U.S. GOVERNMENT PRINTING OFFICE

69–308 DTP WASHINGTON : 2001

S. HRG. 106–833

LOAN GUARANTEES AND

RURAL TELEVISION SERVICE

HEARINGS

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

LOAN GUARANTEES FOR PROJECTS TO SUPPLY TELEVISION SERVICE

TO RURAL AREAS

FEBRUARY 1 AND 9, 2000

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama

CONNIE MACK, Florida

ROBERT F. BENNETT, Utah

ROD GRAMS, Minnesota

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RICHARD H. BRYAN, Nevada

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

JOHN EDWARDS, North Carolina

WAYNE A. ABERNATHY, Staff Director

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

WAYNE A. LEIGHTON, Senior Economist

JONATHAN MILLER, Professional Staff Member

CHRISTEN K. SCHAEFER, Legislative Assistant

GEORGE E. WHITTLE, Editor

(II)

(III)

CONTENTS

TUESDAY, FEBRUARY 1, 2000

Page

Opening statement of Chairman Gramm .............................................................. 1

Opening statements, comments, or prepared statements of:

Senator Bayh .................................................................................................... 2

Senator Bennett ................................................................................................ 2

Senator Enzi ..................................................................................................... 2

Prepared statement ................................................................................... 43

Senator Johnson ............................................................................................... 3

Prepared statement ................................................................................... 43

Senator Bryan ................................................................................................... 3

Prepared statement ................................................................................... 44

Senator Bunning ............................................................................................... 3

Prepared statement ................................................................................... 45

Senator Allard ................................................................................................... 4

Prepared statement ................................................................................... 45

Senator Sarbanes .............................................................................................. 15

Senator Grams .................................................................................................. 21

Senator Reed ..................................................................................................... 24

Senator Hagel ................................................................................................... 24

Prepared statement ................................................................................... 45

Senator Shelby .................................................................................................. 24

Senator Edwards .............................................................................................. 46

WITNESSES

K. James Yager, President and Chief Operating Officer, Benedek Broadcasting, Rockford, Illinois, and Joint Board Chairman, National Association

of Broadcasters, on behalf of the National Association of Broadcasters ......... 4

Prepared statement .......................................................................................... 47

Richard Sjoberg, President and Chief Executive Officer, Sjoberg’s Incorporated, Thief River Falls, Minnesota ................................................................ 6

Prepared statement .......................................................................................... 52

Response to written questions of:

Senator Grams ........................................................................................... 72

Senator Enzi .............................................................................................. 73

B.R. Phillips III, President and Chief Executive Officer, National Rural Telecommunications Cooperative, The Plains, Virginia .......................................... 8

Prepared statement .......................................................................................... 55

David K. Moskowitz, Senior Vice President of Legal and General Counsel,

Secretary, and Director, EchoStar Communications Corporation, Littleton,

Colorado ................................................................................................................ 9

Prepared statement .......................................................................................... 57

Steven J. Cox, Senior Vice President, DIRECTV Incorporated, El Segundo,

California .............................................................................................................. 11

Prepared statement .......................................................................................... 60

Response to written questions of:

Senator Grams ........................................................................................... 74

Senator Enzi .............................................................................................. 76

Senator Crapo ............................................................................................ 77

Gregory L. Rohde, Assistant Secretary for Communications and Information,

National Telecommunications and Information Administration, U.S. Department of Commerce ........................................................................................ 25

Prepared statement .......................................................................................... 63

Response to written questions of Senator Enzi .............................................. 79

Page

IV

Christopher McLean, Acting Administrator, Rural Utilities Service, U.S. Department of Agriculture ....................................................................................... 26

Prepared statement .......................................................................................... 64

William Roberts, Senior Attorney, U.S. Copyright Office .................................... 28

Prepared statement .......................................................................................... 65

Response to written questions of Senator Enzi .............................................. 79

Dale N. Hatfield, Chief, Office of Engineering and Technology, Federal Communications Commission ..................................................................................... 29

Prepared statement .......................................................................................... 68

Response to written questions of:

Senator Grams ........................................................................................... 81

Senator Enzi .............................................................................................. 82

Senator Crapo ............................................................................................ 83

WEDNESDAY, FEBRUARY 9, 2000

Opening statement of Chairman Gramm .............................................................. 87

Opening statements, comments, or prepared statements of:

Senator Enzi ..................................................................................................... 93

Prepared statement ................................................................................... 107

Senator Bunning ............................................................................................... 96

Senator Allard ................................................................................................... 103

Prepared statement ................................................................................... 108

WITNESSES

Conrad Burns, a U.S. Senator from the State of Montana .................................. 88

Prepared statement .......................................................................................... 108

Tim Hutchinson, a U.S. Senator from the State of Arkansas .............................. 89

Prepared statement .......................................................................................... 109

Craig Thomas, a U.S. Senator from the State of Wyoming ................................. 91

Prepared statement .......................................................................................... 110

Blanche Lincoln, a U.S. Senator from the State of Arkansas .............................. 91

Prepared statement .......................................................................................... 111

Dan L. Crippen, Director, Congressional Budget Office ....................................... 97

Prepared statement .......................................................................................... 111

(1)

LOAN GUARANTEES AND

RURAL TELEVISION SERVICE

TUESDAY, FEBRUARY 1, 2000

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 10 a.m., in room SD–628 of the Dirksen

Senate Office Building, Senator Phil Gramm (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PHIL GRAMM

Chairman GRAMM. Let me call the Committee to order.

I will ask the witnesses to take their seats. I want to thank everyone for coming this morning. I am a little discouraged that we

missed all of our hearings last week, and I’m determined in the

next couple of weeks to make up those hearings. I would like to follow the following procedure today. When we get a quorum, wherever we are in the proceedings, I’m going to stop the hearing and bring up the nomination of Alan Greenspan to be

reconfirmed as Chairman of the Board of Governors of the Federal

Reserve System. I will give Members until noon to be recorded on that topic. I would have extended it to 5 p.m., but I am still hoping that we

might push our leadership to bring the nomination up earlier.

Members will have until noon to vote on that topic.

We are here today to talk about the loan guarantees on the sat- ellite bill. I think every Member of Congress is familiar with the

issue. It dominated the Congress in the last couple of weeks of the

1999 session.

We are committed in this Committee to produce a loan guarantee that will have the following objectives: It will be a rational approach to the problem of trying to provide an incentive for the private sector or some nonprofit entity, or some combination thereof,

to provide access to local television signals in the more remote

rural areas of America. We will try to write a loan guarantee program that maximizes the probability that the loans will be paid

back and that the taxpayer will not be left holding the bag. I think

we can achieve both objectives.

I have tried during the recess to look back at loan guarantees for

the last 75 years. I have read the bill that was adopted by the satellite Conference Committee in detail, and let me say that, given

the amount of time they had to work on it, I think it was a good

effort. I do believe that, building on what they did, we can greatly

improve that bill.

2

I would like to say that we will produce a bill within the deadline that we set for ourselves in the agreement. I believe that probably

no other Member has done more to make all this possible than

Senator Conrad Burns. He will be testifying before the Committee

on February 9. We have a lot of work to do. We will be holding an additional hearing. I believe we have started this process with an open mind,

not an empty mind, but an open mind. If anyone has any concerns,

ideas, or suggestions for how we can improve the loan guarantee

program—how we can make it work, make it safer and sounder—

we would very much like to hear from them.

Let me see if any of my colleagues would like to make an opening

statement.

Senator Bayh.

OPENING COMMENTS OF SENATOR EVAN BAYH

Senator BAYH. Thank you, Mr. Chairman. I have no opening

statement. I would just like to welcome our witnesses and thank

them for coming today. I look forward to hearing their statements.

Chairman GRAMM. Senator Bennett.

OPENING COMMENTS OF SENATOR ROBERT F. BENNETT

Senator BENNETT. Thank you, Mr. Chairman, for holding this

hearing today. I, like Senator Bayh, have no opening statement. I

welcome the witnesses and look forward to hearing their testimony.

Chairman GRAMM. Senator Enzi.

OPENING COMMENTS OF SENATOR MICHAEL B. ENZI

Senator ENZI. Thank you, Mr. Chairman. I appreciate you holding these hearings. I would ask that my full statement be made a

part of the record. I would just mention that if you could see the

volume of mail my office has received directed at satellites, you

would know how important this issue is for my constituents. It is

not only the major issue, it is also the majority of my mail.

Wyoming is a State that has a lot of open space, a lot of distance.

We have only 480,000 people spread over borders that are 400

miles on a side. It is a long way between people. Sometimes satellite TV is the only way they have of not only getting to watch

their favorite sports teams and television shows, but, more importantly, it’s the way they get their local weather warnings that can

potentially affect their livelihood, and in many cases, even their

lives. It’s not just an entertainment thing for them. It’s a life and

death matter.

I want to take this opportunity to welcome David Moskowitz,

Senior Vice President of EchoStar Communications, who employs

several hundred Wyoming residents in his operation in Cheyenne,

with headquarters in Littleton, Colorado. We are very proud and

pleased to have that important facility in Wyoming.

Wyoming only has television stations in three cities—Casper,

Cheyenne, and Jackson. The rest of the State is served by stations

out-of-State or by relay transmitters that bring stations to the outlying towns. We have long distances and tall mountains that make

even the best efforts of over-the-air broadcasters and cable companies even more difficult.

3

For the people that are located in the remote areas of the State,

we need a solution. We are looking to you for the solution. I thank

the Chairman for holding these hearings to try to arrive at a solution in a timely manner so that these people will not be left out

of television.

Thank you.

Chairman GRAMM. Senator Enzi, let me thank you. I understand

today’s your birthday. I’m not going to recount the relatively high

number that we’re celebrating.

[Laughter.]

In any case, it is higher than it was last year.

[Laughter.]

I want to say, on behalf of the Committee, ‘‘Happy Birthday.’’ I

want to thank you for all you have done on this Committee. I don’t

remember a new Member of the Committee contributing more than

you have for a very long time. I want you to know that we appreciate it.

Senator ENZI. Thank you very much.

Chairman GRAMM. Do any of you have an opening statement?

Senator Johnson.

OPENING COMMENTS OF SENATOR TIM JOHNSON

Senator JOHNSON. I will submit a statement for the record. This

is a timely hearing. The issue is both critically important and very

urgent to my home State of South Dakota, and I appreciate your

holding this hearing at this time.

Chairman GRAMM. Thank you, Senator Johnson.

Senator Bryan.

OPENING COMMENTS OF SENATOR RICHARD H. BRYAN

Senator BRYAN. Mr. Chairman, I would include a statement for

the record as well. I would just say, parenthetically, no issue that

we have dealt with in the last Congress generated more mail, more

phone calls, more e-mail contact than this satellite issue.

This issue is one of profound importance to my own State, where,

notwithstanding the fact that 85 percent of the people in Nevada

live in metropolitan areas, for those who live outside of the metropolitan Las Vegas and Reno market, there is a vast expanse. We

hear from those people that are very much interested in this issue.

I thank you, Mr. Chairman, for convening this timely hearing

and ask that my full statement be made a part of the record.

Chairman GRAMM. Your statement will be made a part of the

record as if read in its entirety.

Senator Bunning.

OPENING COMMENTS OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman. I want to thank all

of the panelists for appearing today. I have a statement which I

would like to include for the record.

In the State of Kentucky, we need a lot of assistance in servicing

all of the people who rely on dishes, particularly in eastern and

rural Kentucky. I am looking forward to hearing the testimony of

our witnesses and to trying to solve this problem.

Thank you.

4

Chairman GRAMM. Thank you, Senator Bunning.

Senator Allard, do you have an opening statement?

OPENING COMMENTS OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, I would like to place my statement in the record so we can hear from the witnesses.

Thank you.

Chairman GRAMM. Your statement will be placed in the record

as if read in its entirety.

Let me now introduce the members of our first panel. I would

like to ask each member of the panel to try to present their testimony in 5 minutes or less. If you run over a minute or two and

you feel that you absolutely need the time, I am not going to slam

down the gavel and stop you. If you go beyond the allotted time by

more than a minute or two, then I may start staring at you and

throwing ice or something. But try to focus your testimony to the

degree you can in 5 minutes.

Our first witness is James Yager, President and Chief Operating

Officer of Benedek Broadcasting, which is a rural broadcaster. He

is also Joint Board Chairman of the National Association of Broadcasters and will be testifying on their behalf. Our second witness

will be Richard Sjoberg, who is President and Chief Executive Officer of Sjoberg’s Incorporated, a small rural cable company located

in northwestern Minnesota. Next, we will hear from Bob Phillips,

President and Chief Executive Officer of the National Rural Telecommunications Cooperative. Following Mr. Phillips, we will hear

from David Moskowitz, Senior Vice President of Legal and General

Counsel, Secretary, and Director of EchoStar Communications Corporation. Last, but not least, will be Steven Cox, Senior Vice President of DIRECTV, Incorporated.

Mr. Yager, we are ready to hear your testimony.

OPENING STATEMENT OF K. JAMES YAGER

PRESIDENT AND CHIEF OPERATING OFFICER

BENEDEK BROADCASTING, ROCKFORD, ILLINOIS

AND JOINT BOARD CHAIRMAN

NATIONAL ASSOCIATION OF BROADCASTERS

ON BEHALF OF THE

NATIONAL ASSOCIATION OF BROADCASTERS

Mr. YAGER. Thank you, Mr. Chairman. Broadcasters very much

appreciate your holding this hearing on a subject that is vital to

the public’s access to local television. This is also an important

issue to me personally. My company, Benedek Broadcasting, currently operates 26 television stations in small markets located in

16 States across the country, including seven of the States represented by Senators on this panel.

As the Chief Operating Officer of Benedek, I am very concerned

that consumers living in the Benedek markets will never have the

chance to see our network-affiliated stations on their satellite dish

without a loan guarantee program similar to the one proposed by

the House and Senate conferees last year. Given how important

local stations are in providing news, weather, emergency, and other

information to local viewers, all of this should make resolving this

issue a high priority.

5

Currently, there are 211 television markets nationwide. Both

DIRECTV and EchoStar, the two largest satellite providers, are focused on providing local signals only in the top 35 or 40 markets

around the country. Another operator, Local TV on Satellite, says

it may go to the top 68 markets or so. But even with that coverage,

25 percent of the audience nationwide would have no chance of seeing local stations on satellite.

Let me point out that 17 States have no television market in the

top 50 television markets in the country. As a result, both we and

you have been looking at ways to resolve this issue in a consumerfriendly, yet cost-effective, manner.

There are any number of economic and technical hurdles facing

someone trying to create a viable business plan to provide local signals to medium- and small-sized markets. The first is clearly the

limited number of people who live in the smallest 150 markets or

so, making it tough for anyone to break even in the short-term in

this business. Moreover, in order to make the service consumerfriendly and to hold down costs, the rural plan needs to focus on

wholesaling local signals, rather than bearing the burden of retailing them directly to consumers.

The likely partners for such a relationship are sitting next to me

at this table—EchoStar and DIRECTV. But they each have different systems for delivering their signals, so many technical issues

will have to be resolved to make any rural service compatible and

workable. The large number of stations located in rural America

also requires a special satellite using spot-beam technology, an additional orbital slot, and numerous uplink facilities. At the end of

the day, we anticipate that implementing any local service will cost

anywhere between $600 million and $1 billion in the small- to midsized markets.

As we look at this challenge, the National Association of Broadcasters (NAB) supports the concept of having the Government provide an economic incentive to allow local-into-local service to spread

beyond the major markets. However, any such incentives should be

consistent with other loan guarantee programs already in use by

the Government. In addition, Mr. Chairman, please do not create

another bureaucracy or allow the Government to mandate the specifics of a business plan.

Let me add that some here today may suggest the elimination of

the time- and court-tested principle of must-carry, which has been

consistently endorsed by Congress. That approach would be exclusive, not inclusive, and defies the very tone of this hearing today,

which has focused on providing more local TV service to consumers,

not less. Any call to drop must-carry should be rejected.

Last year, the conferees developed a loan guarantee proposal

that ultimately was taken out of the satellite bill that passed. In

looking at that proposal, we see a number of areas that need further refinement. For example, that proposal placed limits on the

size of the loans allowed. We believe that issue would best be left

open-ended in order to accommodate the various means of accomplishing the local-into-local service.

We feel the proposal involved too many Government agencies.

Congress, the U.S. Department of Agriculture, the OMB, and the

6

NTIA would all have a cut at the apple, with a cumbersome approval process that we think is unnecessary.

We question the proposal’s handling of subordination. Putting

the first lien in the hand of the Government will likely be a disincentive for lenders to risk their funds on creating local-into-local

service. If additional financing is needed, it may be unavailable if

the Government does not subordinate some or all of its interests.

Finally, we do not agree that DIRECTV and EchoStar should be

excluded from any loan guarantee program. Allowing a consortium

that includes either or both of these established satellite vendors

may be the quickest way to solve a host of problems related to rolling out local-into-local service in rural areas.

As I close, let me commend the announcement of a public inquiry

by the NTIA on this issue. We look forward to adding our comments to Assistant Secretary Rohde’s worthy undertaking.

Let me also praise your efforts, Mr. Chairman, and those of your

colleagues, as you begin to look critically at local-into-local service

for small markets.

Please accept my assurance that the National Association of

Broadcasters and Benedek Broadcasting look forward to working

with you and the Committee to come up with an appropriate resolution that provides proper incentive for local-into-local service and

ensures access to local television for all Americans who use satellite dishes for their television reception.

Thank you.

Chairman GRAMM. Thank you.

Mr. Sjoberg.

OPENING STATEMENT OF RICHARD SJOBERG

PRESIDENT AND CHIEF EXECUTIVE OFFICER

SJOBERG’S INCORPORATED, THIEF RIVER FALLS, MINNESOTA

Mr. SJOBERG. Mr. Chairman and Members of the Committee, my

name is Dick Sjoberg. I’m President and CEO of Sjoberg’s Incorporated, a privately held cable company in northwestern Minnesota.

My family entered the cable television business in 1962. At that

time, our main goal was to bring broadcast signals to communities

that could not receive them.

Today, our company brings 148 channels to approximately 7,400

customers in 33 small rural towns and townships, all of them connected by fiberoptic cable. Despite low population densities of 12 to

22 homes per mile of cable plant, we currently offer half of our customers high-speed Internet access. The other half will have cable

modem service by the end of the year. Some communities we serve

are as far as 200 miles away from the broadcast stations that we

carry on our cable systems.

My company is committed to delivering new broadband services

to all of our customers, including our schools, and to ensuring that

these services are as good as those offered in urban areas. To date,

my company is the only video service provider to make any major

investments in these rural northwestern Minnesota communities,

where I am a resident, participate in community events, and pay

approximately $30,000 a year in local franchise fees. Moreover, I’m

not alone. As the FCC’s report, Broadband Today, indicates, small

cable systems across the country are deploying broadband.

7

The NCTA supported the Satellite Home Viewer Improvement

Act of 1999, procompetitive legislation that changed the law to permit satellite companies to retransmit local broadcast signals into

local markets. We are concerned, however, about proposals that

might provide Government subsidies to some industries—but not

other industries—in an otherwise competitive video marketplace.

Small cable operators like myself compete against DBS in every

market we serve. Our satellite competitors already have certain advantages, like greater channel capacity and lower marginal costs,

in sparsely populated areas. Yet, some of the proposals for expanding local-into-local service compound DBS’s advantages by having

the Federal Government subsidize our competitors’ capacity to provide local broadcast signals, even though they have market capitalizations of $21 billion and $16 billion and annual revenues ranging

from $1 to $6 billion.

As a small cable operator, I already carry all local broadcast signals on my systems. I raised the money to carry these signals in

the private capital markets. The fear of many small cable operators

is that any rural loan guarantee program will be interpreted as

a congressional mandate to build another satellite—at discounted,

federally insured rates—to carry local broadcast signals into those

markets which local businesses like myself can serve more costeffectively using technologies like translators, repeaters, relay stations, microwave, fiberoptic cable, and wireless systems.

For example, my company has cost-sharing arrangements with

Roseau County and Lake of the Woods County to transport overthe-air broadcast signals into areas where they would not normally

reach. We do it using a combination of fiberoptic cable, microwave

signals, and translators. In these areas, the local rural cooperative,

which is a selling agent for DIRECTV, provides its customers with

dual antennas to receive both the satellite signals and the local

broadcast signals in direct competition with my cable service.

If the Congress moves forward with a Federal loan guarantee

program, I would very much like to see it be technology neutral,

giving ‘‘Main Street’’ businesses the opportunity to extend more

cost effectively the reach of the local broadcast signal. The need for

such technology neutrality is especially important since cable companies like mine are providing rural customers with broadband

services and high-speed access to the Internet, helping to bridge

the digital divide.

Any Government funding or loan guarantee program should be

focused on areas with the least local broadcast signal coverage and

should not be used to subsidize DBS service in urban or suburban

markets.

The program should be structured in a manner that creates the

smallest paperwork burden possible, thus encouraging the smaller

businesses to apply and provide cost-effective, local solutions.

Thank you for your attention. I stand ready to work with this

Committee as it moves forward on legislation to provide better television service in rural and underserved markets.

Thank you.

Chairman GRAMM. Thank you, Mr. Sjoberg.

Mr. Phillips.

8

OPENING STATEMENT OF B.R. PHILLIPS III

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NATIONAL RURAL TELECOMMUNICATIONS COOPERATIVE

THE PLAINS, VIRGINIA

Mr. PHILLIPS. Thank you, Chairman Gramm. I am Bob Phillips, President and CEO of the National Rural Telecommunications Cooperative. The NRTC is a cooperative of nearly 1,000 rural electric

and telephone systems that provide services in 48 States. We serve

the underserved and the unserved markets with electric and telephone service.

The NRTC’s mission has been to help those members bring the

benefits of advanced telecommunications services to these unserved

markets. We believe so much in this mission that back in 1992, we

raised and invested $100 million with DIRECTV to launch the Nation’s first direct broadcast satellite (DBS) service. Today, we serve

1.4 million consumers throughout 48 States.

In my testimony today, I would like briefly to address two problems, Mr. Chairman, that were not addressed by the Satellite Home

Viewer Improvement Act last year. The first problem is the unavailability of local TV service in rural America. The second is the

lack of competition to cable. I would like to propose a satellite solution to both problems, and I would like to suggest that it will require your assistance in the form of a Federal loan guarantee.

Last year’s bill did pave the way for the satellite industry to become a meaningful competitor to cable in some of the Nation’s top

markets. I brought with me today a map which shows approximately 40 markets that will be served by DIRECTV and EchoStar,

which is the best estimate we have today for extension of service.

You will note, I hope, that this leaves out more than half of the

population of America. There are 20 States, in fact, that have no

signal and eight of those States are States represented by Senators

here on the Committee. There is no reason that these constituents

should be left out or disenfranchised from the benefits of the modern information age.

Satellite technology can help us resolve this problem. Satellite

technology, unlike other technologies, is ‘‘distance insensitive.’’ Satellites can go places that cable and other broadcast technologies

will never go. In fact, any technology, I would suggest, other than

satellite is going to provide only a piecemeal or partial, ineffective

approach as a tool to extend service to these remote locations. Furthermore, I would suggest that every cable customer in America

needs a choice of service providers, and satellite technology can

provide that choice. That’s why Congress passed the satellite bill

last year, because satellite holds the promise to serve everyone and

to provide much-needed competition to cable.

Mr. Chairman, last year during this debate, you said that there

are some social goals that are not necessarily met by market forces.

We believe that’s true here. There are problems that cannot be

fixed because, in this case, the money cannot be made in delivering

local satellite TV signals to these remote rural areas.

I would like to suggest that getting this job done will require a

Federal loan guarantee of at least $1.25 billion, and that will have

to be supplemented with additional funds supplied by the satellite

industry.

9

We also strongly recommend that any loan guarantee program be

implemented on a not-for-profit, and preferably a cooperative basis.

A not-for-profit approach would provide and ensure that the Federal loan guarantee funds do not enrich any large corporations or

private interests. In fact, the utilities we work with have used loan

guarantees for 30 years to provide electric and telephone service to

these remote areas of the country and the program administered

by the U.S. Department of Agriculture under the Rural Utilities

Service has done a very effective job over the last 60 years in implementing those programs.

We also want to urge you to establish some strong criteria to ensure that any loan guarantee will be repaid. But we should also

offer that preferences should be given to those plans which will

provide the most comprehensive solution to getting the job done.

That way, the Federal loan guarantee has the most benefit to the

broadest number of people.

Mr. Chairman, I want to be clear as well that we believe this

plan is going to require more than just assistance in terms of financial support. We are going to need satellite spectrum and satellite

orbital locations, as well as some good industry cooperation to get

this job done.

We are committed to that and we believe it is worth the effort

because of your constituents’ and our constituents’ desire to have

local signals through their satellite systems. That’s why they called

and wrote to you last year, and I believe they are still waiting for

that solution.

Mr. Chairman, we want to work with you and the Members of

this Committee to draft a technology solution. We believe satellites

should be chosen to deliver local television signals to these rural

and remote locations, as well as to provide meaningful competition

to cable.

Thank you very much.

Chairman GRAMM. Thank you, Mr. Phillips.

Mr. Moskowitz.

OPENING STATEMENT OF DAVID K. MOSKOWITZ

SENIOR VICE PRESIDENT OF LEGAL AND

GENERAL COUNSEL, SECRETARY, AND DIRECTOR

ECHOSTAR COMMUNICATIONS CORPORATION

LITTLETON, COLORADO

Mr. MOSKOWITZ. Thank you, Chairman Gramm, Senators Enzi

and Allard, both of whom we consider home State Senators, and

other distinguished Members of this Committee. Thank you for inviting me here to testify.

My name is David K. Moskowitz. I am Senior Vice President of

Legal and General Counsel, Secretary, and a Member of the Board

of Directors of EchoStar Communications Corporation, based in

Colorado. EchoStar’s founder, Charlie Ergen, had a vision of a dish

in every home, school, and business in the United States. In fulfillment of that vision, we have launched five high-power direct broadcast satellites since December 1995, and we have another satellite

scheduled to launch this spring.

Our goal has always been to provide competition to cable so subscribers have an alternative to the high prices and historically poor

10

service provided by the monopoly cable company. Last year, Congress took what is, in my view, a tentative first step toward giving

DBS the right to compete with cable on a more equal footing when

it passed the Satellite Home Viewer Improvement Act of 1999. The

success of the copyright license given in that bill will turn entirely

on its implementation. If broadcasters are allowed to exploit their

monopoly power in each local market without clear restraint, the

goal of effective competition will not be met.

Although my company will be able to provide over 50 percent of

the U.S. population with all of their local channels by satellite, the

constraints on DBS capacity and prohibitively high costs make it

impossible for EchoStar to carry all 1,600 channels nationwide. We

currently offer about 100 television stations in over 20 markets

around the country and plan to retransmit approximately 70 additional channels over the next several months, for a total of over 30

markets served by the end of the first quarter of this year.

Cable TV passes over 90 percent of the U.S. population today. If

the goal of a Government loan guarantee is simply to provide access for rural subscribers to their local stations, then only 3 percent

of the U.S. population is at issue here. The bigger problem, however, is the lack of competitive choice. A substantial percentage of

Americans have access to local channels through their cable system, but they do not have competitive choice. With the appropriate

legislation, and vigilant implementation of the existing laws by the

FCC, EchoStar can offer true choice for all rural viewers. The rural

funding mechanism should, accordingly, be based on the fundamental policy of ushering in, and bolstering, competition to cable,

telephone companies, and all other incumbents. Without choice,

cable subscribers in rural areas will surely become victims of even

deeper price gouging and poorer service by their local cable monopolists, and the ‘‘digital divide’’ will deepen.

In that respect, we were disappointed to see in the final days of

the last congressional session that the criteria for loan guarantees

would have included incumbent cable and phone companies. This

would be a mistake, if the ultimate policy goal is to provide equality for rural and city consumers alike.

One of the primary obstacles Congress faces in providing equality

to rural consumers is the must-carry requirement. No single provision of the Satellite Home Viewer Improvement Act hurts rural

subscribers more. For every must-carry channel, our ability to extend local programming to additional markets is reduced by one

channel. While neither EchoStar nor DIRECTV can, at this time,

serve every market, many more of your constituents could receive

local channels absent must-carry provisions.

To be more specific, for EchoStar, the must-carry provisions will

mean that we serve 33 markets instead of 60. Twenty-five percent

of the U.S. population will miss out on fully effective competition

as a result, a direct result, of must-carry provisions. When mustcarry becomes effective, the additional 30 channels we will have to

carry in New York and Los Angeles alone will mean that six more

markets are deprived of full competition to cable.

Must-carry is a law that was imposed on cable because of its

monopoly status. EchoStar is not a monopoly. Unless must-carry is

eliminated, your constituents will suffer because of a law that, in

11

contrast with cable must-carry, does not resolve any competitive

problem.

Now, in addition to legal hurdles, there are technological issues

that must be addressed as well. Some have suggested that the reason EchoStar and DIRECTV are not serving rural areas is purely

economic. The economics are indeed troublesome, but the technical

hurdles are daunting.

The FCC must identify additional spectrum for the carriage of

local stations. There simply is not enough right now. I will not bore

you with the technical mumbo jumbo, but once spectrum is identified, the physical location of a satellite to provide service must be

compatible with both EchoStar and DIRECTV as well.

There is also the issue of encryption. EchoStar and DIRECTV

use different systems, and any solution must address this issue.

We must work with mutual cooperation.

Congress must also tackle the tough question of economic feasibility that lies at the heart of financial support. From EchoStar’s

perspective, there is a very real issue of whether DBS providers

can expect to derive enough revenue from providing local channels

in rural areas to make a return on their investment. If EchoStar

cannot answer this question affirmatively, the investment community will simply refuse to finance the construction of additional satellites, regardless of loan guarantees. Government loan guarantees

cannot change fundamental economics.

The solution to full competition cannot, in our view, lie exclusively with Government guarantees. Whether the ARC’s model in

Alaska or Internet video-streaming models of the future are an

issue, a realistic solution will require creativity as much as it will

require loan guarantees. We challenge the broadcasters to invest

themselves in serving rural customers and to work creatively on

ARC’s, Internet, and other solutions beyond simply spending taxpayer dollars.

Thank you for inviting me here to testify. I look forward to answering your questions.

Chairman GRAMM. Thank you.

Mr. Cox.

OPENING STATEMENT OF STEVEN J. COX

SENIOR VICE PRESIDENT

DIRECTV INCORPORATED, EL SEGUNDO, CALIFORNIA

Mr. COX. I want to thank you, Mr. Chairman, for inviting me to

appear before the Committee today. I appreciate the opportunity to

present DIRECTV’s views on this issue.

DIRECTV has not historically had much business in front of this

Committee, so you may not appreciate how extraordinary it is for

me to say that I concur almost 100 percent with the comments expressed by my sometimes friend, Mr. Moskowitz, of EchoStar.

[Laughter.]

DIRECTV has experienced tremendous growth since its inception

5 years ago, and is today the leading provider of direct broadcast

satellite (DBS) service in the United States with more than 8 million subscribers.

We’re grateful to Congress for passing the Satellite Home Viewer

Improvement Act. While we did not agree with every provision of

12

that bill, it did allow satellite companies, for the very first time, to

begin offering local broadcast channels and to begin offering consumers a service which is fully competitive with cable television.

We have moved quickly to bring the benefits of that legislation

to consumers. We have publicly committed to make local channels

available to at least half of the Nation’s television households— about 50 million households in total. As of today, we are offering

local channels, together with a national PBS feed, in 19 major metropolitan markets. By the end of the first quarter, as we continue

to add additional markets to our roll-out, we will have substantially met our 50 million household commitment.

This hearing today is focused on those communities we are unlikely to serve with local channels, and the potential role of Federal

loan guarantees in expanding this critical element of satellite television. From DIRECTV’s perspective, our ability to broaden the delivery of local channels will not be limited by access to capital, so

while the availability of loan guarantees may create incentives for

some entities to develop local channel offerings, DIRECTV’s ability

to expand the benefits of competition to additional communities is

being hampered by more fundamental legislative and regulatory

obstacles. Specifically, the biggest impediment, as Mr. Moskowitz

indicated, to serving additional communities is the ‘‘must-carry’’ requirement imposed by the recently enacted satellite bill. Even

absent that constraint, we are ultimately limited by the spectrum

allocated to us by the FCC. I would like to briefly explain those

problems.

The must-carry provision, enacted into law last November as

part of the satellite bill, requires us no later than January 1, 2002,

to carry every full-power local broadcast station in each market in

which we offer any local channels. For example, in both New York

and Los Angeles, we could be required to carry up to 23 stations.

The practical implications of this requirement are clear. By imposing a must-carry obligation, a policy decision has been made that

it is much more important for us to carry all 23 local stations in

New York and all 23 local stations in Los Angeles, than to offer the

residents of communities such as Buffalo, Harrisburg, Louisville,

Omaha, or Providence even a single channel of local content.

For the delivery of local channels by satellite to expand, the imbalance reflected by that policy decision must be addressed. Even

if we were to get relief from the must-carry obligation, we would

still not have sufficient available capacity to provide local channels

in all 210 television markets. As a result, we would urge Congress

to direct the FCC to make additional spectrum available to the

DBS providers, which could be used to bring local channels to those

markets we cannot service with our existing limited capacity.

I would point out that more than 21⁄2 years ago, DIRECTV filed

a petition for rulemaking seeking additional spectrum to expand

our channel capacity. Unfortunately, that petition has sat at the

Commission without action. If that petition were to be granted, it

would allow both DIRECTV and EchoStar to gain access to additional spectrum which could be used to serve additional markets

with local channels.

As I indicated at the outset, the presence or absence of a Federal

loan guarantee program will not directly impact DIRECTV’s incenVerDate 11-MAY-2000 10:27 Jan 19, 2001 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 69308.TXT SBANK3 PsN: SBANK3
13

tive or ability to expand the delivery of local channels. Should Congress decide, however, that a Federal loan guarantee program is

desirable, I would offer the following comments. First, we believe

that a fundamental premise of the recently enacted local-into-local

legislation is that many consumers do not find the delivery of local

channels via a separate delivery mechanism, such as an over-theair television antenna, to be the equivalent of a single delivery

mechanism, such as that used by cable operators, to deliver both

local channels and national programming. Thus, only the satellite

delivery of local channels, in a manner that is compatible with the

existing DBS services, will meet the expectations of consumers who

are either unwilling or unable to put up an over-the-air television

antenna and will ensure that urban and rural consumers have

equivalent competitive video delivery choices.

Second, to the extent that Congress decides to create a Federal

loan guarantee program, we believe that taxpayer funding should

be used to complement, rather than compete with, service already

being provided without the benefit of taxpayer subsidies. In other

words, we feel the program should be tailored to ensure that funds

are used to provide local channel service only in markets where the

existing DBS providers are not providing that service.

The ability to expand local channels is a vital factor in ensuring

the continued growth of satellite as a viable competitor to cable.

We look forward to working with Congress to advance these important objectives.

Thank you again for providing me the opportunity to testify.

Chairman GRAMM. Thank you, Mr. Cox.

What I would like to do, since we have a second panel, is to get

Members to rigidly adhere to the 5-minute rule. If someone will

turn on the green light, I will start by doing that myself.

First of all, let me thank everyone here for their excellent testimony. I think it is obvious that there are issues in the whole area

of satellite and television broadcasts that Congress will be dealing

with for a long time. Obviously, we have a difference of opinion on

must-carry. I would have to admit that it’s hard for me to understand, if you have a station in New York that nobody watches and

that nobody is going to watch even if we put it on every satellite

in America, why I can’t get ABC football in a small rural area as

a result of someone else getting some TV station in New York that

nobody watches.

But the point is we are here as the Banking Committee to deal

with the loan guarantee. Let me make it clear that if we are going

to have any hope of passing a loan guarantee, these are issues that

we are going to have to leave to the Commerce Committee and

then, ultimately, to our role as individual Members of the Senate.

Our focus on this bill, at least as it comes out of this Committee,

and hopefully as it is dealt with on the floor of the Senate, is going

to be on the loan guarantee. Let me ask a few questions about the

loan guarantee.

In looking back at the last 75 years of loan guarantees, in looking at those that have been successful and those that have been

unsuccessful—and I define success as two things: one, it achieved

the objective that the loan guarantee was written for; and two, the

money was paid back—there is a pattern to the ones that work and

14

the ones that don’t. I believe it is clear, at least in beginning to

think about this, and I hope to involve every Member of this Committee and every Member of the Senate who is interested, that one

of the things we want to do, rather than having a merry-go-round

process of numerous new bureaucracies and Government agencies,

is establish an oversight board.

My thinking is that we should have the Secretary of the Treasury designate someone from the Treasury whose primary function

is the credit function within the Government, that we should have

the Chairman of the Board of Governors of the Federal Reserve

System, Alan Greenspan, appoint a representative. I assume that

would be another Member of the Board of Governors. Their role

would be to look at the economics of both the proposal and the repayment of the loan.

You would want a third member on the panel. It’s less clear to

me who that should be. I think you could argue that it should be

someone from the Department of Commerce or the Federal Communications Commission. You might argue that it should be someone who is involved in some area of Government that is focused on

rural areas, such as the Department of Agriculture.

I would like to hear briefly from each of our panelists, starting

with you, Mr. Yager, about what agency of Government the board

members should come from. From the point of view of the legal

structure of the board, it would have to be someone in Government.

Within that constraint, let me quickly run through the panel.

Mr. YAGER. I think your suggestions are excellent and I would

heartily endorse the Secretary of the Treasury appointing someone,

the Chairman of the Federal Reserve appointing someone, and the

Department of Commerce appointing someone to that board.

Chairman GRAMM. Mr. Sjoberg.

Mr. SJOBERG. I believe your suggestions are right on target. The

third member of the board should be someone who has knowledge

in all of the different diverse systems that could provide this service, someone or some agency that would have knowledge in broadcast television, in DIRECTV and EchoStar DBS services, someone

who has knowledge in cable television, in translators, and in other

alternative methods of providing this service.

