG’s network because heavy users,

who are no longer charged on a per-minute-basis, will remain connected to DTAG’s

network for the entire day. In addition, DTAG will be in the position to present bundled offers (for instance, combining voice and Internet services) which will undermine any efficient price control by the regulator.21

3. DTAG Has No Outside Incentive to Open Its Local and Long Distance Markets

As the incumbent carrier for local, long distance and international services, there

is not one line of the telecommunications business that DTAG does not dominate.

DTAG already has telecommunications facilities in virtually every building in GerVerDate 11-MAY-2000 15:25 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00163 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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22 Id. at 2.

many, and has long-established relationships with most businesses. In contrast, in

the United States the Bell Operating Companies (‘‘BOCs’’) historically have been precluded from providing long distance service. Under Sections 251 and 271 of the

1996 Telecommunications Act, Congress was able to create a large incentive for

BOCs to open their local markets, and provide interconnection and unbundled local

loops, by making the BOCs entry into the long distance market conditioned on their

complying with the regulations and safeguards needed to open the local markets.

This is a powerful tool that the U.S. Government has for fostering competition. Unfortunately, the RegTP does not have such a competitive mechanism and there are

few, if any, incentives for DTAG to affirmatively open their market. Therefore, it

is even more critical that the RegTP be totally independent from the influences of

the German Government, and can take an aggressive role regulating DTAG. So far,

the RegTP has, after initial tough actions under another government, increasingly

not been able to do so. As a result, DTAG continues to dominate the markets, succeeds in dominating new ones, and competition remains embryonic.

VI. PROPOSED EU LEGISLATIVE MEASURES WILL NOT CHANGE THE PICTURE.

In many cases, gaps exist between national laws and EU laws as its Member States unequally interpret EU directives. The most recent EU proposed directives

which intend to spur competition and close the ‘‘digital divide’’ with the United

States generally will not take effect until the end of 2001 and have not yet passed

the EU Parliament. Past experience has shown that EU Directives are implemented

quite unevenly within the Member States. In the aforementioned Position Paper,

the Ministry already warned the EU that ‘‘the adoption of the additional legal standards in compliance with the development of competition must not be obstructed by EU law.’’ The ‘‘principle of subsidiarity’’ (safeguarding the priority of na- tional law over EU law) ‘‘must be strictly adhered to.’’ The goal is that ‘‘the German

legislator should have sufficient room for maneuvering to ensure the competitiveness of German [emphasis added] carriers on the European and global level.’’ 22

Therefore, one should not expect that pro-competitive missives from Brussels will

improve the competitors’ situation in Germany.

VII. PROPOSAL.

In order to evaluate which measures the U.S. Government should adopt to encourage open market environments, the matter should be addressed on a country-bycountry basis. In the case of Germany, DTAG’s behavior as a whole has been anticompetitive, and the German Government’s response has not been in congruence with its WTO obligations. Moreover, the competitive situation has actually worsened

during the last year. Because DTAG’s share price has plummeted by approximately 60% since the beginning of this year, there is mounting pressure from the political

level public on the Federal Government to interfere with market and competitive

forces to bolster DTAG’s stock. • In general, a key goal should be to ensure that U.S.-based and financed compa- nies have an open market environment and the opportunity to compete, as set forth

by the WTO agreements, particularly as to cost based interconnection and access

to end users. The RegTP and the Ministry are obviously under political pressure to

protect DTAG. However, there is no valid reason that a highly industrialized country with an advanced telecommunications regulatory regime like Germany should

not be able to abide by the WTO standards. Therefore, DTAG can and should make

the necessary commitments to change its anti-competitive practices in order to create an open environment and adequate opportunities for meaningful competition in

Germany. In addition, regulators must actively enforce these commitments by

DTAG. Provided that these commitments are made and enforced, the United States

should allow DTAG to own U.S. telecommunications companies. • Although the German regulatory authorities will take a primary role in enforcing DTAG’s commitments as they relate to its actions in the German telecom mar- ket, U.S. regulatory authorities also should play a role. The U.S. Government has

both expansive and flexible competencies in the sector of merger approvals. Merger

approvals should be granted under the condition that the U.S. Government supervises the performance of DTAG and has the power to impose stiff penalties upon

backsliding and failure to adhere to any commitments it makes. The following are

the minimum commitments to the regulators that DTAG should make to ensure

open competition in the German telecom market.

1) DTAG must timely publish and monitor its internal and external provisioning

intervals for all products it offers to competitors such as unbundled local loops, colVerDate 11-MAY-2000 15:25 Jan 10, 2001 Jkt 010199 PO 00000 Frm 00164 Fmt 6633 Sfmt 6621 E:\HEARINGS\67113.TXT pfrm03 PsN: 67113
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location space, interconnection lines, etc. (including all milestones, for instance the

intervals for preparing the offer). The information should be published for each

month by the end of the first week following that month.

2)DTAG must accept considerable contractual penalties for provisioning lapses

and other service deficiencies in their agreements with their competitors. Penalties

for failure to meet the benchmarks should be assessed in accordance with terms contained in the interconnection agreement. A pre-established matrix should be used

and made publicly available to determine the penalty for failure to comply with a

given benchmark.

3) DTAG must provide convincing evidence that it complies with the provisioning

intervals by observing a benchmark of at least 98.5% of all orders (presenting the

order collocation space, delivery of collocation space, reaction period for a loop order

or interconnection port order, and delivery of the loop or the interconnection port

order). Each order should be delivered free from defects. If DTAG falls below this

benchmark during a certain month, DTAG must make good for this difference during the following month if it wants to avoid predetermined considerable penalties.

4)DTAG must make available its internal data which serves as DTAG’s basis for

loop provisioning to competitors so that both competitors and DTAG must commence

discussions as soon as possible on how to streamline the process. The target deadline should be sufficiently in advance of the RegTP’s review on DTAG’s ULL charges

by March 31, 2001. Electronic bonding, meaning a state-of-the-art online connection

between DTAG and the competitors for ordering and monitoring of the competitors’

orders, must be part of the process. The RegTP should review the ULL charges on

the basis of the streamlined process. The goal is significant reduction of DTAG’s inflated fees for unbundled loops.

VIII. CONCLUSION

DTAG and their government appointed managers have calculatedly and deliberately made it onerous for U.S.-based carriers to compete in the German market.

DTAG should shake off its bodyguard of Government investors and managers and

compete fairly in the marketplace with privately owned competitors. Therefore,

DTAG should be allowed to invest in the U.S. telecom market if it meets two conditions that will serve to help pry open the German market to competition. First,

DTAG must make specific binding commitments to cease immediately all its anticompetitive practices. In this regard, DTAG should commit to timely publish and

monitor its provisioning intervals on a monthly basis; to accept a state-of-the-art ordering and benchmark system via electronic bonding as well as severe contractual

penalties and other prompt and predictable enforcement action for provisioning

lapses and service deficiencies; to make available its internal planning data for loop

provisioning; and to significantly reduce its inflated fees for unbundled local loops.

Second, DTAG’s regulators must enforce these commitments vigorously, promptly

and in a manner that displays no favoritism toward DTAG.

APPENDIX 1

VATM LIST OF MEMBERS

ACC Telekommunikation GmbH; Alpha Telecom GmbH; Bertelsmann New Media;

Broadnet Deutschland GmbH; BT Telecom Deutschland GmbH; Cable & Wireless

Deutschland GmbH; Callino GmbH; Carrier 1 AG; Carrier 24 GmbH; COLT Telecom

GmbH; Completel GmbH; KDD Conos AG; debitel AG; D Plus Telecommunications

GmbH; Drillisch AG; Econophone GmbH; E-Plus Mobilfunk GmbH; European Telecommunication Holding E.T.H. AG; EWE TEL GmbH; FirstmarkCommunications

Deutschland GmbH; First Telecom GmbH; Gigabell AG; Global TeleSystems

(Deutschland) GmbH; HanseNet Telekommunikation GmbH; Hermes Europe

Railtel; Hutchison Telecom GmbH; Interoute Telecom Deutschland GmbH; isis

Multimedia Net GmbH; KKF.net AG; Level 3 Communications GmbH;

Mannesmann Arcor AG & Co.; Mannesmann AG; MCI WorldCom Deutschland

GmbH; mcn tele.com AG; MobilCom AG; Netcologne GmbH; NETnet

Telekommunikationssysteme GmbH; NETZTEL Plus AG; One.Tel GmbH; QS Communications AG; RSL COM Deutschland GmbH; Star Telecommunications Deutschland GmbH; Talkline GmbH; Talkline Infodienste GmbH; Tangens GmbH; TeleBeL

Ges. Fu ̈ r Telekommunikation Bergisches Land mbH; Telegate AG; Teleglobe GmbH;

Telia Telekommunikations GmbH; tesion Communikationsnetze Su ̈dwest GmbH &

Co. KG; Versatel Deutschland GmbH; Viatel Global Communications; and Victor

Vox GmbH & Co. KG.

