U.S. GOVERNMENT PRINTING OFFICE

64–021CC WASHINGTON : 2000

THE RURAL LOCAL BROADCAST SIGNAL ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

H.R. 3615

MARCH 16, 2000

Serial No. 106–119

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

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

SUBCOMMITTEE ON TELECOMMUNICATIONS, TRADE, AND CONSUMER PROTECTION

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

MICHAEL G. OXLEY, Ohio,

Vice Chairman

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

BILL LUTHER, Minnesota

RON KLINK, Pennsylvania

TOM SAWYER, Ohio

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Crippen, Dan L., Director, Congressional Budget Office .............................. 13

Goodlatte, Hon. Bob, a Representative in Congress from the State of

Virginia .......................................................................................................... 11

McLean, Christopher A., Acting Administrator, Rural Utilities Service ..... 23

Parsons, R. Kent, Vice President, National Translators Association ........... 27

Viadero, Roger C., Inspector General, U.S. Department of Agriculture ...... 20

(III)

(1)

THE RURAL LOCAL BROADCAST SIGNAL ACT

THURSDAY, MARCH 16, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON TELECOMMUNICATIONS,

TRADE, AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

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

(chairman) presiding.

Members present: Representatives Tauzin, Cox, Deal, Largent,

Cubin, Shimkus, Wilson, Pickering, Bliley (ex officio), Markey, Boucher, Luther, and Sawyer.

Staff present: Justin Lilley, majority counsel; Cliff Riccio, legislative clerk; and Andy Levin, minority counsel.

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

Today the subcommittee takes up the issue of loan guarantees.

This important legislation almost made it to the finish line in the

last session of Congress. It fell short, though, because of procedural

objections, as you know, in the Senate.

Still, it was very clear at the time that broad support existed for

the idea that Congress enact legislation that would provide loan

guarantees to companies that carry local broadcast signals to those

markets where satellite carriers currently do not and in many

cases do not plan to do so.

We now have the opportunity to look at this matter in a deliberate and considered fashion, which frankly is a good thing. While

many can agree that this is an important matter, it is equally important that we get it right. This includes asking some very precise

and critical questions such as the prospects for actually providing

universal access to subscription based systems that will carry local

broadcast systems.

We also must ensure that we legislate in a technology neutral

manner. We do not pick among the industry’s potential winners

and losers. We should be indifferent as to how many companies

head the multi-channel video market, and concern ourselves more

with companies who simply enter those markets.

Along these lines I would note that some claim that the version

of the legislation in the House is not yet technology neutral, whereas the Senate version may be. I look forward to hearing from our

dear friend Mr. Goodlatte and the others on this issue as to whether such is the case and we might be able to remedy it.

We must also take this opportunity to explore the existing loan

programs administered by the Department of Agriculture. We have

2

with us today Mr. Chris McLean, the Administrator of Rural Utilities Service, who can help the subcommittee better understand the

issues raised by two very recent disturbing audits by the Inspector

General.

Particularly we need to ensure that the legislation before this

subcommittee doesn’t invite more of the same problems pointed out

in those audits, or whether the legislation’s strict underwriting requirements can actually become a model for improving the existing

programs that were so heavily criticized in those audits. We need

to talk about that this morning as well.

In the end this matter deals not only with the Federal credit policy, but indeed with telecommunications policy. In particular, we

are attempting to define the role of the Federal Government in ensuring that multi-channel video providers have affordable access to

capital. Help us find the right balance, and we’ll try to get it right.

Finally, let me also say that the National Telecommunications

and Information Administration could not be with us today. I understand most of them are in Peru with the Chairman of the FCC.

Legislation before the subcommittee this morning would assign the

NTIA an important critical certification role.

And of course we will need and look forward to hearing the views

of the NTIA at some point, and we will be communicating with the

agency in writing on this matter. In the meantime I’m very interested in hearing from our distinguished witnesses, and of course

my good friend Mr. Goodlatte.

The Chair will recognize the gentleman from Virginia, Mr. Boucher, for an opening statement.

Mr. BOUCHER. Thank you very much.

Mr. TAUZIN. Mr. Boucher of course is the cosponsor of Mr.

Goodlatte’s legislation.

Mr. Boucher.

Mr. BOUCHER. Thank you very much, Mr. Chairman. And I am

indeed pleased to be a cosponsor with Mr. Goodlatte on the legislation that will provide this very much needed loan guarantee. The

changes that this Congress made in 1999 to the Home Satellite

Viewer Act enabled that important new service, and that new service is the ability of the direct broadcast companies to offer not just

their national fare but also, for the first time, local television programs.

And the availability of those programs will produce an enormous

benefit. Cable rates will for the first time be market based, because

the direct broadcast satellite companies can now become a full and

complete and viable competitor for local cable TV, offering exactly

the same services that cable television provides.

The new service also provides a potentially tremendous benefit

for millions of rural residents who live primarily in mountainous

terrain and who because of that terrain do not have access at the

present time to their local television programs. They’re blocked by

the mountain from receiving those signals over the air, and cable

TV does not extend to where they reside. And so the new local into

local service for the first time will offer to rural residents an opportunity to get their own local TV signals.

The business plans, however, of the major direct broadcast satellite companies do not extend into rural America. Those business

3

plans in fact don’t even extend to the small and medium sized cities across the United States. The DBS companies have announced

the intention to serve initially 33 of the largest cities in the Nation

with the new local into local service, and potentially over time to

serve as many as 66 of the largest cities in the nation. But that

still excludes the medium sized and small cities and virtually all

of rural America.

Realizing this fact, Mr. Goodlatte and I, who both served as conferees on the Home Satellite Viewer Act last year, proposed to the

Conference Committee an approach that would buy down the cost

of capital sufficiently to enable this local into local service to be

provided, not just in the largest cities, but in all 211 television

markets across the United States.

Our approach is a loan guarantee of $1.25 billion, and a great

deal of advice has been received of a technical and financial nature

indicating that a loan guarantee of this level would be sufficient to

enable the launch of enough satellites to provide this service to all

211 local television markets across the United States.

The conference committee adopted this proposal unanimously.

The conference agreement that contained it was then approved in

the House of Representatives by a vote, as I recall, of 418 to 11.

But a single United States Senator suggested that his committee

should have an opportunity to review this proposal, and as a consequence of his request the local guarantee provision was removed

from the conference report.

But at the time that it was removed, the leadership in both the

House and the Senate made a pledge that a freestanding bill introduced this year containing the loan guarantee would be considered

on the floor of both Houses by no later than April 1, and in fact

we are on track to meet that schedule.

A bill introduced by that Senator in the Senate has been approved unanimously by the Banking Committee in the Senate. Mr.

Goodlatte’s legislation has been approved unanimously by the Agriculture Committee in the House. And I want to commend Mr.

Goodlatte on what is an absolutely extraordinary performance of

legislative skill, in having a bill be introduced 1 week and then be

approved unanimously in committee the next week. I’ve been in

Congress for 18 years, and I don’t recall that record having been

surpassed in any instance. So Mr. Goodlatte has done a wonderful

job in bringing this measure forward.

The legislation is in fact technology neutral. It is very much in

the tradition that has been established in this Congress over decades of enabling people who do not get basic services, because the

for-profit companies can’t afford to provide it in their region, to receive that service as a consequence of government facilitation. This

was done when electricity service was introduced into rural America. It was done again when telephone service was introduced into

rural America.

And even today, rural telephone co-ops and rural electric co-ops

receive government financial assistance in order to make that service affordable where it is not affordable for private companies to

provide. And we are simply through our legislation extending that

time honored tradition to the next generation of technology and

making sure that rural Americans and people who reside in the

4

small and medium sized cities around the country can receive the

same benefits of this local into local service that the residents of

the larger cities are going to receive.

I want to commend Mr. Goodlatte again. I’ll look forward to his

testimony and that of our other witnesses. And I thank you, Mr.

Chairman, for scheduling this timely and very important discussion.

Mr. TAUZIN. I thank my friend. I might add that Mr. Goodlatte

did such a remarkable job on that bill that Hollywood is looking at

making a movie about him, ‘‘Looking for Mr. Goodlatte.’’ Mr. SAWYER. Will that be a short?

Mr. TAUZIN. We’re extremely pleased now to welcome the Chairman of the full committee, Mr. Bliley, the gentleman from Virginia.

Chairman BLILEY. Thank you, Mr. Chairman.

Let me begin by welcoming my friend and colleague from Virginia, Mr. Goodlatte. It’s been a pleasure working with him over

the years. Virginia can count on him for his energy and enthusiasm

for many years to come.

Today the subcommittee considers an issue that I know is very

important to him, the issue of loan guarantees. Congressman Goodlatte has introduced legislation that would authorize the Federal

Government to subsidize the construction of multi-channel video

systems that could deliver broadcast signals to rural markets as

well as other services such as high speed Internet access.

Congress has a strong and historical commitment to rural infrastructure development, and I commend Congressman Goodlatte for

opening a dialog on whether we should expand this commitment to

cover subscription based television services. I urge my colleagues

today to examine closely the potential cost to the American taxpayer. CBO notes that providing local television service in rural

areas is likely to prove financially and technically risky.

I suspect that this is true. For any multi-channel service provider

to make money, millions of households will have to be willing to

pay a premium to satellite or other service providers to receive

local television stations, even though most Americans can view

those stations today at no additional charge through their over-theair antenna or existing cable subscription.

Let me also say a word about the proposed program. The proposed legislation would delegate responsibilities to the Rural Utilities Service which currently administers loan programs for the development of telephone networks and electric utilities in rural

areas. It is noteworthy that unlike rural electrification or telephone

services, there is immediate and intense competition in the video

programming marketplace. I’m concerned about taxpayer risk in

such a high stakes game.

The Wall Street Journal reported this morning that the Inspector

General, who is with us today, has found that the telephone and

electric utility programs are in need of serious review. The Inspector General found, for example, that many of the telephone companies that borrow from the RUS are financially strong and more

than capable of obtaining financing from private lenders.

As for the electric utilities that borrow from the RUS, the Inspector General found that these utilities are playing the stock market,

rather than investing in their communities as Congress had inVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
5

tended. I look forward to hearing from the RUS today on the Inspector General’s finding. In the meantime, Congress needs to proceed very cautiously before expanding the RUS’s authority. I look

forward to working with my colleagues as matters proceed.

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

[The Wall Street Journal article follows:]

[March 16, 2000—The Wall Street Journal]

RURAL UTILITIES INVEST FUNDS IN MARKETS INSTEAD OF LOCAL PROJECTS, AUDIT

SAYS

By Kathy Chen and Bruce Ingersoll, Staff Reporters of The Wall Street Journal

WASHINGTON—An Agriculture Department audit found that the nation’s rural

utilities are sinking billions of dollars into stocks, bonds and other investments instead of rural development, and the report is becoming fodder for a congressional

battle over a rural television bill.

The audit shows hundreds of electricity cooperatives with low-interest government

loans had nearly $11 billion of outside investments during 1997, the last year for

which figures are available. But only $61 million, or about 0.5%, went into local

business ventures or rural infrastructure.