Chairman GRAMM. Mr. Phillips.

Mr. PHILLIPS. Mr. Chairman, I believe if this board is to be appointed and a third party added, the appropriate party in my mind

would be someone under the U.S. Department of Agriculture, primarily the RUS. They have a 60-year history of implementing loan

guarantees and loan programs to extend service, which includes

telecommunications. They have expertise in this area. They have a

track record of success.

I might add that they also have the administrative staff to administer the program at the board’s direction. I believe that’s very

important. It is important that we consider how it would be administered, as well as who would provide the final approval.

Mr. MOSKOWITZ. Mr. Chairman, I agree with Mr. Sjoberg, that

the third member needs to be someone with a technical expertise

and knowledge of the broadcast industry, of the satellite industry,

and of how the copyright process works as well.

Chairman GRAMM. Mr. Cox.

15

Mr. COX. Once again, mirroring Mr. Moskowitz’ thoughts, if one of the key issues you are trying to address, if one of the key issues

you are trying to make sure is addressed by this program, is economic feasibility and reducing the risks to the taxpayers footing

the bill, then someone is needed who understands the technical

challenges that Mr. Moskowitz alluded to in his testimony. It could

be someone from the FCC. It could be someone from the NTIA.

I believe there are several agencies that we have spent a lot of

time with over the years addressing this very issue and the economic challenges associated with it.

Chairman GRAMM. Senator Sarbanes.

OPENING COMMENTS OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you, Mr. Chairman. First, let me say

on behalf of my colleagues, I believe there are a few more Members

that will hopefully arrive here shortly so we will be able to begin

the nomination business. I wasn’t here at the outset. I apologize for

that. I certainly will review the testimony of the panel. I simply

wanted to make a few observations.

I believe it is appropriate for the Government to undertake the

burden of working with private sector partners to make sure that

all Americans have access to the latest technology. Actually, there’s

a fairly well-established principle of universal access to new technology. We did that with electricity, we did that with telephones,

and I believe we should apply the same principle here as we move

into an increasingly electronic age.

Obviously, we are going to have to look at the risk parameters.

We need to be able to assure ourselves that we are not taking a

needless risk and that what we’re looking at is a worthy candidate

for guarantees. But I think we need to move forward. I know for

many of my colleagues from the more rural areas of the country,

this is a very pressing issue. I think we need to address it.

I appreciate the Chairman’s commitment to move legislation out

of this Committee, as I understand it, within the next 60 days. We

will work through this very carefully, and hopefully come up with

a piece of legislation that everyone can agree with.

I believe that the least-served areas of our country, particularly

the rural areas, should have access to the same technologies as the

more urban areas. I look forward to working with my colleagues to

achieve that objective.

Thank you very much, Mr. Chairman.

Chairman GRAMM. Thank you, Senator Sarbanes.

Senator Bunning.

Senator BUNNING. Thank you, Mr. Chairman. Let me try to find

out from the panel here the technical problems that exist. I had to

meet with 40 constituents. That’s why I started with you, left, and

came back.

Senator SARBANES. It wasn’t anything you said that drove him

from the room.

[Laughter.]

Senator BUNNING. No, it wasn’t, believe me.

[Laughter.]

What technical problems are DIRECTV and EchoStar encountering in adding local broadcast signals to their programming?

16

I’m in the Greater Cincinnati broadcast area. I have DIRECTV.

They do not cover my local channels, but I can pick my local channels up by simply placing rabbit ears on my set. If you move just

20 miles to the south, you cannot do that. Why can’t you pick up

the local channels in the same manner? What technical problems

are we looking at in order to be able to pick up a local signal from

DIRECTV or another competitor?

Mr. COX. I believe there are a few key issues which must be settled before you could even begin to formulate a plan, the first of

which is clearly access to spectrum. There are 1,600 and some local

channels in the United States today. We have satellites with the

capacity to carry a couple hundred channels.

Even as we advance our technologies and begin to develop more

efficient uses of our spectrum—such as the spot-beam satellite,

which lets you reuse certain frequencies, if you will, around the

country; adding additional satellites, as both of our companies have

done in the last year; improving the compression, which, in essence, lets you get more channels out of a satellite—even with all

of those evolutions, you do not get in any foreseeable time frame

that anyone can predict, anywhere near the amount of capacity you

would need to deliver those 1,600 channels that essentially blanket

the United States.

The secondary issue—— Senator BUNNING. Excuse me.

Mr. COX. Sure.

Senator BUNNING. That is not what I’m asking. My question is:

Why can’t you get on DIRECTV, or a competitor of DIRECTV, a

local channel? In other words, why can’t you get the Greater Cincinnati channels in the area that they now serve? I don’t care that

they would be available in California or in New York. I don’t want

New York’s local channels. I want either Louisville, Lexington, or

Cincinnati’s local channels. What are the technical problems that

exist in accomplishing this?

Mr. COX. Louisville and Lexington coming into Cincinnati is actually a legislative problem more than a technical one.

Senator BUNNING. No, I’m located in Kentucky, but I receive the

broadcast signals of Greater Cincinnati.

Mr. COX. We can by law only serve channels from a particular

market back into that market.

Senator BUNNING. That’s fine.

Mr. COX. If you are in Kentucky, you can get Louisville stations

if we were delivering Louisville. The technical problem is, at some

point after you start serving the top markets, you run out of capacity to be able to bring channels into markets that are further down

the population scale.

From an economic standpoint, we’re obviously motivated to bring

local channels to places where you have the highest ability to drive

the highest number of subscribers as capacity——

Senator BUNNING. Let me take the top 20 markets. There are

how many channels in each of those 20 markets if we take all the

channels that are available, not counting cable? Counting just the

network channels, how many are available?

Mr. COX. Counting only the network channels, there is ABC,

NBC, CBS, and Fox in each of those markets.

17

Senator BUNNING. That’s four.

Mr. COX. Then, there are probably as many as 20 additional

channels, and some of those channels that we have to be prepared

to carry in 2002, by virtue of the must-carry obligation, and anywhere down to—— Senator BUNNING. You are talking about educational television,

public television, and all of the things that are local?

Mr. COX. I’m talking about independent stations. It would be the

whole gamut, from foreign language programming to religious programming to home shopping to any number of things that we actually carry on a national basis.

Senator BUNNING. You still haven’t answered my question. What

are the technical problems in picking up four Louisville stations on

DIRECTV and broadcasting them in Kentucky? What are the technical problems if they already have ABC, CBS, NBC, and Fox?

Mr. COX. There is nothing that technically precludes us from

doing that, other than for every four additional stations we put up,

we are either running to the end of the spectrum we have or taking

four other stations down.

I am still not sure if I’m—— Senator BUNNING. You are running to the end of the spectrum

or taking other stations down when you supposedly have 900 or almost 1,000 channels on DIRECTV?

Mr. COX. We actually have about 210 channels we deliver on a

national basis and we have now committed close to 100 additional

channels for local. In the most aggressive scenario, 900 or 1,000

channels is nowhere on my radar from a capacity standpoint.

Senator BUNNING. No, but you do have that many channels on

your—— Mr. COX. We have channel spots on there.

Senator BUNNING. Yes.

Mr. COX. But we do not have the capacity to fill all those spots

today, Senator.

Senator BUNNING. But you’re having problems with adding four

additional channels?

Mr. COX. We have problems once we get beyond a fixed number

of channels in that we either have to find new ways to get capacity

or take channels down.

Having launched today in the approximately 20 to 25 markets

we have launched in, we have room to add a few more markets and

then we will—— Senator BUNNING. What are you going to do in 2002 when you

must carry?

Mr. COX. In 2002, we are building and launching what is called

a spot-beam satellite, which will allow us to more efficiently use

spectrum—I don’t want to get overly technical—by taking the frequencies we have and reusing them in spots around the country,

rather than delivering every channel on a national basis as we do

today.

We believe, and we’re working pretty hard at it, as you can imagine, that satellite will allow us to deliver, if we are required to, the

300 or 350 channels that those 20 markets represent in 2002, as

compared to the 80 channels that are represented today.

Senator BUNNING. Thank you.

18

Mr. PHILLIPS. Senator, may I add a followup in answer to your

question?

Senator BUNNING. Sure.

Mr. PHILLIPS. I think something was missed there. The point I

would like to make is it’s not a technical problem. The real reason

behind the problem of providing local channels is the spectrum that

both of these competitors have is being used to serve those markets

where there’s more people and both companies are duplicating the

use of the spectrum.

Senator, in regard to the question as to the FCC being a proper

party for an oversight board, I would suggest that it would be totally inappropriate to have them on the panel for this reason. As

Mr. Cox said, the FCC has not acted on applications to make more

spectrum available. They did not even act to limit this from happening to make it possible to use the spectrum to extend service.

The FCC has advocated that a position of competition will take

care of everything. Furthermore, the FCC has regulation over these

competitors for orbital locations and spectrum. They should not sit

on the same board that is going to judge the loan guarantees. I believe it should be another independent party.

Senator BUNNING. Thank you, Mr. Chairman.

Chairman GRAMM. Senator Johnson.

Senator JOHNSON. Thank you very much, Mr. Chairman. This is

a matter of significant import to my home State of South Dakota.

You only have to look at the map here to understand why. Of the

214 television markets in the United States, my two markets are

Sioux Falls, 109, and Rapid City, 174. With the current effort serving only the top 30 markets, this is a matter of great concern.

I am not particularly wedded to the administrative details of how

to go about this, other than to understand that we do need a loan

guarantee program of some kind and we need to move expeditiously in that direction.

Mr. Phillips, I was intrigued with your observations on how to

administer this program, whether to have the Rural Utilities Service, for instance, involved in the administration. Last year, we were

accused sometimes of promoting corporate welfare and matters of

that sort. It would seem to me there is a case, a strong case, that

could be made that the RUS, or even the NTIA, has greater expertise in rural America and this type of technology. The RUS currently administers electric and telecommunications utilities.

I know that you commented briefly to the Chairman’s question

to the panel on this. I wonder if you would elaborate a bit more

on the logic about why you believe that would be the appropriate

institution and the disadvantages of other options.

Mr. PHILLIPS. Thank you, Senator. I would be glad to.

The Rural Utilities Service, formerly the REA, has been administering loan programs and loan guarantee programs since 1935,

and has in fact allowed billions of dollars to be utilized to fulfill the

public interest of extending electricity and telephone services in

areas that are underserved or unserved.

It seems to us that the issue we have before the Committee here

today is exactly the one that was before Congress in the last decade

when we had a challenge of serving unserved markets. The RUS

understands the challenge. They have the administrative people on

19

their staff, they have the technical people on their staff, and they

have the ability to administer loan programs and loan guarantee

programs. They have a proven track record.

In fact, they do work in telecommunications and they understand

the interests of broadband technologies that are land-based versus,

say, the benefits of satellite technology. They have the expertise in

those areas as well.

I think the Committee will be hearing from Christopher McLean

and I believe he could add to that as well. I believe his testimony

indicates that there would be no further administrative burden in

having the RUS take on this responsibility because they’re already

staffed and able to take it on.

Senator JOHNSON. One of the greatest concerns that Members in

general are going to have, particularly Members new to this issue,

is potential defaulting on loans and potential taxpayer liability.

Are you comfortable that this kind of administration is up to

making certain that this type of liability in fact would not occur?

Mr. PHILLIPS. Yes, sir, I am. Prior to working at the NRTC, I

worked as an attorney and had the opportunity to work with the

RUS on many of these issues. I had the opportunity to deal with

payment problems where the loans had to be restructured and

other issues like that. I worked with Congress, in fact, to deal with

issues of subordination and other things that were mentioned here.

I’m very comfortable that the RUS has the most experience and

the best track record based on the largest portfolio of loan guarantees that exists.

Senator JOHNSON. Thank you. I yield back my time.

Chairman GRAMM. Senator Allard.

Senator ALLARD. One question that frequently comes up on loan

guarantees, no matter what they’re talking about, is this: If you

can’t afford to do it without the loan guarantee, how do you plan

to pay off the loan?

I would like to have each of the panel members discuss that

question. We will begin with you, Mr. Yager.

Mr. YAGER. Thank you, Senator. I believe the real problem we

have here is a short-term versus long-term proposition. In today’s

economic climate, investors are looking for very short-term returns

in the commercial markets. We are a highly leveraged company

and when we borrow money from banks or from insurance companies, the question is always how quick is the return going to come

to us?

I think over a period of time you will find that the rural satellite

program will pay off. It will not have the same rates of return that

they are talking about in the major markets, but long term, it is

a good investment.

Senator ALLARD. Maybe I should have added this as a part of my

question. In the technology arena, we have people who have hightech equipment saying it is outdated in 3 years. You are talking

about long term. How do we assure these loans long term if we

have technology that outdates equipment?

Mr. YAGER. I believe long term today is something like 5 years,

plus. When I started in this business, long term was 15 years, plus,

in technology, but today, long term is 5 years, plus.

Senator ALLARD. In any case, that’s shorter than the loan period.

20

Mr. YAGER. Right. I would have to defer to my colleagues from

the satellite industry here, but I think DBS–1 has another 8 years

left on it, and it’s been up for 7 years, so the life of a satellite is

about 15 years.

Mr. COX. Yes, 12 to 15 years these days is not unexpected.

Mr. SJOBERG. My expertise is in land-based systems, cable TV

and translator systems. The building of land-based systems is very

capital-intensive. If you can lower the cost of capital, you can expand into lower density areas and serve people with the lower population densities.

What we would look at in our system is being able to expand into

maybe the 7 to 10 range of homes per mile of cable plan. I believe

a very significant benefit to consider is the side benefit that when

cable is extended into these areas, these people will have access to

high-speed cable modems, which will then allow the growth of some

e-businesses and other factors like that.

In the rural areas that we serve, I believe that’s significant. The

rural areas are losing population. People are leaving the rural

areas and moving into the cities for better jobs. Oftentimes, if they

had access to high-speed cable modems and services like that, they

would be able to stay in the rural areas and telecommute. I believe

that’s a very significant benefit.

Mr. PHILLIPS. Senator, I would offer three explanations to assist.

First, I believe there is a group of potential subscribers in these

markets that are not served who have not bought satellite technology because it does not carry their local channels. If you would

offer their local channels, they would subscribe and they may also

be willing to subscribe to additional video services. There would be

a return there that would lift and help the economics of the business plan.

Second, as just mentioned, you could add to satellite technology

a common platform that could deliver both video and Internet or

data services. There would be additional benefit to the business

plan for local-into-local perhaps if other services like data could be

offered on the same technology platform.

Third, a loan guarantee, as I suggested, should probably go to a

not-for-profit entity. The reason for that is if you offer a loan guarantee to a not-for-profit entity, that entity does not have to make

the higher returns that are expected for shareholders. The entire

loan guarantee can be utilized on a break-even proposition.

In fact, the gentleman from the broadcast industry suggested

that this might be done on a wholesale level. I agree with that. A

cooperative type enterprise within the industry could be formed on

a not-for-profit basis to do this very cost effectively and allow the

retailing to take place at another point.

Mr. MOSKOWITZ. Senator, EchoStar would love to see anything

that would help more consumers have their local channels available by satellite as an alternative to rising cable rates. But I would

be remiss if I did not tell you that we are very concerned about

whether the economics work with or without the loan guarantees,

especially in the smaller markets. I believe the economics by themselves are suspect. If all you do is pass a loan guarantee without

tackling some of the other issues that surround this, I think things

could come back to haunt us in the future.

21

I believe this is going to be an issue which requires creativity and cooperation. It is going to require broadcasters, potentially in

the smaller markets, to agree to share time on a satellite, like they

do with the ARC’s in Alaska, as opposed to carrying every station

in every market 24 hours a day, 7 days a week.

You need to take a hard look at the economics of that and determine whether the taxpayer is ever going to see their money back.

Mr. COX. I would concur with Mr. Moskowitz. We have done a

tremendous amount of looking at exactly this issue—how do we

take this proposition and expand it as far as we possibly can?

The early results we have received from the markets we have

launched local channels in have been tremendous. Consumers are

extremely excited about it. It actually feels for the first time as if

there is a true competitor to cable, which consumers have not had

in the past.

The very fixed cost that Mr. Moskowitz is referring to, the cost

of getting those signals from a market back to our broadcast centers, is hundreds of thousands of dollars per year. The opportunity

cost of allocating more and more spectrum when it could be used

for other revenue-generating purposes is also challenging.

I believe some level of partnership with the broadcast community

will be required in terms of addressing some of the fundamental

ways we have done business together historically. I believe an examination of some of the issues that I understand are outside the

scope of this hearing is also required: in general, the regulatory regime under which we operate.

Senator ALLARD. Thank you, Mr. Chairman.

Chairman GRAMM. Thank you, Senator Allard.

Senator Grams.

OPENING COMMENTS OF SENATOR ROD GRAMS

Senator GRAMS. Thank you very much, Mr. Chairman.

I welcome all of the panelists here today and thank you for your

testimony. In particular, I want to welcome Mr. Sjoberg from Minnesota. Thank you for taking the time to be here.

I have a lot of questions. I would like to submit most of those

to you in writing, if I could, because there are a lot of details that

we need to know that we won’t have time to ask.

As you look at the map, my State abuts both North and South

Dakota. The rural parts of Minnesota face some of the same problems as do the rural areas of North and South Dakota, and that

is problems obtaining access to their local channels.

Mr. Sjoberg, if Congress were to pass a loan guarantee program,

which I think you advocated should be technology neutral, how

would a cable operator use the available funds to extend the availability of its local broadcast signal?

Mr. SJOBERG. Well, as I said earlier, the building of cable facility

is very capital-intensive. The Federal loan guarantee would provide

a lower interest rate. That lower interest rate would lower our capital costs and allow us to go into areas of lower density.

I also believe, with the loan guarantees in place, there would be

other partnerships, as the partnership I described with ourselves

and Roseau County and Lake of the Woods County. These are two

very rural counties which had explored the possibility of building

22

their own transport system to bring these signals, in the case of

Lake of the Woods County, nearly 200 miles.

By partnering with us and using our transport system, we were

able to reduce their costs by about 90 percent, at the same time

producing very good coverage within the counties. At present, we

have continued the partnership with them for over 10 years. Their

maintenance costs have also been significantly reduced. They are

very happy with the program.

Senator GRAMS. Mr. Sjoberg, economics is going to dictate quite

a lot of this. Would the small cable operators have enough of a subscriber base to repay these loans if they qualify for them?

Mr. SJOBERG. Yes, they would, because they would use the funds

to go into areas which would allow them to reach these pockets of

homes that maybe aren’t economically feasible to reach at market

or above-market rates, the rates that we’re paying for capital now.

The combination of that and new services, like high-speed cable

modems, which are coming online, will be an additional source of

revenue for the cable company and also an additional service for

the customer.

Senator GRAMS. Mr. Moskowitz and Mr. Cox, you talked about

economics. Mr. Moskowitz, you said that economics won’t be the

only criteria. Could you tell us, in more detail, what other things

have to be done as far as regulation or whatever to make it not

only economic, but feasible?

Mr. MOSKOWITZ. Thank you, Senator. I would be glad to. I think

at the top of the list has to be must-carry. If we have to carry 25

or 30 stations in a top market, including the Home Shopping Channel, which is the same in all DMA’s that it’s provided in, then there

are fewer markets that we can economically serve.

I believe, when you look at the detailed economics, the hundreds

of thousands of dollars required to bring the signals of a small local

market back to an uplink facility and up to the satellite, and the

spectrum required to provide those signals to consumers, results in

a price point which is economically discouraging. In order to have

a model that works, we need to look at some steps we can take,

like in smaller markets having—again, like the ARC solution in

Alaska—the ABC, NBC, and CBS station share time each day. You

get a portion of the ABC, a portion of the NBC, and a portion of

the CBS local programming, so consumers can indeed have their

local news, weather, and sports, and locally produced content, but

at a more economically attractive rate. I believe those are the types

of things that need to be considered.

As far as providing loan guarantees to a cable company, the fact

of the matter is that to provide service to small rural areas, satellite is a much more cost-effective point-to-multipoint distribution

system. I question whether Congress should be in the business of

supporting economically less viable systems or whether it should

merely try to help do everything it can to assure service for all at

the most economically attractive model.

Senator GRAMS. I would like to ask all of you, beginning with

you, Mr. Yager, just briefly, what the additional cost is going to be

to the consumer, whether you’re in a major market already receiving signals or in rural areas?

23

Mr. YAGER. Senator, it is my understanding that the charge to

the consumer in New York and those markets that are already

local-to-local is somewhere between $5 and $6. I believe the charge

is actually $4.95 to $5.95. I would anticipate the price points would

be the same for small markets.

Senator GRAMS. Besides the monthly fee, would additional equipment have to be purchased? Would there be initial costs?

Mr. YAGER. I am sure that there is a set top box that would be

included in the installation fee that would go with it.

Let me just say that in the small- to mid-sized markets, we do

not have 23 stations. We operate a station in Duluth, Minnesota.

As you know, Duluth now has four stations. They just signed on

a Fox station this year. It’s a four-station market. We have a station in Colorado Springs, which is going to be a five-station market

soon with the sign-on of a WB station.

We are not talking about 23 stations in the small- to mid-sized

market. We are talking about a very limited number of network affiliates that provide local news, local information. That is what is

so important about this hearing, local television.

Senator GRAMS. Does anyone else want to briefly answer that

question on what the cost to the consumer would be? We will go

right down the line.

Mr. Sjoberg.

Mr. SJOBERG. In our markets where we’re doing the translator

project, it is costing the typical resident of the county about $10

per year. There is no additional receiving equipment needed. It is

transmitted on UHF, so they only need a small antenna to be able

to receive it. It will work on as many TV sets as they have and

they are able to watch multichannels. One person in the house can

watch ABC. The next person can be watching CBS. The next person can be watching Fox.

Senator GRAMS. Mr. Phillips.

Mr. PHILLIPS. The models that we have run look at a cost per

consumer in these remote markets of between $5 and $8. You have

to add to that the cost of the receiving equipment.

Today, that equipment is subsidized by many in the industry to

get the system out there. But we believe to make a common receiving system so that spectrum isn’t wasted as we’re doing today with

two competitors duplicating markets, we will have to have a box

and a dish that’s designed so that both systems can work to serve

one consumer seamlessly. That probably adds, we estimate here, an

additional $100 to the receiving equipment.

Mr. MOSKOWITZ. Senator, we offer local channels today in larger

markets for $5 a month. We can make a return on our investment

by doing so, although to some extent, it’s a loss leader to simply

duplicate the capabilities of cable. That assumes that we have tens

of thousands, and perhaps upward of 100,000 subscribers in each

of those markets at $5 a month for break-even. Capital Broadcasting, Local TV on Satellite, projects about $8 to $9 a month.

Again, that is in the larger markets.

If you are not amortizing your costs over tens of thousands, perhaps upward of 100,000 customers, you can’t make the economics

work at $5 to $8 a month. I hope that specifically addresses your

question.

24

Mr. COX. We’re at about the same point. We’re at $5.99 a month

and we include a PBS feed as part of that. Similarly, we think in

the larger markets, by a combination of driving a large number of

subscribers to that, plus the additional revenues we may get from

other services once we get a box in the home of those subscribers,

the proposition is worthwhile.

It gets significantly more difficult as you get into the smaller

markets and as you start anticipating the 2002 date of having to

bring three, four, or five more channels into each of those cities.

Senator GRAMS. Thank you, Mr. Chairman.

Chairman GRAMM. Thank you, Senator Grams.

Senator Reed.

OPENING COMMENTS OF SENATOR JACK REED

Senator REED. Thank you, Mr. Chairman. I want to thank all of

the panelists for appearing today. I thought the testimony of our

first panel was very enlightening. I look forward to hearing from

our second panel.

Thank you.

Chairman GRAMM. Thank you, Senator Reed.

Senator Hagel.

OPENING COMMENTS OF SENATOR CHUCK HAGEL

Senator HAGEL. Thank you, Mr. Chairman. I will submit a statement for the record. This is a very timely hearing. This issue is

very important to people in my home State of Nebraska, and I appreciate your holding this hearing at this time.

Thank you.

Chairman GRAMM. Thank you, Senator Hagel.

Senator Shelby.

OPENING COMMENTS OF SENATOR RICHARD C. SHELBY

Senator SHELBY. Thank you, Mr. Chairman. I have no opening

statement. I would just like to thank all of our witnesses for appearing today. The testimony of our first panel was very informational, and I look forward to hearing from our second panel.

Thank you.

Chairman GRAMM. Thank you, Senator Shelby.

Let me thank each member of the panel. It is hard to imagine

a panel that could have done a better job of starting this discussion

in the Banking Committee. I want to thank each and every one of

you for coming.

Let me call our second panel. While they are coming up, I will

introduce them. We have with us Gregory Rohde, Assistant Secretary for Communications and Information of the National Telecommunications and Information Administration at the U.S. Department of Commerce; Christopher McLean, Acting Administrator of

the Rural Utilities Service at the U.S. Department of Agriculture;

William Roberts, who is Senior Attorney at the U.S. Copyright Office; and Dale Hatfield, who is Chief of the Office of Engineering

and Technology at the Federal Communications Commission.

Let me thank each of you for coming. I would like to ask each

member of our panel to try to stay within 5 minutes so we will

have plenty of time for questions.

25

With that, Mr. Rohde, let me call on you.

OPENING STATEMENT OF GREGORY L. ROHDE

ASSISTANT SECRETARY FOR

COMMUNICATIONS AND INFORMATION

NATIONAL TELECOMMUNICATIONS AND

INFORMATION ADMINISTRATION

U.S. DEPARTMENT OF COMMERCE

Mr. ROHDE. Thank you very much, Mr. Chairman. It is a real

pleasure to be here. Thank you for holding this hearing.

I would ask that my written statement be included in the record.

Chairman GRAMM. Let me say that everyone’s written statement

will be included in the record as if read in its entirety. If you could

summarize your statement, it would be very helpful.

Mr. ROHDE. Certainly. Thank you very much.

I am pleased to be here. In fact, this is my first opportunity to

testify before Congress since being sworn in as Assistant Secretary

for Communications and Information. I remember well the evening

I was sworn in. In fact, I was watching C–SPAN, watching you and

Senator Lott, Senator Daschle, Senator Baucus, Senator Burns,

and others discussing the unanimous consent agreement, of which

the Senate had agreed to postpone consideration of the loan guarantee proposal until this year. That very night I walked into Secretary Daley’s office to be sworn into my new position. I remarked

to him how ironic it was that when my predecessor was sworn into

the same job in 1993, there were no operational direct broadcast

satellite systems providing services to consumers. Today, there are

over 11 million consumers who are receiving DBS services.

The Administration strongly supported provisions in last year’s

legislation that provided the authorization for satellite providers to

carry local-into-local programming. Since that time, DBS providers

are providing local-into-local service in over 24 markets and are

currently negotiating in 20 more. But the question still remains as

to how viewers in the remaining 200 or more markets are going to

receive local-into-local service over satellite or other technologies.

The Administration believes this debate is quite appropriate. It

is welcoming that Congress is continuing the pursuit of this question as to how small and rural markets are going to receive localinto-local carriage of broadcast signals.

In regard to the loan guarantee proposal in particular, I would

like to highlight three principles which the Administration would

like to see considered as it develops. Let me emphasize that the

Administration welcomes and looks forward to the opportunity of

working with this Committee and other committees in Congress in

considering this legislation.

First, should Congress consider a loan guarantee approach, it is

very important that this approach be technologically neutral. It’s

important to keep in mind that different technologies may best be

suited to deliver local-into-local service in different parts of the

country. It is imperative that any loan guarantee approach or any

loan legislation along these lines is technologically neutral. It’s also

important because we want to spur innovation. We want to be able

to help foster private-sector innovation and be open to the possibility that there are other technologies that could be out there.

26

Second, any proposal should be one that promotes competition in

the multichannel video market. With the new authorization for satellite carriers to carry local-into-local programming, the strength of

the DBS providers to become an effective competitor to cable has

been enhanced. As Congress considers further legislation in this

area, we should keep in mind that one of the objectives should be

to promote competition.

Third, it should be kept in mind that any new program should

demonstrate fiscal responsibility by conforming to existing Federal

credit program policies.

Among the principles that we feel any loan guarantee proposal

should conform with is that we should minimize the Federal risk

to the program. We should also recognize that, obviously, marketbased solutions are the most preferred solutions, but they may not

necessarily solve the issue. I believe those are very important principles to keep in mind.

Finally, I would like to point out that last week, I announced

that the National Telecommunications and Information Administration is going to issue a notice in the Federal Register to solicit

public comment on this question. The NTIA believes that this discussion should not be limited to simply examining the possibilities

of one particular technology, that we should be looking at other

possible approaches. In light of that, we are going to shortly issue

a notice in the Federal Register to solicit public comments and suggestions as to how viewers in small and rural markets can receive

local broadcast signals through a variety of technological means, including satellite.

All of these comments are going to be posted on our Web site as

part of this process. In early March, I intend to host a roundtable

discussion with various stakeholders in this debate—policymakers,

consumers, industry representatives, and technological experts—to

consider all of this.

With that, I will conclude my remarks. I see that the yellow light

is on. I would be happy to answer any questions that you or Members of the Committee may have.

Chairman GRAMM. Thank you.

Mr. McLean.

OPENING STATEMENT OF CHRISTOPHER McLEAN

ACTING ADMINISTRATOR, RURAL UTILITIES SERVICE

U.S. DEPARTMENT OF AGRICULTURE

Mr. MCLEAN. Thank you very much, Mr. Chairman. My name is

Christopher McLean. I am the Acting Administrator of the Rural

Utilities Service at the U.S. Department of Agriculture. We are the

successor agency to the Rural Electrification Administration.

The Rural Utilities Service is a rural development agency. We

administer a $42 billion loan portfolio of more than 9,000 loans for

telecommunications, electric, and water and wastewater infrastructure projects throughout rural America. Our agency administers

the Distance Learning and Telemedicine loan and grant program

as well, and is a leading advocate for rural consumers before Federal and State regulatory bodies.

For the rural residents of America, access to television signals

has long been a challenge. Distance and geography have been very

27

significant impediments to the reception of consistently viewable

broadcast signals. While cable television is available in many rural

towns, it does not reach America’s most rural citizens.

The Rural Utilities Service has a 65-year record of empowering

rural America and meeting major infrastructure challenges. Just

this last October, the Rural Utilities Service telecommunications

program celebrated its 50th anniversary. In those 50 years, our

telecommunications program has helped close the digital divide in

rural areas and has maintained an unprecedented level of loan security over the entire history of the program. And, knock on wood,

we have not had a write-off in our telecommunications program in

that 50-year history.

Since 1993, the RUS has financed more than $1 billion in fiberoptic facilities and more than $725 million in digital switching for

the telecommunications companies and cooperatives serving rural

areas. In 1999 alone, the RUS has provided nearly $500 million in

financing for rural telecommunications infrastructure.

The RUS is very fortunate to have an accomplished corps of engineers, accountants, financial specialists, and rural infrastructure

experts. We also have a program delivery staff that is both in the

field and in Washington, D.C. I’m very confident that the RUS has

the necessary skills to administer new initiatives that will bring

the benefits of the information revolution to all America.

Access to a full range of news, weather, sports, entertainment,

and information is certainly important to maintaining and enhancing rural quality of life. But maintaining expanding access to local

sources of news, weather, and information is also critical to rural

public safety. Recent weather events, such as this months’ back-toback winter storms in the South and the East, highlight the importance of local television as a means of disseminating lifesaving

information.

Linking local residents to their communities of interest is also

important to maintaining and enhancing the vitality of the local

rural economy, as well as the local rural and civic life. From both

an educational standpoint and one of public safety, it is in the public interest that rural citizens have access to local and network programming. Rural America should not fall into a new digital divide:

either as a result of the amendments to the Satellite Home Viewer

Act or the coming conversion to digital television.

The conversion to digital from analog broadcast signals is going

to raise special problems in rural areas because the propagation of

signals under the digital mode is different than under the analog

mode. Right now, as you move further away from a transmitter,

analog signals will gradually fade out. Digital signals will generally

drop off suddenly. There is a possibility that in rural America, once

digital conversion is fully complete, rural viewers may lose access

to broadcast signals they now have.

The Rural Utilities Service believes we have the infrastructure in

place. We appreciate the comments of the Chairman that there is

the desire not to reinvent the wheel or recreate a program delivery

system. We believe we have the expertise available that can successfully administer a program of the nature discussed by Senator

Burns, Congressman Baucher, and Senator Baucus.

28

In conclusion, Mr. Chairman, preserving and enhancing access to

local and network television signals is important not only for rural

quality of life, but for rural public safety and community. Linking

rural viewers to more local signals will also enhance the economics

of rural broadcasting and their rural advertisers. In addition, the

infrastructure necessary to deliver local-into-local services, regardless of mode, can bring new broadband capacity to rural areas. Just

as the Rural Electrification Administration helped rural America

become part of the national economy, the Rural Utilities Service

can continue to help rural America thrive in the information age.

Thank you, Mr. Chairman.

Chairman GRAMM. Thank you.

Mr. Roberts.

OPENING STATEMENT OF WILLIAM ROBERTS

SENIOR ATTORNEY, U.S. COPYRIGHT OFFICE

Mr. ROBERTS. Thank you, Mr. Chairman. I’m Bill Roberts, Senior

Attorney at the U.S. Copyright Office. I’m pleased to appear today

on behalf of the U.S. Copyright Office to address satellite retransmissions of television broadcast signals.

Over the next several weeks, this Committee will be considering

legislation to provide a federally backed loan guarantee program to

build broadcast retransmission platforms in order to bring consumers located in smaller markets in the United States their local

broadcast stations.

The purpose of my testimony is not to present the Copyright Office’s position on the advisability of a loan guarantee program. We

in fact do not have a position because that is not a copyright matter. The purpose of my testimony is to provide this Committee with

a context in which these proposals have arisen.

The concept of a loan guarantee program—to provide rural subscribers with their local television signals—is an offshoot of last

year’s Satellite Home Viewer Improvement Act. The Satellite Home

Viewer Improvement Act is the third major piece of legislation governing the copyright licensing of television broadcasting retransmitted by satellite carriers, such as DIRECTV and EchoStar, since

the foundation of the satellite home dish industry in 1980.

Indeed, the congressional regulation of the satellite industry has

come principally through our copyright laws. The copyright licensing regime for satellite retransmission of television broadcast stations is very similar to the licensing regime for cable systems. Both

cable and satellite have what is known as a compulsory license,

which allows them to clear all the copyrights to the programming

contained on the television signals they choose to retransmit to

their subscribers.

A compulsory license is a Government-created regime whereby

the copyright owners of television broadcasting, such as sports,

movies, and syndicated programs, are compelled to license their

works under fixed terms and royalty fees, rather than negotiate

those licenses in the free marketplace. Both the cable systems and

satellite carriers submit compulsory license fees twice a year, along

with statements of account to the Copyright Office for subsequent

distribution of those monies to copyright owners of the programming that has been retransmitted by those satellite carriers and

29

cable systems. There is, however, one very significant difference between the cable and satellite compulsory licenses.

For satellite carriers, their compulsory license for retransmission

of network television stations is limited to subscribers who reside

in unserved households. An unserved household is one that cannot

receive an over-the-air signal from a local network affiliate using

a conventional rooftop antenna. The reason for the unserved household limitation to the satellite compulsory license is to protect the

local network station from losing viewers in their market who sign

up for satellite and watch a distant affiliate of the same network

via their satellite dish.

The issue of determining when a particular household is an

unserved household and hence, eligible for satellite retransmission

of distant signals, has been troubling through the years and I’m

sure that Members of this Committee have undoubtedly received

angry letters from constituents who lost their satellite service as a

result of the unserved household restriction. The problems of the

unserved household restriction can be solved through the retransmission of local signals by satellite carriers. Providing local network signals eliminates the need to import a network signal of a

distant affiliate from a distant market.

Recently, EchoStar and DIRECTV have announced that they

now possess the technology to deliver local signals to their subscribers. Unfortunately, they have indicated that they do not have

the capacity to deliver the signals of local stations to subscribers

in all markets of the United States. However, the copyright licensing regime is in place, and that’s due to the Satellite Home Viewer

Act, which created a royalty-free compulsory copyright license for

the retransmission of local signals. Consequently, as a result of the

creation of this local signal license, all satellite carriers are now eligible from a copyright perspective to provide local signals to those

people in rural areas of the country. This is why a federally backed

loan guarantee program has been proposed: that is, to deliver or

provide the actual means of getting the signal to the subscribers.

For a further and much more detailed background on the Satellite Home Viewer Improvement Act, I would ask you to refer to

my written statement. I would be pleased to answer any questions

that you or Members of this Committee may have.

Thank you.

Chairman GRAMM. Thank you.

Mr. Hatfield.

OPENING STATEMENT OF DALE N. HATFIELD

CHIEF, OFFICE OF ENGINEERING AND TECHNOLOGY

FEDERAL COMMUNICATIONS COMMISSION

Mr. HATFIELD. Thank you, Mr. Chairman and Members of the

Committee. I greatly appreciate the opportunity to appear before

you today. As you permitted, Mr. Chairman, I will submit my full

testimony for the record and simply summarize some of the key

technological points in the time that I have available. Before I turn

to the substance of my testimony, I want to emphasize that the

views I express here today are my own, and may not necessarily

reflect the views of the agency I represent, the Federal Communications Commission.

30

Last November, Congress took a dramatic step to foster competition in the multichannel video programming distribution market

and increase programming choices for U.S. consumers when it enacted the Satellite Home Viewer Improvement Act. Perhaps the

key provision for purposes of today’s hearing is that legislation’s

amendment of the copyright law to authorize satellite carriers to

retransmit local television signals to all consumers in the station’s

local market.

As the Committee considers the critical goal of ensuring that

rural America has access to local television signals, I would stress

that this goal presents significant technological challenges. Local

television markets vary greatly in size, for example, from the whole

State of Utah, to much smaller areas in Laredo, Texas, or Salisbury, Maryland. Terrain varies also from the appropriately named

Great Plains to the ruggedness of the Rocky Mountains, my home

area, and to Appalachia. Different geographical situations in all

probability will demand different technical solutions.