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APPENDIX 2

PROPOSITIONS REGARDING THE COMPETITIVE AND REGULATORY SITUATION IN THE

GERMAN TELECOMMUNICATIONS MARKET—(ENGLISH TRANSLATION)

CONDITIONS FOR FAIR COMPETITION NO LONGER EXIST— REGULATION OF THE GERMAN

TELECOMMUNICATIONS MARKET THREATENS TO FAIL

1. Deutsche Telekom (‘‘DTAG’’) increasingly determines the rules of the game. The Regulator (‘‘RegTP’’) is threatening to lose control. A clear policy favoring competition is required.

DTAG’s strategy ranges from massively influencing political and regulatory deci- sions to systematically delaying and obstructing the development of competition.(The following merely outlines some of the more important instances out of an

extensive repertoire of competition-obstructing practices by DTAG. Due to their complexity only their highlights are presented in the following.)

DTAG Consistently Abuses Its Market Power

Various services which are of substantial significance to competition in tele- communications are being offered solely to DTAG subsidiaries or its retail customers, but not to its competitors. One example of a technical service not being offered to competitors is automatic quality assurance measures in cases of network

overload or switch failure (overflow and emergency rerouting services). Certain services and pricing terms, too, local flat rate calling for example, are being exclusively

offered to DTAG’s IP subsidiary T-Online, consequently harming the development of the Internet market. DTAG responds to innovative service offerings by competitors, as for example xDSL, with massive predatory pricing campaigns.

DTAG Prevents The Implementation Of RegTP’s Regulatory Decisions

Even where DTAG has been forced to compete fairly, DTAG is openly obstructing the implementation of regulatory decisions, or is circumventing such decisions in

practice through new obstructive behaviors. In response to DTAG’s complete refusal

to offer billing and collection services to competitors, the regulator more than one

year later ordered DTAG to submit a new draft contract addressing such service.

Instead of a full contract and much later than required, DTAG merely submitted

a set of general terms and conditions which would prevent the offering of dialaround (‘‘Call-by-Call’’) services. Not only does this offer substantially raise prices,

it also requires the submission by the competitive carrier for each end customer

wishing to take advantage of dial-around services while having these charges appear on his regular phone bill, of a prior written authorization for withdrawals from

his account. It is in the ad-hoc nature of the dial-around offering that the carrier

does not know who his customers will be.

DTAG Prevents The Implementation Of Court Orders

Even court orders, including threatened fines, are being ignored by DTAG. A court

order threatening to impose fines of approximately $ 22,000 upon DTAG for the continuing refusal to offer a service vital to competition (billing for competitive valueadded services) showed no effect. In March of this year, DTAG for the first time was

fined for contempt. In several cases it took temporary injunctions to force DTAG to

compete fairly.

DTAG Prevents Customer Acquisition By Dial-around Service Providers

The principal inroad into the residential market has been through dial-around,

rather than through pre-subscribed carrier choice. Central to the viability of dialaround services is the ability to offer simple usage and billing options without prior

written agreements. As some 60% of the population to date has never utilized a

competitive provider to make even a single phone call, DTAG is doing all it can to

make the use and billing of dial-around arrangements as difficult, or at least as expensive, as possible. The complete refusal to offer billing services to dial-around providers would mean for the customers to receive and pay a multitude of bills, at least

some of which will be for pennies only. Even as competitive carriers will be obliged

to establish and operate their own customer care and collection services, DTAG is

now trying to raise the price of its remaining billing services (billing and initial payment acceptance) by up to 600%.

DTAG Prevents Customer Acquisition By Preselection Of Long-distance Providers

Since more and more customers are opting for preselection, instead of dial-around,

DTAG is increasingly delaying the switching over of such customers to competitors,

wrongly or never informing customers and carriers about impending transfers, with

over 10% of transfers being switched to the wrong carrier or not switched at all.

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Customers interested in switching over are subjected to unfair win-back marketing

strategies including rebates. New tariffed offerings by DTAG (for example the new

XXL Flat Rate) include terms and conditions, which preclude subscribers from preselecting a competitor, thus leveraging DTAG’s 97% market share in local exchange

to additionally impair the newly emerged competition in long-distance telephony.

Through these so-called ‘‘bundled offerings’’, DTAG is able to use its overwhelming

market dominance to once again monopolize markets which were believed to be

safely on the road to competition.

DTAG Prevents Customer Acquisition by Change Of Local Exchange Network Operator

The greatest difficulties are those encountered in changing the local exchange network operators permanently. Here, DTAG has, and continues to, massively delay or

prevent the necessary physical switch-over of the customer loop (claiming that no

collocation space is available), a practice which at various times has been found to

be an abuse of dominant market power by the RegTP. Since those regulatory rulings

however, no measurable improvement has occurred; rather the situation is worsening. Now as before, competitive carriers are paying more for the unbundled customer loop than end customers of DTAG are paying for complete local exchange

services. Before this background, and at prices which cannot be matched due to the

high prices competitive carriers are being charged, DTAG is currently offering bundled Internet and broadband connections far below its own cost (offering such service for a mere approximately $4 extra, despite initial deployment costs of about $300

per customer).

DTAG Intentionally Constrains the Supply Of Resources Vital To Competition

The spectrum of such actions reaches from the firing of DTAG technical personnel

and their replacement by qualitatively inferior subcontractors to the deficient or delayed provisioning of required network elements and collocation spaces. In doing so,

DTAG is pointing fingers at the alleged difficulties of component suppliers, which

these suppliers are usually unable to confirm. Increasingly, DTAG even argues that

its own real estate subsidiary is unwilling to provide the necessary collocation

spaces.

DTAG is Firing Personnel Urgently Required for Competitive Carrier Provisioning

Increasingly, DTAG claims that personnel bottlenecks are to blame for massive

delays in processing and provisioning orders. Nevertheless, personnel is being reduced in the very areas in which demand will, due to the network build-out activities of competitive carriers demanded by DTAG itself, continue to be high and increase further. This situation is leading to extreme overwork of individual DTAG

employees who are, despite their own enthusiastic efforts, not able to make up for

these personnel shortages.

DTAG Is Preventing The Economical Utilization Of Existing Resources

In spite of existing capacity constraints which are only going to increase on a

going forward basis, for example with regard to available collocation spaces, DTAG

is preventing the efficient use of such network capacities on a level which in other

countries is routine and even according to DTAG technically unproblematic. With

reference to the alleged lack of any legally binding obligation to do so, DTAG is refusing to divide existing collocation spaces among competitors, or even to simply

permit the installation of air conditioning (of course, at the expense of the competitive carriers). To date, DTAG has not even bothered to respond to a request for a

statement on that matter from RegTP dating back to January; nor has DTAG replied to concrete proposals for the better utilization of existing collocation capacities

made by competitive carriers in March of this year.

DTAG Is Preventing Reasonable Network Planning By Competitors

Even where improved network planning on the part of the competitive carriers

would help to prevent over-subscriptions and therefore at least some instances of

capacity constraints, DTAG has refused to cooperate in such undertakings, by stating that it is under no legal obligation to provide existing network planning information to competitors, much less prior to their placing orders with DTAG for interconnection and collocation space.

DTAG Is Preventing Improvements In Internal Processes

Even the processing of applications for carrier preselection or switching over of

individual customers is being consistently obstructed, and processing times are

being massively exceeded in constantly changing locations (up to three times the

agreed-upon time frames). Only 10% of applications are being processed in a timely

164

manner. Many applications still have to be submitted by fax rather than via electronic interfaces. Many potentially cost-saving processing methods adopted, for instance in the British or U. S. context, are not being implemented to the detriment

of competition in telecommunications.

DTAG Is Preventing The Implementation Of Higher Quality-Of-Service Standards By

Competitors

Delivery of the highest quality service is a precondition for successful competition.

The competitive carriers are dependent in many areas upon DTAG’s quality-of-service standards. Requests for higher quality-of-service standards have not only been

rejected, for example with respect to the availability of circuits, but even been met

with attempts to reduce existing quality-of-service commitments. DTAG is even attempting to avoid making available to competitors its overflow and emergency rerouting services. Only the intervention of RegTP forced DTAG into, for example,

offeringrestoration-of-circuit services on par with the terms available to DTAG’s end

customers.

DTAG Is Preventing Effective Network Build-Out By Competitors

DTAG had always claimed that the competitive carriers are attempting to run

their businesses at the expense of DTAG and its legacy infrastructure, cherry-picking customers with minimal investment in technology and without investing in their

own networks. Instead, the current structure of interconnection pricing has predictably lead to massive investment in the competitors’ networks, which are carrying

increasing loads. Even today, DTAG is neither able to timely provide competitors

with the requested interconnection to the long-distance network, nor to comply with

requests for interconnection at the local loop within the contractually specified time

frames. The new structural cost model planned to be implemented in 2001 would,

if one were to apply the assumptions being made by DTAG, not only worsen these

existing problems, but will also result in substantially increased but useless investments in additional switching and transmission infrastructure.