Contrary to Congress’s intent, the 787 borrowers on the roster of the department’s

Rural Utilities Service put most of their cash and other assets into a vast array of

government securities, stocks, bonds, real estate and other nonrural investments.

These findings by the department’s inspector general are set to be released at a

House Commerce Committee hearing today. The audit follows an inspector general’s

report in February that faulted the Rural Utilities Service for continuing to lend

large sums of money at discount rates to rural telephone companies that no longer

need government assistance.

The audit comes as Congress is considering legislation that would give the agency

oversight for a third $1.25 billion loan guarantee program to help companies that

want to beam local TV signals to rural and other underserved areas.

The House and Senate are working on different versions of the legislation, which

would supplement the new law allowing satellite TV shows. However, satellite carriers have said they plan to roll out the service to only the top urban markets, leaving many of their rural customers without access to local TV shows.

Some members of Congress are pointing to the audits as a reason not to allow

the agency to administer the rural TV plan—or not to approve the plan at all. Citing the agency’s ‘‘somewhat lax oversight’’ of previous loan programs, Rep. Steve

Largent (R., Okla.) is ‘‘somewhat skeptical of the need to hand out another $1.25

billion in loan guarantees,’’ said bob Bolster, his telecommunications staffer. ‘‘He

feels we should let the marketplace take care of itself.’’

But Rep. Bob Goodlatte (R., Va.), the sponsor of the House bill, said the measure

is essential to bring local TV shows to tens of millions of satellite TV consumers.

And the Rural Utilities Service has an ‘‘excellent reputation’’ for administering loan

programs, he added.

A Rural Utilities Service spokesman said the agency’s record is ‘‘pretty good’’ for

administering loan programs. Regarding the audit of utilities’ loans, he said there

are no specific requirements on how co-ops should invest and ‘‘we followed the statute.’’

The audit singles out several examples of cash rich rural utilities that could afford

to invest significant sums in their communities. The biggest utility in the audit,

Oglethorpe Power Corp., with $5.1 billion in assets, had $399 million of outside

investments in 1997, but the Atlanta utility sunk no money into rural development.

Oglethorpe spokesman Gregory Jones said the auditors overlooked the fact that

Oglethorpe’s mission is to supply smaller electricity cooperatives with cheap power.

‘‘They, in turn, can afford to get involved in economic development and they can attract industry into their areas with their very competitive [electricity] rates,’’ he

said. Oglethorpe also runs an economic development program throughout Georgia.

In testimony today, Inspector General Roger Viadero is likely to question the investments of Northern Virginia Electric Cooperative, which serves a rapidly urbanizing part of the Washington metropolitan area. In 1997, the cooperative invested $100,000 in a marketing subsidiary and began selling two big companies’ satellite TV dishes to northern Virginia and Washington residents. The money, Mr.

Viadero contends, could be better spent on badly needed services for rural Americans.

6

A spokesman for the Manassas, Va., cooperative said its rural customers are being

offered the same satellite TV service as city dwellers. In 1999, the cooperative had

$128 million invested, including $27 million of stocks and bonds managed by a brokerage firm for ‘‘maximum return,’’ the spokesman said. ‘‘The investment income

helps us keep our rates as low as possible,’’ he said, adding that the cooperative ‘‘never has been approached’’ for venture capital.

Mr. TAUZIN. I thank my friend the chairman.

Now the ranking minority member, the gentleman from Massachusetts, Mr. Markey, for an opening statement.

Mr. MARKEY. Thank you, Mr. Chairman. I want to commend you

for holding this hearing on rural television issues. The legislative

effort underway stems from the debate last fall concerning revisions in the Viewer Act and the advent of local to local service from

direct to home satellite providers. Satellite provided local to local

service promises to extend to millions of consumers much needed

competition in the multi-channel video marketplace.

When Congress was considering legislation last year, it was clear

that the two existing DBS companies would not be providing local

to local service beyond the top markets in the most populated areas

of the country. The legislation before us today was prompted by a

desire to extend local to local service that urban America was going

to receive to rural communities as well. This effort to do so is built

upon America’s experience in extending electricity and phone service to rural towns and hamlets.

I have long supported the universal concept. It ensures that the

poor as well as rural Americans do not fall behind, and that they

can receive the basic services that more affluent urban Americans

do, at affordable prices. I know that my grandfather and grandmother would not have left the farm in Ireland if they had local

into local direct broadcast service, coupled with a very strong price

support system for the goods which they were raising on the farm.

Unfortunately the New Deal had not arrived in the southeastern

corner of Ireland by 1902, and so we came here to America.

But there’s no question that we want to preserve those people in

rural America with those price supports for their farm products

and with additional programs to help them get local into local direct broadcast television service as well. These are critical programs to maintain that lifestyle.

The legislation before us, however, needs some additional analysis and clarifications. For instance, the legislation establishes a

loan guarantee program to improve access to local television stations in unserved and underserved rural markets. From a universal service perspective I understand what an unserved market

is. It is someone who doesn’t get the service.

Yet in this context it isn’t clear whether the service they are failing to receive is satellite delivered local to local service or the delivery of local television stations by any other means, such as provision of local TV stations from an incumbent cable operator. Depending on what the answer to that question is, then we have to

delve into what an underserved market is.

Underserved could mean a rural community that in fact does receive local TV stations from the cable operator in town but doesn’t

get local to local from a DBS provider. If people can already get

local TV stations from a cable operator, then the government

doesn’t need to get involved to extend service to that area in the

7

same way that we extend electricity and phone service to areas

that otherwise wouldn’t get it. The cable guy is already there.

Consumers into that area, however, may understandably want

an alternative to the cable operator, perhaps one they could use in

conjunction with their satellite dish. If we are proposing to extend

loan guarantees to provide alternatives to the local TV service

rural consumers already receive from an incumbent, it makes zero

sense in my view to permit incumbents to be eligible for loans.

If the incumbent monopoly already provides local TV stations to

a community, then rural consumers in that community are choosing not to subscribe to that service for some reason. That reason

is most likely price. Why would Congress ask these rural citizens

for their taxpayer dollars to subsidize the only choice in town they

don’t want anyway? To do so would stand competitive telecommunications policy on its head, rather than addressing the lack

of competition, our lingering concern about affordable cable rates.

We’re proposing to allow the sole multi-channel provider in a

rural area a chance to solidify their position with help from the

United States taxpayer and without any obligation from the loan

recipient to price the subsidized service to consumers affordably.

I hope before this bill leaves this committee we can make it crystal clear that incumbents are not to be eligible for subsidies, as

well as clarifying other areas of the bill, so that we bring the benefits of competition and local TV service to rural America without

extending the headaches of a monopoly era of telecommunications

that this committee has time and again tried to end.

I thank you, Mr. Chairman. I yield back.

Mr. TAUZIN. I thank my friend. I point out to my dear Irish

friend from Massachusetts, with St. Paddy’s Day coming tomorrow,

it’s an absolute enlightenment to me to learn it was really the potato couch famine that sent your family to America.

I yield to my friend the gentlelady from New Mexico, Mrs. Wilson.

Mrs. WILSON. Thank you, Mr. Chairman. I’m tempted to just

yield my time to Mr. Markey and Mr. Tauzin so we can be entertained more this morning. But I will yield my time and put any

statement in the record.

Mr. TAUZIN. I thank the gentlelady.

The gentleman from Ohio, Mr. Sawyer.

Mr. SAWYER. Thank you very much, Mr. Chairman. I am inspired

by the example of the gentlelady from New Mexico, and also insert

my statement into the record.

Mr. TAUZIN. I thank the gentleman. The gentlelady, Mrs. Cubin

from Wyoming.

Mrs. CUBIN. I’m going to inspire you with an opening statement,

Mr. Chairman.

Mr. TAUZIN. The gentlelady may proceed.

Mrs. CUBIN. I thank you for bringing what I consider to be this

very important bill before the subcommittee today. As an original

cosponsor of the measure, I am pleased with this plan that will ensure that all consumers, specifically those in medium and small

markets, have access to local broadcast signals by way of satellite.

The conference report to H.R. 1554, the Intellectual Property and

Communications Omnibus Act, included this same $1.25 billion

8

loan guarantee to help support the launch of certain systems dedicated to provide television service to hundreds of rural and underserved and unserved markets. Unfortunately the bill ran into some

roadblocks in the Senate, not on the merits of the bill, I don’t believe, but on supposed jurisdictional grounds.

I am pleased that we have this bill in front of us today, because

without this plan only the largest television markets in America

will be able to receive local into local service authorized by this legislation. The cities that will be served will only be those with millions of television households. As we all know, the largest TV markets are currently enjoying local into local service over their satellite systems, because of the hard work and dedication of this subcommittee.

Wyoming I think is a perfect example of why we need to enact

the legislation that’s before us today. The two largest television

markets in Wyoming are Casper and Cheyenne. They rank 197 and

199 respectively. Even under the most optimistic local into local

plans, I don’t believe that Wyoming TV markets would ever receive

local into local without the loan guarantee provision that’s included

in this bill.

So today’s testimony from CBO Director Crippen details some of

the financial pitfalls that may occur if we enact this legislation.

And I can only say that in lieu of mandating that satellite providers serve rural areas, this is our only option. Some of our concerns I think can be alleviated with the recommendations that are

put forth by the USDA’s Inspector General to ensure that Rural

Utilities Service the Rural Utilities Service makes better use of

RUS loan funds and invest more wisely in rural America.

I am committed to moving this piece of legislation so rural satellite customers can enjoy the same television programming as our

urban friends. And I truly appreciate Mr. Markey’s support of the

concept if not the words. And I would like to point out that when

we live in a country like America, where we are so diverse geographically and socially, in places like where Mr. Markey lives,

people are crowded more together than they are in places like

where I live, but we’re all one country.

There isn’t one single kilowatt of electricity generated by nuclear

power in the entire State of Wyoming and in some of the other

Western States. And so I see the rural contribution in exchange for

the contribution for universal service is that we take some of the—

you know, we’ll be storing maybe in New Mexico, maybe in Idaho,

we’ll be storing and treating some of the nuclear waste products

that result from generating electricity.

And so it is one country. We all have to make sacrifices for one

another. Sometimes we have to identify what those sacrifices we

make actually are. I’m happy to do it for urban America, and I appreciate the folks in urban America being willing to do the same

thing for rural America.

And I yield back the balance of my time, as if I had some, Mr.

Chairman.

Mr. TAUZIN. I thank the gentlelady. The gentleman, Mr. Shimkus

from Illinois, is recognized.

Mr. SHIMKUS. Thank you, Mr. Chairman. I want to thank Bob

for his efforts and for joining us today. I want to thank you for callVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
9

ing this hearing. I want to mention our colleagues Joanne Emerson

and Eva Clayton who have re-energized the Rural Caucus, which

I am a member of. I look forward to following this legislation very

closely and reporting back to them on how successful we will be in

pushing something that everyone understands and realizes is very

important.

I represent a large rural district, it covers 19 counties over 300

miles. Only one third is now receiving and will be finished receiving local into local St. Louis market, which should be the end of

the month of April, we should have the full coverage of that area,

which is a good sector of the district, but still leaves a lot of the

areas still uncovered. And we’ve been through the drill before, talking about the benefits of local broadcast for community broadcast,

emergency service broadcast warnings.