Fortunately, advances in communications technology provide a

variety of options to address the goal of providing local broadcast

service to rural areas. While no one technology may be able to solve

the entire problem, multiple technologies can be used in combination to achieve that goal. I would like to discuss briefly seven such

available technologies.

First, existing direct broadcast satellite, or DBS systems, such as

DIRECTV and EchoStar, have begun to retransmit local programming, but only in the larger markets, as you heard earlier. Existing

DBS systems were not constructed with the goal of providing local

programming. However, and you have already heard some of this,

the good news is that advances in spot-beam technology may enable future satellite systems to provide greater local coverage to

rural America.

Second, the multichannel multipoint distribution service, or the

MMDS, sometimes referred to as wireless cable, is a terrestrial

fixed wireless service that operates in the 2.5 GHz range of the

radio spectrum.

As suggested by its name, its uses include multichannel video

distribution. Industry consolidation among MMDS providers, along

with digital compression techniques, makes multichannel video distribution by MMDS providers even more practical. Nevertheless,

many of the new owners of MMDS systems see Internet access as

a more attractive offering than video distribution, calling into question the direction that the MMDS is currently headed.

Third, the local multipoint distribution service, or the LMDS, is

a fixed wireless access system that operates in the 28 GHz range

of the radio spectrum. Because of the high microwave frequencies

involved, the range of the LMDS is limited to relatively short distances, a few miles, over unobstructed paths.

The initial focus of LMDS providers seems to be on serving

urban business users. However, the LMDS may eventually find applications in smaller communities for broadband services, including

two-way services, and also video distribution.

Fourth, TV translators are used to receive a television signal on

one channel and retransmit it on another channel, thereby extending the coverage of the originating station into hard-to-reach areas.

31

These relays may be helpful in small towns and isolated areas

where you have suitable locations for the translator. You have already heard a discussion about the use of translators as a means

of bringing in signals.

Fifth, we sometimes forget about it, but a better performing TV

receiving antenna system at an individual residence can be used to

get better over-the-air coverage. In other words, by putting in a

higher antenna, a larger antenna, something called a preamp, and

so forth, you can actually extend the distance over which you can

receive other local stations.

Sixth, there are two ongoing developments in cable television

systems that may enable cable operators to make new inroads in

rural areas. One, cable operators are using fiberoptic technology to

upgrade and extend the reach of their facilities. Two, cable operators are attempting to transform themselves into being full-service

providers. As the industry makes this transition and as consumer

demand for advanced communications services grows, cable operators may have new economic incentives to extend coverage to rural

areas.

Seventh, and finally, similar to cable companies, local telephone

companies are also now employing fiberoptic technology to upgrade

their systems, and increased demand for advanced services may

provide comparable incentives for them to add video distribution to

their package of services and to extend the reach of broadband facilities further into rural America.

In conclusion, let me again stress that no one technology holds

the key to ensuring that local television signals reach rural America. Therefore, a policy of encouraging a wide array of technological

options would be well advised, especially in an era of such rapid

technological change.

Thank you for allowing me to address the Committee. I would be

happy to answer any questions you or Members of the Committee

may have.

Chairman GRAMM. Mr. Hatfield, let me thank you for giving us

a good summary of relatively complicated information.

Let me begin with you, Mr. Rohde. You talked about the Administration’s three principles, and I would say that I’m in agreement

with all three of them. The first is technological neutrality. I assume by that you mean that we’re not going to try, in any way,

to direct technology in the loan guarantee. We are not going to try

to direct who gets the loan guarantee. What we’re going to do is

set up fiscally responsible parameters and let people apply for the

loan guarantee.

The technologies—whether it’s the Internet, satellite, cable, or

whatever, it may be something that we aren’t currently looking at,

perhaps something brought forward by the telephone company—

whatever it may be, we let them compete for the loan guarantee.

Let me be sure that’s exactly what you’re saying.

Mr. ROHDE. It is. What I’m saying is let’s not exclude any technology. Let’s make sure that if we structure a loan guarantee program, it’s available to a variety of means, whether it be satellite,

land-based cable systems, or any other terrestrial wireless systems,

such as the LMDS, the MMDS, or others.

32

I believe we are in agreement. All I’m saying is we should not

limit our options.

Chairman GRAMM. Based on what you said, Mr. Hatfield, I assume you agree with that.

Mr. HATFIELD. Yes, I do, Senator.

Chairman GRAMM. Let me get our other witnesses, Mr. McLean

and Mr. Roberts, to comment briefly on that.

Mr. MCLEAN. Yes, sir, we would agree. At the Rural Utilities

Service, we employ almost every type of technology necessary to get

the job done.

Mr. ROBERTS. We would agree as well, Mr. Chairman. We are

technology neutral when it comes to this approach.

Chairman GRAMM. Let me turn, then, to your third principle,

Mr. Rohde, fiscal responsibility. It seems to me, at least in terms

of the contribution of this Committee, that our major focus has to

be on trying to be fiscally responsible, trying to write a program

that will maximize our chances of achieving what Senator Burns

set out to do in his bill, but to try to do it in a way to maximize

the probability that the loans will be paid back.

Quite frankly, I don’t see that as a conflict with achieving the objective of providing the service. I see a sound loan guarantee program as a mechanism that helps us choose the right technologies

because if we guarantee less than the full amount of the loan,

which I can assure you we will in our bill, we force the lender to

shoulder some of the risk. That gets the lender involved in helping

to be sure that we make the right choice.

To the extent that we broaden the assets that have to be committed, one of the things I intend to try to write very strong language on, given the concurrence of the majority of the Committee,

is that we want to protect ourselves against what I would call shell

entities—might be nonprofit, might be profit—where people set up

an organization that has almost no assets to get the loan guarantee, so that if it goes bad, we don’t have anything to have recourse on except how they might have misused our money.

One thing I want to try to do is write very strong language that

says if a group of companies get together to set up this organization to submit a loan guarantee, they should be committing their

assets to it, not just the assets of this shell entity—and I don’t

mean shell in any kind of derogatory manner.

I would like to get your response on these basic points. I would

like to hear your response to the commitment of assets, to guaranteeing less than 100 percent of the loan, those kinds of things as

they relate to what you were calling fiscal responsibility.

Mr. ROHDE. Well, Senator, I was trying to think if there was anything you said that I could disagree with, and I can’t. I think all

the points you raise are very sound and are consistent with existing credit programs and what the Federal Government has required in other loan guarantee programs. I believe you raise a lot

of very good points.

The only aspect that I would elaborate on and maybe add to is

I think we want to make sure if there is a loan guarantee program,

it’s going to a market that truly needs it. You do not want to have

a loan guarantee program that could be used by an entity to perhaps subsidize service that they are already providing in another

33

market. You want to make sure that this is targeted to the markets that truly need the help.

Chairman GRAMM. I would also add that almost anything you do

has a joint use. Let’s say that a local television station wanted to

build a bigger tower. It might potentially qualify. But let’s say that

60 percent of the benefit of the tower is expanding service and 40

percent is improving the service that’s already in the A or B areas.

We would then be looking, it seems to me, at guaranteeing a part

of 60 percent of the loan, not a part of 100 percent of the loan.

I have heard the people from the satellite industry talk about

competing with cable. I am very concerned about this. I have had

cable and I now have satellite. I have had both services. But there

is something that keeps nagging at me.

My hometown has two cable operators—always has as far back

as I can remember—who invested their money to bring signal to

our community. I want to be sure that we’re not providing taxpayer

money to disadvantage them in competition for people they already

serve.

I’m for competition. I think it’s the basic strength of our system.

But, on the other hand, I believe we have to be sure that we’re

aiming for the right target and we’re reaching people who either

don’t have this service or have very limited access to it. I believe

it’s going to be very difficult to write a law that actually achieves

that result.

Mr. ROHDE. Senator, I would make one comment. If you recall,

contained in the legislation in the conference report that was then

withdrawn, was a provision that any loan guarantee award not

have an anticompetitive effect. I recall a discussion amongst the

authors at the time that required the NTIA to have a consultative

role and, in fact, a certifying role that it would not have an anticompetitive effect.

I believe that would be helpful. The NTIA can play a role in this

if indeed the loan guarantee program is structured and is administered by the RUS. You can have an agency like the NTIA play the

role of raising these competitive questions and providing some consultation to make sure that you are not going to be disrupting a

competitive market, that it will not have an anticompetitive effect.

That seemed to be a decent way to address that issue.

Chairman GRAMM. Let me give everybody a chance to quickly respond, and then I will go to our other Members.

Mr. MCLEAN. Mr. Chairman, in administering a program like the

Rural Electrification Act or the Rural Water and Wastewater Program, you have to bring both sound banking principles as well as

a commitment to the statute.

In the legislation that Congress had considered, there were some

very clear directions with respect to the priorities of Congress as

to requirements of insurance, requirements of covering the costs of

the loan program, and making certain that loan resources are used

for their intended purposes and that they are serving intended

beneficiaries. We have to wrestle with these same priorities a great

number of times every year. We have a $4 billion loan program in

water, electric, and telecommunications, and that is part of the

challenge of running the program. But it’s one that is manageable,

particularly if Congress writes very clear ideas of priority as to the

34

mission of the loan program, as well as the financial security that

the agency can ensure.

Mr. ROBERTS. Mr. Chairman, I have no comment.

Mr. HATFIELD. I’m an engineering techie, and this is probably a

little bit beyond my expertise. Nevertheless, what I heard you say

about fiscal responsibility, especially about having a program that

has unintended anticompetitive consequences, is certainly, it seems

to me, right on target.

Chairman GRAMM. Senator Allard.

Senator ALLARD. Mr. Chairman, I want to repeat my previous

question. I heard the perspective of the first panel. I would like to

hear the perspective of this panel as well.

You have a loan guarantee program out here and the claim is

that you can’t make it without the loan guarantees. How is it that

you can then make it and pay off the loan, particularly in light of

the high-technology environment out there where there is such a

short lifespan on how usable that technology remains? What do you

use as collateral?

I would like to hear some comments on that issue. Each of you,

if you would, can comment.

Mr. MCLEAN. I would be happy to answer that. First, the assets

that are collateralized would have to match the life of the loan.

That would be a pretty fundamental issue in considering the feasibility of any project.

Second, the most important value of a loan guarantee program

is the ability of the program to deliver low-cost capital. In the equity markets, all of us know that equity investors are demanding

very high returns and getting very high returns. The same is true

in the private lending markets. There are very substantial costs.

You have an infrastructure-intensive project. Once again, whether

it’s for local-into-local, whether it’s for water systems, whether it’s

for electric systems, whether it’s for telecommunications systems,

the cost of capital is a very significant part of the project cost.

What would be very useful is if an applicant for the loan program were to take advantage of natural efficiencies, perhaps a common platform, so that you wouldn’t have to duplicate programming

or take advantage of technological efficiencies. That would help to

enhance the viability of the loan.

The easy part of the job at the Rural Utilities Service is to be

able to make loans, to go to ribbon-cutting ceremonies, and to make

speeches, the hard part of the job is to say no to good people who

have good ideas, but projects that just don’t pencil out. We’re not

afraid to do that. We have to do that over and over.

Again, depending on what Congress instructs with respect to the

purposes of the loan, we would apply sound financial principles to

that loan in the evaluation, and hopefully be able to minimize any

risk of taxpayer loss.

Senator ALLARD. Do you want to comment further, Mr. Rohde?

Mr. ROHDE. No, I will defer to my friend, Mr. McLean. The specifics of loan finance are outside of my expertise and that of my

agency. I concur with what Mr. McLean just said.

Senator ALLARD. Mr. Roberts.

Mr. ROBERTS. I have no comment, Senator.

Senator ALLARD. Mr. Hatfield.

35

Mr. HATFIELD. I would comment by reinforcing the notion you

suggest here that the technology is changing very rapidly with

things like streaming video and so forth, where you can essentially

deliver television programming over the Internet. This is all changing, as we say, at Internet speeds. It should be something that we

are all aware of and concerned about.

Senator ALLARD. I would like to continue along the line of your

technology comment. I believe we have been missing in this discussion the Internet aspect of this, where a station could make its programming available over the Internet.

How far away are we from saying that a TV station could make

its programming available over the Internet, consequently making

that programming available to any household having an existing

phone service?

Mr. HATFIELD. I think that question requires a two-part answer.

First, of course, is you’re seeing it today, but the pictures are small

and jerky and so forth.

Senator ALLARD. Yes.

Mr. HATFIELD. Of course, the reason for that is the bandwidth.

Senator ALLARD. Slow.

Mr. HATFIELD. That leads us right back to the issue, again, of

the cable companies, the telephone companies, and others trying to

overcome that problem as quickly as they can by upgrading the

fiberoptics. But the difficulty, of course, lies in some of these rural

areas. These companies are having trouble getting the speeds up,

getting that broadband facility out there so they can deliver the

streaming video over that broadband facility. That’s the challenge.

Senator ALLARD. We certainly want to keep the Internet as part

of the technological choices that would be out there. It could prove

to be more feasible in certain areas, and it seems it could work us

out of our problem with most carriers. A station, if they want to

serve an area, could make their programming available over the

Internet, and people could tune in on the Internet to watch.

Mr. HATFIELD. Absolutely. My comment is that you have to have

the platform there for the Internet to ride on. Getting the platform,

the broadband platform, out where you can stream at high enough

speeds to be able to get a good picture is the critical issue.

Mr. MCLEAN. Density and distance are the biggest impediments

to having that platform in rural areas.

Senator ALLARD. I understand that.

Mr. MCLEAN. It is a big infrastructure commitment, one which

we’re very much committed to trying to solve.

Senator ALLARD. Thank you.

Mr. ROBERTS. May I make one comment, Senator?

Senator ALLARD. Yes.

Mr. ROBERTS. The satellite industry and the cable industry have

a compulsory copyright license to retransmit broadcast signals. The

Internet does not. There is currently not a copyright regime to license Internet retransmissions of broadcast stations.

Senator ALLARD. I’m glad you spoke up. Yes, I want to get that

clarified.

Let’s assume we have all of the technology in place and that if

someone wants to broadcast programming over the Internet, they

can. A company, a broadcasting station in Denver, makes the deciVerDate 11-MAY-2000 10:27 Jan 19, 2001 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 69308.TXT SBANK3 PsN: SBANK3
36

sion to go on the Internet and they do. They begin to broadcast

their programming over the Internet. Their customers pick it up

and bring it into their home. Are you saying the copyright laws

currently prevent them from doing that?

Mr. ROBERTS. They do not have a compulsory license to do it. In

order to do that, they would have to negotiate individually with

each of the copyright owners of the programming that they retransmit, which, if they are retransmitting broadcast programming,

is going to involve—— Senator ALLARD. That’s almost impossible, isn’t it?

Mr. ROBERTS. It’s extremely difficult. There would be hundreds

of copyright owners they would have to execute separate licenses

with.

Senator ALLARD. That would necessitate a change in our copyright laws.

Mr. ROBERTS. Yes.

Senator ALLARD. Could we do that and still protect copyrights in

a way that would be practical? Is there a practical solution that

you see to that?

Mr. ROBERTS. That is a difficult question because the Internet is

very different in its potential scope and reach than cable or satellite. It also has virtually no Government regulation at this point

in time.

The Copyright Office has always been opposed to compulsory licenses. We always favor a private, free marketplace solution. Currently, we are opposed to extending a compulsory license to the

Internet.

Senator ALLARD. Right now, the copyright laws are preventing

the Internet from becoming a viable alternative.

Mr. ROBERTS. If there is no free marketplace negotiation, if the

copyright owners do not execute licenses—— Senator ALLARD. Which you said would be impossible to do.

Mr. ROBERTS. It is difficult to do. I’m not saying it’s impossible.

Copyright owners have always said that they are willing to create

mechanisms, private mechanisms, to deal with that. But there is

currently not a compulsory license to do that.

Senator ALLARD. Could that be fractionated? One of the criticisms I hear from rural areas is that they are unable to get their

local news. Let’s say that a local station creates all the news. They

basically own that. Is there anything to prevent them from saying,

well, you can have our news segment, but you may not have our

movie segment or anything else which may contain some copyright

issues?

Could they just place the news segment of their programming on

local television? Could that be worked out?

Mr. ROBERTS. They could certainly do that, yes, Senator.

Senator ALLARD. Thank you, Mr. Chairman.

Chairman GRAMM. Senator Grams.

Senator GRAMS. Thank you very much, Mr. Chairman.

Gentlemen, thank you again for being here. Not that it’s ever

happened in the past, but I’m very concerned about excessive regulation and paperwork requirements that the Federal Government

or the agencies could impose in trying to implement this Satellite

Home Viewer Improvement Act.

37

I would like to know what actions your agencies would take to

help reduce any unnecessary regulation upon the licensees which

could result in a hidden tax being passed on to the consumer, making it more costly?

Mr. Rohde, what would you do in your role?

Mr. ROHDE. Well, in the legislation that was proposed last year,

the administration of the loan guarantee program would be at the

Rural Utilities Service. The proposal was that the NTIA would play

a role of consulting and actually certifying that there would be no

anticompetitive effect. I believe that legislation contained a 90-day

deadline for the NTIA’s consideration.

Obviously, we’re very committed to trying to have as expeditious

a process as possible. We would not want to become a roadblock

to any consideration. If, indeed, the legislation emerged along the

lines of what was being considered last year, I believe the NTIA’s

role would be more along the lines of just doing a competitive analysis. It may require some information-gathering on the part of the

applicant, but we certainly would want to minimize that to the

greatest extent possible so we could have an expeditious decision.

Mr. MCLEAN. We would focus, of course, on the purpose of the

Act and loan security. Those would be the primary issues for us.

We would have to secure sufficient documentation. It would not be

significantly different than what you would engage in with a private lender.

We are very proud to report that last year, the Rural Utilities

Service received a Hammer Award from the Vice President for our

regulatory reductions. We have a goal of reducing our regulations

year after year, and I think we’re making good progress in doing

that. The value of the reduced interest rate provided by the loan

guarantees should not be eaten up by increased regulatory burden

and red tape.

I believe whatever structure Congress would put into place would

be most efficient if it takes advantage of existing program delivery

means. That would enable you to jump right into it without having

to create a whole new application and review process.

Senator GRAMS. Much of the regulation would come from the implementation and how it was spelled out in the law itself.

Mr. MCLEAN. Yes, sir.

Mr. ROBERTS. I’m pleased to say, Senator, that a loan guarantee

program would not affect my agency at all.

[Laughter.]

The Satellite Home Viewer Improvement Act created a royaltyfree license, so we are not required to administer any details, to

collect any money, or print any forms. That would have no effect

on us at all.

Mr. HATFIELD. It is not clear to me what, if any, role the FCC

would have on the loan guarantee. Our involvement would probably be where an applicant needs a license, to assist that applicant

in getting whatever license they need to be able to go into business.

Of course, we’re trying to do everything we can to streamline that

process and make it as quick as possible.

Senator GRAMS. It is important that we try to provide consumers

with these services. We are talking now about how to deliver these

services, whether it should be via cable, satellite, or other means,

38

but what about the broadcasters themselves? Are there any unintended consequences that they could face?

I know that providing these services is going to be a benefit to

many. But could there also be some negatives to some of the broadcasters, to a point where it might make their operations unfeasible

and put them out of business?

I know first-hand, if we’re talking about the dairy industry, how

unfair Government laws, regulations, and programs can be. What

about the broadcasters? What is in this to protect those who originate the program?

Mr. ROHDE. I would say, as technology emerges, new forms of

distribution systems will emerge. In the same way that DBS, which

didn’t exist 7 years ago, the Internet, and other distribution systems have emerged, there will be new forms of distribution systems

following. If the local broadcaster doesn’t have access to those distribution systems, I think their future is more imperiled. If I were

a small broadcaster operating a small station in a very limited population area, in a rural area, I would be concerned about looking

at what’s ahead because you want to have access to these various

distribution systems.

I believe the peril for small broadcasters lies more with inaction

than with regulation. I believe the fact that Congress is looking at

this issue, and also that the NTIA is looking at various other types

of technologies and how local signals can be carried, is encouraging

to local broadcasters.

Senator GRAMS. What if duplicative programs are brought in and

are in direct competition with me in my area? Could that be an unintended consequence?

Mr. ROHDE. As you know, that has been the perplexing part of

the debate over the Satellite Home Viewer Act. With the authorization of local-into-local over satellite systems, a conflict has been

created with the local broadcaster who has been supplying consumers who live in rural areas with a distance broadcast signal.

If other technologies emerge that have similar types of authorization, and if we succeed in carrying local broadcast stations over

these technologies, that question becomes minimized in terms of its

complexity and in terms of the problems that it causes.

Senator GRAMS. Thank you.

Mr. MCLEAN. Rural broadcasters are going to face a very major

challenge upon the conversion from analog to digital, as will rural

viewers. It could be that the solution suggested in the Satellite

Home Viewer Act and loan guarantees could also provide a solution

to that problem. It could provide both an affordable means for consumers to receive their local broadcast signals, as well as a way for

rural broadcasters to expand their market penetration and be able

to afford the upgrade of their systems. I believe there could be a

substantial benefit.

Personally, I just received, thanks to the Satellite Home Viewer

Act, the authority to receive local-into-local at my home. I notice

that I do, in fact, watch more broadcast stations than satellitedelivered stations, just because of the fact that they are together

on the same satellite delivery system. I believe it’s fair to assume

that if you’re delivering more eyeballs to a small-town broadcaster,

it’s going to be primarily beneficial to that broadcaster to be on the

39

same platform as other multichannel services, whether it’s cable,

satellite, or new wireless technologies.

Mr. ROBERTS. From a copyright perspective, the Satellite Home

Viewer Improvement Act definitely benefits local broadcasters by

permitting local-into-local retransmissions in the satellite context.

The network broadcasters are already protected by the copyright

laws from satellite carriers importing distant affiliates of the same

network and causing the local station to lose viewers, so from a

copyright perspective, it’s positive.

Mr. HATFIELD. I believe the key to, of course, the broadcasters’ success is strong local programming because then, as has already

been stated, the additional distribution mechanisms provide additional ways of getting that good strong local programming to additional locations. I agree with the comments made earlier.

Senator GRAMS. Mr. Chairman, I have just one final question for

Mr. Hatfield. It deals with section 714 of the 1996 Telecommunications Act which establishes, I believe, Mr. Hatfield, a telecommunications development fund, by which small businesses could apply

for loans to deliver telecommunications services to rural, unserved

areas.

Mr. HATFIELD. Yes.

Senator GRAMS. What companies could use these funds and for

what local services? Are there dollars already available for what

we’re trying to do here?

Mr. HATFIELD. I may have to get back to you on that question,

if you would permit me. I am not completely up to speed on that

particular position, but my understanding is that is a very small

program. The last I heard, I believe there was only something like

$25 million in that program.

That program was intended, I believe, to do much more innovative things on a smaller project basis, rather than something global

or whatever we’re talking about here. But it would probably be best

if I were to get back to you with a more complete answer.

Senator GRAMS. I am wondering if, in creating a new program,

we should get rid of an old one at the same time so we don’t keep

building.

Thank you very much, gentlemen.

Thank you, Mr. Chairman.

Chairman GRAMM. Perhaps you’re dreaming about a world that

could be, but perhaps never will be.

[Laughter.]

I want to ask a few concluding questions. Let me begin with you,

Mr. McLean.

Obviously, the approach taken by Congress was to create a loan

guarantee specifically targeted toward this objective. Our objective

will be to try to put that program into place. In that context, we’re

not simply adding money, a huge amount of money, to an ongoing

program, instead, we’re setting up a program specifically for this

purpose.

It would be my intention to have a board that would make the

decisions about the granting of a loan guarantee. As I mentioned

to the previous panel, my thinking is that we should have the Secretary of the Treasury designate someone from the Treasury whose

primary function is the credit function within the Government, that

40

we should have the Chairman of the Board of Governors of the

Federal Reserve System, Alan Greenspan, appoint a representative. I assume that would be another Member of the Board of Governors. Their role would be to look at the economics of both the

proposal and the repayment of the loan.

For example, our most recent loan guarantee was the steel loan

guarantee. In working with Senator Domenici, I put the Chairman

of the Federal Reserve, the Secretary of the Treasury, and the Securities and Exchange Commission Chairman, all of whom complained that they already had a job, to the task of appointing these

individuals. After some pretty extensive work, we ended up with

some designees.

Now, I cannot see moving away from that panel. I believe that

is critical in terms of ensuring the integrity of the program we’re

talking about. I don’t know who the third member should be, but

I think you could make an argument that it should be someone

from the Department of Commerce, I think you could make the argument that it should be someone from the Rural Utilities Service,

I think you could make an argument that it should be someone

from the Federal Communications Commission. I think there are

a lot of good arguments that could be made as to who the third

member should be.

Then there is the question of who would administer the program

once they made the loan decision. I would say, Mr. McLean, at

least just beginning to think about it, that your agency would be

a potential candidate for that role. I do not want to create a new

agency to do it.

My concern is about guaranteeing the integrity of the decision to

make the loan. The conditions under which it is made would be set

by the legislation. Within that context, do you feel comfortable that

if we made the decision to have your agency administer the loan,

that once it’s made, you would have no problem doing that within

the context of the board making the loan decision?

Mr. MCLEAN. Assuming that I have the ability to fill vacant positions at the Rural Utilities Service created by recent retirements,

we would be able to administer a loan program of the size contemplated by the Burns–Baucher amendment or the Baucus bill.

I should point out, however, that administration of a loan program involves a significant amount of work preceding the decision

to make the loan. All of our large loans come to a senior loan committee at the Rural Utilities Service, chaired by myself and staffed

by the assistant administrators and our telephone, electric, water

programs, and financial services staff.

Much of the work on the loan comes before that decisionmaking

process. There is a tremendous amount of expertise required in engineering the loan. There is expertise required in the analysis of

the feasibility and the financial underpinning of the application. If

Congress were to have a super-senior loan committee to pass judgment on loan recommendation of the Rural Utilities Service, you

would need more than those four people to do the actual administration of the loan in preparation of the decision, as well as the administration of the loan both for the servicing of the debt as well

as for insuring that the Act purposes are maintained.

41

We don’t want to create a loan guarantee program where, once

the loan is made, under the pretense of serving the underserved

communities, there is a change in the management decision that

says we need to put these resources to New York, Los Angeles, and

Chicago. The very purpose of the loan guarantee would be undermined. To avoid that, continuing oversight is required.

Again, on the size of the program envisioned by Senator Burns,

Congressman Baucher, and Senator Baucus, I believe we have the

staff resources that could handle that.

Chairman GRAMM. If we set up this board and give them the

ability to use the expertise of the various departments, including

yours, to do the due-diligence on the loans, so that your people, the

FCC, and others that have expertise could give them advice, provide evaluation, and assist in making the decision on the loan,

within that context, do you think you could make that work?

Mr. MCLEAN. Certainly, we will work with the Congress to make

anything work. I hesitate only because without that super-senior

loan committee that you describe, we alone are making $4 billion

worth of decisions a year.

Chairman GRAMM. Yes. But what amount of that is in this area?

Mr. MCLEAN. Obviously, the Satellite Home Viewers Act area is

a relatively new area.

Chairman GRAMM. I think that’s the point. The Congress didn’t

make this decision to simply expand the Rural Utilities Service. We

made this decision to set up a loan guarantee program to try to expedite getting the local signal to the local customer.

It seems to me that if you wanted to do this in the most efficient

way possible, you wouldn’t create any new Government agencies to

provide staff work, assistance, and administration. You would have

three people whose job it was to make the decision about the loan.

They would draw expertise from the various agencies of the Government that already work in these areas, and you would designate

an agency to administer the program once the decision had been

made to make the loan. It seems to me that’s the way you would

go about it.

I was just simply trying to get your views on the workability of

that basic approach. If we have the FCC looking at these technical

issues, if we have your agency involved in administering loans that

are much smaller, but not dissimilar, it seems to me that, basically,

we are safe with having the board make the decision by primarily

gathering expertise. We would be protecting the taxpayer’s interest

in making the loan, because $1.2 billion, $2.5 billion, is still a lot

of money.

Mr. MCLEAN. Yes, sir.

Chairman GRAMM. The problem with having the loan defaulted

or having huge amounts of the loan defaulted is we probably, one,

will never get the money back and, two, we won’t get the signal.

The only way that we’re ever going to get the signal is to make a

successful loan.

Mr. MCLEAN. Yes, sir.

Chairman GRAMM. I’m sure that as this debate flows through the

House and the Senate, there will be people who will say, well, it’s

one thing to be concerned about the loan being repaid, but it’s anVerDate 11-MAY-2000 10:27 Jan 19, 2001 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 69308.TXT SBANK3 PsN: SBANK3
42

other thing entirely to be concerned about the service actually

being provided.

My point is, if the loan is not repaid, that’s pretty good evidence

that the service was probably not provided. I don’t see a conflict.

Quite the contrary. I see us maximizing our chances of getting the

service by making a good loan to begin with.

In any case, let me conclude by asking if anyone wants to make

a final remark before we end the hearing.

Mr. Rohde.

Mr. ROHDE. The only thing I would add is what I said before in

my testimony, that I would welcome the opportunity to work with

you as you consider this legislation and look at other options.

Chairman GRAMM. Great.

Mr. MCLEAN. We thank the Chairman for the invitation and we

will work with you to make any structure work for rural America.

We are completely committed to preventing a digital divide in telecommunications and television access for rural Americans.

Mr. ROBERTS. Thank you, Mr. Chairman, for the opportunity to

appear.

Chairman GRAMM. Thank you.

Mr. HATFIELD. Again, thank you very much.

Chairman GRAMM. Thank you.

We will hold our second hearing on February 9, 2000.

We stand adjourned. Thank you very much.

[Whereupon, at 12:20 p.m., Tuesday, February 1, 2000, the hearing was adjourned.]

[Prepared statements and response to written questions supplied

for the record follow:]

43

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman, for holding this hearing on a very important issue for

rural America—television. If you could see the volume of mail my office has received

over the past 3 years, you would know how important it is for my constituents to

watch their favorite sports teams and television shows. More importantly, you would

know how important it is for them to get their local weather warnings that could

potentially affect their livelihood—perhaps even their lives.

I would also like to take this opportunity to welcome David Moskowitz, Senior

Vice President of Legal and General Counsel, Secretary, and Director of EchoStar

Communications, to today’s hearing. EchoStar Communications currently employs

several hundred Wyoming residents at its state-of-the-art uplink facility in Cheyenne and at its headquarters in Littleton, Colorado. We are very proud to have this

important facility in Wyoming.

Wyoming only has television stations in three of its cities—Casper, Cheyenne,

and Jackson. The rest of the State is served by either stations from out-of-State or

by relay transmitters that bring the stations to outlying towns. Wyoming has long

distances and tall mountains that make even the best efforts by over-the-air broadcasters and cable companies more difficult. For the households that are located in

the remote areas of the State—beyond the reach of cable and relays—satellite is

the only reliable and cost effective choice. But until now, satellite has had one distinct drawback, there was no way to get the news or other local programming that

a Wyoming television station would carry because of the small population of my

State. It is doubtful, without some kind of incentive program, that local television

stations will be available to rural households.

Last November, Congress passed the Satellite Home Viewer Improvement Act to

bring the law governing the direct broadcast satellite (DBS) industry up to date to

reflect the current state of the industry. As part of that bill, the Congress authorized for the first time satellite companies to retransmit local stations back into their

local markets. However, due to satellite capacity, the two national DBS companies,

DIRECTV and EchoStar, will only be able to serve the top 50 out of 210 television

markets, or 75 percent of the households in the Nation. That leaves 160 markets

or 25 percent of the Nation without satellite-delivered local television stations. The

two media markets in Wyoming are ranked 197 and 199, meaning that without

some sort of incentive, local television will probably not be available in Wyoming.

The purpose of this series of hearings is to examine ways to encourage the private

sector to provide local television stations via satellite in rural areas. At the end of

the last session, loan guarantees for not-for-profit corporations to provide this service was proposed as the solution. Under that language, the Government would guarantee loans up to a total of $1.25 billion for not-for-profit corporations to build and

launch satellites to provide local television stations in rural markets. Since that

time, there have been calls that Congress not favor one industry or technology over

another to ensure that all potential providers are allowed to participate in the program. I am optimistic that the Banking Committee will develop legislation that will

make local television stations available to all rural Americans.

Thank you, Mr. Chairman. I look forward to working with you and the Members

of this Committee to solve this pressing problem in rural America.

—————

PREPARED STATEMENT OF SENATOR TIM JOHNSON

Thank you, Mr. Chairman. I want to thank our distinguished witnesses for taking

the time to visit with us on this issue so critical to rural America. With the knowledge and experience of these folks, I am confident we can resolve this issue expeditiously. Their input will be essential as we continue that process.

I think the immediacy of this issue is apparent by the fact that we are having

this hearing so early in the session. I was a cosponsor of the Satellite Home Viewer

Improvement Act, and I strongly supported the final package produced by the Conference Committee, including the rural local broadcast provision. This provision will

bring hope to over 50 million homes in 150 TV markets who otherwise would not

receive local signals via satellite.

The legislation we passed last year permitted satellite providers to provide localto-local coverage. Satellite viewers could receive their local networks over the dish,

much like cable systems provide the local networks via cable. Unfortunately, this

legislation does not require that all markets be served with local-to-local. Thus,

while the 50–60 largest markets will be served, the rest of the Nation will not have

access to any network programming via satellite.

44

Like many of my colleagues, I represent a State, South Dakota, with rural viewers

that should not be left out of the information age. While everyone in this room will

be able to access network programming by satellite, no one living in Sioux Falls or

Rapid City will.

Senators Burns and Baucus have crafted an innovative, fiscally responsible plan

that will ensure that all consumers, especially those in medium and small markets,

have access to local broadcast signals via satellite. Without this plan, only the very

largest television markets in America will receive local-into-local service authorized

by this legislation. These are the profitable cities like New York and Los Angeles.

Under current estimates, as few as 30 of the 210 TV markets will have local service

via satellite without the rural provision. South Dakota is one of the 16 States that

do not have a single city among the top 70 markets. Without this loan guarantee,

markets like Sioux Falls and Rapid City will never get local-into-local service.

This proposal is more than just getting sports or entertainment programming over

your local channels. It is a critical way to receive important local news, storm information, road reports, and school closing information. Rural Americans need the

same opportunity to access their local networks via satellite. Without the rural provision to the enacted legislation, they will lose that opportunity. This approach will

spur technologies that will bring news and information via satellite to consumers

who because of distance or geography are not able to get local TV signals.

Here are a few things to keep in mind about the Baucus bill of which I am a cosponsor. Only those entities that bring forth a credible, financially secure plan will

be eligible for the loan guarantees. The Agriculture Department will conduct a rigorous screening process and consult with several agencies, including the Treasury

Department, the National Telecommunications and Information Agency, and the

Federal Communications Commission, before entering into any loan guarantee.

This plan is not a giveaway to the large satellite companies as some have stated

on the Senate floor. In fact, these companies are not eligible for this program. I

would not endorse any program that would jeopardize the Treasury or the American

taxpayer. The program is capped at $1.25 billion and has been crafted to ensure

there is no exposure to the taxpayer. This proposal has overwhelming bipartisan

support. It passed the House last year by a vote of 411–8.

Again, I thank the witnesses for joining us today, and I look forward to their continued input as we pursue this equal opportunity for rural America.

—————

PREPARED STATEMENT OF SENATOR RICHARD H. BRYAN

Thank you, Mr. Chairman, for holding this hearing today on an issue of great importance to many American consumers.

Mr. Chairman, the issue of satellite broadcasting, and ‘‘local-into-local’’ service,

was an issue that we struggled with for many months last year in the Commerce

Committee. I was a strong supporter of the Satellite Home Viewer Improvement

Act. That legislation, enacted last year, has opened the door for at least one direct

broadcasting system to offer ‘‘local-into-local’’ service for thousands of satellite users

in the Las Vegas area alone. Those of us who supported this bipartisan legislation

all shared a common goal—to allow television consumers to purchase the television

and cable services which best served their needs.

We have nearly 80,000 households throughout the State of Nevada that depend

on satellite technology. As I am sure many of my colleagues on this Committee

know, consumers living in large rural States, perhaps hundreds of miles from the

nearest metropolitan area, face unique challenges in their everyday lives—including

their television viewing options—that consumers living in small to large cities often

take for granted.

The loan guarantees that were included in the original satellite legislation were

designed to encourage system operators to provide local-into-local service to rural

consumers that do not have access to local signals, and certainly that is a goal we

must continue to pursue. However, questions have arisen as to whether the technology and satellite capacity exists to fulfill the promises made by those who might

apply for the loan guarantees.

Clearly, more and more American consumers are choosing satellite technology for

their home television needs, and given the vast numbers of consumers who will very

likely be shut out of local-into-local service if we do not act, I am hopeful we can

come up with a sound proposal that will indeed encourage providers to develop this

critical service for rural and small-town America.

45

These are very important issues that should be addressed in these hearings in the

coming days, and I look forward to hearing the testimony from the distinguished

witnesses before us.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF SENATOR JIM BUNNING

I would like to thank all of the witnesses for testifying today, and I would like

to thank you, Mr. Chairman, for holding this hearing.

Obviously, satellite television has become more and more popular throughout our

country. It is very important in States with large rural populations like Kentucky.

In many parts of Kentucky, it is virtually impossible to receive a broadcast television signal. Cable companies do not serve many of these rural areas. Many in my

State are forced to rely on satellite television to receive the news of the day, weather

reports, entertainment, and most importantly, University of Kentucky basketball.

It is very important that we hold this hearing to help decide what is the best way

to ensure that folks in rural areas of Kentucky have the same access to media that

people in Lexington or Louisville have.

I am definitely interested in learning about the new technologies. I am also very

interested in learning the industries’ thoughts about the Federal loan guarantees

that caused so much controversy at the end of the first session of this Congress.