DTAG Is Preventing Transparency In Cost Accounting

The data underlying DTAG’s cost-basis models being submitted to the regulator

is so restricted in nature as to make nearly impossible the appropriate review of

these cost-models for infrastructure elements and services. Despite repeated requests by RegTP, DTAG has often failed to provide additional data, so that diverse

regulations have had to be written on the basis solely of international comparative

cost models. In the area of end-customer price controls, RegTP has been forced to

work on the basis of dubious modeling assumptions because of this lack of actual

data, such as a 20 to 25% minimum cost differential between wholesale and retail

pricing. The increasing emergence of bundled pricing without any transparency of

the underlying cost renders these simple assumption useless for reviewing DTAG’s

pricing.

DTAG Favors Obstruction Rather Than Cooperation

After more than a decade of competitive regulation, the former monopolists in the

U.S. (AT&T) and the U.K. (BT) have developed completely different business philosophies in which their fellow carriers are treated as customers. Carrier service offerings have become profit centers, i.e. seek to sell to competitive carriers as comprehensive a service offering as possible, especially network capacity. Thus BT today

has a significantly higher share of revenue attributable to the carrier services market than DTAG at significantly lower prices for leased lines and other services.

DTAG Seeks To Destabilize Rather Than To Shape The Market

DTAG systematically creates planning uncertainty for competitive carriers. Important information, for example about planned customer transfers, the making available of interconnection technologies, or simply the necessary planning materials are

being provided by DTAG with the greatest possible delay. Issues agreed upon for

planning purposes are never confirmed in writing even when explicitly requested.

Commitments made by DTAG personnel in regional offices are being in part or entirely revoked by DTAG’s headquarters. Agreed-upon provisioning dates are often

repeatedly rescheduled at the last minute. Short contract terms and brief termination windows create constant insecurity from a legal and business perspective,

hampering the development of new products and the development of business plans.

DTAG Selectively Discriminates Among Competitors

DTAG seeks to establish a contracting practice skewed in its favor by pushing

one-sided agreements on specific carriers who share overlapping interests with

DTAG, or by exploiting inexperienced small carriers who are under considerable

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pressure to get a foothold in the market. The jurisprudence of RegTP institutionalizes the bias created by this practice, in that larger or more experienced competitive

carriers in anti-trust proceedings will find themselves faced with the argument that

these very same practices and rules have become the ‘‘market standard.’’

DTAG Is Waging An All-out Lobbying And Public Relations Campaign To Relax The

Regulatory Framework In Spite of Increasing Competitive Obstacles

DTAG has framed the debate by portraying itself as the last enterprise of national

pride worth protecting. A campaign on this level, in combination with the fact that

DTAG remains majority-owned by the public, makes for a solid emotional appeal to

the public. This campaign seeks to make the public forget the significant impact

that the billions in foreign investment have had on the economy, in addition to the

millions of jobs, which have been created by the competitive carriers and their suppliers in the German telecommunications market. This year, the order volume for

network equipment placed by competitive carriers will overtake for the first time

the volume of orders placed by DTAG, for instance with Siemens. Meanwhile, DTAG

is even trying to blame the domestic regulatory framework for its repeated failures

in international ventures. Its campaign for relaxed regulation culminates in its application to be considered non-dominant on the Berlin route even as DTAG still

holds 97% of all end-user connections to the fixed network nationwide.

RegTP is under significant political pressure to relax the regulatory framework

in favor of DTAG, despite of DTAG’s massive obstruction of competition.

In addition, RegTP does not use its authority to counter the subtle obstructionism

being practiced by DTAG .

The flood of technically and economically complex proceedings are overwhelming

the limited staff and budget of the regulator.

RegTP Is Not Preventing DTAG’s Abuse Of Its Market Dominance:

Even as DTAG has to this day never offered to competitive carriers ‘‘all essential

network services’’ as demanded by the Telecommunications Act, RegTP is avoiding

defining this core criterion, prevents decisions from being taken or delays making

them. In contrast to the regulatory practice in the U.S. which can look back to ten

years of competitive regulation, the RegTP occasionally lacks an understanding of

the economic significance of seemingly minor irritations, like the refusal of DTAG

to offer fast circuit restoration, the ability to switch business customers outside of

business hours, automatic traffic rerouting and overflow routing in emergencies and

other services which DTAG is providing only to itself and its subsidiaries. DTAG

itself, according to its internal strategy memoranda, increasingly seeks to push competitors out of the market through predatory pricing of its products.

RegTP Does Not Prevent Predatory Pricing:

RegTP usually refuses to allow competitive carriers to join as parties the tariff

review proceedings of DTAG, since their interests are allegedly not at stake—even

as this is in fact the heart of their matter. Predatory tariff structures are often not

even noticeable to the regulator, due to the limited knowledge and experience of

RegTP (for example, the Internet access tariffs). Evermore complex tariff structures

are being classified as not requiring approval and are approved up-front without

sufficient review and lacking any factual basis for such classification (DTAG’s digital

subscriber line tariff or ‘‘T-DSL’’), sometimes even being allowed to go into effect for

several month on a ‘‘trial basis’’ without geographic limitation (e.g. DTAG’S ‘‘XXL’’

tariff). RegTP clearly does not have in hand any useful instruments to prevent predatory pricing.

RegTP Is Totally Overwhelmed Due To The Multitude And Increasing Complexity Of

Violations:

The number of proceedings before the RegTP dealing with detailed technical matters has steadily increased since the beginning of liberalization. All agreements

which DTAG had initially voluntarily negotiated with competitive carriers have

been terminated unilaterally by it. Following the initial struggle to force DTAG to

provide basic services to competitors, RegTP is now tasked with deciding upon details of service offerings and network elements without which effective competition

is doomed to fail. DTAG’s bundled tariff filings are growing ever more complex, strategically mixing different services. They can no longer be effectively reviewed for

predatory pricing due to the decision-making principles thus far established (for example, the minimum 25% span assumed to exist between the price for some offering

charged the end customer and the corresponding wholesale price of such offering for

competitors). The provision of incomplete and redacted data by DTAG, which cannot

be challenged by competitors, renders the situation even more difficult.

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RegTP Is Not Consistently Using Its Existing Authority To Enforce Its Decisions

In several instances, RegTP has failed to ensure that its decisions with respect to DTAG are in fact being complied with. For instance, DTAG initially ignored the

timeframes of the regulator’s decision ordering the incumbent to continue to offer billing services to competitors and submit a corresponding offer for this service; substantively the revisions ordered to be made on DTAG’s part are being ignored to this day. Similarly, RegTP determined that the significant delays in transferring

local service customers from DTAG to be a clear abuse of market power; yet the regulator has failed over the past three months to enforce its order in the face of stillincreasing delays in processing customer transfers. With respect to retail price tariffs, RegTP has failed to enforce the legal requirement that DTAG present evidence

of cost-based pricing. Rather than to reject tariff submissions by DTAG lacking such

required proof, the regulator is aiding and abetting DTAG’s behavior by institu- tionalizing the recourse to makeshift approval processes (tariff approvals based on

benchmarking or rule-of-thumb measures like wholesale price-plus-25-percent) rather than to insist on regularizing such approvals as envisioned by the law.

RegTP Is Not Using Its Authority To Actively Shape The Telecommunications Market

Even as many competitively problematic issues have long since been visible (and RegTP has in fact been informed numerous times of these issues) the regulator has

to date continued to rely exclusively on reactive, quasi-judicial processes for each individual dispute. To date, no coherent, overall regulatory plan or rule making for

the market is evident which would avoid the regulator having to make ad hoc decisions under time pressure, and to allow for more predictable planning by competitors. Additionally, the decisions made by RegTP limit themselves to the bare minimum and do not even begin to address future problem-solving approaches. Suggestions made by competitors, such as for example with regard to the proposal for more

economical utilization of limited existing collocation spaces or the provision of automatic emergency overflow and rerouting services, were being rejected by the regulator as late as December of 1999 as unnecessary. The competitors had pointed

RegTP to these emerging problems as much as one year previous to that date.

Demands for a Future Pro-Competitive Regulatory Policy:

1. Competition must be the driving force of:

• lower prices, • innovative services, • rapid infrastructure deployment, • more jobs, • large-scale foreign investment in the telecommunications market.

2. The regulation of the still absolutely dominant incumbent is only in its infancy and must be recognized as the necessary precondition for fair competition. 3. Predatory market behavior with the aim of eliminating competition as a delib- erate strategy by DTAG, based on centralized monopolistic structures, must be met

by stronger regulatory efforts and responses. 4. Only a reliably stable regulatory framework can create:

• future investment,

• innovative technology,

• new jobs with carriers and suppliers, and

• an efficient and consequently cheaper communications infrastructure.