I harken back to the flood of 1993, when the levies broke and

people had to get out of their towns and communities. So I’ve been

a strong advocate of the importance of the local broadcasters in

providing the service that we asked them to provide.

This ability to help rural Americans get access to their local stations and using any means possible is one that we want to make

sure we do with respect to obviously the conservative ideology of

this Congress, that it’s not wasteful, but it’s in a way that we encourage and empower those to provide services that we know are

important for all citizens irrespective of whether they’re from an

urban area or rural area.

And I appreciate the hearing. I look forward to learning more,

Mr. Chairman. I yield back my time.

Mr. TAUZIN. I thank the gentleman. The gentleman from Oklahoma, Mr. Largent, is recognized.

Mr. LARGENT. Thank you, Mr. Chairman. Only a few months ago

Congress responded to the concerns of millions of American television viewers by enacting the Satellite Home Viewers Improvement Act. One of the primary reasons for the legislation was to

offer consumers a complete alternative to cable by granting satellite carriers the ability to carry local broadcast signals back into

their local markets, otherwise known as local into local.

To a large extent the Act appears to be working. The largest carriers appear to be providing local into local to 26 metropolitan markets. It’s projected that ultimately satellite providers will be providing local into local service to 70 percent of American households.

The question before us today is, what do we do about the remaining 30 percent of Americans who live in sparsely populated rural

areas?

One option is H.R. 3165, the Rural Local Broadcast Signal Act

introduced by our colleague Mr. Goodlatte. This legislation would

authorize the Department of Agriculture through the Rural Utilities Service to provide $1.25 billion in loan guarantees to finance

the delivery of local television programming to subscribers of satellite and cable and wireless delivery systems.

Frankly I’ve always had reservations about loan guarantee programs. And after reviewing the testimony submitted by the Congressional Budget Office and the Department of Agriculture’s Inspector General, my concerns have grown. According to the testimony submitted by Mr. Crippen, Director of CBO, ‘‘Federal assistVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
10

ance for this venture would likely prove costly. Most of the proposals envision large capital investments. But the market for delivering local television signals would be most subject to competition

and relatively small, making it difficult to ensure that large investments can be recovered, especially in the near term.’’

I also took note of CBO’s analysis that, based upon its review,

the default rate for companies that may qualify for this program

could be as high as 44 percent. I hope all the taxpayers in America

are listening to this testimony. The testimony submitted by Mr.

Roger Viadero, the Department of Agriculture’s Inspector General,

raises even more serious questions about how the Rural Utilities

Service administers its loan programs and its commitment to stimulate investment in rural America.

Recently the Inspector General’s office conducted two RUS audits, one on the electric program and the other on the telephone

program. What did the Inspector General’s audit reveal? According

to Mr. Viadero’s testimony, the audit of the electric program ‘‘discovered that RUS electric borrowers have not become major players

in financing America’s rural infrastructure, despite the fact these

borrowers hold almost $11 billion in total investments. Disappointingly, only one half of 1 percent of this $11 billion, about $61 million, is actually invested in rural America.’’

So where are these subsidized loans going? According to the

audit, these loans are being invested in money market certificates,

stocks, bonds, and mutual funds, not in rural America. The audit

of the telephone program released on February 11 of this year discovered that more than half of the 815 RUS loans, totaling almost

$1.9 billion, went to 434 companies that are strong enough financially not to need government assistance.

People living in rural America deserve a choice in video delivery

systems. However, in light of the financial risk to the American

taxpayer and the lack of oversight of existing loan programs, I’m

extremely skeptical if now is the time to grant RUS an additional

$1.25 billion in lending authority.

Thank you, Mr. Chairman. I look forward to the testimony of the

panel.

Mr. TAUZIN. I thank the gentleman. The gentleman from Minnesota, Mr. Luther, is recognized.

Mr. LUTHER. I have no comment. Thank you, Mr. Chairman.

Mr. TAUZIN. I thank the gentleman. The gentleman from Georgia, Mr. Deal.

Mr. DEAL. Thank you, Mr. Chairman. I want to thank Mr. Goodlatte for bringing this legislation to the committee. I look forward

to both his testimony and the panel that will follow him. I think

there are some interesting questions to be asked and hopefully

some interesting answers to be received.

As someone who represents a rural part of this country, the

mountains of north Georgia, and a Congressional District that borders four states and is served by three media markets, two of

which are out of my State and one of which is also out of my district, I do have gaps in this television service that is provided to

the communities that make up my Congressional District.

11

And I think any effort to try and fill in those gaps in a financially sound method is certainly one that I am interested in, and

I look forward to the testimony. Thank you, Mr. Chairman.

Mr. TAUZIN. I thank the gentleman. The Chair asks if there are

any other opening statements. And all written statements by unanimous consent will be made a part of the record, including those

of our witnesses, which are now indeed made part of our record.

And we will now welcome the first panel, which is a single panel

represented by our good friend, Mr. Bob Goodlatte of the great

State of Virginia. And Bob, I want to join your colleague from Virginia, Mr. Boucher, in commending you for your excellent work

here in the Congress on this issue. And you heard from the members the great concerns they have about how this program as you

propose it might work and how we might ensure that we don’t have

the problems that the audits recently came out seem to indicate

exist in the current loan programs. And we welcome your testimony. We would urge you to address those concerns today.

Mr. Goodlatte.

STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF VIRGINIA

Mr. GOODLATTE. Well, thank you, Mr. Chairman. I have a chart

that I would like to put up for the members. First of all, let me

thank you for holding this hearing and allowing me to testify; also

for your cosponsorship of this legislation, as a great many other

members of the committee have done, along with 110 other Members of the House. I also want to thank Chairman Bliley for his

participation in this hearing and for the opportunity to work with

him on the Satellite Home Viewer Act of 1999 and many other

pieces of legislation that I’ve worked on with both of you.

I especially want to thank my colleague Rick Boucher, chief

democratic cosponsor of the legislation, and who was very much involved with coming up with the proposal to put to the Conference

Committee last fall, which you and other members of the committee have adequately described the history of how we got to this.

So I would like to devote my time to where we are now and why

we’re here, and address some of the matters that were raised here

by the panel. I do have a statement which I would ask to be made

a part of the record.

Mr. TAUZIN. Without objection, it is.

Mr. GOODLATTE. We have a chart over here which is a little

dogeared, because it’s been on the road quite a lot, to make the

point about this issue, which we call another digital divide. If you

look at the circles that are on the map, those show the cities served

as of January 31 by local into local following the legislation that

enabled the satellite companies to get into the local into local service.

And the yellow circles are the cities that are probably going to

receive local into local service based upon the market plans of the

existing satellite companies. There are some additional proposals,

as mentioned by the gentleman from Oklahoma, that some new

companies might reach as many as the top 67 markets in the country. But that is far from certain. And it is certain that the existing

companies will not reach them.

12

And I would further point out there are 211 television markets

in the country. And no plan, no plan by any existing or proposed

private satellite company will reach more than 140 of those markets. So if you look at the map you’ll see a stunning picture of the

overwhelming majority of the geographic area of the country not

being reached.

And it is important to note that while this legislation is geared

to make sure that rural Americans share in local into local service,

and in fact every square mile of rural America is covered by this

legislation, it is also to be made clear that a great many urban

areas in this country are also not served, including Tulsa, Oklahoma, and Oklahoma City, Oklahoma; Cheyenne, Wyoming; Albuquerque, New Mexico; most of Georgia, except for Atlanta; New Orleans, Louisiana; many parts of Ohio; Springfield, Illinois; for the

gentleman from Massachusetts, Boston is covered, but my original

hometown of Springfield, Massachusetts is not covered by this legislation. So it’s important to consider that fact.

The legislation is designed to do two things; to solve the problem

for rural Americans who cannot receive local into local service, but

also to bring new competition to the urban areas not served on this

map. The areas served on the map are getting that competition

now. People who have the option of having cable or over the air

broadcast will now also have the competitive option of choosing satellite service.

But no one else in America will have the opportunity to do that.

Now, the issue has been raised this morning about whether the

Rural Utilities Service is the best agency to administer this loan

and whether they have done their job appropriately in the past. I

am well aware of the article in the Wall Street Journal this morning, and I have also reviewed the testimony of my good friend

Roger Viadero, who is the Inspector General of the Department of

Agriculture, who testifies before my subcommittee, the Department

Operations Subcommittee in Agriculture, many, many times, and I

have a great deal of respect for his independence. And I very much

agree with many of the observations in his testimony regarding

where the money that is loaned is going and whether it should be

going there.

But it’s also important to note that that is a separate debate that

this Congress should probably have about whether or not loan

guarantees and the loan portfolio of the Rural Utilities Service

should be going into some of the investments and some of the

places that it is going. But this legislation is different in the respect that it is intended to reach more than all of rural America

which it reaches.

It’s intended to reach many, many urban areas and suburban

areas and so on. And so I think it’s important to draw a clear line

between the criticism offered of the agency in terms of whether or

not the loans that it is making now are going to where Congress

intended them to go or whether or not it is possible to have—I’ve

just been advised I have a vote in the Judiciary Committee. I think

I would like to sum up here.

The point I want to make to you, Mr. Chairman, is this. The

Rural Utilities Service is the successor of REA in administering

these loans. For 60 years a loan portfolio of more than $42 billion,

13

and never, never in the entire 60-year history has there been a default. So when you talk about the Rural Utilities Service administering loans, if the question is are they going to take care of the

taxpayers’ money and make sure it is not lost, I can’t think of anyone better to administer this than an agency that has never experienced a default and has a loan portfolio of $42 billion, nearly 40

times the size of what we are proposing in this legislation.

So I would hope that the committee would keep that in mind.

And while I share the concerns of Mr. Viadero regarding whether

or not some of the loans they guaranteed are appropriate, I would

also say that the rural electric cooperatives who have received

many of these loan guarantees have also, because they’ve never defaulted on them, a very excellent record, and have invested the

money soundly. Whether the money invested soundly is invested in

the right place is I think a separate issue for another time and another place.

The issue before us today is, is this legislation important to ensure that more than 85 million Americans will have the opportunity to receive what the rest of the country in the urban areas

is getting now, and will the country have it properly administered

by the appropriate agency. And I think that, as you will hear from

their testimony, they are very capable of administering these loans.

I thank you very much.

Mr. TAUZIN. I thank the gentleman. The gentleman does have a

vote in his other committee. Mr. Goodlatte, if you would like to

come back and join the other panel, you are more than welcome to

do that. That’s your call.

Mr. GOODLATTE. I thank you, Mr. Chairman.

Mr. TAUZIN. I’ll call the second panel, which will include Mr. Dan

Crippen, Director of the Congressional Budget Office; Mr. Roger

Viadero, Inspector General, United States Department of Agriculture; Mr. Christopher McLean, Acting Administrator, Rural

Utilities Service; and Mr. R. Kent Parsons, Vice President, National Translators Association.

We’re pleased to welcome you all. You heard my earlier statement that your written testimony is a part of our record. We have

copies of them before us. You needn’t read them to us. We would

appreciate if you would abide by our 5-minute rule, which means

summarize your testimony within 5 minutes.

Mr. Crippen.