Obviously, we have a big job ahead of us in finding a solution to this problem that

everyone can live with before March 30, 2000. I believe the testimony of all of our

witnesses will help us find an answer.

Again, I thank all of the witnesses for coming before us today and I look forward

to hearing their testimony.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank the Chairman for holding this hearing today. As we are all

aware, the Banking Committee has the opportunity to review loan guarantees for

satellite television as the result of a compromise between various Members.

I realize there are strong feelings on both sides of this issue, and I would like

to thank my colleagues for allowing this provision to come before the Banking Committee. I believe that the committee process plays a valuable role in the Senate. As

a Member of the Banking Committee, I look forward to the opportunity to review

the loan guarantee provision and to take part in that process.

The issue of a Government loan guarantee program of $1.25 billion is a very serious issue that merits careful attention. I look forward to the first in our series of

hearings to examine this proposal more carefully.

Finally, I would like to welcome one of my constituents, David Moskowitz with

EchoStar Communications, to today’s hearing. Mr. Moskowitz, I appreciate you coming from Colorado to testify before the Banking Committee.

We have a great lineup of witnesses, and I look forward to hearing from them.

—————

PREPARED STATEMENT OF SENATOR CHUCK HAGEL

Good morning, Mr. Chairman. I would like to thank you for holding this very important series of hearings.

Last year, we passed the Satellite Home Viewer Improvement Act (SHVIA), which

was included in the FY2000 Consolidated Appropriations Act. The SHVIA expanded

on and extended provisions of the 1988 Satellite Home Viewer Act (SHVA).

One of the biggest changes incorporated by the SHVIA was allowing satellite companies to retransmit local television network signals back into the same local market area, known as local-into-local broadcasting. Unfortunately, the SHVIA does not

ensure that all satellite television consumers will be able to receive their local television signals. The national satellite companies have announced that they will only

offer local-into-local programming in the top 25 to 40 television markets.

In my State of Nebraska, the largest television market is Omaha, which is ranked

number 73. In fact, out of the 210 television markets, Nebraska has one of the

smallest—North Platte is 209. Under the current law, the 248,726 satellite television viewers in Nebraska are unlikely to see any benefits from the new local-intolocal broadcasting provisions.

46

There was an attempt last year to include a provision in the SHVIA that would have established a $1.25 billion loan guarantee to help ensure that satellite television subscribers in rural areas would benefit from the local-into-local programming. Under the proposed provision, companies could qualify for loan guarantees if

they provided local television signals to the smaller television markets not expected

to receive local signals from satellite providers. However, because of concerns regarding the lack of full consideration by Congress and the effectiveness of the program, it was not included in the final package. I am hopeful that Congress will be able to find a solution to help all television viewers gain access to local programming, including those in North Platte. It may

be that a loan guarantee program is the best way to get at this problem. There may

be other ways to solve this problem, but we should at least have a better idea on

how to proceed after this series of hearings.

I realize that this process is not going to be easy. There are many questions that

need to be answered, but I am confident that we can find the answers.

I look forward to hearing from our witnesses, not only today, but also throughout

this series of hearings.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF SENATOR JOHN EDWARDS

I would like to thank Chairman Gramm and Ranking Member Sarbanes for holding these hearings. I believe we are here today to discuss an issue of great importance to many Americans—access to local television programming. I look forward

to hearing from the various witnesses.

For many months now, I have been hearing from concerned North Carolinians

who want to know why they are not able to see their local affiliates via their home

satellites. Many of these constituents believed that when we passed the Satellite

Home Viewer Improvement Act they would be able to watch their local channels.

And they will, but it looks like it won’t happen any time soon.

This problem is pretty serious in North Carolina. Moreover, while roughly 3 percent of homes in the United States do not have access to cable, in North Carolina,

that figure is much higher, at 9.5 percent. Most people believe that both of those

statistics should be significantly higher. Some of these households may have satellite dishes, so maybe they receive movies and other channels, but these people are

not receiving local programming. Similarly, many North Carolinians who own satellite dishes and who live within Grade B contours are not receiving local programming. Even though many of these people theoretically can get local programming

now that the Satellite Home Viewer Improvement Act is law, the reality is that a

great number of these people will not see local programming for a very long time,

if ever.

I am committed to making sure that rural residents have access to local programming, sooner rather than later. I strongly believe the loan guarantee program that

we will hear about today is a critical step we need to take.

Let me tell you why I think this is so important. It’s very simple. People need

to know what is going on around them. In North Carolina, we have recently experienced some of the most catastrophic natural disasters in the recorded history of the

State, and people need to be able to get local information about weather and emergencies. People need to know what their local legislators are doing for them. Rural

schools need to have access to educational programs that help keep their students

on par with students in urban areas. Put simply, people need to know what is going

on in their community.

We are going to hear today from the satellite and the cable industries about how

they think we could and should structure a loan guarantee program to reach the

unserved and underserved households in America. I think we need to listen very

carefully to what each side has to say, because we want to make sure that we proceed carefully. I want to make sure that my constituents have access to their local

programs and affiliates, and I want to make sure that we do it in a way that does

not expose taxpaying Americans to costly risks.

I look forward to hearing from the various witnesses today. In particular, I hope

to hear about the time frame for providing local programming to markets such as

Charlotte, North Carolina (which is the Nation’s 28th largest market), and to other

smaller markets. I also hope to hear what is being done to address the lack of access

in the more rural areas. With almost 33 percent of households in North Carolina

located in rural areas, I’m extremely concerned that these people may be faced with

a significant wait before they are able to receive local programming.

I thank the witnesses for being here and look forward to hearing their comments.

47

PREPARED STATEMENT OF K. JAMES YAGER

PRESIDENT AND CHIEF OPERATING OFFICER

BENEDEK BROADCASTING, ROCKFORD, ILLINOIS, AND

JOINT BOARD CHAIRMAN, NATIONAL ASSOCIATION OF BROADCASTERS

ON BEHALF OF THE

NATIONAL ASSOCIATION OF BROADCASTERS

FEBRUARY 1, 2000

Introduction

Thank you, Mr. Chairman, for the opportunity to appear before the Senate Bank- ing Committee today. I am K. James Yager, President and Chief Operating Officer

of Benedek Broadcasting, which owns 26 television stations in small markets across

the Nation. I also serve as Joint Board Chairman of the National Association of

Broadcasters (NAB), on whose behalf I appear today. The NAB represents the many

owners and operators of America’s radio and television stations. My remarks today will address the loan guarantee program as proposed by the House and Senate conferees last year. The satellite TV industry began as a service primarily targeting rural Americans who could not receive broadcast television signals over the air. The passage of the

Satellite Home Viewer Act in 1988, which permitted delivery of network stations to

unserved households, led to vigorous growth of the satellite industry. The recent enactment of the Satellite Home Viewer Improvement Act (SHVIA) has further enhanced the competitiveness of the satellite industry vis-a`-vis the cable industry by providing satellite carriers a statutory copyright license to deliver local television

broadcast signals within a station’s market.

The NAB applauds the Committee’s interest in ensuring that all Americans, par- ticularly those in rural and small markets, benefit from the recently passed Satellite

Home Viewer Improvement Act. The House and Senate conferees recognized that

the current plans of satellite carriers did not include delivery of local signals in most

smaller television markets. By example, more than one-half of all stations may not

be available on satellite to local viewers. To address this concern, they drafted the

loan guarantee program in an attempt to ensure that rural Americans could receive

local television signals by way of satellite. Beginning in 2002, all carriers will be

obligated to carry all stations in any market where they elect to serve with local

signals. Given the rapidly growing popularity of direct broadcast satellite (DBS), the

NAB believes that the vitality of the local free over-the-air broadcast system that

Congress has consistently worked to preserve may well be threatened if half of the

Nation’s television stations (a vital source of local information) are shut out from

satellite carriage.

The State of the Satellite Marketplace

Current trends indicate that satellite companies will in fact provide local broadcast television signals via satellite only in the largest markets and not in rural

areas. Despite huge capacity (up to 500 channels, many of which are devoted to payper-view and other premium services) and strong demand for local stations, satellite

operators have stated that providing local signals to rural markets is not feasible

at this time. The NAB understands that both DIRECTV and EchoStar currently

provide local signals to approximately 42 percent of the Nation’s television households in 19 and 20 markets, respectively. EchoStar plans to provide local signals to

60 percent of U.S. television households by the end of March 2000 (approximately

the top 37 markets). DIRECTV plans to add 4 more markets in the next few weeks.

A market-by-market listing as of January 27, 2000 is set forth in Table A (located

at the end of this statement).

For a time, it appeared that Local TV on Satellite, founded by Capitol Broad- casting and other investors, would provide local-into-local in all markets. That company, however, appears to have revised its business plan and now may only provide

local stations in the top 68 markets.

In short, the business plans of satellite providers will leave many rural Americans without access to satellite delivery of the signals of their local stations, the signals

which provide viewers with the local news, weather, sports, and other informational

programming. The NAB, therefore, strongly endorses the policy objective of the proposed loan guarantee program, which is to ensure that delivery of all local stations irrespective

of market size by satellite is economically feasible. Without satellite delivery of rural

television signals, access to 800 of the Nation’s television stations that serve America’s smaller communities is at risk if viewers cannot watch local programming by

way of satellite. We are concerned, however, that given the economic and technical

48

hurdles of delivering local signals by satellite, the proposed program may be too limited in scope and too administratively cumbersome to provide the necessary jump

start.

Economic and Technical Hurdles to Rural Delivery of Local Signals

The satellite industry historically has faced legal, technical, and financial obsta- cles preventing the delivery of local signals. The passage of the SHVIA eliminated

a legal obstacle by creating a statutory compulsory copyright, but the technical and

financial hurdles remain.

A Limited Rural Consumer Marketplace

Even though one-half of America’s television stations are located in the smallest

154 television markets, only 25 percent of the U.S. population resides in those markets. Seventy-five percent of the U.S. population (and the other half of the Nation’s television stations) is located in the largest 60 television markets. Current localinto-local retail packages marketed by EchoStar and DIRECTV are $4.99 and $5.99

for four or five local stations. In order to compete with cable, any satellite local-intolocal package must remain within this range. At those levels, we very much doubt

that a rural provider could ever hope to break even.

The Need for a Spot-Beam Satellite Design and an Orbital Slot

Delivering 800 local stations via a conventional satellite from a single orbital slot is not technically feasible for the following reasons:

1. Capacity. Typically, a range of only 250 to 300 channels can be delivered due

to frequency and power limitations.

2. Geographic Coverage. Current DBS’s located within the 101° to 119° orbital arc

are able to deliver the same channels to customers located anywhere in the

continental United States. Although this nationwide coverage is practical for

channels such as CNN, ESPN, and HBO, it is an expensive and wasteful approach for delivering local television stations that can legally be viewed only

in the station’s local market.

Relatively new commercial technology—a spot-beam satellite—is the answer, but

spot-beam satellites represent expensive design challenges. In addition, a company

developing a rural plan must lease or acquire an orbital slot at a potentially very

high cost.

The Need To Be a Wholesaler, Not a Retailer

The NAB does not believe that it is practicable to develop a rural local plan without partnering with DIRECTV or EchoStar. The two primary reasons are the need

to create a consumer-friendly, sellable product and the need to limit marketing and

backroom costs.

The Technical Challenges of Partnering With DIRECTV or EchoStar

A potential relationship between a third party local-into-local service wholesaler

and DIRECTV or EchoStar requires the resolution of many technical issues. Those

issues relate to the location of the local-into-local orbital slot and the development

of an affordable consumer receiver and dish. Challenges include:

• Finding an orbital slot close enough to the current DBS slots to allow a onedish solution;

• Developing set top boxes that can receive signals from the Ku-band, where the

DBS providers are located, and the Ka-band (used by small dishes), the likely

location of a third party local-into-local provider;

• Developing technology that will interface with differing transmission and conditional access systems used by DIRECTV and EchoStar.

Locating, Building, and Maintaining Numerous Uplink Sites

If a spot-beam satellite is used, local television stations must be uplinked from

a facility located within the footprint of that individual spot beam. The number of

spot beams determines the number of uplinks. Additional uplinks may be required

to comply with legislative restrictions and to reduce the cost of delivery of the local

signals to the uplink site.

The Overall Expense—$600 Million to $1 Billion

The NAB estimates that in order to develop and execute a feasible technical plan

to provide all local stations to rural America it will cost from $600 million to $1 billion, depending on (1) whether the plan includes a spare satellite and (2) the number of markets planned to be covered. The cost of building, launching, and insuring

a spot-beam satellite is hundreds of millions of dollars, even without the redundancy

49

of a spare satellite that prudence might require. An orbital slot must be acquired

or leased. Numerous local uplink facilities must be located, built, and maintained

costing several million dollars each. Other major costs include a master control center and conditional access to ensure that consumers are only receiving stations in

the market in which they live.

Is the Loan Guarantee Program an Appropriate Economic Incentive?

Given these challenges, the NAB believes that an economic incentive of some kind

is appropriate, but is unsure whether the loan program as proposed will meet its

important objective. Understandably, the proposal contains numerous mechanisms

to protect the Government against the risk of default. While the Government needs

some security, the loan guarantee program should not dictate a borrower’s business

plan. Likewise, given the lead time necessary to undertake a satellite project (even

if work were begun immediately, a satellite project of this scale has a lead time of

at least 2 years), a borrower’s qualification for the loan guarantee should not be unduly delayed by multiple layers of bureaucracy.

Cap on Loan Amounts

The conferees’ bill contains caps on the amount of the loan guarantees that are

too low to ensure success of the program. The Government would guarantee one

loan not to exceed $625 million, and any other loan could not exceed $100 million.

These caps pose a potentially serious problem for borrowers and would benefit one

borrower to the exclusion of others.

Cumbersome Approval Process

The proposal also contains several layers of approval, any one of which is susceptible to delays that could threaten the success of the program. Prospective borrowers

may be unwilling to front the substantial development costs of planning and structuring a $600 million to $1 billion satellite project without assurance of approval

of the various entities involved: Congress, the Secretary of Agriculture, the OMB,

and the NTIA.

Specifically, the conferees’ bill would require Congress to authorize funds before

the Secretary could approve any loan guarantees. In addition, the bill imposes a

broad panoply of consultation requirements on the Secretary of Agriculture, who

will administer the program. The Secretary must consult with the OMB and an outside accounting firm within 180 days of enactment, and then must obtain NTIA certification for each loan application. The NTIA may take up to 90 days, a time period

that does not even commence until after the Secretary submits the application for

review. In sum, the variegated layers of approval could unduly draw out the borrowing process, yet time is of the essence given the commencement of must-carry

requirements under the SHVIA in 2002.

Priority Lien

The conferees’ bill would require the Secretary to take a priority lien on the borrower’s assets. This lien would trump the liens of any other creditors. Under predecessor loan programs, such as the Rural Electrification Act, the law very specifically

allowed the Government to take a subordinated interest. Subordination allows borrowers to secure senior loans, in addition to their federally guaranteed loans, and

reduces equity requirements. In view of the high risks and very speculative returns

of a rural satellite project, subordination may be necessary to the success of the

project. Alternatively, if the Government is not permitted to take a subordinated

lien, the cap on loan guarantees should be raised to reduce the risk to lenders.

Disqualification of Existing DBS Operators

While satellite carriers are critical to the delivery of local signals, the language

in the bill appears to exclude the two existing DBS operators. The success of this

program may well depend on the satellite carriers’ cooperation since subscribers are

likely to prefer hardware that is inexpensive and interoperable with their existing

DBS equipment. Yet, under this proposal, the satellite carriers with suitable unused

spectrum may not participate in the loan program, and the NAB understands that

DIRECTV and EchoStar, both likely partners in this process, may have available

spectrum. The broad language of the bill would appear to disqualify consortia even

when EchoStar, DIRECTV, or their affiliates hold only a minority interest. Accordingly, this limit on eligibility may be counterproductive in achieving the ultimate

goal of delivering local signals to unserved areas.

The Need for Study and Careful Consideration

Given the technical and economic hurdles that satellite carriers would have to

overcome in order to provide local television signals to rural Americans, and given

50

the complexity of designing an efficient and effective loan guarantee program, the

NAB thanks the Senate Banking Committee for conducting this hearing, which we

assume is the beginning of a thorough inquiry into alternative incentives. We also

applaud the NTIA for commencing a wide-ranging public inquiry into local-into-local

technology. The NTIA has requested public comment on how to ensure the provision

of local programming by satellite and other technologies to viewers in smaller communities. Congress, likewise, should take a careful and thorough look at alternative

approaches, such as tax credits or direct loan programs.

Conclusion

Mr. Chairman, the NAB applauds Congress’ recent action in passing the Satellite

Home Viewer Improvement Act and the efforts of Congress to sustain localism by

ensuring that rural Americans will benefit from access to local signals by satellite.

The future of the 800 television stations operating in smaller markets and access

to their signals for millions of Americans will depend on the success of this effort.

And it must be a joint effort. It cannot happen without the cooperation of the broadcast, satellite, and banking industries.

The NAB is concerned, however, for the reasons I have discussed, that the loan

guarantee program in its present form will not achieve this important objective. We

look forward to working with this Committee to design an appropriate economic incentive. Once again, I would like to express on behalf of the NAB its appreciation

for the opportunity to testify before the Members of the Senate Banking Committee

today.

51

TABLE A DMA’s Served by DIRECTV and EchoStar

January 27, 2000 1

Rank Market

TV Households% of

U.S. DIRECTV EchoStar

1 New York 6,812,540 6.854 Yes yes

2 Los Angeles 5,135,140 5.167 Yes yes

3 Chicago 3,164,50 3.184 Yes yes

4 Philadelphia 2,667,520 2.684 Yes yes

5 San Francisco–Oakland–San Jose 2,368,970 2.383 Yes yes

6 Boston 2,186,100 2.199 Yes yes

7 Dallas–Ft. Worth 1,959,680 1.972 Yes yes

8 Washington, DC–Hagerstown 1,956,160 1.968 Yes yes

9 Detroit 1,846,950 1.858 Yes yes

10 Atlanta 1,722,130 1.733 Yes yes

11 Houston 1,665,550 1.676 Yes yes

12 Seattle–Tacoma 1,548,200 1.558 yes

13 Cleveland 1,475,820 1.485 Yes

14 Tampa–St. Petersburg 1,463,090 1.472 Yes

15 Minneapolis–St. Paul 1,457,820 1.466 Yes yes

16 Miami–Ft. Lauderdale 1,418,940 1.428 Yes yes

17 Phoenix 1,343,040 1.351 Yes yes

18 Denver 1,230,440 1.238 Yes yes

19 Pittsburgh 1,136,230 1.143 yes

29 Raleigh–Durham 834,260 0.839 Yes

30 Nashville 811,870 0.817 yes

33 Kansas City 802,290 .807 yes

Greenville–Spartanburg–

35 Asheville–Anderson 739,850 0.744 Yes

36 Salt Lake City 707,070 0.711 yes

Total % of U.S. Served 41.701% 42.197%

1Source: Nielsen Media Research 1999 Estimates; DIRECTV and EchoStar Company Press Releases.

52

1 NCTA represents cable companies serving more than 90 percent of the Nation’s 68.5 million

cable customers and more than 100 cable program networks.

PREPARED STATEMENT OF RICHARD SJOBERG

PRESIDENT AND CHIEF EXECUTIVE OFFICER

SJOBERG’S INCORPORATED, THIEF RIVER FALLS, MINNESOTA

FEBRUARY 1, 2000

Mr. Chairman, Members of the Committee, my name is Dick Sjoberg. I am Presi- dent and Chief Executive Officer of Sjoberg’s Incorporated, a privately held cable company located in northwestern Minnesota. I serve as Chairman of the National

Cable Television Association’s Rural and Small System Operators Committee and am also a member of the NCTA’s Board of Directors.1

My family entered the cable television business in 1962. In those early days of the industry, our main goal was to bring broadcast signals to the communities that

could not receive them over-the-air—especially in rural areas. My company built its own facilities, beginning with a cable system in Thief River Falls, Minnesota—a small town of 8,010 which was approximately 92 miles from the nearest broadcast

station at the time the system was built. Some of our systems today are as many

as 133 to 200 miles away from the nearest broadcast station they carry. Today, Sjoberg’s Incorporated serves approximately 7,400 customers in 33 small rural towns and townships, with densities ranging from 12 to 22 homes per mile of

cable plant (see attached chart). Since 1993, we have installed fiber to connect each

of these towns. In 1998, we began offering our customers digital cable service, recognizing that we needed to provide more channels to compete with DBS. At present,

we offer our subscribers 148 channels of cable and broadcast programming. As a company, we are committed to delivering new broadband services not only to our residential customers, but also to the schools in the rural communities where

they live. For example, as part of our company’s commitment to the cable industry’s High Speed Education Initiative and Cable in the Classroom, we have wired

all 18 schools in our service area with cable TV and are currently providing a free

cable modem and high-speed Internet access to five schools. All 18 schools will have

free, high-speed access to the Internet by the end of the year. We have also interconnected all of the schools in one of our districts with fiberoptic cable. Furthermore, half of our residential customers currently have access to high-speed cable

modems, while the rest will have access to broadband services by the end of 2000.

We have invested substantial amounts of private risk capital to bring these services

to our customers and do not rely on public funding.

To date, my company is the only video service provider to make this kind of investment in these rural Minnesota communities. I am a resident of the area, participate in community activities, and pay approximately $30,000 per year in franchise

fees to local franchising authorities. My goal as a local businessman is to ensure

that my customers have access to the same services as their counterparts in much

more populated areas. Moreover, I am not alone. As the FCC Cable Bureau’s report,

Broadband Today (October 1999), indicates, small and rural cable systems across

the country are deploying broadband facilities and services.

My cable company and others continue to deploy digital video and broadband

services in rural America, even though the required upgrades are very expensive

and capital intensive. We are willing to undertake the risk of deploying advanced

networks in low-density, high-cost areas because of the stable regulatory environment provided by the Telecommunications Act of 1996 and because we believe that

these services appeal to the rural communities we serve.

The NCTA and many small cable systems supported the Satellite Home Viewer

Improvement Act of 1999—procompetitive legislation which changed the law to permit satellite companies to retransmit local broadcast signals into local markets, including rural markets. We also understand this Committee’s policy goal of providing

improved access to broadcast signals and are prepared to compete with other video

providers. We are concerned, however, about proposals that might provide

Government subsidies to some industries—but not others—in an otherwise

competitive video marketplace.

Small cable operators like myself compete against DBS in every market we serve,

including rural markets. Our DBS competitors already have certain advantages because they can reach every home without the high marginal costs that limit a small

cable operator’s ability to provide service to less densely populated areas. They also

have the technical capability to provide more channels than a typical small cable

system. Some of the proposals for expanding local-into-local service compound our competitors’ advantages by having the Federal Government subVerDate 11-MAY-2000 10:27 Jan 19, 2001 Jkt 000000 PO 00000 Frm 00056 Fmt 6621 Sfmt 6621 69308.TXT SBANK3 PsN: SBANK3
53

sidize DBS’s capacity to provide local broadcast signals—even though these

competitors are owned by companies with market capitalizations of $21 billion (EchoStar) and $16 billion (GM/Hughes) and have annual revenues of

$1 billion to $6 billion.

As a small cable operator, I already carry all local broadcast signals on my systems. In fact, I am required to do so by the must-carry provisions of the 1992 Cable

Act. I raised the money to carry these signals and others in private capital markets.

The fear of many small cable operators is that any rural loan guarantee program

will be interpreted as a congressional mandate to build another satellite—at discounted, federally insured rates—to carry local broadcast signals into those markets

which local businesses could serve more cost-effectively through other technologies.

For example, my company has cost-sharing agreements with Roseau County and

Lake of the Woods County to transport over-the-air broadcast signals into areas

they would otherwise not reach. (I use a combination of fiberoptic cable, microwave

signals, and translators to provide this service, even though the signals compete

with those on my own cable system.) Note that in these areas, the local rural cooperative acts as the selling agent for DIRECTV. The rural co-op provides its customers with dual antennas to receive both the satellite signals and local broadcast

signals in direct competition with my cable service.

If Congress decides to move forward with a Federal loan guarantee program, I

would ask that it adopt one that is:

• Technology neutral, giving small ‘‘Main Street’’ businesses the opportunity to

extend the reach of local broadcast signals in a more cost-effective way. Small

cable businesses and others could use loan guarantees to extend their facilities

to areas that are not currently economical to serve—typically areas with fewer

than 10–12 homes per mile. They could also utilize other technologies, such as

translators, microwave links, repeaters, relay stations, and new wireless systems, to improve access to broadcast signals. The need for such technology

neutrality is especially important since companies like mine are providing rural consumers with broadband services and high-speed access

to the Internet, thus helping to bridge the digital divide.

• Narrowly focused on the unserved or the most underserved markets. Any

Government funding or loan guarantee program should focus on areas with the

least local broadcast signal coverage and should not be used to subsidize DBS

service in urban and suburban markets.

• Set up in a manner that minimizes the paperwork burden on applicants.

The program should be set up in a manner that creates the smallest paperwork

burden possible, thus encouraging smaller businesses to apply and provide costeffective, local solutions.

Thank you for your attention. I stand ready to work with this Committee as it

moves forward on legislation to provide better television service in rural and underserved areas.

54

List of Towns and Townships

Served by Sjoberg’s Incorporated

Community Population

Thief River Falls, MN 8,010

North Township, MN 150

Rocksbury Township, MN 486

Roseau, MN 2,396

Jadis Township, MN 162

Spruce Township, MN 228

Middle River, MN 369

Spruce Valley Township, MN 9

Greenbush, MN 820

Hereim Township, MN 31

Warren, MN 1,813

Warrenton Township, MN 20

McCrea Township, MN 36

Red Lake Falls, MN 1,481

Red Lake Falls Township, MN 42

Warroad, MN 1,679

Lake Township, MN 1,630

Enstrom Township, MN 61

Cedarbend Township, MN 16

Moranville Township, MN 66

Holt, MN 61

Viking, MN 88

Karlstad, MN 921

Deerwood Township, MN 59

Newfolden, MN 382

Badger, MN 498

Stokes Township, MN 20

Baudette, MN 1,146

Wabanica Township, MN 160

Wheeler Township, MN 211

Gulrid Township, MN 72

Spooner Township, MN 101

Baudette Township, MN 109

Total 23,333

55

PREPARED STATEMENT OF B.R. PHILLIPS III

PRESIDENT AND CHIEF EXECUTIVE OFFICER

NATIONAL RURAL TELECOMMUNICATIONS COOPERATIVE, THE PLAINS, VIRGINIA

FEBRUARY 1, 2000

Introduction

Mr. Chairman, Members of the Committee, my name is Bob Phillips. I am Presi- dent and Chief Executive Officer of the National Rural Telecommunications Cooperative. The NRTC is a not-for-profit cooperative association with a membership of

nearly 1,000 rural utilities (550 rural electric cooperatives and 279 rural telephone

systems) located throughout 48 States. Our members provide electric or telephone

service to underserved, low population density areas of the country. The NRTC’s mission has been to meet the advanced telecommunications needs of

American consumers living in underserved areas. In furtherance of that mission,

in 1992 the NRTC paid DIRECTV more than $100 million to capitalize the launch

of the Nation’s first direct broadcast satellite (DBS) business. In return, the NRTC

received program distribution and other rights to market and distribute DIRECTV

programming services throughout large portions of underserved, oftentimes rural

America. The NRTC, its members, and its affiliates currently market and distribute

DIRECTV programming to more than 1.4 million households (more than 20 percent

of all DIRECTV subscribers) using digital DBS technology. The NRTC also distributes C-band or large dish satellite programming to some 50,000 subscribers. In my testimony today I intend to address two problems not addressed by last

year’s Satellite Home Viewer Improvement Act: first, the unavailability of local tele- vision service in rural America and, second, the lack of competition to cable. I’m going to propose a satellite solution to both of these problems, and it will require

your assistance in the form of a loan guarantee.

Local Service Is Unavailable Throughout America

By authorizing the retransmission of local broadcast signals by satellite, last

year’s satellite bill paved the way for the satellite industry to become a meaningful competitor to cable in some of the Nation’s top markets. But the bill did nothing to close the digital divide throughout much of the rest of America, where there is

no ‘‘profit’’ to be made in delivering local service by satellite. Because of the bleak economics, the for-profit satellite companies have announced

their intention to provide local digital satellite service only to the top 33 markets

out of a total of 210. That means that more than half of the Nation’s households

will not have access to local digital satellite service. At least 20 States will be left

out entirely, including eight of the States represented by Members of this Committee. That’s unfair, and it’s contrary to the public interest. Americans located in these unserved areas will be disenfranchised from the modern information age simply as a result of where they live. This is unacceptable to

the NRTC. I believe it will also be unacceptable to your constituents when they

learn that as a result of the satellite bill passed by Congress last year, their urban

neighbors are already receiving service they may never receive.

Satellite Technology is the Only Comprehensive Solution

It is no coincidence that satellite penetration rates in rural America are six times

higher than in urban parts of the country. Satellite is an ideal distribution technology for the less populated areas. Unlike other technologies, satellite is ‘‘distance

insensitive.’’ At a fraction of the investment, satellites can reach where cable and

other broadband technologies will never go. Satellite is ubiquitous. It can cover wide, remote spaces that ground-based tech- nologies will never reach. In fact, any technology other than satellite will be ineffective and piecemeal as a tool to bring local service to the unserved areas. The cable industry will never build out the entire country. More than 90 percent of the NRTC’s 1.4 million satellite subscribers do not even have access to cable.

Why? Because it costs too much to serve these homes with cable. It is estimated that in urban areas the capital costs to build out a cable system are more than $1,200 per subscriber. In unserved and rural areas with low population densities and rough terrain, these costs could easily be four or five times as

much or more. However, even with substantial start-up costs, the necessary capital per subscriber to provide local digital satellite service in unserved areas should be

less than $300. Distance, terrain, and population density are irrelevant.

We estimate that there are at least 10 million homes that do not have access to

cable. Cablevision, the cable industry publication, cites statistics from the National

Cable Television Association to verify that there are nearly 9 million households

unserved by cable.

56

How much is the cable industry willing to spend to extend their lines to serve

these unserved homes? Apparently, not much. According to the FCC, cable companies spent $7.7 billion in 1998. But the great bulk of that money was for upgrades

and rebuilds of existing plant . . . not for the construction of new plant. Many of the

large cable companies spent more than half a billion dollars each on upgrades and

rebuilds. And while $600 million of the $7.7 billion was spent for new plant, it was

not spent to bring service to previously unserved markets. Their ‘‘new builds’’ simply

kept pace with the increase in the number of TV households.

Cable has very little or no economic incentive to build new plant to serve homes

located in more remote, less densely populated areas. For any given large number

of subscribers, satellite is by far a cheaper delivery technology per household than

cable. Compared with any terrestrial system, wired or wireless, a satellite system

has much greater economic leverage because of its much lower incremental cost in

serving subscribers located anywhere in the United States.

The rural electric cooperative members of the NRTC have a history of serving remote, rural, and underserved areas. Unlike the cable industry, they have traditionally constructed electric plant and brought electric services to areas with 5 or fewer

homes per mile. Their motivation and mission is to bring service to the underserved

areas . . . not to cream-skim the lucrative markets.

Competition to Cable

Mr. Chairman, the NRTC fought the cable industry for nearly 10 years here in

Congress to obtain access to programming so we could help build a digital satellite

industry to serve rural America. Throughout that debate, the cable industry argued

in favor of the digital divide. They testified that rural and underserved consumers

should pay more for their programming because of where they live. We disagreed

then, and we disagree now.

Not only can satellite technology provide local service to the unserved markets

where cable is not available, satellite technology can also provide competition to

cable in the underserved markets where cable is available. For the satellite industry

to provide effective competition to cable and fulfill the goal of the Satellite Home

Viewer Improvement Act, we need to provide local signals.

Every cable consumer in America needs a choice in service providers. Satellite

technology can provide that choice. That’s why Congress passed the satellite bill last

year. But if local digital satellite service doesn’t reach every home in the United

States and cable becomes the only choice in the markets not served by DIRECTV

and EchoStar, cable will never be subject to effective competition. Cable rates will

continue to increase, and additional regulation will be required.

Mr. Chairman, access to local service should not be driven solely by concerns of

profitability. It’s a much bigger issue. All Americans should be entitled to receive

the benefits of the modern information age . . . even those living on the other side

of the digital divide, where the delivery of local service is not a moneymaker.

To bring local service to unserved areas across the country and to provide competition to cable, we need to agree on a comprehensive, universal plan based on the

right technology—not a patchwork of different and incompatible ground-based systems. Only satellite technology holds the promise to serve everyone and to provide

much needed competition to cable.

Recommendation

As you said last year, Senator Gramm, ‘‘. . . there are some social goals that are

not necessarily met by market forces. . . .’’ That’s true here. The marketplace will

not fix these problems because there is no money to be made in delivering local satellite signals to these areas.

With your support, we can construct, launch, and operate a satellite system to

provide local digital service to all of those areas not served by the for-profit satellite

companies. Through a common industry platform, we can solve the problems not

addressed by last year’s satellite bill. We can make local service a reality for consumers across the country and provide meaningful competition to cable.

Getting this job done will require a loan guarantee of at least $1.25 billion, to be

supplemented by the satellite industry as needed.

We also strongly recommend that the loan guarantee program be implemented on

a not-for-profit, cooperative basis. A not-for-profit approach would ensure that the

Federal loan guarantee is not used to enrich large, private, or corporate interests.

Not-for-profit, cooperative utilities have used loan guarantees to deliver electric

services to unserved areas since the 1930’s. The U.S. Department of Agriculture,

through the Rural Utilities Service, is intimately familiar with the challenges facing

rural and underserved markets. Rural utilities operating under the RUS program

have an excellent record of Federal loan and loan guarantee repayment. Through

57

1Federal Communications Commission News Release Broadcast Station Totals as of September 30, 1999 (released November 22, 1999).

the loan guarantee program, these cooperatives can ensure that these same areas

are brought into the modern information age. We recognize that an administering body most likely will need to be created for this purpose. We urge you to establish strong criteria to ensure not only that any

loan guarantee will be repaid, but that preferences will be given to plans which will

provide the most comprehensive solution and utilize the Federal guarantee in the

most efficient manner possible. In this way, you and the Committee can ensure that

the public interest will be best served by the use of Federal support. Mr. Chairman, we also recognize that some of these communications issues are beyond the purview of this Committee. To accomplish our goals, we will need the

assistance of other committees as well as the FCC. However, left to its own devices,

the FCC will handle this problem in the very same way it has handled countless

others: by relying solely on ‘‘competition’’ to fix it. But as you recognized last year, competition will never fix this problem, so we will be working with the Congress,

and hopefully the FCC, to obtain the necessary spectrum and orbital location(s) for

this project. Mr. Chairman, if we can get the Congress’ help and approval soon, we can use

satellite technology to bring service to the last mile and to provide meaningful com- petition to cable. It’s a big job, and we need to get started. Thank you. —————

PREPARED STATEMENT OF DAVID K. MOSKOWITZ

SENIOR VICE PRESIDENT OF LEGAL AND GENERAL COUNSEL, SECRETARY, AND DIRECTOR

ECHOSTAR COMMUNICATIONS CORPORATION, LITTLETON, COLORADO

FEBRUARY 1, 2000

Chairman Gramm and distinguished Members of this Committee, thank you for

inviting me here today to testify before you about the provision of local broadcast

signals to rural subscribers via direct broadcast satellite.

My name is David K. Moskowitz, and I am Senior Vice President of Legal and

General Counsel, Secretary, and Director of EchoStar Communications Corporation,

a direct broadcast satellite (DBS) company based in Littleton, Colorado. EchoStar

was started in 1980 as a manufacturer and distributor of C-band satellite dishes

and grew by the mid-1980’s into the largest supplier of C-band dishes in the world.

EchoStar’s founder and CEO, Charlie Ergen, had a vision of a dish in every home,

school, and business in the United States, so that we might provide true, effective

competition to cable for customers nationwide. In fulfillment of that vision, we have

transitioned into the small dish business and have launched five high-powered, direct broadcast satellites since December 1995, with a sixth to be launched this year.

Our goal has always been to provide direct competition to cable television so subscribers might have an alternative to the high prices and historically poor service

of monopoly cable companies. Last year, Congress took, in my view, a tentative first

step toward giving DBS the right to compete with cable on a more equal footing

when it passed the Satellite Home Viewer Improvement Act of 1999. The success

of the copyright license given in this bill will turn entirely on its implementation.

If implemented properly by the FCC, the law will enable us to provide local signals

into the local designated market area (DMA) from which they originate for a sustained period of time (beyond the current 6-month phase-in). The lack of local signals has been the number one reason why consumers, while interested in DBS and

displeased with their cable system, have decided against switching from cable to

DBS. People want access to their local news, weather, and sports, and the technology of satellites allows us to give them that and more.

Although my company will be able to provide over 50 percent of the population

with their local signals, constraints on DBS capacity and prohibitively high costs

make it impossible for EchoStar to carry all 1,616 television stations nationwide.1

We currently carry about 100 television broadcast stations and plan to retransmit

approximately another 65 before yearend. We would like to be able to serve each

of our rural subscribers with their local signals. EchoStar has a substantial number

of customers in rural areas living in C and D counties, which are rural areas as

defined by the Bureau of the Census.

As you seek to develop, with your colleagues in the Agriculture Committee, the

most appropriate funding mechanism to support the provision of local signals to

rural subscribers, we believe that the policy goals underlying this program should

58

2 In the Matter of Annual Assessment of the Status of Competition in Markets for the Delivery

of Video Programming, Sixth Annual Report, CS Docket No. 99–230 (rel. Jan. 14, 2000), at 12. 3 Nielsen Media Research, Local Market Universe Estimates for the 1999–2000 Broadcast

Season, http://www.nielsenmedia.com.

be clearly articulated, and the challenges and obstacles involved in its implementation addressed.

What is the Policy Goal?