5. Not the interests of only one company, but functioning competition as a whole

must be the key for the future competitiveness of Germany as a business location.

Mr. SHIMKUS. Thank you.

Next, and our final panelist, Dr. Noll from the Annenberg School

of Communication. Welcome. You are recognized for 5 minutes.

STATEMENT OF A. MICHAEL NOLL

Mr. NOLL. Thank you, Mr. Chairman, Mr. Markey, and the committee, for inviting me to be here today. This is the first time I

have ever appeared before a congressional committee; and the experience is certainly interesting, to say the least, and certainly a

bit overwhelming, even for an old professor like me. While I am a

professor at the Annenberg School at the University of Southern

California, I want to emphasize that my remarks and in my written statement are solely mine. I do not represent any organization,

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any institution, or any company; and I am here today at my own

personal expense.

Telecommunication like everything else is afflicted with a fever

of merger mania that has gone global. Such globalization seems to

have become information-age imperialism as foreign countries increase market domination outside their borders through companies

that they own and control.

The provision of telecommunication in many countries is no

longer operated by a department of the government. That is a good

thing. Telecommunication has been privatized. However, in many

countries substantial amounts of the stock of the allegedly

privatized company are owned by the government. This is partial

privatization. That is not a good thing, since the government still

has a considerable involvement and financial interest in telecommunications. Partial privatization opens the possibilities for

abuse and for conflicts of interest both within the foreign country

and internationally.

Government ownership skews the marketplace. This occurs because governments, ours and others, do not operate as do markets

to maximize economic efficiency. Additionally, governments are motivated to protect the government-owned company, particularly

when telecommunication is still regulated by the government, as it

is in most countries. Government will not regulate itself fairly compared to a competitor. Indeed, the business of government is government, not owning the stock of telecommunication companies.

Privatization means no government operation or ownership of

telecommunication. Privatize means to make private, totally private. Telecommunication companies are licensed by the U.S. Government to operate as broadcasters and common carriers using the

public airwaves and rights of way. Clearly such license to the use

of public property should not be given or sold to a company owned

by a foreign government. In the end this is an issue of national sovereignty. Until partially privatized countries eliminate totally their

ownership of telecommunication, they should not be allowed to own

any telecommunication business in the United States. And even

then national security and antitrust issues still need to be examined for each particular case.

Senator Hollings’ bill restricts foreign government ownership to

no more than 25 percent and also eliminates the possibility of any

FCC waiver of this restriction. Clearly, I would want to go all of

the way and restrict foreign government ownership to zero. But

Senator Hollings’ bill is a strengthening step in the right direction

and I favor it. It attempts to strengthen that golden share to protect the national sovereignty of our airwaves and telecommunication infrastructure. This clearly is an important topic deserving

thoughtful discussion and consideration by the Congress; and the

subcommittee today clearly is addressing the key issues. Everything that I have heard today touches upon them. I hope my remarks today and my written testimony help focus and summarize

the issues for you. Thank you.

[The prepared statement of A. Michael Noll follows:]

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1 Noll, A. Michael, ‘‘The Myth of Partial Privatization,’’ tele.com, Vol. 4, No. 5, March 8, 1999,

p. 94. 2 Noll, A. Michael, ‘‘Telecommunication Privatization: Mixed Progress,’’ info, Vol. 2, No. 1 (February 2000), pp. 21-23.

PREPARED STATEMENT OF A. MICHAEL NOLL, ANNENBERG SCHOOL FOR

COMMUNICATION

I wish to thank the House Subcommittee for inviting me to give my views on the

topic of foreign government ownership of U.S. telecommunication companies. This

topic has escalated in importance and controversy as foreign telecommunication

companies with substantial foreign government ownership have recently attempted

to purchase telecommunication firms in the United States.

PROVISION OF TELECOMMUNICATION

The Telecommunications Act of 1996 was intended to stimulate competition in the

U.S. telecommunication industry, but instead mergers and industry consolidation

are occurring on an epidemic scale. This fever of merger mania in telecommunication is now becoming pandemic on a global basis as telecommunication firms attempt to turn their pockets overloaded with profits into real property.

Indeed, the world telecommunication market has become global. As a positive benefit, globalization could lead to greater competition and lower prices to consumers.

But globalization could also become a disguise for information-age imperialism as

countries attempt to dominate markets outside their borders. Telecommunications

could well become the 21st century’s oil in terms of future international tensions.

Mergers on a global scale can reduce both choice and competition for consumers.

Globalization seems to have become the politically correct term for imperialism.

Except for a brief period during Word War I, telecommunication in the United

States has always been provided by privately-owned monopolies—the old Bell System and the independent telephone companies. Nearly two decades ago, the Bell

System was disbanded, and today many telecommunication markets in the United

States are highly competitive. However, the monopolistic position of the local telephone companies in the United States has been difficult to break, perhaps because

the provision of local service is more of a natural monopoly than the concept is politically acceptable today.

There are many ways that telecommunication can be owned and provided, ranging from a government owned and operated monopoly to a completely competitive

environment operated by private industry. Between are such ways as a private monopoly and a government-owned company. The two significant dimensions are ownership (varying from completely private to completely public) and market (varying

from closed monopoly to open competition). The ideal situation is open competition

provided by private industry—as in the United States and in the United Kingdom.

In the past, telecommunication in most other countries was provided by an agency

of the government, frequently as the postal, telephone, and telegraph (PTT) department. These government owned and operated monopolies were usually inefficient

and stifled competition. Recently, many countries have opened their telecommunication markets to competition and have privatized the former government operated

telecommunication department by creating government-owned corporations, but this

is not privatization.

PARTIAL PRIVATIZATION

Privatization was accomplished in many countries by creating a private company

to operate the telecommunication system, but the stock of the privatized companies

was owned by the government. Some of the stock was then sold gradually to the

public, but in many major countries, large proportions of the stock is today still

owned by the government. I call such ‘‘privatization’’ partial privatization.1, 2 It appears to be a ruse to give the appearance of a private company while the government still owns and controls telecommunication, although not anymore directly responsible for the operation of telecommunication facilities.

Privatization must be complete. In the same way a woman can not be half pregnant, a business can not be partially privatized. Partial privatization opens the possibilities for abuses along with the appearance of conflicts of interest. Even a single

share can create the potential for abuse, particularly if it is the ‘‘golden share’’ that

grants veto power to the government.

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HARMS OF PARTIAL PRIVATIZATION

The standard should not be to document harm in advance, but rather the standard should be a matter of prudence about potential harms. There seem to me to be

two major causes of potential harms from partial privatization. The first center on

the commitments made by countries to the WTO to open telecommunication markets, and the second involve aspects of partial privatization that give me an uneasy

feeling of concern.

The WTO is stimulating global business and the opening of markets around the

planet. In its commitments to the WTO, I could not imagine that the U.S. could

have agreed to accept partial privatization as representing an opening of foreign

telecommunication markets to competition. Given the high value that the U.S.

places on private industry, it is inconceivable to me that the U.S. could have agreed

to this.

Government ownership skews markets. This occurs because governments—ours

and others—do not operate, as do markets, to maximize economic efficiency. Countries that have only partially privatized their domestic telecommunication have not

privatized and should receive no WTO privileges until they totally privatize.

Governments are in an awkward position financially because of their ownership

of the stock of partially-privatized telecommunication firms. If the government sells

the stock, then the price of the stock will be depressed, thereby harming the existing

holders of the stock, frequently their own people. Since it is the function of government to act in the best interests of its people, the government cannot sell large

blocks of the stock that it owns, and it can only sell very small amounts on a gradual schedule. Keeping stock off the open market through government ownership inflates the value of the remaining stock on the open market.

These financial conflicts of interest also creates temptations to protect the government-owned telecommunication company from competition within the domestic market—particularly when telecommunication is still regulated by the government in

most countries. The opportunities for such protectionism—or even the appearances

of protectionism—are not consistent with competition and open markets. It should

not be the role of governments to be concerned about the profitability or the return

on investment of businesses.

Regulation should be an adversarial process, and this is awkward when the government’s regulators are attempting to regulate an entity owned by the government.

There is also the appearance and suspicion that the regulators might be treating

the government-owned entity more favorably.

In some ways, the privatization of telecommunication is an internal domestic matter for each sovereign country. However, total privatization most likely benefits consumers by stimulating both competition and foreign investment and thus benefits

those countries that privatize completely. If a country wants to play on a global

basis, however, then the ownership of telecommunications becomes the concern of

other countries and is no longer an internal domestic matter.

It is particularly disturbing when a government-owned telecommunication company acquires telecommunication companies in another country. In effect, such acquisitions are government acquisitions because of the government ownership, and

this is little more than old-fashioned imperialism, with all its evils. When a government-owned company acquires a company in another country, it is poor business

policy when the acquiring government and country are dragged along in the venture. This can ultimately be the potential for increased international tensions. Government does not belong in business.