STATEMENTS OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET OFFICE; ROGER C. VIADERO, INSPECTOR

GENERAL, UNITED STATES DEPARTMENT OF AGRICULTURE;

CHRISTOPHER A. McLEAN, ACTING ADMINISTRATOR, RURAL

UTILITIES SERVICE; AND R. KENT PARSONS, VICE PRESIDENT, NATIONAL TRANSLATORS ASSOCIATION

Mr. CRIPPEN. I’m pleased to be here with you this morning to

discuss providing Federal loan guarantees to increase access to

local television markets. We need to keep in mind there are at least

two objectives of this legislation, and I think Mr. Markey’s terminology went to exactly that. He talked about the unserved and the

underserved.

14

So there are two differing objectives to this: providing broadcasts

to folks not now receiving them, and providing competition to existing multi-channel providers. We often hear these objectives, Mr.

Chairman, mixed together. And we need to keep them separate or

clearly understood not so much as a matter of policy but in order

to understand how we evaluate this legislation.

Our conclusion is that Federal assistance to this venture would

likely prove to be 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 would

be borne by the government.

The budgetary treatment of loan guarantee programs 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 associated with the

guarantees. Under credit reform, the subsidy cost of a loan guarantee is the estimated long term cost to taxpayers.

The subsidy cost of federally guaranteed loans depends primarily

on expected defaults and the degree to which the losses can be offset by collateral and by income from fees or other charges. In

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 attempted to assess.

For such services to be economically viable, millions of households have to be willing to pay a premium to satellite or other service providers to receive local television stations, even though most

households can view those stations at no additional charge through

their over-the-air antenna or existing cable. We have, I think, if

David can put it up, a chart as well.

Let me say, Mr. Chairman, too, this should not be interpreted as

a chart that discounts anything Mr. Goodlatte said. He was making

the point about the desirability or the appropriateness of the policy.

This chart I show you just to explain why we estimated what we

did. You have undoubtedly seen this chart before. It’s a mapping

of areas currently receiving at least ‘‘Grade B’’ television broadcast

signals.

Obviously most of the country and even more of the population

can receive local broadcasts over the air. And many of the folks in

the white areas or yellow areas can get local broadcasts through

cable or MMDS or other alternatives. In fact, as you know, more

than 97 percent of television households are covered by cable. For

the remaining 3 percent, or roughly 3 million households, local signals may be available over the air or by other means. In other

words, there are fewer than 3 million—more likely something like

2 million—television households that cannot currently receive local

broadcasts in some fashion.

This is the primary market for any alternatives. This then is Mr.

Markey’s unserved. In addition, unlike companies that provide

rural electrification or television service, these new entrants would

immediately confront established competitors everywhere else.

Thus, borrowers of the proposed guaranteed loans might have trouVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
15

ble achieving the necessary local market penetration to support a

new television service.

They would also face numerous technical risks, including the risk

that emerging technologies will allow local broadcast signals to be

delivered through less costly methods. As I said, our analysis did

not include regulatory risk, such as the availability of spectrum

and appropriate satellite slots or the ability of any new entrant to

gain licenses to those.

CBO has now completed estimates of both the House and Senate

bills. The House bill—similar to the legislation included in last

year’s conference report on H.R. 1554—would provide a subsidy of

28 percent of the face value of the guarantee, a cost we estimate

to be $350 million, therefore, based on $1.25 billion total. The Senate bill, because it would allow a guarantee for only 80 percent of

any loan, would have a subsidy rate of approximately 20 percent,

or $250 million.

To reiterate, the cost of a loan program to the taxpayer is determined by the riskiness of the venture and how much of that risk

the government will bear. As is evident from our scoring of the

Senate bill, one way to reduce the cost of the 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.

About half of existing Federal loan guarantee programs guarantee less than 100 percent. Some guarantee as little as 50 percent. Guaranteeing less than full value can obviously reduce the

cost to the taxpayers. First, it lowers the total amount of exposure.

Second, and perhaps more important, it can reduce the default

risk by encouraging private lenders, who have more expertise in

analyzing credit risk, to scrutinize their own exposure more carefully. Modifying the terms of the loan guarantees can also change

the subsidy cost, but for the most part, such technical changes will

have a relatively small effect on the cost of the program. Such

other options include requiring borrowers to pay fees, enhancing

the government’s security in the event of default, and ensuring underwriting criteria.

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. The purpose of a

Federal loan guarantee is to provide credit for activities that the

private marketplace considers too costly or too risky to pursue.

Such support comes at a cost.

Thank you, Mr. Chairman.

[The prepared statement of Dan L. Crippen follows:]

PREPARED STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CBO

Mr. Chairman and Members of the Subcommittee, I am pleased to be with you

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 telVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
16

evision 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. The Congressional Budget Office (CBO) has estimated the cost

of one proposal this session—H.R. 3615, as ordered reported by the House Agriculture Committee. My testimony this morning is based on our analysis of that program proposal.

H.R. 3615 envisions 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—especially up-front fees—offset some of the subsidy cost of most loan

guarantee programs.

In CBO’s view, providing local television service in rural areas is likely to prove

financially and technically risky. For such services to be economically viable, millions of households would have to be willing to pay a premium to satellite or other

service providers to receive local television stations—even though most households

can view those stations at no additional charge through their over-the-air antenna

or existing cable subscription. Thus, borrowers of the proposed guaranteed loans

might have trouble achieving the necessary level of market penetration for a new

television service. In addition, unlike companies that provide rural electrification or

telephone services, those borrowers would immediately confront competitors in the

marketplace. They would also face numerous technical risks, including the risk that

emerging technologies will allow local broadcast signals to be delivered to the home

through less costly methods.

To estimate the subsidy cost of the loan guarantee program for rural television

service, 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 January 2000 report by Standard & Poor’s

indicated that the cumulative default rate for investments with a ‘‘BBB’’ rating is

less than 5 percent; for those with a single ‘‘B’’ rating, the default rate is 28 percent;

and for those with a ‘‘CCC’’ rating, the rate is 44 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. 3615 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 about the total amount

of the loan guarantees would be made by the Secretary of Agriculture Administrator

17

of the Rural Utilities Service. Finally, H.R. 3615 would authorize the Secretary Administrator to levy fees and accept a payment from a nonfederal source to fund all

or part of the credit-risk premiums.

CBO estimated that the loan guarantee program authorized by H.R. 3615 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. 3615 would make implementation of the program contingent

on future appropriation action, those costs would be discretionary. (A copy of our

letter to Congressman Goodlatte about cost estimate for H.R. 3615 is attached.)

OPTIONS TO REDUCE THE COST OF LOAN GUARANTEE PROGRAMS

As I noted earlier, the cost of a loan program is determined largely by the riskiness of the venture and how much of that risk the government will bear. One way

to reduce the cost of a loan guarantee program significantly is to reduce its size—

either by decreasing the total obligation level or by guaranteeing less than the full

value of each loan. Modifying the terms of the loan guarantees can also change the

subsidy cost, but for the most part, such technical changes would have a relatively

small effect on the cost of the proposed program. Other options to reduce subsidy

costs include requiring borrowers to pay fees, protecting the government’s security

in the event of default, and ensuring effective underwriting criteria.

Reduce the Obligation Level

The simplest way to decrease the size of the program is to reduce the amount of

loans that the government is offering to guarantee. H.R. 3615 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 lowering the dollar amount of the guarantee. Although that would reduce the cost of

the proposed program, it would run the risk that private lenders might be unwilling

to lend enough funds to meet borrowers’ needs. Second, it can reduce the default

risk by encouraging private lenders to exercise 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 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 higher costs for equipment or services), their debt-service costs, and thus the risk of default, will increase. Capitalizing fees can also result in borrowers’ having insufficient

collateral to support the loans.

Many federal programs, especially 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 long maturities (between 15 years and 30 years). However, annual fees cannot be collected if a loan

18

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 allow the government’s guarantee to be subordinate to any private-sector financing. Subordination would reduce the incentive for lenders to assess

the riskiness of the loan and would increase the likelihood that if a default occurred,

the government’s loss would be significant.

Recoveries from subordinated debt have been lower than recoveries from senior

debt in federal credit programs and in the private debt market. For example, the

SBA guarantees financing to businesses in 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. Making government liens superior to all other liens on the assets of the borrower could

reduce the federal subsidy, relative to that of H.R. 3615.

Ensure Effective Underwriting Criteria

H.R. 3615 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 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. 3615 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. 3615

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.

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

March 1, 2000

H.R. 3615—Rural Local Broadcast Signal Act

As ordered reported by the House Committee on Agriculture on February 16, 2000

SUMMARY

H.R. 3615 would establish a loan guarantee program for certain companies to provide local television service to areas of the country that do not receive local television stations from satellite companies. The bill would authorize the Administrator

of the Rural Utilities Service (RUS) at the Department of Agriculture to guarantee

loans to qualified borrowers, totaling up to $1.25 billion. The bill would authorize

the appropriation of amounts necessary for the costs of the loan guarantees and associated administrative expenses.

Under the bill, one guaranteed loan could be as much as $625 million, but all

other loans would have to be $100 million or less. Qualifying loans would be payable

19

in full within the lesser of 25 years or the useful life of the assets purchased. H.R.

3615 would allow the government’s guarantee to be subordinate to any private-sector financing and would give RUS broad authority to modify the terms and conditions of loans. The authority to guarantee loans would be contingent upon future

appropriation action and would expire on December 31, 2006.

CBO estimates that implementing H.R. 3615 would cost about $365 million for

loan subsidy and administrative costs over the 2000-2005 period, assuming appropriation of the necessary amounts. H.R. 3615 would not affect direct spending or receipts; therefore, pay-as-you-go procedures would not apply. H.R. 3615 contains no

intergovernmental or private-sector mandates as defined in the Unfunded Mandates

Reform Act (UMRA) and would not affect the budgets of state, local, or tribal governments.

ESTIMATED COST TO THE FEDERAL GOVERNMENT

For the purpose of this estimate, CBO assumes that H.R. 3615 and related supplemental appropriations will be enacted in fiscal year 2000. The estimated budgetary impact of H.R. 3615 is shown in the following table. The costs of this legislation fall within budget function 370 (commerce and housing credit).

Spending Subject To Appropriation

By Fiscal Year, in Millions of Dollars

2000 2001 2002 2003 2004 2005

Estimated Authorization Level .................................................................. 5 352 2 2 2 2

Estimated Outlays .................................................................................... 2 233 124 2 2 2

BASIS OF ESTIMATE

Under procedures established by the Federal Credit Reform Act of 1990, the subsidy cost of a loan guarantee is the estimated long-term cost to the government, calculated on a net present value basis (excluding administrative costs). We estimate

that the loan guarantees provided under the bill would cost about 28 percent of the

total amount guaranteed—or $350 million, subject to the availability of appropriated

funds. In addition, CBO estimates that administering the program would cost about

$5 million in 2000 and about $2 million in each subsequent year. The bill would

authorize the Secretary of Agriculture to charge fees, which could offset some of the

subsidy or administrative costs, but this estimate assumes no fees would be

charged.