Cable television passes 97 percent of the population nationwide.2 If the goal of a

Government loan guarantee is to provide access for rural subscribers to their local

television stations, then only 3 percent of the population would need to be targeted

by the loan guarantee. The larger problem, however, is the lack of true competitive

choice: a much more substantial percentage of Americans, particularly rural consumers, do not have a competitive choice to cable offered on a truly equal footing,

even though these viewers may have access to local signals through their cable system. This situation is not satisfactory. With appropriate legislation, and vigilant implementation of the existing laws by the FCC, EchoStar can become a true choice

for rural viewers, and a competitor that welcomes the competition from all other

sources. The rural funding mechanism should accordingly be based on the fundamental policy of ushering in, and bolstering competition to cable and all other incumbents such as the telephone companies. We believe the intention of any Federal

and congressional efforts should be to provide subscribers with the same kind of

competitive choices that urban and suburban dwellers could enjoy if the SHVIA is

properly implemented. Without such a choice, cable subscribers in rural areas will

surely become victims of even deeper price gouging and poorer service by their local

cable company, and the ‘‘digital divide’’ will deepen.

In that respect, we were disappointed to see in the final days of the last congressional session that the criteria for loan guarantees would have made the incumbent

cable and phone companies eligible. This would have allowed them to more deeply

ensconce the advantage they have over consumers with no true competitive choice

to cable. We believe this would be a mistake if the ultimate policy goal is to provide

equality for rural and city dwellers alike.

Technological Obstacles That Must Be Considered

We believe one of the primary obstacles that Congress faces in seeking to provide

equality to rural subscribers is, ironically, the must-carry requirements passed by

Congress in the last session as part of the Satellite Home Viewer Improvement Act.

No single provision of the SHVIA hurts rural subscribers more. With every channel

that we must carry because of that requirement, our ability to extend local programming to additional markets is reduced by one channel. While neither EchoStar nor

the other DBS provider would, at this time, be able to serve the rest of the country

absent the must-carry provisions of the SHVIA, many more of your constituents

could receive local channels without these provisions.

For EchoStar, to be more specific, the must-carry provisions of the SHVIA mean

we serve 33 markets instead of 60. That’s the difference between 56 percent of the

population and 72 percent of the population nationwide.3 When must-carry becomes

effective, the additional 30 or so stations we may be required to carry in New York

and Los Angeles threaten to deprive consumers in 6 television markets of an effective competitor to cable. Moreover, the additional channel space that would be freed

up by not being required to carry the same Home Shopping Network channel in

every market, would mean that even more unserved markets would receive their

local television stations via satellite.

Must-carry is a law that was imposed on cable because of its monopoly status.

EchoStar is not a monopoly. Your constituents would be suffering because of a law

that, in contrast with cable must-carry, does not resolve any competitive problem.

Technological Obstacles to Serving Rural Subscribers

In addition to the legal hurdles, technological issues must be addressed in the provision of any satellite service that would carry the local broadcast signals of rural

areas.

• Additional spectrum is necessary to carry all 1,616 television stations via satellite. The FCC must identify spectrum in a band that can be used easily in

conjunction with the current DBS service, since local signals must be integrated

with the other programming offered by DBS services to be of any value to rural

consumers.

59

4 In the Matter of Redesignation of the 17.7–19.7 GHz Frequency Band, Blanket Licensing of

Satellite Earth Stations in the 17.7–20.2 GHz and 27.5–30.0 GHz Frequency Bands, and the Allocation of Additional Spectrum in the 17.3–17.8 GHz and 24.75–25.25 GHz Frequency Bands

for Broadcast Satellite-Service Use, Notice of Proposed Rulemaking, 13 FCC Rcd 19923 (1998).

• The FCC has proposed allocating another 500 MHz of spectrum in each direction to DBS, but has proposed to defer this allocation until 2007.4 This is an

excessively long period given the urgent need of rural consumers for competition

and for service. While this proposal is consistent with an International Telecommunication Union timeline for this allocation, there is no reason why the

United States could not implement that allocation earlier for the benefit of U.S.

consumers. In addition, while some of this spectrum is used by the Department

of Defense, we understand that this use can be reduced or phased out substantially more quickly. Congress could direct the FCC to allocate that spectrum on

a more expedited basis, subject to appropriate conditions relating to servicing

rural consumers.

• Assuming that more DBS spectrum could be allocated for commercial purposes,

the orbital location of such a service is key. There are three full CONUS (continental United States) locations over the United States and any satellite that

plans to carry local stations for rural subscribers must have location compatibility with those satellites. This poses a dilemma for a satellite provider of

rural local television stations because there is no one location for that provider

that enables compatibility with both EchoStar and DIRECTV.

• Then there is also the issue of the method of encryption a rural satellite service

provider might use and its compatibility with the two main service providers.

EchoStar and DIRECTV have differing proprietary encryption formats that cannot communicate with one another. A rural local satellite service provider would

either have to find a format that is technically compatible with both EchoStar

and DIRECTV, or choose one of us over the other. Technological advances may

ultimately solve this problem. We believe any service of rural local signals

should be compatible with both of the main DBS providers.

After addressing these questions, Congress should tackle the real-life question of

economic feasibility that lies at the heart of determining the appropriate level and

type of financial support. Subject to overcoming these legal and technical hurdles,

DBS would become an excellent conduit for at last bringing local signals and competition to rural subscribers.

From EchoStar’s perspective, there is the issue of whether DBS providers can expect to derive enough revenue from providing local signals in rural areas to make

a return on their investment. If EchoStar could not answer this question in the affirmative, the investment community would simply refuse to finance the construction of the very expensive additional satellite capacity required to achieve this goal.

Added to the satellite costs are the extremely high costs of ‘‘backhauling’’ the signal

of each station to the satellite uplink facility. The initial cost of establishing a local

loop of fiber in any given television market varies widely—from between $3,000 to

$50,000 per local station, depending on the city. It also costs between $120,000 and

$150,000 per station, per year to maintain that feed at an average range of cost per

market of between $480,000 to $600,000. It is difficult to imagine that in some of

the most sparsely populated areas of the country, a provider is able to gain enough

subscribers to secure a return on its investment.

Summary

We believe service to rural subscribers is an important policy goal. If Government

loan guarantees are made available, they should not be available to cable companies

seeking to further entrench their monopolies. Clearly, the aim of guaranteed loans

should be to both serve the unserved subscribers and to provide a competitive choice

for those who currently have no alternative to cable. Satellite is the most efficient

method to achieve both universal service and parity for rural dwellers in their ability to have a competitive choice. There are several resource, logistical, technical, and

economic issues to be addressed in the building and launching of a satellite to provide local signals in rural areas and these issues must be addressed before a provider can move forward. The benefit will come in not only providing video services

for rural subscribers, but in providing them with the same kinds of advanced services that, increasingly, will be available via satellite.

Thank you very much for inviting me to testify before you today. I look forward

to answering your questions.

60

PREPARED STATEMENT OF STEVEN J. COX

SENIOR VICE PRESIDENT

DIRECTV INCORPORATED, EL SEGUNDO, CALIFORNIA

FEBRUARY 1, 2000

I would like to thank you, Mr. Chairman, for inviting me to appear before the

Committee. I appreciate the opportunity to present DIRECTV’s views on the issue

of Federal loan guarantees to promote satellite delivery of local television signals

to rural areas.

DIRECTV has experienced tremendous growth since its inception 5 years ago, and

is now the leading provider of direct broadcast satellite (DBS) service in the United

States with more than 8 million subscribers, including those customers subscribing

to the PRIMESTAR By DIRECTV medium-power DBS service. Today, one in every

12 households in the United States has DIRECTV.

Before I begin, I would like to thank Congress for passing the ‘‘Satellite Home

Viewer Improvement Act.’’ While we did not agree with every provision of that legislation, on balance we viewed it as worthy of our support. Most importantly, the legislation allows satellite TV companies—for the first time—to offer local broadcast

network channels. The ability to deliver local content enables DIRECTV—again, for

the very first time—to offer consumers a service that is fully competitive with cable

television.

We at DIRECTV have moved quickly to bring the benefits of that legislation to

consumers. We have publicly stated our commitment to serve at least half of the

Nation’s TV households—about 50 million households—with local channels. As of

today, we are offering local network stations, together with a national PBS feed, in

19 major metropolitan markets. Additional markets will be added in the coming

weeks. By the end of the first quarter, we will substantially have met our commitment to serve half of the Nation’s TV households with local channels.

This hearing today is focused on those communities we are unlikely to serve with

local channels, and the potential role of Federal loan guarantees in expanding this

critical element of satellite television. I would like to be clear about DIRECTV’s position on the specific issue of loan guarantees. Our ability to broaden the delivery

of local channels will not be limited by access to capital. While the availability of

loan guarantees may create incentives for some entities to explore expanded local

channel offerings, the ultimate deployment of a widespread, satellite-based local

channel solution requires the reexamination of much more fundamental legislative

and regulatory objectives. Unfortunately, despite the tremendous consumer response

we have already received in the areas where we have launched our local channel

offering, our ability to expand the benefits of competition to additional communities

is being hampered by both statutory and regulatory obstacles. Specifically, the biggest impediment to serving additional communities is the ‘‘must-carry’’ requirement

imposed by the Satellite Home Viewer Improvement Act (SHVIA). Even absent that

constraint, we are ultimately limited by the spectrum allocated to us by the Federal

Communications Commission (FCC). Let me explain.

Unlike cable operators, which have the ability to increase their channel capacity

indefinitely, DBS providers face very tangible channel capacity constraints. There

are only three DBS orbital slot locations that are ‘‘full-CONUS’’—that is, capable

of serving the entire continental United States. All of the frequencies at those three

orbital locations have been licensed by the FCC to DIRECTV and EchoStar. Using

digital compression, today we are delivering about 210 channels of programming to

subscribers nationwide. That includes entertainment programming, such as CNN,

A&E, Discovery, Nickelodeon, and, of course, C-SPAN; sports programming, such as

ESPN and regional sports networks; ethnic programming; public interest programming we are required to carry; pay-per-view movies; and special events. In addition,

today we are retransmitting more than 75 local broadcast stations to subscribers in

the stations’ local markets.

The must-carry provision, enacted into law last November as part of the SHVIA,

requires us to carry every full-power local broadcast station in a market in which

we offer any local channels no later than January 1, 2002. This means that we have

to use our limited satellite capacity to deliver stations for which, frankly, there is

negligible consumer demand. For example, in both New York and Los Angeles, we

could be required to carry up to 23 stations. Many of these stations have, based on

their ratings, minuscule audiences. Carrying such a station is a poor use of our limited satellite capacity. The practical implications of this requirement are clear: By

imposing must-carry, Congress has decided that it’s much more important for us to

carry all 23 stations in New York and Los Angeles than to offer the residents of

61

cities such as Buffalo, Harrisburg, Louisville, Mobile, Omaha, and Providence even

a single channel of local content.

In order to maximize the local channel opportunity, we have ordered a new highpower spot-beam satellite. A spot-beam satellite will enable us to make the most efficient use of our existing capacity. I can tell you that we would much rather use

that new satellite to extend our local channel offering to additional, smaller markets

than to use that satellite to deliver little-watched channels in markets in which we

have already substantially satisfied consumer demand for localism.

Even if we were to get relief from the must-carry obligation, we still would not

have sufficient available capacity to provide local channels in all 210 television markets in the United States. For direct broadcast satellite to become the full-fledged

competitor to cable that Congress desires, we need more spectrum. To achieve this

objective, we would urge Congress to direct the FCC to make additional spectrum

available to the DBS providers, which could be used to bring local channels to those

markets we cannot serve with our existing limited capacity. Because of the substantial costs associated with the delivery of local channels, the only way to make this

concept economically workable is for the additional spectrum to be made available

to the DBS providers at no cost. In addition, the DBS providers must be able to use

the spectrum both for providing local channels, and for other more financially remunerative services. The hundreds of millions of dollars required to build, launch, and

operate satellites to use the additional spectrum couldn’t be justified if those satellites could only be used to provide services from which we would never see a profit,

or even break even. But if we were, in essence, allowed to underwrite the cost of

bringing local channels to rural markets by providing other services with the spectrum, we believe it could be a financially viable proposition.

I would point out that more than 21⁄2 years ago, DIRECTV filed a petition for

rulemaking seeking additional spectrum to expand our channel capacity. Unfortunately, that petition has sat at the Commission without action. If that petition were

to be granted, it would allow both DIRECTV and EchoStar to gain access to additional spectrum that could be used to serve additional markets with local channels.

As I indicated at the outset, the presence or absence of Federal loan guarantees

will not impact DIRECTV’s incentive or ability to expand the delivery of local channels. Should Congress decide, however, that a Federal loan guaranty program is desirable, I would offer the following comments. First, I believe Members of Congress

should clearly identify the problem that they are attempting to address. Is it to ensure that the 3 percent or so of U.S. households that today do not have access to

local broadcast channels either via an over-the-air antenna or cable can gain access

to their local channels? Or is it to ensure that consumers in rural areas will have

the same choice of a fully competitive DBS provider as their friends who happen

to reside in the most populous cities? The program should be tailored to address the

problem identified by Congress.

Additionally, to the extent that Congress is trying to ensure that rural and urban

consumers have the same choices when it comes to selecting a multichannel video

provider, I would suggest that a terrestrial or other nonsatellite-based provider of

local channels does not meet that goal. A fundamental premise of the recently enacted local-into-local legislation is that consumers do not find the delivery of local

channels via a separate delivery mechanism, such as an over-the-air television antenna, to be the equivalent of a single delivery mechanism—such as that used by

cable operators—to deliver both local channels and cable programming. Thus, only

the satellite delivery of local channels, in a manner that is compatible with the existing DBS services, will meet the expectations of consumers who are unwilling or

unable to put up an over-the-air television antenna and will ensure that rural and

urban consumers have equivalent video delivery choices.

Finally, to the extent that Congress decides to create a Federal loan guarantee

program, we believe that taxpayer funding should be used to complement, rather

than compete with, service being provided without the benefit of taxpayer subsidies.

In other words, those who obtain Federal loan guarantees should be permitted to

provide local channel service only in markets where that service is not being provided by the commercial DBS providers.

We look forward to working with Congress to advance these important objectives.

Thank you again for the opportunity to testify.

62

63

PREPARED STATEMENT OF GREGORY L. ROHDE

ASSISTANT SECRETARY FOR COMMUNICATIONS AND INFORMATION

NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION

U.S. DEPARTMENT OF COMMERCE

FEBRUARY 1, 2000

Thank you, Mr. Chairman, for inviting me to testify before this Committee on providing loan guarantees to providers to carry local broadcast signals to residents of

small, rural local broadcast markets. The Administration believes that the question

of how consumers in small and rural markets receive local news and information

is very important and deserving of congressional attention.

I can recall well the night the Senate passed the Omnibus Appropriations Act and

discussed a proposal to provide loan guarantees for carriers to provide local-intolocal broadcast coverage to small and rural markets. I was struck by the fact that

when this Administration took office back in 1993, there were no operational direct

broadcast satellites (DBS) providing service to viewers. In 1993, there never could

have been a debate like that which embroiled the Senate last November over the

question as to how small and rural markets would get local-into-local service over

satellite systems. Today, there are more than 11 million DBS subscribers. DBS companies are providing local-into-local service in 24 markets and are currently negotiating for the rights to deliver local-into-local broadcasting in 20 more. The question

remains, however, as to how viewers in the remaining 200 or more television markets obtain access to local-into-local service.

The Administration strongly supported provisions in the Satellite Home Viewer

Improvement Act (SHVIA) that provided authorization to satellite providers to carry

local-into-local broadcast programming. The Administration firmly believes that authorizing local-into-local service not only promotes greater access to local television

signals for all Americans, but also strengthens DBS providers’ ability to provide

meaningful competition to cable with comparable program offerings. Unfortunately,

markets in which local-into-local broadcasting over satellite systems is not offered

will be less likely to enjoy the same competitive benefits. Moreover, in some rural

areas, there is no multichannel video programming supplier offering local broadcast

signals and many of these communities lay outside of the signal coverage area of

their local broadcast stations.

For these reasons, the Administration believes that it is important to find ways

to ensure that consumers in rural and small markets have access to local broadcast

programming. The Administration is prepared to work closely with the Congress on

any proposal to address this issue, including a loan guarantee proposal. We believe

that these three principles should guide such legislation. First, the Administration

believes that any new program should be technology neutral in recognition of the

fact that different technologies may best be suited to deliver local broadcasting services to unserved areas in different parts of the country. Technology neutrality can

spur innovation and the application of new technologies to address this problem.

Second, the program should be crafted to ensure that it promotes competition in the

multichannel video programming market and encourages future private investment

in infrastructure. Finally, the program should demonstrate fiscal responsibility by

conforming to Federal credit program policies, which minimize Federal exposure to

loss and ensure the least expensive, most efficient financing of federally guaranteed

loans.

The Administration also believes that the discussion over ensuring local-into-local

broadcast programming in the digital era should not be limited to the loan guarantee approach. Thus, the NTIA announced that it will publish a Federal Register

notice to solicit public comments and suggestions as to how viewers in small and

rural markets can receive local broadcast signals. All comments will be posted on

the NTIA’s Web site (http://www.ntia.doc.gov). As part of this effort, I intend to host

a roundtable discussion in early March with various stakeholders—consumers, industry representatives, policymakers, and technology experts—to explore ways in

which small and rural markets can have access to local programming via satellite

and other technologies. Our efforts in this area are intended to complement the congressional action and efforts by the Federal Communications Commission to examine this question as required under the SHVIA. Our intent is to help raise visibility

on this issue and contribute to the debate.

Extending the reach of local broadcasting and its crucial news and information

has been a longstanding goal of the NTIA. The agency administers the Public Telecommunications Facilities Program (PTFP), which provides grants to establish and

extend the reach of local public television and radio stations into unserved areas.

Since 1962, the program has been a major factor in the Nation’s success in bringing

64

local public television stations to rural areas—through the establishment of fullpower stations, as well as the construction of television translators and repeaters.

The PTFP estimates that approximately 94 percent of all Americans can receive at

least one free, over-the-air public television signal from a local PBS member-station.

The preservation of local broadcasting in the digital era is vitally important and

ensuring that viewers in small and rural markets are included in this new age is

critical. The Administration pledges its support to advance the goal of extending the

reach of local broadcasting to all Americans and looks forward to working with the

Congress on the loan guarantee proposal as well as exploring other approaches to

this issue. We would appreciate the opportunity to provide comments on any specific

legislative proposal.

Thank you very much. —————

PREPARED STATEMENT OF CHRISTOPHER McLEAN

ACTING ADMINISTRATOR, RURAL UTILITIES SERVICE

U.S. DEPARTMENT OF AGRICULTURE

FEBRUARY 1, 2000

Mr. Chairman and Members of the Committee, it is an honor to testify today on

the idea of a new loan guarantee program to finance the delivery of local television

programming to subscribers of satellite television in rural and small markets. The

U.S. Department of Agriculture (USDA) appreciates the Committee’s concern, both

in the existing coverage of rural access to local broadcasting and the possibility that

developing technologies can broaden that problem.

The Rural Utilities Service (RUS) is a rural development agency of the USDA. We

administer a $42 billion loan portfolio of more than 9,000 loans for telecommunications, electric, and water and wastewater infrastructure projects throughout rural

America. Our agency also administers the Distance Learning and Telemedicine loan

and grant program and is a leading advocate for rural consumers before Federal and

State regulatory bodies.

The RUS Record of Success

For nearly 65 years the REA and RUS have been empowering rural America. Just

this last October, the RUS telecommunications program celebrated its 50th anniversary. In those 50 years, the RUS telecommunications program has helped close the

digital divide in rural areas. The telecommunications program has maintained an

unprecedented level of loan security over the history of the program.

Since 1993, the RUS has financed more than $1 billion in fiberoptic facilities and

more than $725 million in digital switching for telecommunications companies and

cooperatives serving rural areas. In 1999 alone, the RUS provided nearly $500 million in financing for rural telecommunications infrastructure. In addition, since its

inception in 1993, the RUS Distance Learning and Telemedicine (DLT) program has

provided $83 million in funding to 306 projects in 44 States and two territories.

The RUS is fortunate to have an accomplished corps of engineers, accountants,

financial specialists, and rural infrastructure experts. I am confident that the RUS

has the necessary skills to administer new initiatives that will bring the benefits

of the information revolution to all America.

The Need for Local Access

For America’s rural residents, access to television signals has long been a challenge. Distance and geography have been significant impediments to the reception

of consistently viewable broadcast signals. While cable television is available in many

rural towns, it does not reach America’s most rural citizens.

Since its inception, satellite-delivered television and now direct broadcast satellite

services have provided increased access for communications services to rural residents. Satellite television gave America’s many rural residents first time access to

vital sources of news, information, educational programming, entertainment, and

sports. As good as these services were, satellite services did not connect rural residents to their local communities.

The amendments in 1999 to the Satellite Home Viewer Act (SHVA) dramatically

changed the dimensions of satellite service by giving carriers the right to deliver

local television signals to viewers via satellite. However, that legislation limited the

ability of these carriers to deliver distant network programming to consumers.

Since the enactment of the SHVA amendments, satellite broadcasters have announced significant new initiatives to provide local signals to viewers. Current satellite carriers are offering ‘‘local-into-local’’ service mainly to larger urban markets.

There is little evidence that under current conditions significant ‘‘local-into-local’’

65

offerings will be made in the markets below the 40 largest markets. The smaller

the market, the more rural residents will be impacted.

Once the amendments to the SHVA are fully implemented, many rural residents will likely lose their ability to purchase distant network signals. Many will still be

unable to receive a suitable signal via antennae from their local broadcaster. Given

the capacity limitations of current satellite providers, and the cost of nationwide

local-into-local service, it is doubtful that current carriers will provide local signals

to many smaller markets. The availability of local programming will become more problematic as the tele- vision industry converts to a digital system of signal delivery. The propagation of

digital signals is different from analog signals. Analog signals fade out with distance

from the transmitters. Digital signals drop off suddenly. The likely result is that

some current rural viewers of broadcast television may lose their ability to receive

a viewable signal once the conversion to digital is complete. Without the ability to retain and perhaps expand their viewer base, rural broad- casters may not have the financial ability to upgrade their systems. Once digital

conversion is complete, the technology will make it likely that rural viewers will be

able to receive fewer channels over a conventional TV antenna than currently available in analog mode.

Ensuring Public Safety

Access to a full range of news, weather, sports, entertainment, and information is certainly important to maintaining and enhancing rural quality of life. But maintaining expanding access to the most local sources of news, weather, and information is critical to rural public safety. The 1999 violent tornado season, and recent

weather events such as this months’ back-to-back winter storms in the South and

East, highlight the importance of local television as a means of disseminating lifesaving information. Linking local residents to their communities of interest is also important to main- taining and enhancing the vitality of the local rural economy and civic life. From

both an educational standpoint and one of public safety, it is in the public interest

that rural citizens have access to local and network programming. Rural America

should not fall into a new digital divide: either as a result of the amendments to

the SHVA or the coming conversion to digital television.

Loan Guarantees

The delivery of local signals to rural viewers will require significant infrastructure

investment, regardless of the technology utilized. RUS loans, loan guarantees, and

grants have helped bring modern electric, telecommunications, and water infrastructure to the 80 percent of America that is rural. This public-private partnership has

been the hallmark of rural infrastructure investment. The RUS is capable of helping

rural America meet this new infrastructure challenge.

We welcome the opportunity to comment on any specific legislative language and

look forward to working with the Committee. We believe that legislation should be

technologically neutral, should expand consumer choice, and be consistent with Federal credit policies.

Conclusion

Preserving and enhancing access to local and network television signals is important not only for rural quality of life, but for rural public safety and community.

Linking rural viewers to more local signals will also enhance the economics of rural

broadcasting and their rural advertisers. Moreover, the infrastructure necessary to

deliver ‘‘local-into-local’’ services, regardless of mode, can bring new broadband capacity to rural areas. Just as the Rural Electrification Administration helped rural

America become part of the national economy, the Rural Utilities Service can help

rural America thrive in the information age.

Thank you, Mr. Chairman. —————

PREPARED STATEMENT OF WILLIAM ROBERTS

SENIOR ATTORNEY, U.S. COPYRIGHT OFFICE

FEBRUARY 1, 2000

Mr. Chairman and Members of the Committee, the Copyright Office thanks you

for this opportunity to appear before the Committee to discuss the provisions of the

recently enacted Satellite Home Viewer Improvement Act. Before discussing the provisions of that Act, it is useful to provide a brief background on the legal regime

governing copyright licensing for satellite retransmissions of over-the-air television

broadcast signals.

66

The satellite home dish industry had humble beginnings with the introduction in 1980 of the home satellite dish. These large C-band dishes, which originally cost

thousands of dollars, were initially marketed to people in rural areas of the country

who did not have access to cable television and who could receive few, if any, overthe-air television signals. Owners of these dishes were not required to pay programming fees because satellite signals at that time could be received for free. However,

as broadcasters became aware of the C-band dishes, they began to scramble their

satellite signals, forcing dish owners to program packagers who would sell them the

programming they desired in the same way that cable operators sell programming

to their subscribers. These program packagers, who were typically the same concerns that sold the dishes as well, needed to clear the copyrights to the broadcast

signals that they were delivering to their customers. In 1986, satellite providers first

approached the Congress seeking creation of a compulsory license under the copyright law, similar to that enjoyed by the cable television industry, that would allow

them to easily license broadcast programming without engaging in costly face-toface negotiations with the copyright holders of each and every broadcast program. In 1988, Congress responded to satellite providers’ requests by passing the Satel- lite Home Viewer Act of 1988. The 1988 Satellite Home Viewer Act created a 6-year

statutory compulsory copyright license, codified at section 119 of Title 17, U.S. Code,

that allowed satellite providers to clear all copyrights to programming contained on

over-the-air television broadcast stations. This was accomplished through a semiannual submission of royalty fees and statements of account to the Copyright Office.

Royalty fees were calculated on a per subscriber, per month basis. The Office took

the deposited fees and distributed them to copyright holders of the programming retransmitted by the satellite providers. While the section 119 satellite license provided satellite carriers with a simple

mechanism for clearing copyrights, it did place restrictions on satellite’s ability to deliver network signals to their subscribers. Because the satellite industry lacked

the technological capability of providing subscribers with their local network affiliates, satellite carriers were forced to provide their subscribers with network stations

taken from distant markets. Thus, for example, a satellite subscriber residing in

Montana would receive the network affiliates from Los Angeles and New York, as

opposed to network stations from Montana.

This did not please the local network affiliate where satellite subscribers resided,

because such subscribers would watch the signals of distant affiliates rather than

the local signal. As a result, Congress limited the section 119 compulsory license for

network signals to only those subscribers who resided in ‘‘unserved households.’’ If

a subscriber did not reside in an ‘‘unserved household’’ with respect to a particular

network, then a satellite carrier providing a distant station of that same network

was liable for copyright infringement. An ‘‘unserved household’’ was a subscriber

who, through the use of a conventional outdoor rooftop receiving antenna, could not

receive an over-the-air signal of Grade B intensity from the local network station.

‘‘Grade B’’ is a measurement of the strength of a television signal as it arrives at

a subscriber’s rooftop antenna.

As the satellite industry grew throughout the late 1980’s and early 1990’s, satellite began to move from rural areas of the country into the cities. Several factors

brought about this occurrence, including reduction of the costs of satellite service,

the greater numbers of potential subscribers in urban areas, and the introduction

of direct broadcast satellite (DBS) service. With DBS, which provides digital quality

service using small, dinner plate-sized dishes, consumers in urban areas could subscribe to satellite without the attendant difficulties associated with the placement

of a large C-band dish. Unfortunately, with the migration of satellite from rural into

urban areas, the potential increased for violations of the ‘‘unserved household’’ restriction of the section 119 license.

Congress addressed this problem in the Satellite Home Viewer Act of 1994. In addition to extending the section 119 compulsory license for an additional 5 years,

Congress implemented a transitional challenge scheme designed to weed out those

subscribers who did not reside in ‘‘unserved households,’’ yet nevertheless were receiving the satellite network service. For a 2-year period (1995–1996), local network

broadcasters could issue written challenges to satellite carriers who were serving

subscribers with distant network stations inside the local broadcaster’s Grade B contour. A ‘‘Grade B contour’’ is the geographic area in which it is predicted that a consumer with an outdoor rooftop receiving antenna can pick up a signal of Grade B

intensity from the local network broadcast station.

When a satellite carrier received a written challenge with respect to a particular

subscriber, the carrier had two options under the 1994 amendments. The carrier

could turn off the subscriber’s network service, or conduct a test at the subscriber’s

household to determine if the subscriber did in fact receive a signal of Grade B inVerDate 11-MAY-2000 10:27 Jan 19, 2001 Jkt 000000 PO 00000 Frm 00070 Fmt 6621 Sfmt 6621 69308.TXT SBANK3 PsN: SBANK3
67

tensity. The cost of the test would be allocated to the satellite carrier or the local

broadcaster, depending upon the outcome (a ‘‘loser pays’’ provision). Unfortunately, because of the up-front costs associated with conducting household tests, virtually

no tests were performed, and many subscribers lost their satellite network service

whether or not they resided within an ‘‘unserved household.’’ And many satellite carriers continued to sign up urban subscribers and provide them with network signals regardless of their ‘‘unserved household’’ status. These activities prompted certain broadcasters to file copyright infringement lawsuits against certain satellite

carriers. Broadcasters were successful in these suits across the board (there is still

one pending), and many satellite subscribers lost their network service as a result

of injunctions handed down by the courts. At the end of last year, the section 119 compulsory license was again slated to expire, and Congress again had to address the quandary of ‘‘unserved households’’ and when a satellite subscriber should be eligible for network service. Fortunately,

for the first time, there appeared a technological solution to the problem. Because

of advances in the DBS industry, it was now possible for DBS providers (EchoStar

and DIRECTV) to provide satellite subscribers with the television broadcast signals

they most wanted to see: their local TV stations. But such service of local signals

is not nationwide. Currently, only those subscribers who reside in large television

markets (which, because of their population, represent the greatest number of potential satellite subscribers) can receive their local network signals. While these

companies plan to expand their service of local signals in the future, it may be that

neither company will serve all 211 television markets across the United States with

local signals. Nevertheless, with the potential of local service as a cure to the headache of the ‘‘unserved household’’ restriction, Congress enacted the Satellite Home Viewer Im- provement Act of 1999 and created a new, permanent compulsory license for satellite carriers, codified at section 122 of Title 17, U.S. Code, for the carriage of local

television stations. Moreover, Congress extended for another 5 years the section 119

license for the retransmission of distant broadcast signals and amended the communications law to prescribe must-carry and retransmission consent rules for the satellite industry. Although satellite retransmission of local signals is the long-term solution to the ‘‘unserved household’’ conundrum, it was still necessary to address the issue of when a subscriber is eligible to receive distant network stations from a satellite carrier.

The Satellite Home Viewer Improvement Act approaches the problem in several

ways. First, the Act grandfathers until December 31, 2004 those DBS subscribers

who lost their satellite network service between July 11, 1998 and October 31, 1999

as a result of the lawsuits filed by broadcasters against certain satellite carriers.

In addition, those subscribers who continued to receive satellite service of distant

networks on October 31, 1999 are also grandfathered, regardless of whether they

reside in an unserved household. This grandfathering provision, however, only applies to subscribers who reside outside the Grade A contour of the local network station. The ‘‘Grade A contour’’ is a geographic area, within the Grade B contour of

a station, where a signal of Grade A intensity can be received by a consumer with

a rooftop antenna. A signal of Grade A intensity is more powerful than a signal of

Grade B intensity, and typically covers the area in and around the broadcaster’s

transmitter, as well as the broadcaster’s city of license.

Second, the Act grandfathers all satellite network subscribers using the old-style

C-band dishes, regardless of their location, provided that the subscriber lost network

service prior to October 31, 1999.

Third, the Act directs the Federal Communications Commission to deliver a report

to Congress by November 29, 2000, recommending any changes to the Grade B signal standard that will improve over-the-air receipt of television broadcast signals.

Fourth, the Act provides that the ‘‘unserved household’’ restriction does not apply

to recreational vehicles and certain commercial trucks.

Finally, the Satellite Home Viewer Improvement Act provides an avenue of relief

for the subscriber who resides in a household that is predicted to receive an overthe-air signal of Grade B intensity, but for some reason does not actually receive

such a signal (perhaps a building or stand of trees blocks the subscriber’s receipt

of a Grade B signal). Such a subscriber may submit a waiver request, through his

or her satellite provider, to the local network affiliate asking permission to receive

a distant affiliate of that same network from the satellite provider. Upon receipt of

the waiver request, the local broadcaster has 30 days in which to grant or reject

the request. If the broadcaster does not respond within the 30 days, the waiver is

deemed granted. If the broadcaster rejects the request, the subscriber may insist

that the satellite provider conduct a test at the subscriber’s household to determine

if the subscriber actually receives a signal of Grade B intensity from the local netVerDate 11-MAY-2000 10:27 Jan 19, 2001 Jkt 000000 PO 00000 Frm 00071 Fmt 6621 Sfmt 6621 69308.TXT SBANK3 PsN: SBANK3
68

work broadcaster. Like the 1994 Satellite Home Viewer Act transitional provisions,

the costs of the test are borne by the loser of the test (either the carrier or the

broadcaster). However, unlike the 1994 Act, the subscriber has the right to insist

that a test be conducted. It is expected that the waiver provision of the 1999 Satellite Home Viewer Improvement Act will provide a real mechanism for determining

whether a satellite subscriber can receive a distant network station or is required

to watch the local over-the-air signal. The section 119 compulsory license for distant signals, and the section 122 com- pulsory license for local signals, comprise the copyright licensing scheme for the retransmission of television broadcast stations by satellite carriers. It is important to

note that while the Satellite Home Viewer Improvement Act has created this elaborate licensing mechanism, copyright owners and satellite carriers are always free to

negotiate their own licensing agreements outside the compulsory license. In fact, the

Copyright Office continues to support marketplace negotiation of copyright licenses

and opposes compulsory licenses. We address the other two elements of the Satellite Home Viewer Improvement

Act, must-carry and retransmission consent for satellite, but only briefly because

they are communications, rather than copyright provisions. The Act imposes a mustcarry requirement, similar to that applicable to the cable industry, on all satellite

carriers retransmitting local broadcast signals on or after January 1, 2002. Under

must-carry, a satellite carrier will be required to retransmit all eligible local stations

to subscribers, and not just network stations, as is the current practice. The Federal

Communications Commission has until the end of November 2000 to adopt regulations implementing the must-carry obligation. The Satellite Home Viewer Improvement Act also establishes retransmission consent for certain local broadcasters for satellite retransmissions of their signals. ‘‘Retransmission consent’’ is a right granted to a broadcaster whereby the broadcaster has the option of deciding whether to allow a retransmission provider to carry its

station. Retransmission consent has applied to cable operators carrying broadcast

signals since 1993 and will become effective against satellite carriers in May 2000.

The Federal Communications Commission is currently in the process of fashioning

rules governing the terms and conditions under which retransmission consent must

be sought and may be granted. This is the background and regulation of the satellite industry from the copyright perspective. We are pleased to answer any questions.

—————

PREPARED STATEMENT OF DALE N. HATFIELD

CHIEF, OFFICE OF ENGINEERING AND TECHNOLOGY

FEDERAL COMMUNICATIONS COMMISSION

FEBRUARY 1, 2000

Mr. Chairman and Members of the Committee, thank you for the opportunity to appear before the Committee today to discuss current Federal communications law

and technical and other issues related to the transmission of local television signals

to rural areas of the country. Before I begin, I want to clarify that the views I express today are my own, and may not necessarily reflect the views of the Federal

Communications Commission (FCC or Commission).

SHVA Provisions

First, I want to provide an overview of the most relevant, communications-related provisions of the Satellite Home Viewer Act (SHVA), enacted in 1988, and the more

recent Satellite Home Viewer Improvement Act (SHVIA), enacted last November.

Congress enacted the Satellite Home Viewer Act to establish a limited exception to the exclusive programming copyrights held by television networks and their affiliates. It did so because it recognized that some households were unable to receive

network signals directly over-the-air. The exception permitted satellite carriers to

transmit local TV signals to ‘‘unserved’’ households. The SHVA defined an ‘‘unserved

household’’ as one that ‘‘cannot receive, through the use of a conventional outdoor rooftop receiving antenna, an over-the-air signal of Grade B intensity (as defined by

the Federal Communications Commission).’’ Last February, the Commission provided consumers as well as industry with a uniform method for measuring the signal strength at individual locations that was

much simpler than the method previously contained in the Commission’s rules. In

addition, last February, the Commission endorsed a computer model for predicting

Grade B strength in lieu of making actual measurements. Known as the ‘‘Individual

Location Longley-Rice’’ or ‘‘ILLR’’ model, and similar to the point-to-point predictive

69

model the Commission had established for digital television (DTV) allocations, the

model provided a practical and readily available methodology for predicting signal

intensity at individual locations.

SHVIA Provisions

In November 1999, the Congress enacted the Satellite Home Viewer Improvement

Act (SHVIA) to foster competition in the multichannel programming video distribution (MPVD) market and increase programming choices for consumers. The SHVIA

amended the copyright law to authorize satellite carriers to retransmit local TV signals to all consumers in a station’s local market. (This is commonly referred to as

‘‘local-into-local’’ service.) Until May 29, 2000, satellite carriers can deliver local signals without local broadcasters’ permission; after that date, such permission is required. The SHVIA also requires the FCC to take all actions necessary to make a

determination regarding licenses or other authorizations that will utilize spectrum

otherwise allocated to commercial use for the delivery of local signals to satellite

subscribers in unserved and underserved local markets, and to issue a report to

Congress by January 1, 2001 on the extent to which such actions have facilitated

delivery into unserved and underserved markets. The SHVIA also continues to authorize satellite providers to retransmit distant network signals (i.e., signals originating outside a subscriber’s local television market) to unserved households, and

grandfathers many satellite subscribers who would otherwise not be eligible to receive distant network service.