Many of the partially-privatized companies are very active in international acquisitions, mergers, and partnerships. It is almost as if they are more interested in

mergers and acquisitions than in concentrating on improving and developing their

domestic telecommunications. Profits from domestic operations are being used to

fuel these global mergers and acquisitions. The partially-privatized companies can

appear to be fronts for their governments in these international ventures.

Another potential problem area is interlocking ownership and managements

across government-owned telecommunication entities. For example, 2 percent of

France Telecom is owned by Deutsche Telekom, although the investment is planned

to be sold by 2002. These kinds of global alliances between government-owned telecommunication firms are disturbing because they can reduce competition and have

the appearance of colonial alliances.

DEUTSCHE TELEKOM ACQUISITION OF VOICESTREAM

This summer, Deutsche Telecom announced its intent to acquire VoiceStream

Wireless in a deal valued at over $50 billion. The financial aspects of this proposed

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3 Noll, A. Michael, ‘‘A Big ‘Nein’ to Deutsche Telekom,’’ Los Angeles Times, July 26, 2000,

p. B9.

acquisition do not make much sense.3 VoiceStream lost $455 million on revenue of

$475 million in 1999. The price being paid by Deutsche Telecom is equivalent to

over $20,000 per wireless subscriber—an amount that would require yearly profits

of $3,200 per subscriber to recoup the investment in 10 years at a return of 10 percent.

Clearly, at such an exorbitant price, Deutsche Telecom will have an impossible

task in recouping or obtaining a return on its investment. Why then is Deutsche

Telekom making such a foolish investment? Is this just an example of a company

that must do something with its overvalued stock before it is too late? What will

be the reaction of the German people and government when the size of this financial

calamity becomes apparent? Are there some other aspects of this acquisition that

are escaping scrutiny? Will the price of the deal be lowered through the intervention

of the German government?

If Deutsche Telekom makes a catastrophic business decision, then U.S. and other

companies would be expected to attack Deutsche Telekom in its domestic market.

But how can this otherwise happen if the German government owns and protects

Deutsche Telekom in its to foolish business decisions? I would have no problem with

the acquisition of VoiceStream by Deutsche Telekom if Deutsche Telekom were not

owned by the German government, although U.S. security and antitrust issues

would still need to be examined.

CONCLUSION

My views about foreign ownership of US telecommunication firms might well be

perceived as xenophobic. But I do believe that the ‘‘business of government is government’’—not owning the stock of telecommunication, or any other, companies. I

therefore believe that privatization must be complete—not partial. ‘‘Privatize’’

means to make private—totally private! Other foreign countries are not respecting

their obligations to the WTO to privatize completely their telecommunications. Until

they do so, they should be ineligible to own telecommunication companies in the

United States.

If a company has been totally privatized with not a single share of its stock owned

by the government, then most of the potential domestic and international problems

that I foresee evaporate. I would see little opportunity for harm if such a privatized

foreign company acquired a United States telecommunication company—other than

the possible antitrust and national security issues that would need to be assessed

for each particular case.

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TABLE I.

Government Ownership of Telecommunication

Country Telecommunication Firm % Government Owned

Canada ................................................................ Bell Canada ........................................................................... always 0%

United Kingdom .................................................. British Telecom ...................................................................... 0%

New Zealand ....................................................... Telecom New Zealand Ltd. .................................................... 0%

Italy ..................................................................... Telecom Italia ........................................................................ 3.5%

Australia .............................................................. Telstra .................................................................................... 50.1%

Japan ................................................................... Nippon Telephone & Telegraph (NTT) .................................... 53%

Germany .............................................................. Deutsche Telekom .................................................................. 58.0%

Korea ................................................................... Korea Telecom ........................................................................ 58.9%

France ................................................................. French Telecom ...................................................................... 63.2%

Sweden ................................................................ Telia ....................................................................................... 70%

South Africa ........................................................ Telkom SA .............................................................................. 70%

Singapore ............................................................ Singapore Telecom ................................................................. 78.7%

TABLE II.

Foreign Ownership Limits

Country Foreign Investment Limit

Australia .................................................................................... 5%

Canada ...................................................................................... 46.7%

France ....................................................................................... 20% in radio-based networks & France Telecom

Germany .................................................................................... no limits

India .......................................................................................... 25%

Italy ........................................................................................... no limits

Japan ......................................................................................... 20% in KDD & NTT

Korea ......................................................................................... 49% on facilities—20% Korea Telecom

Malaysia .................................................................................... 30%

Mexico ....................................................................................... 100% cellular—49% other services

New Zealand ............................................................................. 49.9% in NZ Telecom

Singapore .................................................................................. 74% (combined direct & indirect) permitted

South Africa .............................................................................. 30%

Sweden ...................................................................................... no limits

United Kingdom ........................................................................ no limits

United States ............................................................................ 20% direct

The data in this Table is based on ‘‘WTO Basic Telecommunications Services Agreement—Summary of Country Commitments’’ posted at the

Web site of the U.S. Department of Commerce’s Office of Telecommunications Technologies.

Mr. SHIMKUS. Thank you.

The Chair now recognizes himself for 5 minutes. I want to ask

Mr. Stanton and Mr. Bahr, my statement and questions to the

other panel dealt with the national security issues, and you both

didn’t precisely address that, but in your testimony I thought there

were some assumptions made.

Can you address the accusations being imposed about a threat to

national security through this process?

Mr. STANTON. We have had some experience with the national

security issues. Our largest shareholder today is a Hong Kongbased company. They made a substantial investment in our business, which was closed in February. A precondition for completing

that investment was a review by the committee for foreign investment in the United States. We went through that process. We also

went through a process of negotiating an agreement with the FBI

which provided for certain protections that were described by Mr.

Di Gregory and the gentleman from the FBI. Those processes I believe are thorough; and I believe that, as the national security concerns have been expressed to us by CFIUS and by the FBI, they

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were satisfied in those—in the agreements and the approval process respectively.

Mr. TAUZIN. Thank you. Mr. Bahr.

Mr. BAHR. This is not an area of my expertise, and I mentioned

in my testimony that I listened carefully to Mr. Di Gregory and the

witness from the FBI, and I would have to be guided by their satisfaction that the national security would be served in any merger.

Mr. SHIMKUS. Following up on your testimony which I found very

intriguing because of the international corporation, kind of a competition trade and the communications workers being supportive of

this merger, and so I want to follow up on the premise, in your testimony you talked about the governing board of 20, 10 being members of the bargaining unit. And that is a—carrying on your testimony, you are saying that would be good because it could—it may

work its way into the business, the communication industry as

competition moves and may be a good example for other companies

to follow, if I am reading into that. That is how I interpreted that.

How would a governing board with 20 members, 10 members and

two only being government officials be a possible assault on the national security of entering into the United States market if your

premise of the 20-member governing board, 10 being communication workers, two being members of the government and eight

being management?

Mr. BAHR. That is not a premise. That is a fact. That is what

the governing board——

Mr. SHIMKUS. So the communication workers and the management would be in cahoots with the government in a national security concern? Is that what you are saying?

Mr. BAHR. The company, as I understand it, is run by the governing board that appoints the management board on which there

is no government representative. It would seem to me that the negotiations that we heard on the previous panel would take place

with VoiceStream with the full cooperation of those who manage

Deutsche Telekom, and I have a lot more confidence in the outcome

based on the governing board that exists with Deutsche Telekom

than some other countries.

Mr. SHIMKUS. Based upon that premise, I think that would speak

against a fear of a national security risk based upon the organization that that has set up. So that is why I was intrigued by the

organizational structure because I don’t think that it speaks in

support of a fear of a usurping of national sovereignty and a national security risk for this country.

Mr. BAHR. I agree.

Mr. SHIMKUS. Mr. Sidak?

Mr. SIDAK. I have two brief points on that. One is that the acquisition of VoiceStream is substantially smaller than the acquisition

of AirTouch last year by Vodaphone, which already went through

a very exhaustive FBI national security analysis, and there were

conditions laid down there.

The second thing I would hope is that the FCC in the exercise

of its discretion under the public interest standard would pay attention to what country the foreign investment is coming from. If

it is a NATO ally of ours, I think that is a very different situation

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from one in which the investment is coming from North Korea or

Iraq or some country which has lukewarm relations with the U.S.

Mr. STANTON. I think you correctly described the Deutsche

Telekom supervisory board as having two members, one direct and

one indirect from government, 10 from the workers group. The

other eight are actually outsiders, business people in Germany.

Mr. SHIMKUS. I appreciate that correction. I yield back the balance of my time, and I turn to the ranking member, Mr. Markey.

You are recognized for 5 minutes.

Mr. MARKEY. Thank you, Mr. Chairman, very much.