To prepare this estimate, CBO consulted with industry experts and investment

analysts and examined the credit ratings of firms in the satellite television and related industries. The information on credit ratings is useful because different credit

ratings reflect analysts’ expectations of defaults. Based on this information, we assume that the rural television loans likely to be guaranteed under this bill would

have a credit risk comparable to debt rated as ‘‘B’’ or ‘‘CCC,’’ which typically have

default rates ranging from about 30 percent to 45 percent, respectively. We also estimate that provisions in H.R. 3615 allowing the government’s guarantee to be subordinate to private-sector financing would increase the subsidy cost of such guarantees. Subordination would reduce the incentive for lenders to assess the riskiness

of the loan and increase the likelihood that if a default occurred, the government’s

loss would be significant. Recoveries from subordinated debt have been lower than

recoveries from senior debt in both federal credit programs and the private debt

market.

PAY-AS-YOU-GO CONSIDERATIONS: None.

INTERGOVERNMENTAL AND PRIVATE-SECTOR IMPACT

H.R. 3615 contains no intergovernmental or private-sector mandates as defined in

UMRA and would not affect the budgets of state, local, or tribal governments.

ESTIMATE PREPARED BY: Mark Hadley (226-2860)

ESTIMATE APPROVED BY: Peter H. Fontaine, Deputy Assistant Director for

Budget Analysis

Mr. TAUZIN. Thank you very much, sir. So we can understand

your testimony, I just want to, before we move on, understand the

charts you’ve given us. The red areas are the areas covering consumers with over-the-air broadcast local signals, is that correct?

20

Mr. CRIPPEN. Right.

Mr. TAUZIN. And that includes areas that receive good signals,

bad signals, any kind, a signal intensity map?

Mr. CRIPPEN. Grade B contours.

Mr. TAUZIN. And the yellow areas do not receive over-the-air but

may receive it through cable or some other means?

Mr. CRIPPEN. Precisely.

Mr. TAUZIN. Thank you, sir.

We will move on to Mr. Roger Viadero, Inspector General of the

United States Department of Agriculture. And we’ll appreciate

your testimony, Mr. Viadero.

STATEMENT OF ROGER C. VIADERO

Mr. VIADERO. Thank you, Mr. Chairman, and members of the

committee here today. I’m pleased to be here today to speak to you

about the Office of Inspector General’s recommendations to the

Rural Utilities Service, RUS. With me today to my left is Mr.

James R. Ebbitt, Assistant Inspector General for Audit. Before I

begin my testimony, I would like to submit two recently issued

audit reports for the record, sir.

Mr. TAUZIN. Without objection, they will be included.

[The report appears at pg. 63.]

Mr. VIADERO. Thank you, sir. I share your concern that rural

America be made a full partner in the information age. To that end

two reports issued by my office describe options for the RUS Administrator to stimulate rural investment and make better use of

RUS loan funds. Funds made available through implementation of

the report’s recommendations could be used to better connect rural

communities to rapidly developing information technologies.

Electric borrower investments. We audited RUS electric program

borrowers to determine the extent of their investment activities

and the degree to which borrowers invested in rural America. We

discovered that RUS electric borrowers have not become major

players in financing America’s rural infrastructure, despite the fact

that these borrowers had almost $11 billion in total investments.

Disappointingly, only one half of 1 percent of this amount or

about $61 million is actually invested in rural America. The Northern Virginia Electric Cooperative provides a good example. NOVEC

has borrowed about $129 million from RUS and holds $128 million

in investments, none of which is classified as rural development.

Among the electric co-op’s investment is a subsidiary called

NOVASTAR, a company that is partnering with DISH Network

and DIRECTTV to sell premium satellite services to the northern

Virginia and metropolitan Washington, D.C. Areas.

I want to emphasize that NOVEC is not, I’ll say again, is not violating any laws by investing in satellite TV for our metropolitan

area. However, I believe encouraging RUS borrowers to invest more

heavily in rural America just makes good sense. The same dollar

that provides satellite TV to the area right here on Capitol Hill

could be used to bring much needed services to the underserved

communities in rural America.

Unfortunately RUS electric program borrowers on their own have

not invested heavily in rural America. Instead, investment dollars

are used for such things as money market certificates, stocks and

21

bonds, and mutual funds. We recommended that RUS develop and

implement a strategy to encourage electric borrowers to use some

of their $11 billion portfolio to make discretionary investments in

rural America.

RUS has agreed to develop and implement policies and procedures to strongly encourage borrowers to meet the intent of Congress. This new strategy could promote investment practices to ensure the delivery of local television programming to subscribers of

satellite television in rural markets. Through increasing investments for rural access to telephones, computers, and the Internet,

RUS electric borrowers would help close the digital divide.

Let’s talk about telephone borrowers who do not need assistance.

In another recent audit we identified 434 RUS telephone program

borrowers with loan balances totaling $1.87 billion that appear to

be in good enough financial condition to satisfy their credit needs

from their own financial organizations or from other credit sources.

Our findings echo and expand on conclusions reported by the

General Accounting Office in a January 1998 report that detailed

options to make the RUS telephone program more effective and

less costly. GAO reported that some borrowers may retain loans

longer than needed and are therefore able to take advantage of the

favorable terms provided by the government.

RUS continues to incur interest and other administrative costs in

servicing the accounts of its financially healthy borrowers. The law

requires RUS to encourage and assist rural telephone systems to

achieve the financial strength needed to enable them to satisfy

their credit needs from their own financial sources.

Our trend analysis of key financial ratios showed steady improvement in the telephone loan portfolio, and that half of RUS

borrowers are in strong financial condition. However, RUS does not

have discretion to refuse a loan because a borrower is in strong financial condition. And the Rural Electrification Act is silent regarding loan graduation, that is, requiring borrowers to move to

private credit when they’re financially able. We recommended that

RUS work with the Congress to clarify policy regarding loan graduation and requiring financially strong borrowers to obtain credit

from commercial sources. RUS disagrees with our recommendation.

RUS should seek clarification about loans to borrowers who do

not need government assistance. As decisions are made about funding rural America’s move into the information age, it is important

to remember that over half of the RUS telephone loan borrowers

may not really need government assistance.

The money freed up could perhaps be used in other ways. For example, preserving and enhancing access to local and network television signals is important to rural America’s economy. As enunciated in bill number 3615, local television, with its mix of crop reports, local news, weather reports, public service announcements,

and advertisements from local businesses is vitally important for

development efforts.

According to the National Telecommunications and Information

Administration, Americans living in rural areas are lagging behind

the national average in computer and Internet access regardless of

income level. At some income levels those in urban areas are 50

percent more likely to have Internet access than those with similar

22

earnings in rural areas. The $1.9 billion currently loaned to the

telephone program borrowers who do not need Federal assistance

could go much further in closing the digital divide.

In summary, my office has identified two potentially important

options for increasing the effectiveness of RUS loans. Electric program borrowers hold about $11 billion in investments that could be

used to build technological infrastructure for rural America. Telephone borrowers who could likely finance their operations privately

owe the government $1.9 billion, money that could with appropriate authority be used to foster access to technology and electronic media.

We are currently working on another audit that will address additional opportunities for RUS to increase the sufficiency and thus

its contribution to rural America.

Mr. Chairman, thank you for inviting me here today to talk

about our recommendations on RUS.

[The prepared statement of Roger Viadero follows:]

PREPARED STATEMENT OF ROGER VIADERO, INSPECTOR GENERAL, U.S. DEPARTMENT

OF AGRICULTURE

Thank you, Mr. Chairman and members of the committee. I am pleased to be here

today to speak with you about the Office of Inspector General’s recommendations

to the Rural Utilities Service (RUS). With me today is James R. Ebbitt, Assistant

Inspector General for Audit. Before I begin my testimony, I would like to submit

two recently issued audit reports for the record.

I share your concern that rural America be made a full partner in the information

age. To that end, two reports issued by my office describe options for the RUS Administrator to stimulate rural investment and make better use of RUS loan funds.

Funds made available through implementation of the reports’ recommendations

could be used to better connect rural communities to rapidly developing information

technologies.

ELECTRIC BORROWER INVESTMENTS

We audited RUS electric program borrowers to determine the extent of their investment activities and the degree to which the borrowers invested in rural America. We discovered that RUS electric borrowers have not become major players in

financing America’s rural infrastructure, despite the fact that these borrowers hold

almost $11 billion in total investments. Disappointingly, only one-half of 1 percent

of this amount—about $61 million—is actually invested in rural America.

The Northern Virginia Electric Cooperative (NOVEC) provides a good example.

NOVEC has borrowed about $129 million from RUS and holds $128 million in investments, none of which is classified as rural development. Among the electric

coop’s investments is a subsidiary called NOVASTAR—a company that is partnering

with DISH Network and DIRECTTV to sell premium satellite TV services to the

Northern Virginia and Metropolitan Washington, DC areas. I want to emphasize

that NOVEC is not violating any laws by investing in satellite TV for a metropolitan

area. However, I believe that encouraging RUS borrowers to invest more heavily in

rural America makes good sense. The same dollar that provides satellite TV to the

area right here on Capitol Hill could be used to bring much needed services to underserved communities in rural areas.

Unfortunately, RUS electric program borrowers, on their own, have not invested

heavily in rural America. Instead, investment dollars are used for such things as

money market certificates, stocks and bonds, and mutual funds. We recommended

that RUS develop and implement a strategy to encourage electric borrowers to use

some of their $11 billion portfolio to make discretionary investments in rural America. RUS has agreed to develop and implement policies and procedures to strongly

encourage borrowers to meet the intent of Congress. This new strategy could promote investment practices to ensure the delivery of local television programming to

subscribers of satellite television in rural markets. Through increasing investments

for rural access to telephones, computers and the Internet, RUS electric borrowers

could help close the ‘‘digital divide.’’

23

TELEPHONE BORROWERS WHO DO NOT NEED ASSISTANCE

In another recent audit, we identified 434 RUS telephone program borrowers with

loan balances totaling $1.9 billion that appear to be in good enough financial condition to satisfy their credit needs from their own financial organizations or from

other credit sources. Our findings echo and expand on conclusions reported by the

General Accounting Office in a January 1998 report that detailed options to make

the RUS telephone loan program more effective and less costly. GAO reported that

some borrowers may retain loans longer than needed, and are therefore able to take

advantage of the favorable terms provided by the Government. RUS continues to

incur interest and other administrative costs in servicing the accounts of its financially healthy borrowers.

The law requires RUS to encourage and assist rural telephone systems to achieve

the financial strength needed to enable them to satisfy their credit needs from their

own financial resources or from other sources. Our trend analysis of key financial

ratios showed steady improvement in the telephone loan portfolio, and that half of

RUS telephone borrowers are in strong financial condition. However, RUS does not

have discretion to refuse a loan because a borrower is in strong financial condition,

and the Rural Electrification Act is silent regarding loan graduation—that is requiring borrowers to move to private credit when they are financially able.

We recommended that RUS work with Congress to clarify policy regarding loan

graduation and requiring financially strong borrowers to obtain credit from commercial sources. RUS disagrees with our recommendation.

RUS should seek clarification about loans to borrowers who do not need Government assistance. As decisions are made about funding rural America’s move into the

information age, it is important to remember that over half the RUS telephone loan

borrowers may not really need government assistance. The money freed up could,

perhaps, be better used in other ways. For example, preserving and enhancing access to local and network television signals is important to rural America’s economy.