The SHVIA continues to link the definition of ‘‘unserved household’’ to the FCC’s

definition of Grade B signal strength. However, under the new law the Commission

is required to complete an inquiry to determine whether the Grade B standard continues to be appropriate for determining eligibility for distant network service, report its findings to Congress, and, if appropriate, recommend modifications of the

Grade B standard. (Although the statute requires that this inquiry be completed by

November 29, 2000, the Federal Communications Commission intends to complete

this inquiry by June 1, 2000.)

The SHVIA also requires that, by May 27, 2000, the Commission amend its rules

to establish a predictive model for determining whether consumers at individual locations can receive signals of Grade B intensity. The SHVIA specified that the Commission should rely on the ILLR predictive model it endorsed last February, but

that improvements should be made to account for terrain, buildings, and other land

cover variations. The SHVIA further requires that the Commission establish procedures for continued refinement in applying the ILLR model as additional data become available. The Commission released a Notice of Proposed Rulemaking seeking

comment on these issues on January 20, 2000.

Technological Options

With this overview of the SHVA’s and SHVIA’s provisions related to local-intolocal service and of the Commission’s role in its implementation, I want to discuss,

first, the various technological options for delivery of television signals to unserved

and underserved rural areas, and second, some of the economic, technical, or other

barriers or limitations on the viability of those options to provide service to these

areas. At the outset, I want to stress that the goal of providing local television programming throughout our country presents significant technical challenges. These

challenges stem from the sheer size of our country, areas of rugged terrain, and

sparse and isolated populations in some regions.

Advances in communications technology, however, provide a variety of options to

address the goal of providing local broadcast service to rural areas. While no one

technology may be able to solve the entire problem, multiple technologies can be

used in combination to achieve the goal of universal coverage. Local television markets (referred to as ‘‘designated market areas’’ or ‘‘DMA’s’’ as defined by Nielsen

Media research) vary greatly in size, for example, from the whole State of Utah to

much smaller areas in Laredo, Texas, or Salisbury, Maryland. Terrain varies also

from the appropriately named Great Plains to the ruggedness of the Rockies and

Appalachia. Serving isolated small towns is a very different problem than serving

isolated farms. Different geographical situations in all probability will demand different technical solutions.

The existing direct broadcast satellite (DBS) systems in the 12 GHz band, such

as DIRECTV and EchoStar, provide MPVD to nearly the entire continental United

States. In addition, existing DBS providers have begun to provide local programming, but only in the larger markets. This is so even though existing DBS systems

were not constructed and deployed with the intention that they would provide local

broadcast programming. Present DBS systems generally cover either the whole or

half of our country. If such a system is used to transmit a local signal, only users

70

in a very small part of its footprint can receive the local signal because, under the

SHVIA, only users in the local DMA are authorized to receive the signal, while

those outside that DMA are precluded from accepting the signal. Moreover, because

present DBS systems are not equipped for frequency reuse throughout their footprints, the power used to transmit to those portions of the satellite’s footprint that

are outside of the DMA would be wasted. While DBS systems can provide 200 or

more channels of programming, to provide all of the local channels in every market

throughout the country would require more channels than is feasible with currently

deployed satellite hardware and existing spectrum. A new generation of satellites, however, is coming which uses ‘‘spot beams,’’ or more focused transmissions from satellite to earth that cover a much smaller area.

With this technology, the same downlink frequency can be reused numerous times

across the country. This not only increases the capacity of the satellite in terms of

the total number of different signals that can be distributed, but the more focused

beams also reduce the power required per signal. Spot-beam technology does require

larger antennas on the satellite. Thus, what is now a 90-inch antenna on the satellite must be replaced by one that is four to five times larger. However, such large

antennas are achievable with today’s technology. The multichannel multipoint distribution service (MMDS) is the FCC’s designa- tion for a terrestrial fixed wireless service utilizing the 2.5 GHz band of the radio

spectrum whose potential uses include multichannel video distribution. Some of this

spectrum is shared with educational users, but FCC rules permit sharing by educational and commercial users and many such agreements have been reached. In

the past, ownership of MMDS channels was fragmented and it was difficult to assemble a multichannel package that would be attractive to viewers, but industry

consolidation along with significant gains in capacity due to digital compression

techniques now make such packaging practical. Many of the new owners of MMDS

systems, however, see Internet access as a more viable product than video distribution, so it is unclear in what direction the MMDS technology is moving. The local multipoint distribution service (LMDS) is our designation for a fixed wireless access system that operates in the 28 GHz range of the radio spectrum.

Because we have allocated over 1,000 MHz of spectrum for this service, LMDS systems are capable of providing a broadband array of two-way voice, data, and video

services. Because of the high microwave frequencies involved, the range of LMDS

systems is limited to relatively short distances (a few miles) over relatively unobstructed paths. The LMDS is in the early stages of development and the initial focus

seems to be on serving business users in urban locations. However, over time, the

LMDS may find applications in smaller communities as a way to provide broadband

services, including the distribution of television stations. TV translators have traditionally been used in rural areas to extend television coverage. These translators receive a signal on one channel and shift or translate

it to another channel for local distribution. For example, if an intervening ridge or

mountain blocks reception of a signal, a translator can be placed on the top of the

mountain (where reception is good) and used to relay the signal into the otherwise

shielded area. Some translators are owned by originating stations, while others are

owned by organizations in rural areas. Translators can be an economical solution

to extending coverage in small towns and isolated areas when advantageous locations can be found. However, the ongoing transition to DTV complicates the issue

of finding frequencies for new translators, especially in areas bordering on metropolitan areas. (I will have more to say about the DTV transition shortly.)

In areas where TV transmission is limited primarily by distance (as opposed to

mountainous terrain) and where population density is low, the use of better performing receiving antenna systems at residences may be the most cost-effective method

of expanding local television station coverage. Improved reception can be achieved

by using larger antennas, higher towers, and/or antenna preamplifiers.

Cable antenna television (CATV) technology is another technology which has the

potential to deliver local television broadcast signals to unserved and underserved

parts of the country. The data available to us indicate that cable television service

is currently available to about 97 percent of the 100 million television households

in the country. However, because this is a national figure, there are certainly some

rural and other remote areas of the country where cable service is not as widely

available. For example, in some States, such as Montana, Texas, and Wyoming, that

have large rural areas with relatively low population densities, the percentage of

households that have access to cable service is considerably less than the national

average.

Two ongoing developments may enable cable television operators to make new inroads in rural and small communities. First, as is the case throughout much of the

communications industry, cable operators are using fiberoptic technology to upgrade

71

and, in some cases, extend their facilities. Second, as the cable industry deploys

state-of-the-art technology, it is also attempting to transform itself into a full service

supplier of communications services—voice and data, as well as video. As the industry makes this transition and as consumer demand for advanced communications

services grows, cable operators may have new economic incentives to serve rural

and small communities currently beyond their reach.

As you evaluate the most effective means to deliver local broadcast service to

rural America, it is also important to recall that cable television operators are the

only multichannel video programming distributors that have a statutory obligation

to provide local television signals to their subscribers. In addition, cable operators

are required by law to provide their customers with local broadcast service before

any other video service.

I would further point out that, like cable companies, local telephone companies are

employing fiberoptic technology to upgrade and, in some cases, extend their systems

to more distant groups of users. These systems also have the capability of carrying

video signals, and because of increased consumer demand for advanced services,

telephone companies have very similar incentives to extend their coverage into rural

America.

Finally, I would note that several new technologies have been proposed that hold

out the potential to serve rural and isolated areas of our country. Some of these proposals have been submitted to the FCC for authorization. The Commission will address these requests in a fair manner and as expeditiously as possible, bearing in

mind the goal we all share to provide coverage to unserved and underserved areas

of the country.

Digital Television Transition

All of these approaches are somewhat complicated by the ongoing conversion of

television broadcasting from the present analog National Television Systems Committee (NTSC) technology to digital television (DTV). During this transition, all stations will continue with their present NTSC signal. DTV signals will be phased in,

starting in the largest markets, at the same time on different frequencies. Thus, at

the end of the transition now scheduled for 2006, there will be twice as many signals as at present. Further, the flash cut over to DTV when the transition period

ends could be very disruptive if DTV is not phased in appropriately. Finally, while

the transition is scheduled to end in 2006, legislation requires that it be extended

if certain milestones related to new DTV receiver sales are not met. This uncertainty also complicates the selection of options to extend rural coverage.

Conclusion

In conclusion, I want to express my gratitude to the Committee for the opportunity to appear before you today. FCC Chairman William Kennard has consistently

advocated the deployment of communications services in rural America and, in fact,

was one of the early proponents of local-into-local legislation. Chairman Kennard is

also committed to implementing the provisions of the SHVIA in an effective and an

expeditious manner. Indeed, the Commission has already initiated or has completed

two SHVIA implementation proceedings well ahead of the deadlines called for in the

SHVIA statute. The first rulemaking proceeding proposed rules related to the goodfaith standard to negotiate retransmission consent agreements, and the second proceeding has already adopted procedural rules to process complaints alleging that

satellite providers have retransmitted signals without broadcasters’ consent.

In sum, the FCC is ready to work with Congress, with the NTIA, the Copyright

Office, the Rural Utilities Service, and others to improve television service to rural

America.

Thank you very much.

72

RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMS

FROM RICHARD SJOBERG

Q.1. The primary Federal agency governing the cable industry is the Federal Communications Commission. However, the loan guarantee program that was developed last year assigned responsibility

for this program among several agencies including the Rural Utilities Service (RUS) and the National Telecommunications Information Agency (NTIA). Are you confident that these agencies will be

attentive to the unique needs of the cable industry?

A.1. While I do not have a position about which agency is most qualified to oversee the loan guarantee program, the chosen agency

should be knowledgeable about the cable industry and sensitive to

its economic, technical, and service characteristics. I’m certain that

whichever entity Congress chooses will be responsive to congressional directives, such as ensuring that the rural TV loan guarantee program is technologically neutral.

Q.2. Please respond to satellite companies and others who suggest that a high percentage of homes passed or served by cable means

that there is less need for cable operators to participate in the loan

program.

A.2. The fact that cable passes a high percentage of homes has little to do with the problem this bill primarily seeks to address;

i.e., how to bring local broadcast signals to communities that today have little or no access to them. Cable operators are well-positioned

to use loan guarantees to build out plant to areas that currently

are uneconomic to serve (typically areas with 12 or fewer homes

per mile of plant). Extending existing facilities may prove to be a

much more cost-effective means of serving consumers, and may

also prove to be a means for these customers to gain access to other

services, like high-speed Internet service through cable modems,

which they might not receive today.

Q.3. You have testified that a Federal loan guarantee program

should be narrowly focused on the most unserved and underserved

markets. The Federal loan guarantee program developed last year

authorized the Rural Utilities Service to give priority to borrowers

based on the population of a market, its terrain, and the projected

cost to consumers, among other factors. What other factors should

be considered when granting loans to priority borrowers? Is there

any one factor that is more important than others when making

this determination?

A.3. In addition to the factors listed above, the administrator or review board should be instructed to give priority to loans based on

the percentage of the project cost that can be attributed to providing service to ‘‘unserved’’ homes, i.e., homes that have absolutely

no access to their market’s local broadcast signals.

Q.4. As someone who has accessed capital from private markets, to

what extent do you believe that private capital markets cannot or

will not meet the goals of providing financing to those who seek to

provide local service in smaller, more rural areas?

A.4. My family has invested substantial amounts of private risk

capital to bring multichannel video services, including digital cable

and high-speed Internet service, to approximately 7,400 customers

73

in 33 small, rural towns and townships. And I am not alone. Small

cable operators across the country have invested private capital in

rural and small towns, all without any Government funding. In

some communities where population is below 10 to 12 homes per

mile of plant, however, the cost of private capital may make it

more difficult to obtain.

Q.5. How can we be assured that a rural television service loan

guarantee program passed by Congress will not have a substantial

adverse impact upon competition between the satellite and cable

industries?

A.5. The best way to assure that competition is not harmed would be to avoid creating a program that subsidizes marketplace competitors who do not need Government help. My DBS competitors

are owned by companies with market capitalizations of $21 billion

(EchoStar) and $16 billion (GM/Hughes) and have annual revenues

of $1 billion to $6 billion. This program has the potential to make

these companies the principal beneficiaries of a taxpayer-supported

loan guarantee program to support the building and launching of

a new satellite that would retransmit local broadcast signals in

markets where they have chosen not to use their existing capacity

to deliver local-into-local broadcast service. My company invested

private risk capital to build out plant to deliver these same local

broadcast signals to consumers.

However, if Congress moves forward with a Federal loan guarantee program, a substantial adverse impact can be minimized if

the program is: (1) technology neutral, giving small ‘‘Main Street’’ businesses—whether they are cable, wireless, or others—the opportunity to extend the reach of local broadcast signals; (2) limited,

i.e., the loan guarantees are limited to efforts that focus on un- served or areas with the least broadcast coverage; and (3) set up

in a manner that minimizes the paperwork burden on applicants.

Q.6. How do you determine the costs consumers will face when

they seek to obtain local-into-local service? Other than ‘‘must-carry’’ obligations, what specific regulatory policies could be repealed or

modified that would help to further reduce the costs of local service

to consumers?

A.6. The best way of reducing costs to consumers is to ensure that

the lowest risk means are used to provide local broadcast service

into unserved areas. Opening the bidding to all technologies and

reducing paperwork burdens is critical to ensuring that the appropriate providers secure Federal loan guarantees.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI

FROM RICHARD SJOBERG

Q.1. I understand from your testimony that you operate a small

23,000 subscriber, 33 town cable system in northwestern Minnesota. You state as well that your association, the National Cable

Television Association, supports a technology neutral loan program

meaning that the legislation should not favor one technology or

industry over another. My State is served almost exclusively by

AT&T Cable Services, the Nation’s largest cable company, and they

can easily go to the capital markets, while your company raises

capital in the communities that it serves. Should Congress consider

74

some limit on the size of the companies that can participate in

whatever program is created?

A.1. If the goal is to deliver broadcast signals to areas that currently do not get them, Congress may not want to limit the size

or number of players eligible for the loans. However, those administering the program should ensure that loan guarantees are not

used to underwrite the delivery of broadcast signals to populated,

urban areas or communities where EchoStar, DIRECTV, and other

multichannel video providers already plan to offer local-into-local

service.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMS

FROM STEVEN J. COX

Q.1. What is the current channel capacity for DIRECTV? How

many of those channels are used to carry video programming? How

many of those video programming services are pay-per-view? If

there are any vacant channels, what do you plan to put on those

channels? Do you have any plans to increase the number of channels you are able to offer? By what means will you increase the

number of channels?

A.1. Channel capacity on a DBS system is primarily a function of

the available bandwidth and the ability to digitally compress programming. Bandwidth at DBS frequencies is currently fixed at 32

frequencies (500 MHz) per orbital slot. Advances in digital compression technologies has increased the number of video channels

per frequency from one in the early 1990’s to eight or more today.

Actual channel capacity on DIRECTV is typically a function of the

types of programming carried and varies from day to day. This

ranges from sports programming that requires more bandwidth due

to detail and high action to movies and news programming that requires less bandwidth to audio programming that requires even

less bandwidth. Added to this mix are pay-per-view movies and

seasonal sports packages that vary in quantity and bandwidth demands on a daily to monthly basis. At an 8 : 1 compression ratio,

the 46 DIRECTV frequencies at the 101°, 110°, and 119° orbital

locations could quite potentially provide more than 350 channels of

programming.

DIRECTV is currently utilizing virtually all of its capacity at its

101° orbital position and is quickly developing its recently acquired

110° and 119° orbital capacity. The vacant capacity at the 119° and

110° orbital positions will be filled with additional national, ethnic,

public interest, and local broadcast channel programming in the

coming months.

DIRECTV is continually exploring ways to increase the capacity

of its system. The primary method is through efficiency increases

in video compression. Recent advances in compression technologies

allowed DIRECTV, at the 101° orbital location, to offer local channels to nearly 50 percent of the U.S. television households using existing receiver and dish hardware. Capacity also can be increased

by adding additional bandwidth. This can be accomplished through

licensing of additional DBS frequencies by the FCC.

Q.2. Under the ‘‘Rural Local Broadcast Signal Act’’ proposed last

year, one loan may have been granted for as much as $625 million,

75

while other loans could not exceed $100 million each. Under this

proposal, a borrower could receive a $625 million loan and decide

to serve only a small percentage of the smaller, more rural markets

that are without local-into-local service. What specific conditions

should govern these loans to ensure that more television markets

are served with this service?

A.2. We believe that to the extent that Congress decides to create

a Federal loan guarantee program, taxpayer funding should be

used to complement, rather than compete with, service being provided without the benefit of taxpayer subsidies. In other words,

those who obtain Federal loan guarantees should be permitted to

provide local channel service only in markets where that service is

not being provided by the commercial DBS providers.

Second, satellite is the most efficient and cost-effective technology for serving numerous markets throughout the United States.

To the extent it is Congress’ goal to ensure service to a large number of markets throughout the United States, it should consider

focusing the loan guaranty program on satellite technology.

Q.3. How can we be assured that a rural television service loan

guarantee program passed by Congress will not have substantial

impact upon competition between the satellite industry and the

cable industry?

A.3. According to the FCC’s most recent (January 2000) report on

competition in video markets, 82 percent of all subscribers to multichannel video program distribution (MVPD) services received their

programming from a franchised cable operator. Moreover, the FCC

reported that 96.6 percent of U.S. households are passed by cable.

Given the market dominance of cable, as demonstrated by these

figures, it is difficult to envision a way in which a loan guaranty

program could do anything other than promote competition in the

multichannel video market. The only exception to this is if cable

operators are eligible to receive loan guarantees, which could have

the unintended effect of further entrenching the market-dominant

incumbent provider and ultimately limiting consumer choice.

Q.4. How do you determine the costs consumers will face when

they seek to obtain local-into-local service? Other than ‘‘must-carry’’

obligations, what specific regulatory policies could be repealed or

modified that would help to further reduce the costs of local service

to consumers?

A.4. The retail price charged to consumers for local-into-local service is determined based on a variety of factors, primarily including

the following:

(1) the size of the capital investment that is required to offer local

channels;

(2) the amount of the operating expenses required to support local

channel service;

(3) the marketplace pricing for competitive products and services;

and

(4) the estimated elasticity of consumer demand for local channels.

DIRECTV is adding local channels to make its package of services more competitive with cable, thereby attracting more new customers to the overall DIRECTV service.

76

The must-carry obligation is clearly the biggest impediment to

providing additional communities with local channels. But even if

DIRECTV were to get relief from the must-carry obligation, we

would not have sufficient available capacity to provide local channels in all 210 television markets in the United States. For DBS

to become the full-fledged competitor to cable that Congress desires, we need more spectrum. To achieve this objective, we would

urge Congress to direct the FCC to make additional spectrum

available to the DBS providers, which could be used to bring local

channels to those markets we cannot serve with our existing limited capacity. Because of the substantial costs associated with the

delivery of local channels, the only way to make this concept economically workable is for the additional spectrum to be made available to the DBS providers at no cost. In addition, the DBS providers must be able to use the spectrum both for providing local

channels, and for other more financially remunerative services. The

hundreds of millions of dollars required to build, launch, and operate satellites to use the additional spectrum could not be justified

if those satellites could only be used to provide services from which

we would never see a profit, or even break even. But if we were

in essence allowed to underwrite the cost of bringing local channels

to rural markets by providing other services with the spectrum, we

believe it could be a financially viable proposition.

Over 21⁄2 years ago, DIRECTV filed a petition for rulemaking

seeking additional spectrum to expand our channel capacity. Unfortunately, that petition has sat at the Commission without action.

If that petition were to be granted, it would allow both DIRECTV

and EchoStar to gain access to additional spectrum that could be

used to serve additional markets with local channels.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI

FROM STEVEN J. COX

Q.1. DIRECTV is [the] largest provider of satellite-based programming in the Nation with over 8 million subscribers and is a subsidiary of General Motors. If this Committee drafts a bill creating

loan guarantees, should we make it open to all companies in the

business of providing local television service regardless of size, or

should it be limited to not-for-profit corporations or smaller companies operating in rural areas?

A.1. Should Congress decide to create a Federal loan guarantee

program, it should be open to all companies in the business of providing local television service via satellite. The National Association of Broadcasters concurs. As K. James Yager testified before

the Committee on behalf of the National Association of Broadcasters, a limit on the eligibility of the existing commercial satellite

TV providers ‘‘may be counterproductive in achieving the ultimate

goal of delivering local signals to unserved areas.’’

Q.2. I understand that the EchoStar platform and the DIRECTV

platform are currently incompatible from the standpoint of satellite

locations and encryption standards. What difficulties would a third

party provider of local stations create for your customers in rural

areas?

77

A.2. The primary compatibility differences between the DIRECTV

and EchoStar platforms are the digital transmission format, the

encryption format, electronic program guide, and orbital locations.

New hardware (receiver and dish) capable of receiving either provider’s core programming service along with the third party’s local

channel service would require the duplication of critical functions

within the receiver hardware and a larger and more complex dish

resulting in more costly hardware. Additionally, key proprietary

information would need to be shared between all three parties to

develop this hardware. Such a service would not be backward compatible with existing customers since they would need to purchase

all of this new hardware in order to receive the third party’s local

programming.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO

FROM STEVEN J. COX

Q.1. If the existing proposal is adopted, will every television market receive DBS local-into-local signals and, if so, when? When

could Idaho’s markets expect local-into-local services?

A.1. The extent of the service that will be provided will depend

upon the use of the loan guarantees. A loan guarantee program

alone, however, will not ensure the greater availability of local

channels. It will require significant additional dollars for ongoing

operating and marketing costs.

Furthermore, while the availability of loan guarantees may create incentives for some entities to explore expanded local channel

offerings, the ultimate deployment of a widespread, satellite-based

local channel solution requires the reexamination of much more

fundamental legislative and regulatory objectives. Specifically, the

biggest impediment to serving additional communities is the ‘‘mustcarry’’ requirement imposed by the Satellite Home Viewer Improvement Act (SHVIA). Even absent that constraint, DBS providers are

ultimately limited by the spectrum allocated by the FCC.

The costs of delivering local channels to major metropolitan markets are not significantly different from the costs associated with

smaller markets, yet the population sizes vary greatly. As a result,

the ability to generate enough local subscriptions to justify the

local costs decreases as the size of the market decreases.

Among the top 30 U.S. markets, the average population is 1.8

million households. The number of households in each of the three

Idaho DMA’s is substantially smaller: Boise (#125, 199,760 households); Idaho Falls/Pocatello (#166, 103,840 households); and Twin

Falls (#166, 56,850 households). Under the existing must-carry regime, and absent the allocation of new spectrum, it is unlikely that

the Idaho markets will receive local channels by satellite.

Q.2. What has been the cost of developing, launching, and operating existing DBS systems?

A.2. DIRECTV spent $750 million on the initial launch of the service and, to date, has invested a total of over $1 billion on the

DIRECTV service.

Q.3. How much has DIRECTV paid for its existing spectrum and

orbital slots?

78

A.3. The FCC allocated DBS spectrum to DIRECTV prior to the

date on which Congress authorized the FCC to use auctions to allocate spectrum. DIRECTV pays hundreds of thousands of dollars in

annual FCC regulatory fees, as well as tens of thousands of dollars

in filing fees in connection with various satellite applications and

modifications.

Because of the substantial costs associated with the delivery of

local channels, the only way to make the expansion of local channel

service economically workable is for the additional spectrum necessary to be made available to the DBS providers at no cost. In addition, the DBS providers must be able to use the spectrum both

for providing local channels, and for other more financially remunerative services. The hundreds of millions of dollars required to

build, launch, and operate satellites to use the additional spectrum

could not be justified if those satellites could only be used to provide services from which we would never see a profit, or even break

even. But if we were in essence allowed to underwrite the cost of

bringing local channels to rural markets by providing other services with the spectrum, we believe it could be a financially viable

proposition.

Q.4. Is the cost of developing, launching, and operating a spotbeam satellite expected to be higher than that of existing direct

broadcast satellites?

A.4. Yes. A spot-beam satellite is technically more complex (more

transponders, more complex antennas, higher power satellite) than

the typical direct broadcast satellite that provides full CONUS coverage. Additionally, a spot-beam satellite may require, depending

on the number and location of the spot beams, regional uplink centers, further adding to the costs of operating the system.

Q.5. What is the anticipated cost of securing spectrum and orbital

slots, as well as launching and operating satellites?

A.5. The ultimate cost would depend upon the process used by the

FCC to allocate spectrum, should it decide to make available additional frequencies suitable for use by the DBS operators.

Q.6. How many satellites would it take to deliver local signals in

DMA markets 30–210?

A.6. An accurate answer to this question is difficult to provide

since it requires that a detailed technical study be completed. In

the absence of such a study, the following provides a maximum

number based on the use of CONUS satellites. Markets 30 to 210

represent nearly 1,200 broadcast stations across the United States.

Assuming that each and every one of these stations is carried, as

may be required, up to 2 GHz of bandwidth would be required.

This translates to four equivalent DBS orbital positions or as many

as 12 satellites. (DIRECTV currently has three satellites at its

prime 101° orbital position). Using spot-beam technology would reduce the bandwidth required, although a specific response would

require a substantial technical undertaking.

Q.7. What orbital positions could house those satellites?

A.7. The most logical location to support the delivery of services to

existing DBS subscribers is somewhere along the 101° to 119° WL

79

arc, which is the range within which the existing DBS operators

provide service.

Q.8. Would these be full CONUS locations?

A.8. Yes, the locations along that arc are full CONUS.

Q.9. Would viewers be able to view local signals using existing satellite receivers? If not, how many would be required?

A.9. Conceptually, local channels could be broadcast in a manner

that subscribers to both DIRECTV and EchoStar could access, although there are substantial technical challenges and proprietary

technology-sharing issues that would need to be resolved. Such a

‘‘shared service’’ would require both a new receiver (set top box)

and a new satellite dish. Existing customers would need to purchase this new hardware in order to receive the third party’s local

programming.

Q.10. Can the existing DBS systems currently provide broadband

Internet access? Do they currently offer broadband Internet access?

Are they expected to?

A.10. Broadband Internet service can be offered via satellite either

as a ‘‘one-way’’ satellite service with a telephone-based return path

or as a ‘‘two-way’’ satellite service with a satellite-based return

path. Divisions of Hughes Electronics, DIRECTV’s parent company,

are offering a one-way broadband Internet service, DIRECPC, at

present and are currently developing ‘‘two-way’’ broadband Internet

services for future launch.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI

FROM GREGORY L. ROHDE

Q.1. Several of the witnesses expressed concern that a new bureaucracy could result from this legislation. Which agency would be

best suited to administer a loan guarantee program for providing

local stations in rural markets?

A.1. The Administration believes that if a new loan guarantee program is enacted to promote the provision of local television service

in rural America, it should be administered by the Department of

Agriculture’s Rural Utilities Service (RUS). The fundamental mission of the RUS, successor to the Rural Electrification Administration, is to promote infrastructure investment in rural America. The

agency certainly has the expertise and experience to administer

such a new loan guarantee program for rural television service.

The RUS manages $4 billion annually in loan and loan guarantees,

and a total portfolio of more than $42 billion in outstanding loans

to electric, telecommunications, water, and wastewater utilities

serving in rural areas. In addition, the RUS administers the Distance Learning and Telemedicine loan and grant program.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI

FROM WILLIAM ROBERTS

Q.1. In your testimony you outlined the situation facing satellite

customers and providers prior to the passage of the Satellite Home

Viewer Improvement Act. In your opinion, has the intent of the

SHVIA been carried out by all parties involved and are you seeing

80

that satellite customers are satisfied with the work that Congress

did last year?

A.1. Given the fact that the Satellite Home Viewer Improvement

Act (SHVIA) is less than 3 months old, and that many changes

made by the Act require implementation through rulemaking proceedings by the Federal Communications Commission which have

yet to be completed (and, in some instances, have not yet begun),

it is too early to tell if the SHVIA is a success. We will be glad to

inform you of our impressions once the statute has been allowed to

fully operate and we receive input from the public.

Q.2. What should Congress have included in the legislation that

would have improved the ability of all satellite subscribers to receive network stations?

A.2. As we stated in our 1997 Report to Congress on the satellite

copyright compulsory license, we are concerned with the test for determining when a satellite subscriber is eligible for satellite network service (that he or she does not receive an over-the-air signal

of Grade B intensity) as it is applied to the individual household.

Our past experience has been that tests were not performed at subscribers’ households because the cost of the test to the satellite carrier exceeded the potential revenue from the subscriber for network

signals. This left many thousands of subscribers without recourse.

While the improvements made by the Satellite Home Viewer Improvement Act—such as the Individual Located Longley-Rice model

which predicts geographic areas where the average subscriber will

not receive an over-the-air signal of Grade B intensity, and the

waiver process which allows a subscriber to petition their local

broadcaster for a waiver to receive satellite network service—will

unquestionably reduce the total number of subscribers without any

network service, we believe that there still will be satellite subscribers who cannot get satellite network service, even though

these subscribers do not receive an over-the-air picture from the

local network broadcaster.

The ultimate solution to this problem is more local signals being

offered by satellite carriers in more markets. Any incentives that

Congress can establish—such as a loan guarantee program—to encourage the delivery of local stations by satellite should certainly

be encouraged.

Q.3. One of the solutions offered last year to bridge the gap between the passage of the SHVIA and the availability of local stations in every market was a blanket waiver for rural State households to receive distant signals without having to worry about

whether or not they qualified as an ‘‘unserved household.’’ What

are your thoughts on such a proposal?

A.3. In order to apply a blanket waiver, one must still determine

when a geographic area of the country is ‘‘rural’’—i.e., does not receive an over-the-air signal of a network station. If an area truly

is ‘‘rural,’’ then the households in that region are unserved households and can receive distant network stations. There is no need

for a waiver. If the region can receive an over-the-air signal from

a network station, then it is not ‘‘rural’’ for purposes of that television network.

81

The point of the unserved household limitation is to direct subscribers located near a network affiliate that can receive an overthe-air signal to watch the local affiliate, as opposed to a distant

affiliate of the same network provided by the satellite carrier. The

satellite compulsory license is not intended to threaten the local affiliate’s market by permitting satellite subscribers to gain access to

a distant network station when they are able to receive an overthe-air picture from the local affiliate. This is true whether the

subscriber lives in a ‘‘rural’’ State or an ‘‘urban’’ State. Someone

who lives a mile away from the transmitter for KGWC, a CBS affiliate in Casper, Wyoming, and has no difficulty receiving the KGWC

signal should not be permitted to receive the Denver CBS affiliate

from satellite in lieu of the local KGWC station.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR GRAMS

FROM DALE N. HATFIELD

Q.1. Section 714 of the 1996 Telecommunications Act established

a ‘‘Telecommunications Development Fund’’ by which small businesses could apply for loans to deliver telecommunications services

to unserved rural areas. Are companies entitled to use these funds?

If not, should the authority for this fund be expanded to help facilitate the deployment of local service in unserved areas?

A.1. The Telecommunications Development Fund (TDF) was established to promote access to capital for small businesses to enhance

competition, to stimulate new technology, and to promote training,

employment, and telecommunications services. Since its 1996 authorization as a private corporation, the TDF has received approximately $25 million in interest paid by financial institutions.

The TDF established itself as a venture capital fund that makes

equity investments in small, early stage communications companies. Given the size of the TDF’s fund, it anticipates making approximately 10 to 12 investments in order to ensure a diversified

portfolio, and in accordance with prudent investment practices.

The purpose of the rural satellite loan guarantee legislation,

however, is to enable satellite or cable carriers to receive loan guarantees that would enable them to deliver local television signals via

satellite or by some other means of transmission. Such businesses

usually have capital requirements far in excess of the investment

size that would be prudent for the TDF to make. Therefore, the

TDF does not appear to be an appropriate entity ‘‘to help facilitate

the deployment of local service in unserved areas.’’

Q.2. The proposed loan guarantee program included a provision

that prohibited any satellite companies with unused spectrum that

could be used to provide local service from applying for a loan guarantee. Does this prohibition apply to EchoStar and DIRECTV? At

what point does the spectrum have to be used? Is it at the point

the application is filed, or at the time the application is granted?

A.2. Although the proposed legislation does not address the specific

points raised by this question, the prohibition would presumably

apply to both EchoStar and DIRECTV if they applied for the loan

guarantee program. Satellite licensees normally have milestones in

which to construct, launch, and operate their licensed satellites. At

the present time, DIRECTV has utilized all of its authorized DBS

82

orbital locations by launching satellites. EchoStar, however, has

one DBS orbital assignment that it purchased at auction that is

currently unoccupied. EchoStar’s plans to implement that location

at 148° WL were delayed due to some technical problems with one

of its satellites. It has filed a request that the Commission find it

has met its due diligence obligations for that location. In addition,

EchoStar has a preliminary assignment of channels at 175° WL for

which it has requested an extension of its due diligence deadlines.

The current version of the proposed legislation does not specify

when the prohibition would apply.

In addition, both DIRECTV’s parent corporation and EchoStar

have interests in Ku- and Ka-band fixed satellite orbital locations.

Those locations are not specifically allocated to DBS, but could be

used for delivery of video programming such as local signals. Some

authorizations at those locations are currently unused.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI

FROM DALE N. HATFIELD

Q.1. The FCC is the agency responsible for assigning spectrum and

orbital slots. In the past, the Commission has auctioned off both

spectrum and orbital slots to companies wishing to provide direct

broadcast satellite services. Those auctions involved some of the

largest media companies in the world and the stakes were very

high. If the Congress authorizes some form of a loan guarantee program targeting the satellite industry, what assurances can the

Commission make that the spectrum and orbital slots will be used

to provide local television stations in rural areas?

A.1. In licensing satellite systems, the Commission has the authority to impose conditions on operators. If the Commission were to

auction spectrum that would be used by companies participating in

such a loan guarantee program, it could require that auction participants certify that they would use any spectrum acquired to provide local television channels in rural areas and any licenses issued

as a result of an auction could be so conditioned.

Q.2. We have heard from the National Rural Telecommunications

Cooperative about the cost of the spectrum and the orbital slot.

How much do you think it might cost to launch a satellite-based

service to provide local television service in rural markets?

A.2. The cost to build and launch a spot-beam geostationary DBS

can range from $200–$300 million. This does not include the cost

of the orbital location or the cost of developing or purchasing a distribution system.

Q.3. The Satellite Home Viewer Improvement Act authorized several new rulemakings in the areas of retransmission consent and

signal standards that must be completed by the end of this year.

What additional rules and regulations does the Commission envision necessary to implement portions of any loan guarantee program under its jurisdiction?

A.3. The Commission does not envision any additional rules and

regulations to be necessary since there is no portion of ‘‘any loan

guarantee program under its jurisdiction.’’

83

Q.4. Several of the witnesses expressed concern that a new bureaucracy could result from this legislation. Which agency would be

best suited to administer a loan guarantee program for providing

local stations in rural markets?

A.4. The Commission does not have the financial expertise required

to recommend a particular agency to administer a loan guarantee

program designed to facilitate access to local television broadcast

signals. The Commission, however, recognizes the benefits of the

approach outlined in S. 2097, which assigns the responsibilities for

approving loan guarantees and administering the loan guarantee

program to separate entities.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO

FROM DALE N. HATFIELD

Q.1. The FCC is expected to issue a determination on must-carry

digital television standard requirements for cable television. Would

this provision apply to satellite broadcasters?

A.1. The Communications Act of 1934, as amended by the Cable

Television Consumer Protection and Competition Act of 1992, directed the Commission to begin a proceeding to determine whether

changes in our mandatory carriage rules are necessary to accommodate digital broadcast television signals on only cable television

systems. Thus, the proceeding currently underway at the Commission does not address obligations of satellite television providers to

carry local digital broadcast television signals.

Q.2. Is the FCC expected to issue a determination on must-carry

digital television standards for satellite broadcasters?

A.2. Beginning on January 1, 2002, the Satellite Home Viewer Improvement Act of 1999 requires satellite carriers that elect to provide at least one local broadcast signal in a market to carry all

other local broadcast stations requesting carriage in that market.

The law requires the Commission, within 1 year of enactment, to

establish regulations to implement the carriage obligations of satellite carriers. The statute also specifically directs the Commission

to adopt carriage requirements for satellite carriers that are comparable to those imposed on cable television operators.

Q.3. Using spot-beam technology, how much spectrum will be required to serve DMA markets 30–210?

A.3. The amount of spectrum needed will depend on a number of

factors, including the frequency band used, the size or the type

of transmitting antenna (this determines the size of service area of

the spot beams), and the quality and type of service provided (high

definition video and sports programming, for example, may require

more spectrum). Taking these considerations into account, a rough

estimate might be that approximately 2 MHz of spectrum would be

required for each local TV channel. Assuming a frequency re-use

factor of 4 (due to use of spot beams), and assuming there is an

average of seven local TV channels per DMA market, 630 MHz of

spectrum would be required to deliver all of the local channels (assuming a must-carry requirement) in 180 DMA’s (markets 30–210).

84

Q.4. What was the purchase price for spectrum, used by DBS providers, in the last FCC auction? What was the cost of the most

recent orbital slot acquisition by a DBS provider?

A.4. From January 24, 1996 through January 26, 1996, the FCC

auctioned two direct broadcast satellite (DBS) construction permits.

The first permit, for the use of 28 channels in the 110° WL, offering full nationwide coverage, was awarded after 19 rounds to MCI

Telecom Corp., with a winning bid of $682.5 million. The second

permit, for use of 24 channels in the 148° WL, was awarded after

25 rounds to EchoStar DBS Corp., with a winning bid of $52.3 million. The 148° WL offers coverage for most of the United States

with the exclusion of parts of the East Coast.

Q.5. How many satellites would it take to deliver local signals in

DMA markets 30–210?

A.5. Many direct broadcast satellites in service today use 16 transponders, but the number of transponders a DBS licensee will decide to place on a given future satellite is difficult to predict. There

are many considerations, including power requirements. Assuming

that each satellite will have 16 transponders, approximately four

satellites would be needed. Assuming that each satellite will have

eight transponders, approximately seven would be needed.