Let me begin by first of all saying to you, Mr. Stanton, that you

represent the very best of the United States and our leadership in

the wireless area, and I think every member of this committee admires you and your company and what you stand for in our economy and potentially in the global economy.

Mr. STANTON. Thank you very much.

Mr. MARKEY. Mr. Bahr, the same thing is true of your union

members and your incredible grasp of the technical issues which

they have which has made it possible for your employees working

with leadership in the companies across our country to give us

without question looking over our shoulder at No. 2 and three or

four in world leadership, which is obviously why the rest of the

world wants to come to the United States.

We stand here not trying to do anything other than to enhance

the capacity for the United States to become the big winner. We

know that you will be, Mr. Stanton, but ultimately this committee’s

goal has to be that the cover of Business Week or Forbes is the

United States of America is the winner, in the same way that Germany Inc. or Japan Inc. might want to have their country’s symbol

on the cover of those magazines, and they do so through this relationship. Kiretsu, or call it what you will in these countries, that

has historically been the relationship between the government and

the private sector.

The Securities and Exchange Commission filing which Deutsche

Telekom has had to make is quite illuminating. For example, under

the section ‘‘civil servants’’ it says as of December 31, 1999, approximately 41 percent of all employees of Deutsche Telekom are

in fact civil servants. In particular, civil servant salaries are set by

statute in Germany and not by Deutsche Telekom or by collective

bargaining agreement. In addition, civil servants are tenured employees and may not be unilaterally terminated except in extraordinary statutorily defined circumstances. This concerns me. This

concerns me that in the event Deutsche Telekom merges with other

companies, American and otherwise, might have to protect their

own employees under German statutes by government dictate that

could ultimately come to harm American workers because the bylaws of that company will tie their hands in terms of who is expendable.

Further, on the page dealing with share holding, it says as long

as the Federal republic directly or indirectly controls the majority

of Deutsche Telekom shares, it will, like any majority shareholder

in a German stock corporation, have the power to control most decisions taken at shareholder meetings, including the appointment

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of all of the members of the supervisory board elected by the shareholders and approval of proposed dividend payments.

Again, this keeps the government making all of the decisions;

and no matter how you might try to cloud it in public statements,

in their SEC filing they have to be quite forthright about that

nexus that will continue to exist between the Federal Government

of Germany and this corporation.

I think that Mr. Noll’s testimony is quite helpful. On page 9 of

his testimony he gives a grade to countries around the world in

terms of how successful they have been in privatizing their telecommunications sector. Obviously, the United Kingdom and New

Zealand, as I mentioned in my opening statements, deserve A’s;

and he gave it to them. Singapore was given a D minus with 78.7

percent still owned by the Singapore Government.

Germany and France are somewhere in the middle of the pack

with a can-do-better note attached, and that is what this hearing

is all about. They can do better, a lot better. We saw in our testimony from the last panel that our government negotiators don’t

really take the time to send that message to them. You can do better in this one little field, ownership, because that ownership question implicates so many other aspects of the German Government,

as we can see from their SEC filing; and ultimately that can come

back to haunt American shareholders, American workers who

might become part of some conglomerate that is organized out of

the German Government.

So we who are proposing this legislation are really trying ultimately to be helpful to you, Mr. Stanton, and to you, Mr. Bahr, and

to any in the future that might have dealings with Deutsche

Telekom. We hope that Deutsche Telekom purchases you, Mr.

Stanton; but we hope that they do so without the government being

the owner. We think that it would be good for the United States

for Deutsche Telekom to purchase you. We will go that far. I think

every member of the committee will agree with that. I think it is

hard—Mr. Bahr, if you would just let me finish. I think that people

don’t understand the extent to which our committee is committed

to ruthless Darwinian global telecommunications competition. It is

not protectionist; it is this advocacy for this Darwinian competition

that brings us here today. Mr. Bahr.

Mr. BAHR. I just wanted to comment on the 41 percent civil service. If you look at the history of the process of privatization, you

will find that you had 100 percent of the employees who were civil

service workers owned by the government. The union played a very

strong role in the legislation to let the privatization, and this was

a compromise. This was an accommodation to grandfather the benefits for 41 percent, or whatever it was originally. That is a declining number as people pass through the system and retire. I don’t

know how long it takes to phase it out, but the number will continue to reduce.

Mr. MARKEY. The point that I am trying to make here is if you

are the German Government and you own a company and 41 percent of the people are civil servants, that might affect the way that

you view the decisions that you make. We prefer that it be a private sector company that has this responsibility. The contractual

relationship obviously would have to continue, but at least there

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you could keep the government from perhaps tilting and putting

their finger on the scale with regard to other issues related to the

openness of their telecommunications marketplace in an effort to

continue to prop up this firm which has so many civil servants

working for it.

Mr. STANTON. If I may comment, your statistics were correct as

of December 31. It may be helpful to know that as of June 30 they

had reduced that percentage to 33 percent in part because of the

retirements that Mr. Bahr mentioned and in part because of the

increase in the total size of the work force.

Mr. SHIMKUS. Mr. Largent is recognized for 5 minutes.

Mr. LARGENT. Are you aware of any of the signatories to the

WTO basic telecommunications agreement, if any of those other

countries have government ownership limitations like those proposed in the Hollings bill? Is anybody aware of countries that have

legislation similar to what we are proposing to do?

Mr. LIPMAN. Canada does have a limitation with foreign ownership. It is essentially limited to 46 percent of facility-based carriers,

but I believe they took an exception or a footnote to the WTO

agreement, and there are several other countries that do have restrictions on foreign ownership. Interestingly, none of the European

Union countries no longer have foreign ownership restrictions.

Mr. LARGENT. Are they foreign ownership? I want to make the

distinction. Are they foreign ownership restrictions or foreign government ownership restrictions?

Mr. LIPMAN. No, just foreign ownership that I am aware of.

Mr. LARGENT. This is a foreign government ownership limitation?

Mr. LIPMAN. Countries have done that on a case-by-case basis as

in the case of Spain with KPN and in the case of Italy with Deutsche Telekom, but I don’t believe that was a matter of statute. It

was a matter of policy.

Mr. LARGENT. So in other words what you are saying is that

what they did in those case-by-case issues, we could do in this

country as well based upon the testimony of the panel that went

before you?

Mr. LIPMAN. I would agree with that.

Mr. LARGENT. I wanted to ask Dr. Noll, in your testimony both

written and spoken, you talked about market domination, that government-controlled industries have exhibited market domination as

a result of the power. Could you name some examples of market

domination by a government-controlled company?

Mr. NOLL. What I wanted to do in my testimony, but I didn’t

have the data, was look at two dimensions. One dimension was the

extent to which the former government entity has been privatized

and what extent there was still some government ownership. The

other dimension that I wanted to look at was the extent to which

markets in those countries had been opened to competition. I

thought those were really the two key things, and I would have

liked to have seen whether there was any relationship between the

two.

The problem is how do you determine the extent to which a market has been opened. How do you determine whether that government, former monopoly, still dominates in that country or not? The

simple fact that there are hundreds of carriers available doesn’t

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necessarily mean that there is still not a dominant one. A good

example—— Mr. LARGENT. Would market share be a good index?

Mr. NOLL. It is difficult to look at another country, but one of the

ways to do that is think about the United States. If you talk about

long distance competition, I think everyone would agree that has

been very successful. There is not really a dominant carrier; it used

to be AT&T. When you start to get to the local level, local phone

companies, you can point out that there are hundreds of competitive local exchange carriers in the United States; but when it comes

down to it, it is the Baby Bells who are the dominant ones. It is

a difficult question. My general sense in a number of these countries, there is still one big dominant carrier, and that is the former

government monopoly and that is what I was referring to.

Mr. LARGENT. Well, let me ask you this question because you

spoke in your testimony about liking the Hollings bill. To me, I

guess, the question I would have for you is why is having a merger

between a company that is—that 25 percent of the company is

owned by the government versus 44 percent, why is that better? To

me it is—I don’t see why one is less risky or less risky than another.

Mr. NOLL. I stated today that actually I would prefer zero. I

would like to get government out of telecommunications. It was enlightening to me today to sit here and listen to the trade representative try to handle those questions. I spent many hours myself

looking on the Web trying to understand what did the United

States agree to in the WTO, and I was horrified not to find much

written documentation of anything. It seemed to be a bunch of people handshaking and making up loose schedules.

If some country says we will privatize and if their idea is to create a company that is mostly owned by the government, that was

disturbing to me. Before allowing them into the United States, I

would like to see that ownership to be zero. If zero, I would then

also want to give to the FCC the right to waive. There might be

some conditions. If the country went from 60 percent to 20 percent

in 1 year, and they were planning to reduce that 20 percent next

year to zero, I would say that shows good faith; and I would allow

the FCC to have the right to let somebody do something today. But

I would like to see zero.