As enunciated in H.R. 3615, local television, with its mix of crop reports, local news,

weather reports, public service announcements, and advertisements for local business, is vitally important for rural development efforts.

According to the National Telecommunications and Information Administration,

Americans living in rural areas are lagging behind that national average in computer and Internet access, regardless of income level. At some income levels, those

in urban areas are 50 percent more likely to have Internet access than those earning the same income in rural areas. The $1.9 billion currently loaned to telephone

program borrowers who do not need federal assistance could go far in closing the

‘‘digital divide.’’

SUMMARY

My office has identified two potentially important options for increasing the effectiveness of RUS loan programs. Electric program borrowers hold about $11 billion

in investments that could be used to build technological infrastructure for rural

America. Telephone borrowers, who could likely finance their operations privately,

owe the Government $1.9 billion—money that could, with appropriate authority, be

used to foster access to technology and the electronic media.

We are currently working on another audit that will address additional opportunities for RUS to increase its efficiency and, thus, its contribution to rural America.

Thank you for inviting me here today to talk about our recommendations to RUS.

Mr. TAUZIN. Thank you, Mr. Viadero. The chair is now pleased

to welcome Christopher McLean, the Acting Administrator of the

RUS.

STATEMENT OF CHRISTOPHER A. McLEAN

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

very much, Mr. Markey. As a former staffer of Senator Exon, who

spent so many hours at this table working on the Telecom Act, it

is a very honoring and humbling experience to appear in this capacity at this table as a witness.

If I may have my statement on the satellite bill inserted into the

record.

Mr. TAUZIN. Without objection.

24

Mr. MCLEAN. I would appreciate it if I could use my time to comment on the comments of the Inspector General. The Rural Utilities Service administers a $22 billion portfolio, telephone, electric

and water. In many cases people say we’re all wet; water, electric,

telecommunications. We also administer distance learning and telemedicine programs.

And our program is not to be a lender of last resort, in differentiation from other programs within the Department of Agriculture,

perhaps like rural housing or rural business. The purpose of our

program is to help roll out the most advanced, the best, highest

quality, the most affordable service to rural America.

And we want telecommunications companies and co-ops to be in

our program, because to be part of the RUS program you accept responsibilities to comply with State modernization; that you comply

with RUS engineering standards; that you comply with civil rights

obligations; that you limit your charging of high connection fees,

one of the biggest barriers to service in rural America; that you

commit to area wide coverage; and that you restrain yourselves

from charging zone and mileage charges, in other words having a

higher rural rate.

Now, since I left my position in the staff of the United States

Senator, I have worked in the RUS as Deputy and now for the last

several months as Acting Administrator. And as I traveled across

this country I have not met a single customer of an RUS financed

system who wishes they could be served by one of the large telecommunications companies that serves rural America.

Nobody wants to trade places the other way from an RUS. People

come to us and say, how can we get that quality of service into my

community that’s not served by an RUS borrower? The same situation in the electric program. The RUS family of co-ops have higher

reliability rates than their counterparts in the investor owned utilities.

The RUS program has encouraged economic development, and I

accept the Inspector General’s request that we redouble our efforts

to encourage more investment in rural economic investment, although I think he went a bit too far in his statement that rural

electrics are not investing in rural infrastructure.

Anybody who visits rural America and sees telecommunications,

the distance learning, the water projects, that rural electrics and

rural telephone companies are investing in their communities, and

the scholarship programs that they’ve put together for their kids,

they know that that’s not a true statement.

Now, in the Northern Virginia example that Roger used, we at

the RUS have been working very closely with the auditors of the

Inspector General to try to explain the multi-layered system of cooperatives. Cooperatives are owned by their members. And in the

$127 million of investments cited by the Office of Inspector General, and that was included in their exhibit, $56 million of those

assets are patronage capital from the distribution co-op, from their

generation of transmission capital, their generation of transmission

cooperative.

This is not cash that’s available to be invested. Five million dollars are the capital investments in the National Rural Utilities Cooperative Finance Corporation, a private sector cooperative owned

25

lending institution that helps finance supplemental private sector

lending to leverage RUS investment, to do exactly the kind of thing

that Roger is asking us to do in our program. That is not cash that

is available.

There’s $12 million on the balance sheet of Northern Virginia

Power for prepayment of their power bills. That was a very smart

thing to do. They invested $12.7 million to prepay their power.

Now, we’re having a demonstration here on Capitol Hill from truckers who, if they could have prepaid $12 million of oil and energy, they would not be demonstrating today.

We want to work with the Office of Inspector General to make

our program as good as it can be. But if you evaluate the fundamental criticism in both of these reports, it’s that we are lending

to institutions that are too financially strong.

Now, to make the record clear, in the telecommunications program, 50 years of experience, there has not been one writeoff in the

telecommunications program. There have been writeoffs, I shall acknowledge, in our electric and water programs. The serious problems have been concentrated in nuclear investments that go back

over 20 years. But the record of this agency and the record of this

administration in running a program that fosters rural economic

development is very good.

And I will work closely with Roger in my new position to make

sure that we’re making this program as good as it can be. But I

do think that there is not one dollar of RUS loans that are not

going toward rural electric infrastructure or rural telecommunications infrastructure or water infrastructure.

[The prepared statement of Christopher A. McLean follows:]

PREPARED STATEMENT OF CHRISTOPHER MCLEAN, ACTING ADMINISTRATOR, RURAL

UTILITIES SERVICE, U.S. DEPARTMENT OF AGRICULTURE

Mr. Chairman, it is an honor to testify today on HR 3615, which authorizes a new

loan guarantee program to finance the delivery of local television programming in

rural and small markets. The United States 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 USDA. We ad- minister 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.

RUS RECORD OF SUCCESS

For nearly sixty-five years the REA and RUS have been empowering rural America. Just this last October, the RUS telecommunications program celebrated its 50

th anniversary. In those fifty 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 fiber optic facilities and

more than $725 million in digital switching for telecommunications companies and

cooperatives serving rural areas. In 1999 alone, RUS provided nearly half a billion

dollars 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.

26

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 all 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 1999 amendments to the Satellite Home Viewers 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 to local’’ service primarily to larger urban markets.

There is little evidence that under current conditions significant ‘‘local to local’’ offerings will be made in the markets below the 40 largest markets. The smaller the

market, the more rural residents will be affected.

Once the amendments to 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 to local service, it is doubtful that current carriers will provide local signals

to many smaller markets.

The availability of local programming will become more problematic as the television industry converts to a digital system of signal delivery. The propagation of

digital signals is different from analog signals. Analog signals fade out with distance

from the transmitters. Digital signals drop off suddenly. The likely result is that

some current rural viewers of broadcast television may lose their ability to receive

a viewable signal once the conversion to digital is complete.

Without the ability to retain and perhaps expand their viewer base, rural broadcasters may not have the financial ability to upgrade their systems. Once digital

conversion is complete, the technology will make it likely that rural viewers will be

able to receive fewer channels over a conventional TV antenna than currently available in analog mode.

ENSURING PUBLIC SAFETY

Access to a full range of news, weather, sports, entertainment and information is

certainly important to maintaining and enhancing quality of rural life. But maintaining and 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 year’s back to back winter storms in the South and

East, highlight the importance of local television as a means of disseminating life

saving information.

Linking local residents to their communities of interest is also important to maintaining and enhancing the vitality of the local rural economy and civic life. From

both an educational standpoint and one of public safety, it is in the public interest

that rural citizens have access to local and network programming. Rural America

should not fall into a new digital divide: either as a result of the amendments to

SHVA or the coming conversion to digital television. The infrastructure necessary

to deliver ‘‘local-to-local’’ programming can also be a platform for other needed services such as broadband internet access, weather radio signals, and educational programming.

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. RUS is capable of helping

rural America meet this new infrastructure challenge.

We believe HR 3615 is a step in the right direction and look forward to working

with the Committee to fully develop a loan guarantee program that is technoVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
27

logically neutral, includes eligibility for broadband investments, expands consumer

choice, and is consistent with Federal credit policies, consistent with OMB Circular

A-129.

CONCLUSION

Preserving and enhancing access to local and network television signals is important not only for rural quality of life, but is vital to 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 help rural America thrive in the information age. The Administration looks

forward to submitting to you in writing at a later date more detailed comments.

Thank you Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. McLean. And our final panelist, Mr.

Kent Parsons, vice president of the National Translators Association.

Mr. PARSONS. If you’ll pass him a mike, please. You’ve got two

of them now. You’ve got a bigger loan than you needed there, Mr.

Parsons.

STATEMENT OF R. KENT PARSONS

Mr. PARSONS. Thank you, Mr. Chairman. I hope this small voice

from a farm boy in Utah has a different perspective here than what

I have heard. By introduction, by way of introduction, my name is

Rollo Kent Parsons. I am 67 years old and live in Monroe, a small,

rural community of 1,600 people located in the south central mountain valley of Utah.

For 43 years I have been involved in the installation, repair, and

engineering of television translators—in this hearing today I’ve

never even heard that word mentioned—and am currently Vice

President of the National Translator Association, a nonprofit volunteer organization dedicated to the preservation and extension of

free over-the-air television and FM radio for all parts of the country.

I think I qualify in this position of being a rural person, as it

takes me 3 hours of driving to get to Salt Lake City to the airport,

or 41⁄2 to Las Vegas.

Mr. TAUZIN. Mr. Parsons, we always say in this House that you

live in the country if you have to drive toward town to go hunting.

Mr. PARSONS. We appreciate this opportunity to briefly outline

the regulatory issues that have prevented broadcast translators

from reaching their full potential in bringing a full measure of free

over-the-air television to rural America. The issues of most concern

to the NTA are the infrequency of filing opportunities or windows

and the subsequent delay of approval bought on by the disproportionate number of applications that result; the impact of new technologies on this process; and the preservation of free over-the-air

television to viewers in rural areas.

Since 1980 there have been five 5-day opportunities to file for

permanent TV translator licenses, the most recent being in the

spring of 1994. We believe that the implementation of a fast track

authorization program would greatly simplify and expedite license

applications for the underserved rural areas on an ongoing basis.

28

The NTA filed a request for such a rulemaking in March 1998,

titled New Fast Track Authorization For Very Small Output Power

Rural Translators. If this rulemaking could be expedited immediately, the burdens placed upon the regulatory agencies would be

considerably lighter, and would give those agencies more time and

resources to devote to the full range of issues related to the current

technologies and their impact on the telecommunications industry

as a whole.

The following chain of events has occurred that have significantly

impacted the providing of free over-the-air television to rural communities. It began in 1955, when the FCC initiated a new television service to allow TV translators to provide television to rural

areas located beyond the direct coverage of the primary stations.

This service was called secondary service, to protect the primary

stations from any interference which may be generated by the new

translator stations. These stations were authorized to operate on

channels 70 through 83.

In 1978 or thereabouts, the FCC initiated a rulemaking which

assigned the channels 70 through 83 for a new cellular telephone

service, which required TV translators operating on those channels

to change to a different frequency in the range of the authorized

channels of 55 to 69. At that time there were approximately 3,500

translator stations in operation providing local broadcast television

to the Continental United States.