Q.6. What orbital positions could house these satellites?

A.6. DBS licensees may choose to move their satellites, and use

a satellite orbit location where they already have an operational

satellite, to provide local channels. The specific factors relevant to

such decisions involve a wide range of business planning factors

that would be difficult for us to predict. However, there are DBS

orbit locations for which we do not currently have operational direct broadcast satellites on all available channels. These locations,

which could certainly be used for provision of local television channels, are as follows: 61.5° WL on some channels, and at 148° WL,

157° WL, 166° WL, and 175° WL.

In addition, orbital locations in the fixed satellite service allocations at Ku- or Ka-band could also be used. The Ku-band is heavily

used at the current time, while the Ka-band has 14 authorized but

not yet operational systems.

Q.7. Would these be full CONUS locations?

A.7. All full CONUS locations in the existing 12 GHz DBS allocation to the United States are being used. The 61.5° WL location is

not quite a full CONUS location, but could be used to serve most

of the contiguous 48 States with the exception of the Northwest

United States. The 148° WL location could be used to serve most

of the contiguous 48 States, but cannot serve the Northeastern

United States. At the satellite locations further to the west, there

is increasingly limited coverage of the Eastern United States. The

148° WL, 157° WL, 166° WL, and 175° WL locations could be used

to provide service to Alaska and Hawaii.

In addition, other frequency bands could be used to provide local

TV channels. In the Ku- and Ka-band FSS allocations, there are

both full CONUS and non-full CONUS orbital locations that would

be potentially usable.

85

Q.8. Would viewers be able to view local signals using existing satellite receivers? If not, how many would be required?

A.8. Viewers/DBS customers could use a standard DBS receiver to

view local channels. However, if the local channels are being provided from a different orbital satellite location than other DBS programming, a consumer may need a slightly larger receive dish with

two (or more) ‘‘feed horns’’ in order to receive signals. Alternatively,

a consumer may need a second receive dish if they wish to receive

signals from satellites that are significantly separated in orbit from

the current CONUS coverage satellites at 119° WL, 110° WL, and

101° WL. In addition, for a dish receiving from multiple orbital locations, the viewer will need a new set top receiver. Also, if the

local signals were delivered using a non-DBS frequency band, such

as the Ka-band, a new set top receiver would be required.

(87)

LOAN GUARANTEES AND

RURAL TELEVISION SERVICE

WEDNESDAY, FEBRUARY 9, 2000

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Committee met at 11:03 a.m., in room SD–628 of the Dirksen Senate Office Building, Senator Phil Gramm (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN PHIL GRAMM

Chairman GRAMM. Let me call the Committee to order.

First of all, I want to apologize to everybody. We had scheduled the hearing for 10 a.m., but we had a Republican conference this

morning and since many of our Members would have been denied

the right to testify, and I would have been denied the right to hear

them, we rescheduled the hearing to begin at 11 a.m. I want to

thank each of you for coming. We are in the process of putting together a loan guarantee pro- gram that will do everything economically feasible to encourage

investment in a system that will bring local television signals to

every household, to every farm and village in rural America. We believe it is important in putting this proposal together that it be financially prudent and that it protect the taxpayers’ interest.

The best check we have to assure that we actually get the signals

to rural America is a requirement that those who are making the

investment be investing their own money, that they commit their

assets, and that we blend together a loan guarantee with private

capital. There is nothing that so brings the mind to focus on the

task in front of you than having your own capital, your own assets,

your own money at stake. I want to say here that I have been working very closely with Senator Burns, the author of this bill. Without his leadership, we

wouldn’t be here. He and I are trying to put together a bill that we can move forward together. Senator Lugar said it yesterday, and I will repeat it here: It is exciting to think about rural America having access to local television. Whatever we can do, consistent with protecting the taxpayers’ interest, we are going to do. I would add that if the process

fails, if loans are defaulted, we end up with the worst of both

worlds. We end up with no transmission of local signals, and we

end up with the taxpayer losing potentially $1.25 billion.

I am very happy to have our colleagues here today. I want to

welcome each and every one of them: Conrad Burns from Montana,

88

who is the author of this bill; Tim Hutchinson from Arkansas;

Craig Thomas from Wyoming; and welcome Blanche Lincoln from

Arkansas. Senator Burns, would you please begin.

OPENING STATEMENT OF CONRAD BURNS

A U.S. SENATOR FROM THE STATE OF MONTANA

Senator BURNS. Thank you very much, Mr. Chairman. My statement will be very short today as we look at this issue and move

it along. I want to thank you, for your office and your staff have

been very good to work with. You made the commitment that we

would get this done early in this session of the 106th Congress, and

you have shown your willingness to do that. You made the commitment to move this along, and I am very appreciative.

I believe it’s going to take a cooperative and collaborative effort

in order to pass a piece of legislation that, as you stated, protects

the taxpayer, but also does some things in rural America that we

sorely need.

Mr. Chairman, when I offered the loan guarantee on the Satellite

Home Viewer Improvement Act, it was apparent to me that we

were only going to get about 40 of the largest markets in the satellite broadcast industry to fulfill the requirement of providing

local-into-local service. By the way, I offer my congratulations to

you for keeping this technology-neutral. That is very important because it allows the landscape of competition, which has been the

best regulator over the years on ingenuity and entrepreneurship to

get this done.

But I also would be remiss if I didn’t recognize that a lot of local

radio and television stations would be left out as we passed that

Satellite Home Viewer Improvement Act. Rural areas, especially

rural areas where they depend on the local broadcaster for their

news, weather, and information, would be left out. In the State of

Montana, we have the highest per capita ownership of satellite

dishes of any place in the country. The ownership of satellite dishes

is high in many rural States. I would imagine that Texas has a

great preponderance of people leaning toward satellite broadcast.

They, too, want to receive their local station because that provides

their local news. That is where they get their local information,

farm and ranch news, weather, and so on. They cannot be left out

of this mix.

I initially proposed the rural viewer amendment because I was

concerned that without it, only the largest television markets in

America would receive local-into-local service authorized by the

Satellite Home Viewer Improvement Act. These would be the big,

profitable markets—New York, Los Angeles, Chicago—where the

big get bigger, but the small just don’t have the capital with which

to compete. Even the most optimistic local-into-local plans will

require 2–3 years to employ and then to only about 70 of the 210

television markets in the United States.

Like I said, it is very important in this country, in the movement

of information, that we have local broadcasters fulfilling their responsibilities to those communities.

What about the other 140 markets? In Montana, I have the

smallest market, number 258 on the scale. I am in a State that is

almost as big as Texas, but not quite.

89

Chairman GRAMM. Let’s not get carried away, Senator.

[Laughter.]

Senator BURNS. Well, if we were to roll it out flat, if we were to

iron it out flat, we would be bigger than you.

Nonetheless, these markets and the folks that live in these areas

should be rewarded by their local broadcasters just the same as

anybody else. The ability to receive local television signals is more

than just having access to local sports or entertainment programming. It is a critical and immediate way to receive important local

news, weather, and community information. Of course, we live in

an area where weather plays a big part.

I want to congratulate my colleague from Texas because he has

picked up an interest in this, and we believe it is very important

for the State of Montana as we move this information forward. I

would also thank my friend from Wyoming and my friends from

Arkansas who feel strongly about this. With over-the-air broadcast

signals and cable delivery limited because of distance or the geography of our States, satellite television has become very important.

I believe how we broadcast our local-into-local services will be just

as important.

I appreciate this opportunity. I will not go through the bill, but

I believe all the makings are there, including the building blocks

that protect the taxpayer. It is technology neutral, and it is something that the broadcast industry can work with. They can make

it work with just a little help from the U.S. Government.

I thank you for your efforts on this particular issue. I thank you

very much. I yield the remainder of my time.

Chairman GRAMM. Thank you, Senator Burns.

Senator Hutchinson.

OPENING STATEMENT OF TIM HUTCHINSON

A U.S. SENATOR FROM THE STATE OF ARKANSAS

Senator HUTCHINSON. Thank you very much, Mr. Chairman. I

want to commend Senator Burns for his outstanding work on this

issue, and I am glad to join Senator Thomas and my colleague from

Arkansas, Senator Lincoln, this morning. Thank you for affording

us the opportunity.

Members of the Committee, thank you for allowing me to speak

on behalf of my constituents who will benefit from satellite companies being allowed to provide local programming, and a Federal

loan guarantee program that will assist the industry in reaching

that goal.

Arkansas, like Montana, is a rural State. The rugged terrain of

the Ozark and Ouachita Mountains means that many Arkansans

are so far removed from over-the-air signal and cable providers

that they must rely on satellite service as their sole source of television programming.

I have heard from hundreds of Arkansans who are concerned

about their network programming and want local television signals

through their satellite providers. That is why I am here today. I

want to join with my colleagues, not only those that are here today

but all of my colleagues from rural States, in support of a Federal

loan guarantee program whose goal is providing unserved Americans with local television programming.

90

I supported the Satellite Home Viewer Improvement Act because

it ensured that our constituents in unserved areas would keep their

network satellite programming and will be able to enjoy local programming someday. The challenges created by requiring satellite

companies to provide local-into-local service is another reason why

I am here today.

In order to reach our goal, I believe that satellite technology is

an efficient way to deliver that local programming. However, that

is not to say that cable companies and cooperatives may not be the

best medium in certain areas.

We know that the technology and infrastructure needed to provide rural, unserved Americans with local television signals is both

underdeveloped and expensive. A loan guarantee program will assist companies in complying with must-carry rules and expedite the

proliferation of technology needed to provide local programming to

rural customers in States like Arkansas.

Rural communities in my State are very close-knit communities.

The local news and weather, as Senator Burns said, are important

to the families living there. Some people may think that we are

going to a lot of trouble to make sure our rural, unserved constituents have access to local programming. While it is nice that all Arkansans would be able to watch our beloved Razorbacks, there are

far more important reasons why we need to continue our efforts.

One of the benefits of providing local channels is the ability to

inform Arkansans of dangerous weather. Like Montana, we face a

lot of serious weather, but tornados in particular. I know the Senator from Texas will recognize the severity. We have not only a

great deal of property damage every year, but lives that are lost

every year. The ability to respond quickly to sudden changes in the

weather may mean the difference between life and death.

Another reason I am here testifying today is because I want my

constituents to have access to the very best technology available,

no matter where they choose to live. It is clear that many rural

communities in my home State are not served because providing

them with reliable programming is not ‘‘cost-effective.’’ That is very

understandable.

There is precedent, as all of you know, for the Federal Government helping in rural areas, whether it is helping with electrification or telephones. I don’t know that we can put a price tag on the

opportunities communities are given when they have technology

available to them. I believe we have the resources to allow Americans living in rural areas to benefit from the technology revolution.

Americans in rural areas should not be left out.

Mr. Chairman, I appreciate your commitment to writing a loan

guarantee program that maximizes the probability that the loans

will be paid back and your determination to move legislation prior

to the March 30 deadline. I want to commend you and the other

Members of the Committee for what you are doing to ensure that

rural, unserved constituents have access to local programming.

Thank you for affording me the opportunity to testify today.

Chairman GRAMM. Thank you, Senator Hutchinson.

Senator Thomas.

91

OPENING STATEMENT OF CRAIG THOMAS

A U.S. SENATOR FROM THE STATE OF WYOMING

Senator THOMAS. Thank you, Mr. Chairman. It is always a great pleasure to testify when you know your fellow testifiers are wellinformed and intelligent because they agree with me. [Laughter.]

I am basically going to say the same thing. I do want to lend my support, however, and join with my colleague, Senator Enzi, in support of this as it affects our State. This proposal will bring hope

to over 50 million homes in 170 television markets that otherwise

would not receive local signals via satellite. I want to commend Senator Burns for his work on this provision.

He and I sent out a letter some time ago, and I believe that letter

attracted a broad base of support for this type of proposal. I also

want to commend you, Mr. Chairman, for what you have done. I

was one of the group that gathered when we had this bill passed

last fall to get this part of it done.

I won’t repeat what has already been said, but, without this,

under the best-case scenario, only 40 of the 210 television markets

will have local service via satellite, none of which are in my State.

You can understand why this is so very important to us. There is

vital information that people need which can be obtained from television, not only the news but the weather, school closings, road reports, and so on.

I am with you, Mr. Chairman, in that we want to make sure this

is a sound financial proposition, and I believe it can be. I believe

the USDA’s Rural Utilities Service has the expertise to administer

this loan guarantee program. I come from being Manager of the

Wyoming Rural Electric Association, so we have had some experience in this kind of thing.

In any event, anything I can do to be helpful, Mr. Chairman, I

want to do. I commend you and the Members of the Committee and

hope we can move forward quickly.

Thank you.

Chairman GRAMM. Thank you, Senator Thomas.

I want to welcome Senator Lincoln from Arkansas. I believe we

sometimes forget what a rough place the U.S. Senate is. I remember when Senator Lincoln first came here, she seemed so young.

Now she is walking around with a cane.

[Laughter.]

I hope people take into account the great sacrifice that we make

in being here.

Senator Lincoln.

OPENING STATEMENT OF BLANCHE LINCOLN

A U.S. SENATOR FROM THE STATE OF ARKANSAS

Senator LINCOLN. Thank you, Mr. Chairman, and I appreciate

your willingness and genuineness in holding this hearing on a very

important issue. I did just come from the Agriculture Committee

where the surroundings were not quite as easy, and I did trip on

a television cord. I’m telling you, it’s tough when you are aging as

rapidly as I am.

Senator THOMAS. Satellites work better.

[Laughter.]

92

Senator LINCOLN. But I do thank you, Mr. Chairman, for your

leadership in allowing us to be here and allowing me to echo the

comments of Senator Johnson, Senator Burns, Senator Hutchinson,

Senator Thomas, and others who have taken a leadership role in

seeing that rural satellite viewers are not left behind.

I do recognize I am the only Democrat in the room, so I want to

assure you that there is a good Democratic support for this initiative. I worked hard on this issue during the end of the session last

year, and I think we recognize that there were a lot of Democrats

interested.

Mr. Chairman, it seems like it has all been said, but not everyone has said it. It is now my turn. I guess that’s one of the privileges, which I quite enjoy, of being a new Member of the Senate.

I always get to go last, so I actually have the last say. I will take

just a few minutes. As I look around, I am delighted to see new

faces who have recognized how important this issue is to all of us

across this country. It’s good to see they appreciate the importance

of this issue to folks in Arkansas and the rest of rural America.

I wish we had all gathered together in November when I was circulating a letter in support of the rural loan provision. We might

have avoided revisiting the issue today. But now that we are here,

I appreciate your interest. I hope that through these hearings, and

those we are holding in the Agriculture Committee, we can reach

a consensus on how to ensure maximum coverage in rural areas.

I am probably the best example of the consumers out there. I live

in the middle of nowhere. I have had to use both satellite and

cable. It wasn’t until about 6 months ago that I was actually able

to get local stations. I live in the eastern part of Arkansas, next

to the Mississippi River, and for quite some time all I was able to

get was Tennessee news. These issues definitely hit home. I have

to station myself so I can catch the Seattle news, the Atlanta news,

and the Boston news on satellite, then hopefully I will be able to

get the Arkansas news later in the afternoon or evening.

This is an issue that affects the daily lives and access to information of thousands of my constituents, and I include myself in that.

Since January 1999, my office has received more letters and phone

calls about satellite legislation than almost any other piece of legislation we have dealt with. More than 500,000 people in Arkansas

were left without access to local TV programming when we adjourned in November without adopting the rural loan provision in

the satellite bill.

Twenty percent of our viewers in Arkansas depend on satellite,

which is 10 percent above the national average. A loan guarantee

is important because current satellite capacity can provide localinto-local only in the 30 or so top markets. I am not telling you

anything you don’t already know. In my home State, our largest

media market, Little Rock, is only number 57 in the country. Our

other local stations are in even smaller markets. The people who

live in these communities deserve access to the same local news,

weather, and programming that folks in larger cities have.

As my colleague from Arkansas said, we are prone to tornados.

Of course, they sometimes start in Texas or Oklahoma and pick up

speed. By the time they reach us, they are real humdingers. We

need to know about them when you send them our way.

93

There is widespread support in the Congress for this proposal. Last fall, when the Chairman expressed concern over the rural

loan provision, a bipartisan group of 24 Senators joined me in signing a letter urging the Majority Leader to file cloture on and proceed to the satellite bill. After we delivered the letter, there were

five additional Senators who called my office seeking to sign on at

that point. Meanwhile, Senator Burns was circulating another letter among Republicans, clearly demonstrating bipartisan support

for the rural loan provision.

Local broadcasters provide a valuable service to rural communities. They provide people with local news and vital details about

storm warnings, school closings, all of what is going on in those

local communities. People in rural communities need access to this

information. It is vital to their quality of life. They deserve it. I certainly urge Congress and this Committee to do its part in seeing

that we get it done. I know we can, and I pledge myself with you,

Mr. Chairman, to work hard to make sure that it does get done.

Thank you very much for inviting me.

Chairman GRAMM. Thank you very much, Senator Lincoln.

I would like to ask unanimous consent that we invite all of the

Members on this panel to come up and join us when we finish with

this part of our hearing. We have Dan Crippen with us, who is Director of the CBO. He will be the next witness. Any of you who

would like to participate in that discussion, we would very much

like to have you.

Let me say that our commitment from last year was that we

would report a bill by the end of March. I believe we are going to

prove better than our word and report a bill by the end of this

month. I hope we can move very quickly. I don’t see this as a partisan issue. Even though Senator Burns is going to flatten his

State out to make it as big as Texas, I have more people who face

problems in getting local signals than any State in the Union,

though on a per capita basis, I think at least two of the States represented here would exceed Texas. I am not sure about Arkansas;

it would be close.

We all have a stake here. The question is: Can we do it right?

Again, I don’t see a conflict between writing a bill that protects the

taxpayer and writing a bill that gets the job done, because the last

thing on earth we want to do is end up with a bill where we spend

the $1.25 billion, we don’t get the coverage, and we don’t get the

$1.25 billion back.

One thing is certain. Anybody that gets this loan guarantee and

repays the loan will have succeeded. It is success that we want.

Let me yield to Senator Enzi. I know he has been active in this.

He may want to make a statement and ask some questions.

OPENING COMMENTS OF SENATOR MICHAEL B. ENZI

Senator ENZI. I will include some comments with my questions.

I ask that my entire statement be made a part of the record.

Chairman GRAMM. Your statement will be made a part of the

record as if read in its entirety.

Senator ENZI. I want to thank you for holding this series of very

critical hearings. In Wyoming, there probably isn’t anything that I

get more correspondence on than this particular issue.

94

Now, I appreciate all of the effort that Senator Burns has gone

to. I want to encourage him not to flatten Montana, although that

would mean greater economic development for Wyoming because

then, people would come to Wyoming to see the mountains. But I

am envisioning him moving us a little further south, and unless

Mexico would give on their border, Texas will be smaller.

[Laughter.]

Senator BURNS. I have to work my way through that one.

Senator ENZI. That is just a part of U.S. ingenuity, probably, and

throughout the history of the United States, there has been a lot

of American inventions that have moved from novelty to necessity.

In each instance, usually the U.S. Government has helped rural

areas to have equality of access to this new necessity. For instance,

the U.S. Mail. We now assure that for 33 cents you can send a letter anywhere in the United States, no matter how rural or how far

from the mainland. That is a Federal Government initiative. Later,

electricity became a necessity, and the United States helped rural

areas, again, to be sure that they had this new necessity.

More recently, phones have become a health and safety necessity,

and several programs have been put into effect for rural areas.

Today, television is seen as a necessity. People rely on TV not just

for entertainment but, as you have said, for news and weather and

special warnings of impending disasters. The more rural a person

is, the more they need to have TV for critical information as well

as for entertainment.

No one, hardly anyone, outside of this group or the people that

provide television understand ‘‘must-carry’’ and the other lingo that

we are using with this whole issue. What rural folks understand

is that ‘‘must-carry’’ and the other special lingo keeps them from

having television signals that they know are available in the air

around them. We need to help everyone get this basic necessity.

I want to again particularly congratulate Senator Burns for the

lead that he has taken through the Commerce Committee and for

bringing this issue to us early last year. I also, of course, have to

thank my colleague for his comments today and the interest and

leadership that he has shown in this issue. And I would be very

remiss if I didn’t mention our lone Congresswoman from Wyoming,

Barbara Cubin, who was one of the early leaders in getting a solution and one who sold a solution on the House side. She is watching with a great deal of interest what we do over here.

The emphasis that I am trying to place here is this rural one,

and I am afraid that part of the message is getting lost in the city

competition issue. I am pleased that each of you mentioned the

rural aspect of this. I would be interested in comments on how

much of a priority in your State the competition in cities of having

more than one method of delivery and the networks would be as

compared to the need for those rural folks to jump to the head of

the list, perhaps, and be able to get access to what the folks in the

cities already have in one way or another.

Senator LINCOLN. I would be glad to jump in. As I mentioned,

Little Rock is our major city in Arkansas, number 57 in terms of

the size of its media market. I don’t believe we reach the estimates

in terms of what the current satellites could serve. And even if we

did, Little Rock would be the only market that would be serviced

95

through the current satellites. That is the reason it is so absolutely

important for the entire rest of our State to be able to have access

through the capability of getting those networks up on satellite and

accessible to, as I said, 20 percent of our viewers, 500,000 people

in Arkansas who depend on that.

I would echo what the Chairman said, that we want to see this

as a successful piece of legislation, and I think the success depends

on getting the biggest bang for our buck, and that means covering

as many consumers as we possibly can with the funds that we are

going to be using. In my opinion, the coverage for consumers is

going to be one of the biggest measures of success in this. For us

in rural States, where almost all of our State is predominantly affected, that is going to be the real key.

Senator THOMAS. Senator, I think certainly there are two aspects

to this. One is to provide some competition for cable so that the

prices do not continue to be unaffected. But the real emphasis at

this point clearly is on the agricultural area, on the rural area,

where people can get no service at all if they are not in the broadcast area. As you know, in our State, the emphasis is on the rural.

Senator ENZI. Since my time—— Chairman GRAMM. Let’s have both Senator Hutchinson and Senator Burns respond.

Senator HUTCHINSON. I think that Senator Lincoln has it exactly

right. In Arkansas, the magnitude of the problem in rural areas is

such that any concern about undue competition is overwhelmed by

the sense that we have to provide that service to the rural areas.

I believe Senator Thomas is right as well, that competition is a

healthy thing.

Senator BURNS. This Act, the Satellite Home Viewer Improvement Act, is the result of a lawsuit that was filed and tried to deal

with this must-carry situation. The must-carry language in the

Cable Act was crafted in my office during that debate. Although

people want to see the network news in rural areas—the NBC’s,

the ABC’s, the Fox’s, all of these stations—they were watching

Charlotte, North Carolina, New York, Los Angeles, San Francisco,

Denver, or whatever, and it was really a slap in the face to the

local broadcaster who had the same programming but couldn’t get

it to them. They had no reception in, let’s say, the B contour. You

have an A contour, the primary, then you have the B. That is what

bothered me, and that is why we had to come up with an idea on

how to service all of the markets, not just a few, on local-into-local.

When we say local, that means local broadcaster to that B and C

contour.

Perhaps I’m using some terms in there that you are not familiar

with on the Banking Committee, but we’re very familiar with them

over on the Communications Committee. The emphasis is on rural.

When the Chairman and I were talking about this, we asked how

do we do that? Well, the RUS funds—and they came up during

that conference—were our only vehicle.

Yes, it was flawed, the initial thrust was flawed a bit. We worked

it out, and I think we have a better bill, thanks to the Chairman

working with us. We appreciate your efforts on that.

Chairman GRAMM. Thank you, Senator Burns.

Senator Bunning.

96

OPENING STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. May I make an opening statement? Chairman GRAMM. You certainly may.

Senator BUNNING. Thank you, Mr. Chairman, for holding this hearing. Of all the issues in the first half of the 106th Congress,

I received more mail on satellite television, or the lack of it, and

local stations being carried by satellite than on any other issue. In

many parts of my State, like all of your States, it is virtually impossible to receive any broadcast. Cable companies do not cover

most of the State. Many in my State are forced to use satellite reception for the news of the day, the weather, or whatever it might

be, and none of it in Kentucky contains any Kentucky broadcasts.

None. The only reason they pick up a satellite is to see University

of Kentucky basketball games, because they are usually carried on

national television.

It is very important that we hold this hearing to decide what is the best way to ensure that folks in the rural areas, not only in

your States, but also in Kentucky, have the same access to the

media in Lexington, Louisville, and any other stations that are

home broadcast stations within the State.

In my area, I receive Cincinnati television. That is all. I don’t get a Louisville or a Lexington station in northern Kentucky. I am able

to see the weather and news, but no news of Kentucky. If I had

satellite and I could pick up Louisville or Lexington, I would be

able to know what is going on south of me. I applaud my colleagues who have come before us today to share their ideas on how we best can make sure the citizens of our States

and our country have access to local news, weather, and entertainment. I am also very interested in hearing your thoughts about the

Federal loan guarantees that caused so much controversy at the

end of the first session of this 106th Congress.

I would like to know what all of you think we should do. I know

some of us support the bill as presented. Some of us may have

other ideas on how we can guarantee those loans and make sure

that they are paid back and they get the service we are looking for

into our areas.

Should we limit participation? That is what the dish companies

are doing. They are picking the 30 best or the most populous or the

largest television stations and putting them on my dish whether I

like it or not. I don’t want to know what is going on in Seattle or

New York. I want to know what is going on in Louisville or Lexington. They tell me there is a technical problem of putting enough

local stations that carry local news on the dish. In this day and

age, I think that’s baloney. I think we can do it and do it well.

Obviously, we have a big job ahead of us in finding solutions to

this problem that everyone can live with. But I am sure, as the

Chairman has said, we will have a bill on the floor by the end of

February or some time in early March.

I believe that all of your testimony has gone a long way toward

helping us find an answer. I thank all of you for coming before us.

I welcome you to move up here and join us in asking questions of

Mr. Crippen, the Director of the CBO.

Thank you, Mr. Chairman.

Chairman GRAMM. Thank you.

97

Let me thank each of you for coming. Your testimony is greatly

appreciated. Let me remind you, if you have time, we would be

happy to have you come up and join us.

Let me call Dan Crippen, who is Director of the Congressional

Budget Office. Mr. Crippen, I want to thank you for being here. Obviously, your input is very important, not only because you are a

very distinguished economist, but also because of the content of the

thought and because you will end up scoring our loan guarantee,

and it will be triggered by an appropriation of that amount. Your

input is very important to us.

As I mentioned earlier, our goal is to have a loan guarantee program that will in the process encourage private investment to deal

with this problem. We are trying to structure it in such a way as

to minimize the risk to the taxpayer, but in doing so maximize the

chances that we will actually achieve our objective.

I think it is important to remember that only a successful loan

guarantee where the loan is repaid is one that actually puts lead

on the target by delivering the signal.

Nonetheless, your input is very important. We want to thank you

for coming on fairly short notice and we apologize for holding you

up an additional hour. Let me ask you to proceed.

OPENING STATEMENT OF DAN L. CRIPPEN

DIRECTOR, CONGRESSIONAL BUDGET OFFICE

Mr. CRIPPEN. Thank you, Mr. Chairman. There is a tradition at

the CBO that I didn’t know about before I went. When I walked

into the office, not only was the requisite Government-issue furniture there, of course, but when I opened the top drawer of my

desk, I found a skunk. That apparently gets passed—— Chairman GRAMM. Was it dead or alive?

Mr. CRIPPEN. Well, it was dead at the time. It had been deodorized. While I got some of the meaning at the time, now—looking

up at this panel and the previous one—I fully understand why the

skunk gets passed on from one Director to another.

I am pleased to be with you this morning to discuss providing

Federal loan guarantees to increase access to local television services in mostly rural markets that are unlikely to receive signals

through existing DBS companies.

Federal assistance for this venture, we believe, Mr. Chairman,

would be likely to prove costly. The market for delivering local television signals would be both subject to competition and relatively

small, making it difficult to ensure that large investments could be

recovered, especially in the near term. The cost to the taxpayers

would depend on the size of the program and how much of the risk

was borne ultimately by the Government.

The budgetary treatment of loan guarantee programs, as you

know and have just cited, is governed by the Federal Credit Reform

Act of 1990. That Act makes commitments of Federal loan guarantees contingent on the appropriation of enough funds to cover the

estimated subsidy. Under credit reform, the subsidy cost of a loan

guarantee is the estimated long-term cost to the taxpayers.

The subsidy cost of federally guaranteed loans typically depends

on expected defaults as well as on any recoveries through collateral

and income from fees or other charges.

98

In the CBO’s view, providing local television service in rural

areas is likely to prove financially and technically risky, with an

attendant regulatory risk we have not assessed. For such services

to be economically viable, millions of households would have to be

willing to pay a premium to satellite or other service providers to

receive local television stations—even though most households can

view those stations at no additional charge through their over-theair antenna or existing cable subscription. Thus, borrowers of the

proposed guaranteed loans might have trouble achieving the necessary level of market penetration for a new television service.

In addition, unlike companies that provide rural electrification

or telephone services, these borrowers would immediately confront

competitors in the marketplace. They would also face numerous

technical risks, including the risk that emerging technologies will

allow local broadcast signals to be delivered to the home through

much less costly methods.

As I mentioned, our analysis does not include any regulatory

risk, such as the availability of spectrum and appropriate satellite

slots, if that is the technology, or the ability of any new entrant to

gain licenses for those resources.

Many options to provide Federal loan guarantees for rural television service are under consideration, but the CBO has estimated

the cost of only one proposal thus far. Last fall, we estimated the

subsidy cost of the loan guarantee program initially included in

Title II of the conference report on H.R. 1554. We estimated that

this program would have a subsidy rate of about 28 percent of the

total amount guaranteed. For a $1.25 billion loan guarantee program, which was included in that bill, that translates into an estimated subsidy cost of about $350 million.

To reiterate, the cost of a loan program to the taxpayer is determined largely by the riskiness of the venture and how much of that

risk the Government will bear. One way to reduce the cost of a

loan guarantee program significantly is obviously to reduce its size,

either by decreasing the total obligation level or by guaranteeing

less than the full value of each loan.

About half of existing Federal loan programs guarantee less than

100 percent. Some guarantee as little as 50 percent. Guaranteeing

less than the full value can reduce the cost to taxpayers in two

ways: First, it obviously lowers the total dollar exposure; second,

and more important, it can reduce the default risk by encouraging

private lenders, who have more expertise in analyzing credit risk,

to scrutinize their exposure more carefully.

Modifying the terms of the loan guarantees can also change the

subsidy cost, but for the most part, such technical changes would

have a relatively small effect on the cost of the proposed program.

Other options to reduce subsidy costs include requiring borrowers

to pay fees, protecting the Government’s security in the event of default, and ensuring effective underwriting criteria.

It is possible to reduce the cost of proposals to guarantee loans

for delivering additional television services, but it is not possible to

eliminate all of the risk or the cost of making such guarantees. In

theory, the purpose of the Federal loan guarantee is to provide

credit for activities that the private marketplace considers too risky

to pursue on its own. Such support comes at a cost.

99

The surest way to reduce the cost of proposals like the one included in H.R. 1554 would be to reduce the size of the Federal loan

guarantee. Other modifications, such as charging fees or improving

underwriting criteria, are unlikely to reduce the estimated subsidy

appreciably because the activities being financed are fundamentally

risky. Options designed to reduce the cost to the taxpayers could

make the program less attractive to potential borrowers or lenders,

which in turn could reduce the demand for the loan guarantees.

I will end my testimony at this point, Mr. Chairman, because I

am sure there are questions.

Thank you very much.

Chairman GRAMM. Mr. Crippen, thank you for your primer on

loan guarantees. I think that what you have said is clearly true.

I would like to ask you four questions.

First of all, one of the concerns I have had is the concern you

raised here that where we assure that if somebody is going to borrow money there is a loan guarantee—which, when converted into

plain, simple English, means if they don’t pay, the taxpayer pays—

we should require them to put up capital. One of the things you

always face with a loan guarantee is the potential that, for example, a group of television stations might get together and say, well,

let’s form this entity and apply for the loan guarantee. But that

entity may have virtually no assets.

One of the things we are looking at is requiring that if there is

an entity set up by a group of economic interests having assets, if

that entity applies for a loan guarantee, we will require that those

who own or are affiliated or associated with that shell company

commit their own assets. Obviously, in the case of the television

stations, the assets would be the stations themselves.

You could have a county or a State set up an entity, for example,

the Utah Satellite Distribution Corporation, as a State entity with

no assets. But if we required the State of Utah to commit its tax

base as an asset, then obviously we have an asset.

I would like to get your response on the desirability of requiring

real capital to be committed to this process.

Mr. CRIPPEN. Clearly, Mr. Chairman, under any loan scenario,

private or public, the quality of the collateral is very important, not

just the amount of the collateral. Secondarily—something we have

not yet discussed—is the need to make certain that the Federal

Government’s lien is superior and not subordinate to private sector

liens, so that any exposure that the taxpayers have would be met

first. It is not just a matter of being first in line but a matter of

making sure that the private entities involved are paying close attention to the risk they are exposed to.

Chairman GRAMM. That was the third question I was going to

ask you. There has been some discussion of whether the Government would have prior claim. It seems to me that to do it any other

way—given that no one is proposing that we guarantee less than

50 percent of the loan so that obviously the taxpayer is going to

be more on the hook than anybody else—to suggest that we not

give the taxpayer first claim if the entity that has borrowed the

money defaults would be totally unacceptable. Is that your and the

CBO’s position?

100

Mr. CRIPPEN. Yes, sir. ‘‘Unacceptable’’ is not a word we would

use, but it would certainly change the dynamic of the loan dramatically. If you let the private entities—whether they are paying 30,

40, or 50 percent—get first claim, then the taxpayers are certainly

on the hook. There are a couple of expressions for that which we

probably should not repeat here, but they should not be second in

line. Certainly, the taxpayer should not be subordinate.

Chairman GRAMM. In terms of the percent of the loan guaranteed, obviously to the degree that the Federal Government doesn’t

guarantee 100 percent of the loan, that means that somebody has

to convince a private lender that their project is credible enough

they should actually have some exposure.

I take it from your opening statement that you believe it is absolutely essential that there be a private risk element in the loan and

that we not have a 100 percent loan guarantee.

Mr. CRIPPEN. Certainly, Mr. Chairman, that is the most effective

way to reduce the subsidy. If your goal is to try, as you and others

have stated, to minimize or reduce the risk to the taxpayers, that

is the most effective way to do it.

Chairman GRAMM. A final question. Senator Burns was talking

about using the language of television distribution—and, Senator

Burns, thanks to these hearings and to all of our meetings, I now

know more about this subject than I want to know—and one of the

things, it seems to me, that we want to keep a focus on in this

Committee, because it is our responsibility, is that an advantage of

requiring real capital, an advantage of requiring a private element

in the loan by not guaranteeing 100 percent of the loan, an advantage of giving the taxpayer first claim forces those that are involved to exercise prudence and due diligence. If, in the end, they

have nothing at stake, if only the taxpayer has something at stake,

I think that breeds, whether people like to admit it or not, the willingness to take risks that people would not ordinarily take if they

had assets of their own at stake. A lender making a loan where

they have no risk is a very different lender than one making a loan

who faces some risk.

I see doing the things you have outlined—requiring real capital,

guaranteeing less than the face value of the loan, giving the Federal Government first claim—but I think there is an added benefit,

and that is, it reinforces prudence and due diligence on the people

that are borrowing the money and the people that are making the

loan. Do you agree with that?

Mr. CRIPPEN. I do, and I would add that it is prudence and due

diligence by people who are probably much better able to assess the

quality of the loan or the venture itself than any of us.

Chairman GRAMM. Thank you, Mr. Crippen.

Senator Burns.

Senator BURNS. Thank you, Mr. Chairman.

Mr. Crippen, do you remember the details of the Chrysler guaranteed loan program when Chrysler was—— Mr. CRIPPEN. Probably not well enough to answer your question,

but I will try.

Senator BURNS. I believe it would be unfair, but, actually, I like

our approach, the way we are doing this right now. I also want to

caution that when we start into a program like this, had we taken

101

this same attitude, we would not have electricity on a lot of our

farms and ranches today. There is a certain amount of obligation

that we have toward rural America that would make the risk a little more palatable to the taxpayer because we have an obligation

to our rural areas that are very sparsely populated. In other words,

in eastern Montana, we have a lot of dirt between light bulbs, and

we wouldn’t have electricity today had it not been for the REA.

As we move along, I appreciate your testimony this morning. I

also appreciate your figures and your view of how we should structure this thing. I believe the Chairman has it just right. I like the

idea of reinforcing prudence and due diligence and the responsibility that borrowers have to the taxpayer, to their own viewing

audience, and also to their industry on how they approach this. I

think that is what brings it all together. It may be the very thing

that ties them together that will make it a success.

I thank you for your testimony this morning. That is all I have

to say. I appreciate your good help.

Chairman GRAMM. Thank you.

Senator Enzi.

Senator ENZI. Thank you, Mr. Chairman.

In your testimony today and in a letter that I saw you had sent,

you estimated that there would be, it looks like two different numbers, a $300 million cost or $350 million cost on the loan. Can you

give me a little more information on how much of that is up front?

Is that spread? Is that an annual cost? What factors are involved

in that?

Mr. CRIPPEN. The way the credit reform requirements are now,

since 1990, the total exposure for the taxpayer is to be estimated

up front as a net present value over the life of the loan. According

to the Credit Reform Act, at least, the $300-plus million would

have to be appropriated in the first year. It is not an annual cost;

it is the total expected cost of the credit.

The main factors, obviously, are how much of the loan is guaranteed by the Federal Government and what the risk of any default

might be.

Senator ENZI. What assumptions were made when coming up

with the $350 million cost?