Trying to cut it between 40 percent, or as I said jokingly to

Chairman Kennard, maybe we should pick a number like 3.79 percent and let everybody struggle with why we came up with such

a silly number. I would like it to be zero. I think that eliminates

the possibilities, the concerns of everything I heard today. I don’t

see what the problem is. There are some countries like New Zealand that took it to zero quickly. Some countries like Canada never

had any government ownership of telecommunications. It can be

done. Yes, it is going to be a problem with the stock when the stock

is dumped on the market and drops in value, but let’s go all of the

way. Let’s not have a sense of trying to create a partial pregnancy.

Let’s have it all of the way. That is my personal belief.

Mr. SHIMKUS. Mr. Cox is recognized for 5 minutes.

Mr. COX. I thank the chairman, and I would like to thank the

panel for being here and also to echo exactly what my colleague

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from Massachusetts said about the business leaders that are here

with us. Mr. Stanton, your company is not under scrutiny here

today. Rather, you have a proposed business transaction that has

some very interesting policy questions attached to it.

Mr. STANTON. Thank you.

Mr. COX. But none of this has anything to do with your company.

We had a hearing like that yesterday, unfortunately.

Mr. STANTON. My children were worried about that when I

talked to them last night.

Mr. COX. But all of this in a certain sense reflects well upon your

company and your workers.

Mr. Sidak, of course representing the acquiror, likewise is paying

a compliment to your firm because they are a suitor.

Mr. Lipman is here as a competitor and not surprisingly has the

competitor’s view of the wisdom of what you are up to.

And the only person who is here without a stake in the outcome

is Dr. Noll who even paid his own way here, so I am particularly

interested, Dr. Noll, in what you have to say.

Let me ask you this question. We watched as Europe and the

U.K., for example, went through great travail in some major

privatizations, some of them necessitated by government ownership

of industry that we never witnessed in this country. It was very

hard politically. In those circumstances the voters of the countries

involved were the sovereigns. If we import government ownership

of our industry into this country, then don’t we have an even worse

predicament in the sense that we are just like they used to be in

the U.K., let us say pre-Thatcher, because now we have got government-owned industry in this country that we would like to privatize but we can’t vote to influence the government to change because we don’t live there? The government in this case would be

Germany or the government would be Hong Kong or the government would be somewhere else, but it is not the U.S. Government.

The U.S. Government has a salutary policy of private ownership of

business. Aren’t we even worse off than they are in the U.K. before

Thatcher?

Mr. NOLL. Mr. Cox, that is an excellent point. This country

would be moving backwards in essence by allowing government

ownership of telecommunications sort of once removed. That would

be disturbing to me. Good perspective. I hadn’t thought of it myself.

Mr. COX. Mr. Lipman, Dr. Noll said in his testimony that government doesn’t belong in business, and he also said that the relationship between business and the regulators should be arm’s length.

Your testimony was to the latter point, that at present in your

view that relationship is not at arm’s length. Do I understand that

correctly?

Mr. LIPMAN. That’s correct, Congressman.

Mr. COX. One of the things that I am sure that the FCC will be

interested in is the future, is where the government stake in Deutsche Telekom is headed. Mr. Sidak has some trends that he shows

which would encourage us I think to believe—hope—that this is a

work in progress and that we are headed in the right direction and

in fact will arrive at our destination; but I don’t know if anyone

here knows presently whether or not there is anything that we can

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reliably accept from the German Government as a commitment to

dispose of their interest. Am I wrong in that?

Mr. STANTON. Two comments, Congressman Cox.

I think it is important to appreciate that there is a distinction,

for example from New Zealand, which, while having done a terrific

thing, is a much smaller country than Germany. The German Government has said publicly, there is a letter that has gone from the

embassy to each of the members that says that they clearly intend

to reduce their interest. The problem bluntly is the size of the interest that they have. The value of that stock today is worth somewhere in the neighborhood of $75 billion; and notwithstanding Dr.

Noll’s comments, I think it is fair to say that the German Government wants to make sure that it gets value for its stock. They have

done very large public offerings for the last several years to reduce

the interest. They have expressed that they intend to continue to

do large offerings, but it takes huge offerings. The largest public

offering in history is AT&T Wireless’ stock sale. If they were to do

a transaction that size, it would take seven of those to reduce the

interest to zero.

What we are doing with this merger is diluting them. You do

make an interesting point, the notion of stepping backwards; but

I would suggest that what this does is that it dilutes the government from 57 percent to 44 percent, and they have—which is moving from a majority to a minority. It is clearly still a substantial

stake. I am not going to argue that.

Mr. COX. The German Government—we have other foreign government ownership restrictions across our economy, and one of the

ways that the Department of Justice and other agencies of the Federal Government have dealt with these in the past is voting agreements and voting trusts. Is that something that Deutsche Telekom

would consider?

Mr. STANTON. I am not in a position—I represent VoiceStream

not Deutsche Telekom. We have not discussed anything like that.

We would be happy to put the question to them.

Mr. COX. Do you happen to know, Mr. Sidak?

Mr. SIDAK. Let me clarify I am not representing them as a lawyer.

Mr. COX. I understand that. I didn’t mean to impugn your reputation in that way.

Do you have any idea whether they would look favorably upon

that kind of a proposal from the FCC?

Mr. SIDAK. I would be happy to take the suggestion back to them

and invite them to respond to your question.

Mr. COX. Mr. Lipman was about to interject.

Mr. LIPMAN. Thank you, Congressman. I want to say that the

German Government can, of course, modulate its interest in Deutsche Telekom; but they can also do several things today to demonstrate to U.S. policymakers that they are removing themselves

from their involvement and we would submit their interference in

the German telecom market. They can stop reversing decisions

made by the regulator, RegTP, and they can stop trying to roll back

some of the modest procompetitive steps that RegTP has taken.

They can eliminate the license fees in Germany, which as we show

in our testimony are far and away the highest in Europe. It costs

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nearly $6 million up front to get a license to serve all of Germany,

and they can also encourage and stop discouraging open market

standards.

That is really what our clients would like to see accomplished here, that Deutsche Telekom and the German Government, particularly the ministry, meaningfully move to open competition for

both the German market as well as the U.S.-to-German market.

Mr. SHIMKUS. For the sake of our voting ability on the floor and our timely departure—— Mr. COX. I yield back the balance of my time.

Mr. SHIMKUS. The gentleman yields back. I want to thank the panel. This hearing is adjourned. [Whereupon, at 4:56 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

PREPARED STATEMENT OF THOMAS J. DONOHUE, PRESIDENT AND CEO, U.S.

CHAMBER OF COMMERCE

Mr. Chairman and members of the committee, I am Thomas J. Donohue, President and Chief Executive Officer of the United States Chamber of Commerce. The

U.S. Chamber is the world’s largest federation of business organizations, rep- resenting more than three million businesses and professional organizations of

every size, in every business sector, and in every region of the country. The Chamber serves as the principal voice of the American business community here in this

country and around the world through our 88 American Chambers of Commerce

abroad.

I. INTRODUCTION

Mr. Chairman and members of the Subcommittee, I welcome the opportunity to testify on an issue that is critically important to American consumers and businesses of all sizes—free and fair competition in our telecommunications markets.

The U.S. has the largest and most dynamic economy in the world. Our telecommunications products and services for consumers have grown exponentially over the last

several years, as witnessed by the incredible growth of new telecommunication services, the wireless market, the use of cell phones, pagers, and the latest personal

handheld devices. These telecommunications products are becoming more affordable

and available to all consumers as a direct result of our open markets and healthy

competition.

There are proposals currently before Congress that could stifle this incredible

growth and threaten the benefits American businesses and consumers have begun

to enjoy in the telecommunications market. These proposals could also lead to a

counterproductive and damaging trade war with our foreign trade partners. Specifically, H.R. 4903 would prohibit all companies with 25 percent or more foreign government investment from obtaining a telecommunications license from the Federal

Communications Commission.

The legislation is bad policy and should not be supported for several reasons: (1)

The legislation is a potential violation of the World Trade Organization (WTO)

agreement and would likely lead the European Union (EU) and other member WTO

countries to retaliate by closing markets to American goods and services; (2) foreign

investment in U.S. telecommunications providers would diminish markedly, limiting

the competitive benefits of such investment to U.S. consumers and truncating technological innovation and economic expansion; and (3) procedures currently exist to

protect U.S. national security interests and to ensure that the public interest is

considerd in any telecommunications mergers or investmens by foreign entities with

U.S. providers.