Within 2 years translators were assigned to operate on any vacant channel in the 2 to 69 range, subject to very stringent interference criteria. Low power television services, a plan to help TV

translators provide some local programming to these underserved

areas, was in development at this time, and licensing and administration of this new service was combined with the older translator

licensing process. In 1980 the FCC declared a freeze on all applications for new and modified TV translator stations that lasted 6

years, until 1986.

In 1987, a 5-day filing opportunity was opened for filing new applications to include both services, LPTV and TV translators, which

included modifications for existing licensed stations. After another

2-year freeze, additional opportunities for new translators were

opened in 1989, 1991, 1992, 1994, and an additional window was

opened in 1996 for modification to existing stations only.

Only five new filing operations have been available in the past

20 years. Many communities still do not have access to some of the

major networks and local independent primary stations, even

though there are 6,000 authorized TV translators now serving

rural communities. New technological issues, such as digital television, the May 10, 2000 auction of channels 60 through 69, the

proposed auction of channels 52 to 59, add to the pressures put on

the regulatory agencies.

We are concerned that free over-the-air broadcast television will

become increasingly lost to rural America as a result of the congressionally mandated transition to DTV. There has been no provision whatsoever to include translators in the DTV transition. These

communities depend on translators for local weather bulletins such

as tornado alerts, high wind warnings, fire information, floods, et

cetera.

29

While it is certain that the new technologies will produce many

new opportunities, a larger question looms. Can the small, rural

communities afford it? The new satellite local to local has provided

some local broadcast signals to those who can afford it. The rest

of the rural viewing audience without translators must pay or go

without. At this time translator stations are the only viable method

to serve these people with free over-the-air television.

If Congress and the FCC are concerned about the people living

in the rural areas relying on free over-the-air broadcast signals for

critical local information, they must provide ways to help not only

retain the present NTSC signals, but also ways to help in the transition to the new digital world. The NTA recommends a method to

simplify and expedite license applications—is that my time?

Mr. TAUZIN. No, that goes off when Members of Congress need

to go to the House and vote.

Mr. PARSONS. Okay—applications for rural underserved areas on

an ongoing basis through their proposed rulemaking. The Fast

Track Authorization For Very Small Output Translators specifically addresses the needs of the grassroots people. We believe free

local over-the-air broadcasting must prevail in all parts of rural

America through the continued expansion of TV translator stations.

To require secondary service to go to auction is counterproductive

to these communities.

I’m about through here. Personnel at the FCC have been extremely helpful and cordial in the processing of our TV translator

applications, as far as policy allows. We extend our thanks to these

individuals. And as I looked at the State of Utah on the panel there

that was portrayed, I must say at this time 99 percent of the people of the State of Utah have access to at least five networks, free,

over-the-air.

Thank you.

[The prepared statement of R. Kent Parsons follows:]

PREPARED STATEMENT OF R. KENT PARSONS, VICE-PRESIDENT, NATIONAL

TRANSLATOR ASSOCIATION

INTRODUCTION

My name is Rollo Kent Parsons. I am 67 years old and live in Monroe a small,

rural community of 1600 people located in a south-central mountain valley of Utah.

For 43 years I have been involved in the installation, repair, and engineering of television translators, and am currently vice-president of the National Translator Association (NTA), a non-profit volunteer organization dedicated to the preservation, and

extension, of free-over-the-air television and FM radio for all areas of the country.

We appreciate this opportunity to briefly outline the regulatory issues that have

prevented rebroadcast translators from reaching their full potential in bringing a

full measure of free-over-the-air TV to rural America.

The issues of most concern to the NTA are: (1) the infrequency of filing opportunities or ‘‘windows’’ and the subsequent delay of approval brought on by the disproportionate number of applications that result; (2), the impact of new technologies on

this process; and (3), the preservation of free-over-the-air television to viewers in

rural areas.

FILING OPPORTUNITIES OR ‘‘WINDOWS’’

Since 1980, there have been five, five-day opportunities to file for permanent TV

translator licenses, the most recent being the spring of 1994. We believe that the

implementation of a ‘‘Fast-Track’’ authorization program would greatly simplify and

expedite license applications for under-served rural areas on an ongoing basis. The

NTA filed a request for such a rulemaking in March of 1998 titled ‘‘New Fast-Track

Authorization for Very Small Output Power Rural TV Translators’’. If this ruleVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
30

making could be expedited immediately, the burdens placed upon the regulatory

agencies would be considerably lighter, and would give those agencies more time

and resources to devote to the full range of issues related to the current technologies

and their impact on the telecommunications industry as a whole.

IMPACT OF NEW TECHNOLOGIES

The following chain of events has occurred that have had significant impact on

providing free-over-the-air television to rural communities.

In 1955, the FCC initiated a new television service to allow TV translators to provide television to rural areas located beyond the direct coverage of the primary stations. This service was called ‘‘secondary service’’ to protect the primary stations

from any interference which may be generated by the new translator stations. These

stations were authorized to operate on channels 70-83.

In 1978, the FCC initiated a rulemaking which assigned channels 70-83 for a new

cellular telephone service, which required TV translators operating on those channels to change to a different frequency in the new range of authorized channels, 55-

69. At that time there were approximately 3500 translator stations in operation providing local broadcast television to rural areas in the continental United States.

Within two years, translators were assigned to operate on any vacant channel in

the 2-69 range, subject to very stringent interference criteria. Low Power Television

(LPTV) Services, a plan to help TV translators provide some local programming to

these under-served areas was in development at this time, and the licensing and

administration of this new service (LPTV) was combined with the older translator

licensing process. In 1980, the FCC declared a freeze on all applications for new or

modified TV translator stations that lasted until 1986.

In 1987, a five-day filing opportunity was opened for filing new application s to

include both services (LPTV and TV translators), including modifications for existing licensed TV translator stations.

After another two-year freeze, additional opportunities for new translators were

opened in 1989, 1991, 1992, and 1994, and an opportunity for modifications to existing stations only was opened in 1996.

Only five new filing opportunities have been available during the past 20 years.

Many communities still do not have access to some of the major networks and local

independent primary stations even though there are approximately 6,000 authorized

TV translators now serving rural communities.

New technological issues, such as digital television, the May 10, 2000, auction of

channels 60-69, and the proposed auction of channels 52-59, add to the pressures

put on regulatory agencies. We are concerned that Free-Over-The-Air broadcast television will become increasingly lost to rural America as a result of the congressionally mandated transition to DTV. These communities depend on the translators for

local weather bulletins, such as tornado alerts, high-wind warnings, fire information, and floods, etc.

While it is certain that new technologies will produce many new opportunities, a

larger question looms—Can the small, rural communities afford it? The new satellite ‘‘local to local’’ has provided some local broadcast signals to those who can afford it, the rest of the rural viewing audience without translators must pay or go

without. At this time, translator stations are the only viable method to serve these

people with free-over-the-air television.

RECOMMENDATIONS

If Congress and the FCC are concerned about the people living in rural areas, relying on free-over-the-air broadcasting signals for critical local information they

must provide ways to help not only to retain the present NTSC signals, but also

ways to help in the transition to the new digital world.

The NTA recommends a method to simplify and expedite license applications for

rural under-served areas on an ongoing basis through their proposed rulemaking,—

Fast-Track Authorization for Very Small Output Power Rural TV translators. This

document specifically addresses these needs of the ‘‘grass roots people’’.

We believe local free-over-the-air broadcasting must prevail in all parts of rural

America through the continued expansion of TV translator stations. To require secondary service to go to auction is counterproductive to the needs of these communities.

Personnel at the FCC have been extremely helpful and cordial in the processing

of TV translator applications as far as policy allows. We extend our thanks to those

individuals.

31

32

33

Mr. TAUZIN. Mr. Parsons, thank you.

The Chair recognizes himself. I’ll do a round of questions, and

we’ll try and get a second one in, then we’ll take a break for the

vote.

Let me first of all, Mr. Parsons, tell you that I think you put your

finger on something, that while we’re talking about getting local

into local satellite service, one of the most important things I think

we need to keep our eye on is whether or not people have the option of free over-the-air service as a first option, because the first

choice for consumers ought to be whether they get a free signal or

they want to buy a signal from a company that’s carrying a cable

or a satellite signal that wants to sell it to them as an option.

And so my first question is, why all these freezes? Why hasn’t

the FCC been more accommodating to the request of your members

to put out more translators and deliver more on-the-air signal opportunities to rural Americans?

Mr. PARSONS. I’m not certain about that. We have made repeated

requests. We met with the FCC commissioners 1 on 1 a year ago.

Mr. TAUZIN. What do they tell you when you meet with them?

Mr. PARSONS. That we provide a very special cause to the rural

people, and it is something that should be done.

Mr. TAUZIN. So they blessed you on the way in and blessed you

on the way out, but you got no relief?

Mr. PARSONS. I have no comment.

Mr. TAUZIN. Bottom line is that you offer us an opportunity that

perhaps, Mr. Goodlatte, we need to look at, in terms of what we

do in this bill, to ensure both elements, as you have correctly pointed out, not only those persons who have no access, the 1 remaining

percent in Utah and others, but for the citizens in other states who

are left out of any access to local signals because there is no choice

for free signals.

Mr. PARSONS. Let me make a comment here, what’s happening.

We have some small communities—you talk about REA, I live in

a community that happens to be an REA, and my son was on the

City Council, and they talked about having their own local cable

system, but this is starting to create a problem, because I’m thinking of a small community just north of me, that the community

owns their own cable system because it’s too small for the big players to come in.

As they drop off—there’s five stations that come out of Salt Lake

on the satellite now, five locals. But as people drop off, the number

of members on that small cable system starts to deplete their revenue, and so now it’s getting to the point whether the cable system

will stay on or not.

Mr. TAUZIN. The second part of this bill is connected to cable programming. I mean, one part of it should be designed to make sure

nobody is left out in the whole system of coverage. The second

point is competition for the cable programming together with the

local programming. Customers obviously do like cable programming. There’s a growing number of Americans who choose to watch

cable over network programming.

In that instance, now, Mr. Goodlatte, what we’re hearing in

terms of Mr. Viadero’s testimony is that the co-ops that are serving

America for telephone and electric do have apparently an awful lot

34

of money loaned to them by the government from RUS in some

cases that is in excess of their needs, apparently, because they’re

using it for other investments.

Can we get some comment from you on that criticism of the bill

and the question that Mr. Largent and others asked, why should

we loan them more money if they already have money they’re investing in the stock market?

Mr. GOODLATTE. Mr. Chairman, first, if I might join you in observing that Mr. Parsons’s comments are very apt.

It’s our belief that the bill would allow the resources to be used

for translators. But if for any reason there needs to be clarification

put into the legislation that they could also avail themselves of

this, we certainly would be supportive of that.

Mr. TAUZIN. Well, as I understand it, they’re not a multi-channel

system provider, so they may not qualify. Second, it looks like an

FCC problem we may need to address in the legislation as well.

But I like your comments on—this is one of the central tenets of

the debate here. Should the government authorize another $1.25

billion of loans to provide this service to rural Americans, either to

unserved or underserved areas? And we’ve seen audits saying, look,

we’re loaning money to the rural electrics and telephones and they

don’t need it, they’re investing it in the stock market, so why don’t

you use that money to do this job.