Mr. CRIPPEN. The primary one, of course, is that the legislation

specifies $1.25 billion of loan guarantees and covers 100 percent of

the loans. Also, the default risk is relatively high, as I stated, because of the technical and financial risk involved.

Senator ENZI. What would you consider to be the most significant

risk in this?

Mr. CRIPPEN. I don’t know that I can say which is most significant. There is certainly a financial risk in the loan itself. But more

important, is the business a going concern? Can it get enough subscribers? There is a technical risk not only in delivering service

with current technology, but also in what new technology might do.

And there is a regulatory risk in whether or not we have slots and

spectrum and other things that would be needed to implement

these systems.

Senator ENZI. Do you have any specific suggestions on how to set

up the selection process in ways to minimize the risk through that

selection?

102

Mr. CRIPPEN. I think the Chairman was talking about how one

can set up the loan program. That is probably the best thing to

focus on, as opposed to trying to regulate the characteristics or criteria of applicants. It is the nature of the program that will bring

serious folks to the table. If they put up real assets, that will help

to mitigate the risk the taxpayers face.

Senator ENZI. Thank you.

Thank you, Mr. Chairman.

Chairman GRAMM. Senator Bunning.

Senator BUNNING. Thank you.

Is the risk dependent on the inability to have one specific entity

responsible for the loan? Maybe you can clarify that for me.

Mr. CRIPPEN. No, it is not. In fact, the legislation we scored made

provision for half of the loan going to one entity, but having other

entities eligible as well.

The one primary issue that drives our estimate is the economics.

Currently, cable passes about 97 percent of all television households, so there is a 3 percent market, if you will, as an upper bound

of people who can’t or don’t receive local television. I say upper

bound because some of those 3 percent are receiving it through

other, noncable means and over the air. There is a very small number of households who currently can’t receive local television via

another means.

That means there is instant competition in most of the country.

Ninety-seven percent of the country has another source, in cable,

so the competition that would be instantly on the ground in most

places would mean there wouldn’t be the ability to have monopoly

pricing or even relatively high pricing. But it also means there is

a very small market, and with many of these ventures, the fixed

capital costs are high and the variable cost is very low, so it is a

matter of volume and number of subscribers that help make the

venture economically viable.

Thus, it is the current economics of television in this country

that drives these estimates more so than any individual loan or

technology.

Senator BUNNING. The fact of the matter that we hear from so

many of these people is because they are, in fact, shut out of television completely.

Mr. CRIPPEN. Senator, I am obviously not privy to any of your

correspondence. Most of the letters I have seen on this subject are

complaining because people have been cut off from network programming, and that is because the local broadcasters can——

Senator BUNNING. They get something that is carried on a DSH

like cable. But they don’t get ABC, CBS, NBC, and Fox.

Mr. CRIPPEN. Right. And they don’t get that even on their DSS

because the local broadcasters have disallowed the waiver. That is

what many of the complaints that I have seen and talked to people

about focus on—that they are not getting network broadcasting as

opposed to local broadcasting.

Senator BUNNING. I am sure that DSH and DIRECTV, if they

had a minimal fee for the must-carry provision and carried something in Kentucky or, for that matter, in Wyoming or wherever,

would get enough subscribers to pay down the loan over a 25-year

103

period. Are you telling me that is the risk we are taking because

technology might overtake the ability to get that in another way?

Mr. CRIPPEN. Yes, as well as the fact that there is such a small

market in which to gain any market share for this new service,

there are a limited number of subscribers, and technology may well

overcome this need very soon. Thus, there is a technical risk in addition to the basic financial risk, which is the primary one.

Senator BUNNING. I know the CBO doesn’t issue opinions on this,

but we have to deal with it on a daily basis, that the viability of

delivering services where nobody else will go is the main cause of

this thing that we passed last year. For example, rural electrification and other things that were considered weren’t considered

essential at the time, but are considered very essential now.

How much is that worth in this equation? We have to weigh that.

Mr. CRIPPEN. We are not here to say it is worth it or not worth

it. That is not up to us. All we are saying is that the current technology and private sector are unable or unwilling to take the risk

to do this. Obviously, the intent of this legislation is to provide

some impetus to do it where it is not going to be done otherwise.

That impetus, in our view, will expose the taxpayers to some risk.

It is our duty to tell you what we think that number might be, but

not to say the legislation is right or wrong.

Senator BUNNING. You are telling us it is a high risk.

Mr. CRIPPEN. It is a relatively high risk.

Senator BUNNING. What if we were to go ahead with the guaranteed loan program, but instead of guaranteeing 100 percent of the

loan, we were to guarantee 50 percent?

Mr. CRIPPEN. Well, the more you reduce the coverage, the lower

the risk.

Senator BUNNING. Thank you very much.

Chairman GRAMM. Senator Allard.

OPENING COMMENTS OF SENATOR WAYNE ALLARD

Senator ALLARD. Thank you, Mr. Chairman.

The thing that bothers me is if a company can’t afford to provide

the loan, how are they going to be able to afford to pay down the

loan? Do you have a response to that?

Mr. CRIPPEN. The notion is that the loan guarantee would allow

a lower rate of interest and presumably reduce the overall cost of

financing to tip it over onto the side of the ledger where it is now

viable. It is certainly not——

Senator ALLARD. We create an interest subsidy, in fact.

Mr. CRIPPEN. Yes.

Senator ALLARD. Do you have any idea how many people might

benefit from this?

Mr. CRIPPEN. Of course, you have to define benefit and all of

that, but just looking at the raw data, 97 percent of the households

who have televisions in the country are passed now by cable, and

cable must carry local channels as well as network broadcasting,

so 97 percent of television households have the ability now to get

network and local programming through their cable. Of those, approximately 67 percent are currently taking advantage of that. But

the point is, if those people wanted to get local and network programming now, there is at least one alternative.

104

Part of the objective, as others said this morning, is to introduce

more competition into some of those areas. But in terms of people

who don’t now receive coverage, we believe the maximum would be

about 3 percent of households. We believe that is a maximum because they may be getting over-the-air signals, they may be getting

signals through microwave systems, or they may be getting signals

elsewhere.

Therefore, the maximum number of folks who can’t receive local

broadcasts and network signals is about 3 million households.

Senator ALLARD. I apologize for being late, and you may have answered this question, but how much do you anticipate this would

cost the taxpayers?

Mr. CRIPPEN. A little over $300 million is our number. This is a

unique program. Many of the things we score under credit reform

have thousands if not hundreds of thousands of loans, so it’s much

easier to think about in terms of a risk pool and all of those things.

But this is one event, and while the legislation makes loans available to several entities, it is still a single occurrence. You might

envision a world in which borrowers pay the loans back, as the

Chairman said, and if it is successful, there would be little cost to

the taxpayer. On the other hand, if they default, there would be a

big cost.

Thus, what we are forced to do, and what the law requires, is

to make an assessment of what the factors are and say this is ultimately the value or the risk to the taxpayer of this particular loan.

Senator ALLARD. What is the feasibility of putting maybe a $1

fee on each person that would benefit? If you did that, you would

pay for the program.

Mr. CRIPPEN. It would take $350 million, and there are only a

few million people, in theory, who would want this service.

Senator ALLARD. But you said it could be up to 3 million.

Mr. CRIPPEN. It could be. That would be $100 per person.

Senator ALLARD. To me, $2 or $3 doesn’t seem like an excessive

amount if it is a one-time deal, and that is what we are talking

about here, basically, aren’t we?

Mr. CRIPPEN. No, it would be closer to $100 per person for all

3 million people.

Senator ALLARD. Now, there are some bleak aspects to what we

are talking about here. How realistic do you think it is to expect

private sources to pick up these loans without a full 100 percent

guarantee?

Mr. CRIPPEN. I don’t know, Senator. In looking at other Federal

programs, the guarantees run from 100 percent all the way down

to 50 percent, and even at the 50 percent level there are still some

willing takers. It will obviously depend on the individual credit involved, whether the bankers or the other private financiers believe

it is a viable, going concern that they are dealing with. It depends

a lot on the specifics of the individual deal and on how much the

private sector would be willing to take as risk.

At this point, it looks like they aren’t willing to take the risk

standing alone and without this program. That is obviously the

reason for your legislation.

105

Senator ALLARD. But can you see where we could make this attractive to the individual investors with a partial guarantee at

some point there?

Mr. CRIPPEN. Sure.

Senator ALLARD. Do you have any idea where that threshold

might be?

Mr. CRIPPEN. I don’t. Again, it would depend on the specifics of

the deal and on the kind of technology involved. There are things

like regulatory risk that we haven’t taken into account here. Let’s

say there was a large corporation willing to do it. Then it would

be easier, I am sure, to get private funding. If it is an unknown

new entity, it is going to be much harder. It depends on a lot of

those characteristics.

Senator ALLARD. Mr. Chairman, I believe he brings up a good

point on regulatory risk. We do have some provisions in our banking laws where we require banks to invest in their communities,

and I am wondering if somehow the other credit couldn’t be applied

to this as an investment into rural communities. We might give

that some thought.

I would also ask unanimous consent that my prepared remarks

be made a part of the record.

Chairman GRAMM. They will be made a part of the record.

Before we conclude, I want to go back and touch very briefly on

a few things, Mr. Crippen. The more capital we require to be put

up, the less the cost is going to be, other things being the same.

Mr. CRIPPEN. Yes.

Chairman GRAMM. The more we require private lenders that are

participating to share with the Government some of the risk, the

lower the cost is going to be to the taxpayer.

Mr. CRIPPEN. Correct.

Chairman GRAMM. The stronger the claim we give the taxpayer

to claim assets if borrowers default, the lower the cost will be to

the taxpayer.

Mr. CRIPPEN. Mr. Chairman, if the Federal taxpayers were made

subordinate, it might raise the cost to the taxpayer dramatically as

opposed to slightly.

Chairman GRAMM. Well, again, it seems to me that what we are

trying to do here is not wish away a problem. Obviously, there is

both a technical challenge and an economic challenge in what we

are trying to do. It seems to me that a well-crafted loan guarantee

basically says that we are willing to incur some risk to try to encourage this to happen. But if you underwrote 100 percent of the

loan and you set no capital standards, you know the loan will be

made, but you have no guarantee whatsoever that any service will

ever be provided.

It seems to me that if you set out a prudent policy, you enhance

the chances that, in fact, you will get coverage to the people who

are going to be paying for that coverage, and in the process make

it possible to repay the loan.

Again, I get back to my point. A fiscally responsible program not

only minimizes the risk to the taxpayer, but also maximizes the

chance that in San Geronimo we are going to get access to the local

programming. Do you agree with that?

106

Mr. CRIPPEN. Certainly, the less exposure the taxpayer has, the

more likely the success of the loan. That is exactly what you are

saying.

Chairman GRAMM. Mr. Crippen, we can’t ask you and I certainly

am not asking you to wish away the problem. This is obviously a

difficult problem. We hope to put together a bill that is going to

have less exposure to the taxpayer than we had before. Obviously,

we hope that the projected cost, which we have to appropriate up

front, will be less than $350 million. All we can do is keep in mind

what you have said, write the bill to the best of our ability, and

have you score it. We will see how the process goes and whether

or not we actually achieve the goal.

No one could ask for clearer testimony than that which you have

provided today, and I want to thank you on behalf of the Banking

Committee.

Mr. CRIPPEN. Thank you.

Chairman GRAMM. Thank you very much.

We stand adjourned.

[Whereupon, at 12:10 p.m., Wednesday, February 9, 2000, the

hearing was adjourned.]

[Prepared statements supplied for the record follow:]

107

PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

Thank you, Mr. Chairman, for holding this second hearing on loan guarantees to provide local television service in rural areas. Throughout the history of the United

States we have seen several American inventions move from novelty to necessity.

In each instance the U.S. Government has helped rural areas to have equality of

access to necessity. First was the U.S. Mail—we even assure that 33 cents will deliver a letter to any- where in the United States, no matter how rural or distant from the mainland.

Then electricity became a basic necessity. The Rural Electric Associations were encouraged to fill a rural need. Phones more recently have become a health and safety necessity. Several pro- grams for rural phone service have made phones available to almost everyone. Today, television is seen as a necessity. People rely on TV not just for entertain- ment, but for news and weather and special warnings of impending disasters. The

more rural a person is, the more they need to have TV for critical information as

well as for entertainment.

No one, especially rural folks, understand ‘‘must-carry’’ or any of the other special lingo that is used to keep them from having television signals that they know are

in the air around them. We need to help everyone have this basic necessity. At the last hearing we heard from the parties that are interested in participating in the program this Committee creates. Now we get to hear from our colleagues who

were working to include a loan guarantee in the Satellite Home Viewer Improvement Act of 1999. I would like to especially thank Senator Burns of Montana for

bringing to the Senate’s attention the situation faced by rural satellite viewers and I look forward to working with him to develop a solution that truly benefits rural

America. Senator Burns has provided excellent leadership on this issue for several

years. I am interested in hearing from our colleagues on this panel their ideas and

suggestions for how we can craft a program that protects the taxpayer and brings

local television stations to rural areas as quickly as possible. I would also note and thank my colleague from Wyoming for his interest in our bill. I also want to mention and congratulate the Congresswoman from Wyoming,

Barbara Cubin, for her dedication to this issue, her early work on solutions, and

her ability to sell it on the House side. During the last hearing we learned that the satellite programming companies, EchoStar and DIRECTV, are quickly rolling out local-into-local service in the top 30

markets but have no plans to serve rural markets without some sort of Government

incentive or mandate. As we have seen in other industries, regulations and mandates often block innovative solutions to longstanding problems. I believe that any

plan this Committee develops must be targeted to bring local television stations to

unserved households in Glendive, Montana, and Cody, Wyoming, not just the top

100 or 150 markets. We should be looking to serve the unserved first—maybe pro- viding an incentive for programming companies to actively work to close the gap— from the smallest to the largest media markets. I also believe we should take into

account the size and resources of the applicants and consider limiting the program

to companies focusing their operations in rural areas. We must also ensure once the

satellite is in orbit and providing service to rural America that it not end up serving

urban areas due to economic excuses made by the operator. I have thousands of letters from constituents who live in the most remote areas

of my State and who use a satellite system to stay connected to the world. One of

the most poignant letters I received was from a constituent who lives in a rural area

near Worland, Wyoming. Worland is a particularly isolated spot in my State, and

this constituent uses a satellite dish to receive network programming. She would

like to be able to watch Wyoming stations for her news and weather, but because

of distance and geography is unable to do so. I would like to read some excerpts

from her letter expressing her frustration at not being able to access Wyoming network stations. She writes:

We have no local television station, only one local mediocre radio station, and

cable TV is not even considering coming this far out in the country. Wyoming, as

you are only too well aware, is isolated in its own right. We have no such thing

as ‘next-day’ delivery of mail or Federal Express or Airborne deliveries. . . . For

us ‘out in the boonies’ the satellite system was our only link to the Nation’s news,

entertainment, and culture. It provided us a link to the rest of our Nation and

the world.

She goes on to convey her displeasure at her inability to receive the same types

of satellite programming access that the urban areas receive. I believe people such

as this constituent should be the first to benefit from the loan guarantee program

we develop in this Committee.

108

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank the Chairman for holding the second hearing in our series of hearings to examine the issue of loan guarantees for rural broadcasting more

closely. Although it was unfortunate that the weather forced us to delay this hearing initially, I am pleased to see that this new date has afforded the Committee the

opportunity to hear from several additional Members.

I’m sure that my colleagues have received a significant response from their con- stituents on this issue, just as I have. We all have constituents who are concerned

about being able to receive their local stations, and I appreciate the opportunity to

learn more about the issue.

As a Member of the Banking Committee, I’m hopeful that we can find a way to balance the concerns of rural constituents who wish to receive their local broadcast

stations with the concerns that taxpayer money should be protected. I believe it is

possible to formulate a loan guarantee program that will take both viewpoints into

account.

I welcome my colleagues to the Banking Committee, and I look forward to their

testimony. Thank you very much, Mr. Chairman.

—————

PREPARED STATEMENT OF CONRAD BURNS

A U.S. SENATOR FROM THE STATE OF MONTANA

FEBRUARY 9, 2000

To begin with, I would like to thank Chairman Gramm for holding today’s hearing. The fact that this hearing is being held so early in the session is a clear indication of just how serious this issue is to both the Chairman and the entire Senate.

I would also like to thank the Chairman for the open and cooperative approach he

has taken with me on this issue.

I am very pleased to report that the Chairman and I have come to an agreement in principle on a bill that would provide local television signals to rural America in

a fiscally responsible way. I am confident that the ‘‘Burns–Gramm’’ bill will meet

this important goal. The Chairman and I plan to introduce the bill as soon as possible after today’s hearing, taking into account the expert testimony we will hear from Dan Crippen, the Director of the Congressional Budget Office. Providing access to local television signals is crucial to rural States. With over-the- air broadcast signals and cable delivery limited by the geography of my own State

of Montana, satellite television has been a staple of our so-called ‘‘video marketplace’’ for many years. In fact, Montana has the highest penetration level of satellite television in the country at over 35 percent. I initially proposed the rural viewer amendment because I was concerned that without it, only the largest television markets in America would receive local-intolocal service authorized by the Satellite Home Viewer Improvement Act. These are

the very profitable cities like New York and Los Angeles with millions of television

households. Even the most optimistic local-into-local plans will require 2–3 years to employ, and then to only about 70 of the 210 TV markets in the United States. What about the 140 other TV markets? There are 16 States—including my own— that do not have a single city among the top 70 markets. They should not be left

out of the information age just because they are smaller. These 140 markets that

would be left out are more than just remote, unpopulated areas. They include half

of the Nation’s State capitals and a dozen cities with nearly 500,000 people each. The rural viewer amendment was designed to spur technologies that would bring news and information to consumers who because of distance or geography are not

able to get local TV signals. It could be the launch of satellites to serve these 140

‘‘unserved markets’’ or it could be terrestrial technologies that deliver these signals.

The ability to receive local television signals is more than just having access to

local sports or entertainment programming. It is a critical and immediate way to

receive important local news, weather, and community information. Access to local

signals is particularly critical in Montana, where we experienced severe flooding last

fall and sudden blizzards are always a possibility.

During the conference on the Satellite Home Viewer Improvement Act last fall,

I became very concerned that the bill being considered did not address the needs

of rural viewers. Several of the conferees shared my concerns and eventually agreed

to accept the rural viewer amendment I offered into the conference report, which

was approved by the House 411–8. The language that was eventually accepted by

the conferees went through literally scores of different versions over several weeks

109

to make sure it was fiscally sound and administered properly. It would have created

a Federal loan guarantee program to make sure that all Americans had access to

local television signals.

While he agreed with the goal of the amendment, Chairman Gramm expressed

strong objections to its inclusion in the conference report. Eventually an agreement

was reached that the rural viewer amendment would be taken out of the conference

report and given fast-track consideration before the Senate Banking Committee. The

Chairman showed his good faith by committing to report legislation to the Senate

for floor consideration by March 30, 2000.

Chairman Gramm and I are in absolute agreement that the loan guarantee program must meet two critical conditions—the program should not favor one technology over another and it should not pose a burden to the taxpayer. I am confident

that these hearings will serve as a constructive base to make sure that the Senate

is able to vote out the best bill possible on this issue.

As I have emphasized to the Chairman during our discussions on how to draft

the bill, I have no pride of authorship about the language I submitted to the SHVIA

conferees. While I am confident that the rural viewer amendment was the best solution we could have come up with in the final weeks of session, I know it can be

improved—and improved significantly. I am not concerned with how this problem

is solved but only that it is solved in the most effective way possible, both for consumers and for taxpayers. The Chairman has a wealth of expertise in the financial

arena and I welcome his contributions on this issue.

Again, I thank the Chairman for the opportunity to testify today. I look forward

to continuing to work with him and other interested Members in a bipartisan way

to solve this critical problem for America’s rural television viewers.

Thank you very much, Mr. Chairman.

—————

PREPARED STATEMENT OF TIM HUTCHINSON

A U.S. SENATOR FROM THE STATE OF ARKANSAS

FEBRUARY 9, 2000

Mr. Chairman, Members of the Committee, thank you for allowing me to speak

on behalf of my constituents who will benefit from satellite companies being allowed

to provide local programming, and a Federal loan guarantee program that will assist the industry in reaching that goal.

Arkansas is a rural State. The rugged terrain of the Ozark and Ouachita Mountains means that many Arkansans are so far removed from over-the-air signal and

cable providers, they must rely on satellite service as their sole source of television

programming.

I have heard from hundreds of Arkansans who are concerned about their network

programming and want local television signals through their satellite providers.

This is why I am here today. I want to join with my colleagues from rural States

in support of a Federal loan guarantee program whose goal is providing unserved

Americans with local television programming.

I supported the Satellite Home Viewer Improvement Act (SHVIA) because it ensured that our constituents in unserved areas would keep their network satellite

programming and will be able to enjoy local programming someday. The challenges

created by requiring satellite companies to provide local-into-local service is another

reason why I am here today.

In order to reach our goal, I believe that satellite technology is an efficient way

to deliver that local programming; however, that is not to say that cable companies

and cooperatives may not be the best medium in certain areas.

We know that the technology and infrastructure needed to provide rural, unserved

Americans with local television signals is both underdeveloped and expensive. A

loan guarantee program will assist companies in complying with must-carry rules

and expedite the proliferation of technology needed to provide local programming to

rural customers in States like Arkansas.

Rural communities in my State are very close-knit, and local news and weather

are important to the families living there. Some people may think we are going to

a lot of trouble to make sure our rural, unserved constituents have access to local

programming. While it is nice that all Arkansans would be able to watch our beloved Razorbacks, there are much more important reasons why we must continue

our efforts.

One of the benefits of providing local channels is the ability to inform Arkansans

of dangerous weather. Tornados damage property and take lives every year in my

110

State. The ability to respond quickly to sudden changes in the weather may mean

the difference between life and death.

Another reason I am here testifying today is because I want my constituents to

have access to the best technology available, no matter where they choose to live.

It is clear that many rural communities in my home State are not served because

providing them with reliable programming is not ‘‘cost effective.’’

Can we put a price tag on the opportunities communities are given when they

have technology available to them? Personally, I believe we have the resources to

allow Americans who are living in rural areas to benefit from the technology revolution. Americans in rural areas should not be left out.

There is no doubt that reaching the goal of providing rural customers with local

programming is going to take cooperation. It is my hope that the technologies best

suited to provide the local signals to our constituents will be given the opportunity

to do so.

Mr. Chairman, I appreciate your commitment to writing a loan guarantee program that maximizes the probability that the loans will be paid back, as well as

your determination to move legislation prior to the March 30 deadline.

I commend the work you and the other Members of the Senate Banking Committee are doing to ensure that my rural, unserved constituents have access to local

programming. Again, thank you for allowing me to speak on behalf of thousands of

Arkansans who will benefit from the work being done here.

—————

PREPARED STATEMENT OF CRAIG THOMAS

A U.S. SENATOR FROM THE STATE OF WYOMING

FEBRUARY 9, 2000

I appreciate this opportunity to lend my support for the rural loan guarantee provision to bring local television service to small markets. This proposal will bring

hope to over 50 million homes in 170 television markets that otherwise would not

receive local signals via satellite.

I want to commend Senator Burns for his work on this provision. Like the State

of Wyoming, Montana has many small, rural television markets that will not get

any local signals via satellite without the rural provision. I also want to thank

Chairman Gramm for his commitment to work on this issue and to craft a fiscally

responsible plan that will ensure that all consumers—especially those in medium

and small markets—have access to local broadcast signals via satellite. Last year,

I worked with Senator Burns on a letter that attracted a broad base of support from

our colleagues for this type of proposal. I know this sentiment is shared on both

sides of the aisle.

Without this plan, only the very largest television markets in America will receive

local-into-local service authorized by this legislation. These are the profitable cities

such as New York and Los Angeles. Under the best-case scenario, only 40 of the

210 television markets will have local service via satellite. None of these markets

are in my State of Wyoming.

Unfortunately, because of distance or geography, not everyone can get a local TV

signal, even with a rooftop antenna. The rural provision in this legislation will spur

technologies that will bring news and information via satellite to consumers who

cannot get a decent over-the-air signal.

We have very harsh weather in Wyoming and we rely on local channels as an important way to receive important local news, storm information, road reports, and

school closings.

Some have raised concerns about the potential costs of this provision to the American taxpayer. I will put my record as a fiscal conservative up against anyone in

the Senate. I am not going to support any program that will jeopardize the Treasury

or the American taxpayer. I am confident that protections can be written into this

proposal that will ensure that taxpayers will not be left holding the bag.

I also believe the USDA’s Rural Utilities Service has the expertise to administer

this loan guarantee program. I am not aware of any Federal agency that has the

expertise and loan experience to bring vital telecommunications services to rural

America as does the Rural Utilities Service.

I appreciate the opportunity to be here today and look forward to working with

Members of the Committee to craft legislation that will ensure constituents in rural

America are not left out.

111

PREPARED STATEMENT OF BLANCHE LINCOLN

A U.S. SENATOR FROM THE STATE OF ARKANSAS

FEBRUARY 9, 2000

Thank you, Mr. Chairman and Members of the Committee, for allowing me to echo the comments of Senator Johnson and others who have taken a leadership role

in seeing that rural satellite viewers are not left behind. Mr. Chairman, it seems like it has all been said, but not everyone has said it. I guess that’s one of the privileges of being a new Senator in the Minority Party. I get to go last. I will take just a few moments. As I look around the witness table,

I see some new faces and I’m glad my colleagues appreciate how important this issue is to folks in rural Arkansas and rural America.

I wish we had all gathered together to get this done last fall, when I was circu- lating letters in support of the rural loan provision. We may have been able to avoid

revisiting this issue today. But, here we are and it’s important that we take this opportunity to act. I hope that through these hearings, and those we’re holding in the Agriculture Committee, we can reach a consensus on how to ensure maximum coverage in rural areas. This issue affects the daily lives and access to information of thousands of my con- stituents. Since January 1999, my office has received more letters and phone calls

about satellite legislation than almost any other issue. More than 500,000 people

in Arkansas were left without access to local TV programming when we adjourned

in November without adopting the rural loan provision in the satellite bill.

A loan guarantee is important because current satellite capacity can provide localinto-local into only the 30 or so top markets. In my home State, our largest media

market, Little Rock, is only number 57 in the country. Our other local stations are

in even smaller markets. The people who live in these communities deserve access

to the same local news, weather, and programming that folks in larger cities have.

There is widespread support in the Congress for this proposal. Last fall, when the

Chairman expressed concern over the rural loan provision, a bipartisan group of 24

Senators joined me in signing a letter urging the Majority Leader to file cloture on

and proceed to the satellite bill. After we delivered the letter, five additional Senators called my office seeking to sign it. Meanwhile, Senator Burns was circulating

another letter among Republicans, clearly demonstrating bipartisan support for the

rural loan provision.

Local broadcasters provide a valuable service to rural communities. They provide

people with local news and vital details about storm warnings and school closings.

People in rural communities need access to this information. They deserve it. I urge

Congress to do its part and see that they get it.

Thank you.

—————

PREPARED STATEMENT OF DAN L. CRIPPEN

DIRECTOR, CONGRESSIONAL BUDGET OFFICE

FEBRUARY 9, 2000

Mr. Chairman, Members of the Committee, I am pleased to be here this morning

to discuss providing Federal loan guarantees to increase access to local television

services. The proposed loan guarantee program is designed to encourage investment

in systems that deliver local television signals to mostly rural markets that are unlikely to receive those signals through existing direct broadcast satellite (DBS) companies. In my statement today, I will provide an overview of some of the factors that

affect the budgetary cost of such loan guarantees. I will also discuss options that

might reduce the cost of the proposed program to the Federal Government.

Federal assistance for this venture would be likely to prove costly. Most of the

proposals envision large capital investments. But the market for delivering local television signals would be both subject to competition and relatively small, making

it difficult to ensure that large investments could be recovered, especially in the

near term. Federal credit programs can shift—but not eliminate—the risk of such

projects. The cost to the Federal Government would depend largely on the size of

the program and how much of the risk was borne by the Government.

Factors That Affect the Budgetary Cost of Loan Guarantees

Many options to provide Federal loan guarantees for rural television service are

under consideration, but the Congressional Budget Office (CBO) has estimated the

cost of only one proposal. Last fall, at the request of Congressman Bob Goodlatte,

the CBO estimated the subsidy cost of the loan guarantee program initially included

112

in Title II of the conference report for the Intellectual Property and Communications

Omnibus Reform Act of 1999 (H.R. 1554). My testimony this morning is based on

our analysis of that program. H.R. 1554 envisioned a $1.25 billion loan guarantee program. Up to half of that amount could be awarded to a single borrower, with the remainder divided among

several smaller borrowers (each receiving no more than $100 million). The loans

would be used to finance the infrastructure needed to deliver local television broadcast signals—whether through satellite facilities, cable systems, or other wired or wireless systems. Although the legislation was written to cover a variety of possible

technologies, key supporters argued that the program should be used to finance satellite transmission of local television signals. The budgetary treatment of loan guarantee programs is governed by the Federal Credit Reform Act of 1990 (as amended). That Act makes commitments of Federal

loan guarantees contingent on the appropriation of enough funds to cover the estimated subsidy associated with the guarantees. Under credit reform, the subsidy cost

of a loan guarantee is the estimated long-term cost to the Government, calculated

on a net present-value basis. Budget authority for the subsidy is recorded in the

year it is provided; outlays are shown in the year in which the guaranteed loans

are disbursed.

The subsidy cost of federally guaranteed loans typically depends on the extent of any defaults and the degree to which those losses are offset by proceeds from liquidating collateral and by income from fees or other charges. (Some loan guarantees

also provide an explicit interest rate subsidy, which adds to the cost.) The credit risk

of existing loan guarantee programs varies widely. Some programs have average default rates of less than 2 percent; others, between 10 percent and more than 20 percent, net of recoveries. Most existing programs guarantee a high volume of loans

each year, effectively pooling the credit risk of many individual borrowers. In addition, fees—particularly up-front fees—offset some of the subsidy cost of most loan

guarantee programs. In the CBO’s view, providing local television service in rural areas is likely to prove financially and technically risky. For such services to be economically viable,

millions of households would have to be willing to pay a premium to satellite or

other service providers to receive local television stations—even though most house- holds can view those stations at no additional charge through their over-the-air antenna or existing cable subscription. Thus, borrowers of the proposed guaranteed

loans might have trouble achieving the necessary level of market penetration for a

new television service. In addition, unlike companies that provide rural electrification or telephone services, those borrowers would immediately confront competitors

in the marketplace. They would also face numerous technical risks, including the

risk that emerging technologies will allow local broadcast signals to be delivered to

the home through less costly methods.

To estimate the subsidy cost of the loan guarantee program for rural television

service, the CBO consulted industry experts and investment analysts and examined

the credit ratings of firms in the satellite television industry. That information is

useful in estimating subsidy rates because the different credit ratings reflect analysts’ expectations of defaults. For example, a 1999 report by Standard & Poor’s indicated that the cumulative default rate for investments with a ‘‘BBB’’ rating is less

than 8 percent; for those with a single ‘‘B’’ rating, the default rate is 32 percent;

and for those with a ‘‘CCC’’ rating, the rate is 45 percent. Based on our review of

publicly available information about the ratings of companies in similar industries,

we anticipate that the credit rating for rural television projects would be at the

riskier end of that range.

We also examined the legislative terms and conditions that might mitigate such

risk. For example, the loan guarantee program in H.R. 1554 would give the Government a superior lien on the assets of a borrower in the event of default, but it would

let the Administration decide how much collateral to require. Likewise, judgments

about the reasonableness of borrowers’ business plans and the total amount of the

loan guarantees would be made by the Secretary of Agriculture. Finally, H.R. 1554

would authorize the Secretary to levy fees and accept a payment from a non-Federal

source to fund all or part of the credit-risk premiums.

The CBO estimated that the loan guarantee program authorized by Title II of

the conference report for H.R. 1554 would have a subsidy rate of about 28 percent

of the total amount guaranteed. For a $1.25 billion loan guarantee program, that

translates into an estimated subsidy cost of about $350 million (assuming that the

optional fees would not be charged or collected). Because H.R. 1554 would make implementation of the program contingent on future appropriation action, those costs

would be discretionary. (A copy of our letter sent to Congressman Goodlatte about

H.R. 1554 is attached.)

113

Options to Reduce the Cost of Loan Guarantee Programs

As I noted earlier, the cost of a loan program is determined largely by the riski- ness of the venture and how much of that risk the Government will bear. One way

to reduce the cost of a loan guarantee program significantly is to reduce its size— either by decreasing the total obligation level or by guaranteeing less than the full

value of each loan. Modifying the terms of the loan guarantees can also change the

subsidy cost, but for the most part, such technical changes would have a relatively

small effect on the cost of the proposed program. Other options to reduce subsidy

costs include requiring borrowers to pay fees, protecting the Government’s security in the event of default, and ensuring effective underwriting criteria.

Reduce the Obligation Level

The most simple way to decrease the size of the program is to reduce the amount of loans that the Government is offering to guarantee. H.R. 1554 would authorize

guarantees totaling $1.25 billion. Lowering the amount of obligations would cause

a proportional reduction in the Government’s exposure and thus in the subsidy cost.

Guarantee Less Than the Full Value of the Loan

Another way to reduce the potential cost to taxpayers is for the Government to guarantee less than 100 percent of the value of each loan. About half of existing

Federal loan guarantee programs guarantee less than 100 percent of insured loans;

some guarantee as little as 50 percent of the value of their loans. Examples at the

lower end of the range are the Development Credit Authority program at the Agency

for International Development (AID) and the Section 7(a) General Business Guaranty program at the Small Business Administration (SBA). Guaranteeing less than the full value can reduce the cost to the Government in two ways. First, it can lessen the Government’s direct exposure for each loan by low- ering the dollar amount of the guarantee. Although that would reduce the cost of

the proposed program, it would run the risk that private lenders might be unwilling

to lend enough funds to meet borrowers’ needs. Second, it can reduce the default

risk by encouraging private lenders to exercise much more care in underwriting

loans. The profit motive should push lenders to lend only to those borrowers most

likely to repay the debt. Private lenders also have more expertise in analyzing business plans, industry trends, and financing options than their Federal counterparts.

However, having some degree of private financing is not a panacea for eliminating

risk—both the AID and the SBA programs mentioned above have default rates of about 15 percent.

Require Borrowers to Pay Fees

Most current loan guarantee programs require borrowers to pay either an up-front fee (when the loan is made) or an annual fee (collected as the borrower pays off the

loan). Up-front fees are more common and typically range from less than 1 percent

to more than 5 percent of the loan amount.

If properly designed, up-front fees can reduce the subsidy cost by a corresponding amount. Two caveats apply, however. First, there is a limit to the amount of fees

that borrowers would be willing to pay—and that amount is likely to be far smaller than the subsidy cost of this program. Second, unless borrowers are prohibited from

capitalizing the fee either directly (by adding it to the loan amount) or indirectly

(by having third parties pay the fee, which would in turn be recovered through increased costs for equipment or services), their debt-service costs, and thus the risk

of default, will increase. Capitalizing fees can also result in borrowers’ having insuf- ficient collateral to support the loans.

Many Federal programs, particularly those involving housing and business loans, impose annual fees. The fees typically range from about 0.5 percent to 0.75 percent

of the outstanding balance of a loan. Such fees can significantly reduce subsidy costs

for programs that are characterized by a low risk of default and by long maturities

(between 15 years and 30 years). However, annual fees cannot be collected if a loan

is in default, so they may not significantly reduce subsidy costs for programs in

which the expected default rate is high.

Protect the Government’s Security in the Event of Default

H.R. 1554 would make Government liens superior to all other liens on the assets

of borrowers, up to the unpaid balance of the guaranteed loan. Such priority ensures

that the Government would maximize the amount it could recover in the event of

default.

Some parties have suggested that legislation allow the Government’s guarantee

to be subordinate to private sector financing. But that would reduce the incentive

for the lender to assess the riskiness of the loan and increase the likelihood that

if a default occurred, the Government’s loss would be very significant. For example,

114

the SBA guarantees financing to businesses in both the Section 504 Certified Development Company and the Section 7(a) General Business Guaranty programs. In the

504 program, the Government’s guarantee is subordinate to that of the lender; in

the 7(a) program, the Government’s guarantee is equal in priority. Recoveries from

defaulted loans have been significantly lower in the 504 program, even though it

requires collateral in real estate and equipment and the 7(a) program does not.

Ensure Effective Underwriting Criteria

H.R. 1554 would direct the Secretary of Agriculture to develop underwriting criteria for the guaranteed loans in consultation with the Office of Management and

Budget and an independent accounting firm. Although the CBO expects the resulting standards to be consistent with current Government practice, lawmakers may

want to spell out some of the criteria in law. For example, legislation could require

that the liquidation value of the collateral be equal to the outstanding principal balance of the loan. Even at that level, however, collateral alone would not eliminate

the subsidy cost of a program because of the time and expenses associated with care

and preservation, liquidation, and litigation of the collateral.

The criteria for evaluating loans could also be strengthened. H.R. 1554 would

allow projections of an applicant’s ability to repay a loan to include the value of collateral pledged to protect the Government’s interest. Collateral provides a basis for

recoveries in the event of defaults; it is not a substitute for cash flow. As a result,

it is not a useful basis for determining whether an applicant’s project is viable.

Conclusion

It is possible to reduce the cost of proposals to guarantee loans for delivering additional television services to rural areas, but it is not possible to eliminate all of the

risk or cost of making such guarantees. In theory, the purpose of a Federal loan

guarantee is to provide credit for activities that the private marketplace considers

too risky to pursue on its own. Such support comes at a cost.

The surest way to reduce the cost of proposals like the one included in H.R. 1554

would be to reduce the size of the Federal loan guarantee. Other modifications, such

as charging fees or improving underwriting criteria, are unlikely to reduce the estimated subsidy appreciably because the activities being financed are fundamentally

risky. Options designed to reduce the cost to the Government could make the program less attractive to potential borrowers or lenders, which in turn could reduce

the demand for the loan guarantees.

115

116

117