II. PROTECTIONIST PROVISIONS WOULD LEAD TO FOREIGN RETALIATION AGAINST U.S.

PRODUCERS AND CONSUMERS

The U.S. Chamber of Commerce has helped lead the fight to open markets overseas so that American businesses and their employees can benefit from increased

trade opportunities and the jobs supported by foreign trade. Since 1995, the U.S.

has worked hand-in-hand with the WTO to ensure that foreign trading partners

open their markets to American businesses and abide by fair trading practices. Although the U.S. has not won every case before the WTO, American businesses and

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1 United States Trade Representative Office

2 Congressional Research Memorandum to Senate Commerce Committee, July 24, 2000, WTO

Compatibility of Proposed Legislation Prohibiting Certain FCC Licensing.

workers have clearly benefited as U.S. exports have risen by more than 35 percent

since 1994.1

In the specific area of telecommunications, on February 15, 1997, the United

States and 68 other countries reached a market-opening accord on a set of commitments under the 1995 General Agreement on Trade in Services (GATS) that fundamentally changed the structure of the global telecommunications market. This set

of commitments, known as the WTO Basic Telecommunications Agreement, is guided by a worldwide commitment to opening markets, promoting competition, and preventing anti-competitive behavior. This agreement is continuing to increase competition significantly in the U.S. and foreign telecommunications markets—to the benefit of American consumers and businesses.

For example, free trade under the WTO and the WTO Basic Telecommunications

Agreement paved the way for a recently-concluded bilateral agreement between the

United States and Japan. Under the agreement, Japan has agreed to reduce interconnection fees now charged by Nippon Telegraph and Telephone to U.S. telecommunication companies. This agreement will begin to allow U.S. telecommunications companies to compete more effectively in the Japanese market. This historic

agreement with Japan and other benefits under the WTO could not have been negotiated against the backdrop of the narrow protectionist ownership restrictions contained in H.R. 4903 had been in effect at the time.

Moreover, as outlined in the Congressional Research Service Memorandum on

this issue, it is likely that H.R. 4903 or similar legislation would place the U.S. in

violation of its commitments under the WTO Basic Telecommunications Agreement.2

There is also little doubt that this legislation would spark counterproductive and

damaging retaliation by our foreign trading partners. The EU has already threatened retaliation over U.S. violation of the WTO Agreement. On July 24, 2000, EU

Trade Commissioner Pascal Lamy wrote to United States Trade Representative

Charlene Barshefsky regarding congressional efforts to restrict foreign telecommunications ownership: ‘‘This [the proposed legislation] would clearly violate US commitments in the WTO . . ’’ Lamy further urged Barshefsky to ‘‘resist such legislation and

indicate clearly to the Congress the opposition of the US Administration to its adoption . . . We have to avoid a very damaging trade fight in this highly important sector.’’

The U. S. Chamber of Commerce is never afraid of a good fight when the interests

of our members are at stake. So we are not simply reacting to EU threats. We are,

however, strongly reacting to efforts that would set a bad precedent and risk putting

the United States in an unnecessary trade war with our European trading partners

and other members of the WTO.

III. UNNECESSARY RESTRICTIONS ON FOREIGN INVESTMENT WOULD HURT AMERICAN

CONSUMERS

Consumers benefit from competition in the global marketplace. Greater competition and greater market opportunities for American producers and consumers provide for greater choice at better prices in the U.S. and abroad. Our continued and

unprecedented economic expansion is a testament to the willingness, too often

grudgingly, of government to stand aside and let the marketplace govern. Clearly,

American businesses and consumers will suffer if foreign governments retaliate by

closing their markets to American goods and services.

Moreover, American businesses and consumers will also be harmed by the loss of

foreign investment in this country. Access to capital is the lifeblood that pulses

through the American economy. Access to capital is what has energized the technological advancements and innovation so fundamental to the recent economic expansion. Billions of dollars of foreign investment is made annually in the U.S. This investment has helped to fuel the growth and investment in this country. If telecommunications firms cannot raise needed investment capital to provide new products and services for consumers, the engine of our record economic expansion could

find itself out of gas.

By imposing unnecessary and counterproductive protectionist restrictions on foreign investment, H.R. 4903 would chill foreign investment in the U.S. telecommunications sector. This legislation would unwisely tie the hands of executive branch in

favor of a rigid ‘‘auto-pilot’’—‘‘one solution for every problem’’ approach to U.S. foreign investment in the face of an increasingly flexible global investment regime.

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3 Neil King Jr. and David S. Cloud, Wall Street Journal, August 24, 2000, Global Phone Deals

Face Scrutiny From a New Source: The FBI. 4Section 5021 of the Omnibus Trade and Competitiveness Act of 1988.

This would set a dangerous precedent and send the wrong message to our trading

partners.

IV. CURRENT LAW ALREADY SAFEGUARDS PUBLIC INTEREST

Current law protects the public interest from foreign investment that may be

harmful. Under section 310(b)(4) of the Communications Act of 1934, the Federal

Communications Commission (FCC) must make an affirmative finding that the public interest would be served before any foreign entity (including one with foreigngovernment ownership) can obtain control of a U.S. entity that owns a common carrier licenses.

The FCC in every case will consider any risks to domestic competition and potential harm to consumers, including any of the threats identified by the sponsors of

H.R. 4903. The FCC also consults with the Executive Branch, including the Federal

Bureau of Investigation, the Department of Justice, and the United States Trade

Representative, to determine whether foreign investments pose a risk to national security, law enforcement, foreign policy, or trade.

The FCC has the legal authority to condition its approval of both foreign and domestic telecommunication mergers to protect U.S. interests relating to competition,

national security, or law enforcement.

The ability to raise much needed investment capital in the cutting edge telecommunications industry has always been based on the investor’s rights to secure

assets such as an FCC license. Denying such rights without the FCC being able to

consider the overall ramifications of such actions, such as improving competition,

could severely hinder U.S. telecommunications entities from securing much needed

capital in order to compete in the global market place. Such outright restrictions

could have the unintended consequences of hindering investment in all telecommunication entities whose survival may depend on the ability to secure foreign

investment.

In addition to the FCC, the Department of Justice (DOJ) and the Federal Trade

Commission (FTC) have significant roles in determining the public interest in any

telecommunications mergers. Under Section 7 of the Clayton Act, the DOJ Antitrust

Division and the FTC review proposed mergers, including combinations that would

bring common carrier licenses under the direct or indirect control of a corporation

in which a foreign government holds more than a 25% interest.

These agencies may—and often do—sue to enjoin mergers that would harm competition and consumers in the United States. If a transaction involving a foreign corporation poses a threat to competition, DOJ has full authority to take preventive

action.

V. NATIONAL SECURITY IS FULLY PROTECTED

Some have argued that the national security of the U.S. would be threatened if

new legislative restrictions on foreign telecommunications ownership are not enacted. This is simply not true. Current law protects our national security interests.

Foreign investments of any type in the U.S. telecommunications market are already

strictly scrutinized to ensure that our national and domestic security is well protected.

Recently, an August 24, 2000 article in the Wall Street Journal outlined the extensive scrutiny given by the Federal Bureau of Investigation (FBI) to foreign telecommunications companies in the U.S. The article points out the significant hurdles

these companies must go through before any deal is approved. For example, according to the article, negotiations between Verio and Nippon Telegraph and Telephone

were delayed for nearly three months as ‘‘the FBI pushed to assure that the Japanese government, which owns 53% of NTT, would have no role in Verio’s day-today operations or involvement in wiretapping Verio’s network. The agency also demanded—and the companies agreed to—a variety of restrictions on who could have

access within Verio to federal wiretapping information.’’ 3

In addition to FBI oversight, current law also gives the President the power to

block any acquisition of a U.S. company that would result in foreign control and

‘‘threaten to impair national security.’’ Under the ‘‘Exon-Florio provision,’’ the President consults with the Committee on Foreign Investment in the United States

(CFIUS), an eleven-member interagency body that includes, among others, the Secretaries of Defense, State, Treasury, and Commerce and the Attorney General.4

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The President then may exercise his authority under Exon-Florio to suspend or

prohibit any foreign acquisition, merger or takeover of a U.S. corporation in order

to alleviate national security and law enforcement concerns. In the telecommunications arena, the threat of possible actions under Exon-Florio has forced companies

to accept conditions relating to U.S. national security interest. These conditions

have included restricting the foreign parent’s access to sensitive information and authority over sensitive activities; required that facilities used to manage U.S. domestic telecommunications infrastructure remain in the United States; and required

that various records be maintained and remain available in the United States.

VI. CONCLUSION

Mr. Chairman, Congress must reject the proposed restrictions to foreign government ownership of American telecommunications companies found in H.R. 4903. Enactment of these restrictions would invite retaliation by the EU and other WTO

countries, starting an unnecessary trade war. The federal government has sufficient

authority to protect America’s businesses and consumers under current law. American consumers rely on the benefits from competition in the global marketplace,

which would be jeopardized by these restrictions. Finally, the current law already

allows for strict scrutiny of any foreign investment in the U.S. telecommunications

markets to ensure that our national security is protected.

Thank you again for the opportunity to testify today. I would be pleased to answer

any questions you might have.

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