What’s your answer to that?

Mr. GOODLATTE. Well, the answer I think is that first of all,

working with the CBO and later the Appropriations Committee in

terms of coming up with whatever funding is necessary to fund the

loan guarantee based upon what the risk may be, we will be looking to many sources for the purpose of doing that. And again, I

think the question of whether or not the RUS is making loans and

allowing loan guarantees in areas they may not be needed is something that we can certainly look at.

Mr. TAUZIN. It could be one of the offsets.

Mr. GOODLATTE. Absolutely. But one of the points that I think

needs to be made is that this simply is not going to happen for a

large portion of America, including some significant sized cities, unless Congress does get involved with this legislation. So I don’t

think you can simply say we’ll sit back and watch money that is

already out there flow into this area. It’s going to require legislative authorization to do that.

Mr. TAUZIN. Before my time expires, your map indicating the

places where local to local is going in identified the sites of the cities, but it did not outline the DMA, the service area of that local

into local. It would be interesting to see that map, to see how much

local into local coverage is going to occur from the cities in which

the service will be provided. And we probably need to look at that.

Mr. Parsons.

Mr. GOODLATTE. Mr. Chairman, can I just comment on that?

That is absolutely correct. Some of those circles would actually be

smaller than they appear on the map, and some of them would be

somewhat larger. But I think as a representation it is fairly accurate. But certainly some of those television markets are a bigger

circle.

35

Mr. TAUZIN. The DMAs are pretty large. That’s why I’m saying

we probably ought to look at that in terms of getting a good picture

at what local into local is going to provide under current law.

Mr. Parsons.

Mr. PARSONS. Yes, it might be well to note that the Salt Lake

City market presently is number 36. If we remove the translators,

it goes to 42.

Mr. TAUZIN. Mr. Markey is recognized.

Mr. MARKEY. Thank you very much. Mr. Goodlatte, do you believe incumbent cable operators should be eligible for the loan

guarantee?

Mr. GOODLATTE. The way the bill is written now, we do not discriminate against any form of technology.

Mr. Markey. I’m only talking about where the cable companies—

where it is already the incumbent. Where it’s already providing

service, would you give them subsidies, not where they’re not providing services.

Mr. GOODLATTE. Where they’re already located——

Mr. MARKEY. They also have a license in a community. Would

you give them a subsidy?

Mr. GOODLATTE. I would think it would not be necessary to do

that.

Mr. MARKEY. Okay. Good. The bill allows loans to entities to,

quote—this is in the bill—finance the acquisition, improvement and

enhancement, construction, deployment, launch, or rehabilitation of

the means, including spectrum rights, by which local television

broadcast signals will be delivered to an area. That’s the end of the

quote in the legislation.

When the bill says the loan can be used for the acquisition of

spectrum rights, does that mean we would extend loans to people

to bid at FCC auctions?

Mr. GOODLATTE. That’s correct. The loan guarantees—in other

words, we’re not going to give a loan to anybody, we’re going to

make a loan guarantee to somebody to——

Mr. MARKEY. I appreciate that. But they——

Mr. GOODLATTE. They’ve got to require the spectrum. If an auction is the only way they can get the spectrum, this is not going

to work unless you can put the whole package together, not just

the physical plan, but also——

Mr. MARKEY. But we have auctions where some people have loan

guarantees getting in and other people wouldn’t have loan guarantees getting in. We just had a C block, I don’t know if you’re familiar with it, it was a debacle, people thought they could get in kind

of a cheap money, bidding up the price because they had some

longer period of time. Do you support loans that people—you do

support loans that people can use at auctions.

Well, I think that, you know, in summary, Mr. Chairman, the argument made to immediately deregulate small cable systems in

1996 was that they need to be deregulated so that they could invest

in the system upgrades. I think—I know that many of these cable

companies would like us now to give them loan guarantees to help

them to upgrade. I think that would be a bad policy. I don’t think

we should be doing that.

36

But I can work with something that, you know, again, dealt with

the unserved areas of the country. But something that is more than

that gets much more difficult. Thank you.

Mr. TAUZIN. Thank you. I’m going to put Mr. Shimkus in the

chair. I’ll go and vote. Mr. Shimkus will be in the chair, and we

will have a round of questions with you, and John, if you can get

the witnesses to talk until we get back. Thank you, sir.

Mr. SHIMKUS [presiding]. Thank you, Mr. Chairman. Give me a

minute to get organized. Any time I get a chance to get into the

seat of responsibility, I try to do that. Also accountability, sometimes. So you have to be careful. Let me go to—it was CBO that

put up that map, that’s correct? I’m sure you’re going to hear this

from a lot of my other colleagues, and I know your assistant was

cringing when I made all these facial expressions, because, you

know, the FCC is using the contour A and contour B as a protractor, correct? A delineation—do you know that?

Mr. CRIPPEN. Yes.

Mr. SHIMKUS. And the basic assumption is that we take a protractor, put it on the tower, spin it around, everybody within that

grade A has perfect signals, everybody in the grade B has ‘‘should

be able to receive’’ signals. Well, I’m going up tomorrow afternoon

to Baylis, Illinois. Now, Baylis is situated definitely in that red

area. I mean, the whole county is in that red area. It is probably

60 miles north of St. Louis, probably 35 miles southeast of Quincy,

which has a local TV station, probably 65 miles southwest of

Springfield.

Obviously they have no reception. I assume this would be—well,

that’s actually the Illinois River. I’m an old Army officer who

trudged up a lot of hills. I understand contour and contour intervals. If you’re using that as an—I just think that’s a bad map to

try to make your case, because what you’ll find out is most of us

who hear constantly from our constituents have areas based upon

the contour that are not receiving signals.

And I would ask for you first if you would talk to me about if

you did any consideration on the actual signal strength. And I’ll follow up with, we have had numerous discussions with the FCC

through this committee to talk about how do you really judge signal strength. And I think we’ve actually, in the bill, asked the FCC

to assure how we can better identify those red areas.

And I think you would see, once they do that, a very different

perspective about who is served and who is not served.

Mr. CRIPPEN. I think there are at least a couple of questions in

there. One, I understand the problems in parts of the contours. In

fact, the Chairman and I share an interest, if you will, in occasionally going out to Maryland’s Eastern Shore, and it turns out that

we are in a grade B contour and can’t receive much over-the-air

unless conditions are perfect.

Mr. SHIMKUS. Can I chime in? So those red areas are grade A

and grade B combined?

Mr. CRIPPEN. Yes. I mean, they’re on top of each other.

Mr. SHIMKUS. Grade B encompasses grade A.

Mr. CRIPPEN. Sure.

37

Mr. SHIMKUS. So you’re saying they don’t have a signal, although

in the introduction you’re making the claim that everyone but the

red has no signal.

Mr. CRIPPEN. The point is not to speak to the desirability of the

bill; rather, in our assessment of whether or not you’re going to

have a lot of people take this service, is it economically viable.

Mr. SHIMKUS. But you’re making the assumption——

Mr. CRIPPEN. First, 97 percent of television households are

served by cable. So they have available some form of local signal

already by a multi-channel distributor. And most of the country, if

not all, and some of the grade B contours don’t get very good signals. But most of the country also has over-the-air.

So again, we’re not speaking to the desirability of the policy.

Rather, we’re talking about the economics of the venture and about

whether many of the people who get over-the-air will be willing to

pay for satellite service. People who have cable, would they be willing to switch? That’s the point we’re trying to make, not that

there’s perfect coverage or that there’s no need for the bill.

Mr. SHIMKUS. You’re going to hear this today over and over

again, because first of all, in my area, you go to Calvin County,

there’s no cable coverage there. And then if there is, there’s no

choice. And the whole emphasis of the satellite bill, the Satellite

Home Viewer Act, was to make sure we had competition for cable

and competition that would carry a local signal. So——

Mr. CRIPPEN. As I said, there are two objectives to the bill. One

is to serve what would in Mr. Markey’s terms be unserved, the

places that don’t get signals now, they may be in grade B, they

may be in the red. The second is to instill competition, whatever

multi-channel distributor is now there. The question, though, in

terms of policy is, do you want to subsidize competitors through existing incumbents? I mean, that’s up to you.

The point we’re trying to make is not about the efficacy of the

policy, but rather, if there’s competition there, then trying to break

into that market is going to be much harder. There’s a limit on

prices. You’ll have to get people to convert from something they

now use to something new.

The complaint that you’re hearing from many of the constituents

and that I’ve had some members show me in their mail—and I’ve

had this experience myself—is that you can’t get network programming over a satellite, because the local broadcaster won’t give you

a waiver, despite the fact that you’re in a contour where you can’t

get it. I see what’s happened to us in Wingate, Maryland.

Mr. SHIMKUS. My point is you discredit your argument by using

that map, for those of us in rural areas who have constituents who

are living inside the red area that have no choice and they have

no signal.

Mr. McLean, do you want to add to this?

Mr. MCLEAN. Thank you. And the situation is going to get even

more complicated as we proceed with digital conversion, because

the propagation of a digital signal is that it drops off suddenly,

whereas an analog signal fades out gracefully. One of the reasons

that Congress enacted the Satellite Home Viewer Act improvement

was that the grade B contour which was determined by a court in

38

Florida to be good enough was at that time of the legislation considered to be 50 percent of the signal 50 percent of the time.

And when you go to digital, you will either have a signal or no

signal. So it’s going to be even more complicated, looking 60 years

into the future.

Mr. CRIPPEN. Mr. Chairman, that really doesn’t have anything to

do with our point. Our point is simply there is competition, and

there are services available, cable in 97 percent of the households,

large areas of the country, most of the viewers in the country can

get over-the-air. And that’s what drives our estimate; again, not

whether or not you pass this bill, whether the policy is right or

anything else, but it has to do with how we come up with the estimate.

Mr. SHIMKUS. Thank you. My time has expired.

Mr. Boucher, for your sake, I’ve gone over the map quite extensively. I’m sure you had concerns about that also. And so you are

recognized for 5 minutes.

Mr. BOUCHER. Thank you. Mr. Crippen, welcome.

Mr. CRIPPEN. Thank you.

Mr. BOUCHER. I appreciate your testimony this morning. I do

have some differences with your conclusions. I live in a mountainous region of the western part of Virginia, and my constituents

in huge numbers cannot get any local signals. They may live within

the grade B contour of the local stations, but they’re blocked by the

mountains from getting the signals at all.

And those who can get signals usually find that they’re not

viewable. And so one of the best things that happened in my region

over the last decade in terms of the ability to get television programming of any kind was the advent of the 1988 Home Satellite

Viewer Act. And in that, people who could not get adequate local

TV signals from the station were able to subscribe to the network

programming delivered by satellite.

I notice in your testimony you say that—and by the way, my district is not unique. The entire State of West Virginia is affected by

the same concern. I don’t see that highlighted on your map. Western North Carolina, eastern Kentucky, I daresay parts of the

Ozarks, the Allegheny region, much of the eastern United States

is in exactly the same condition.

That 1988 Satellite Home Viewer Act is instructive for a couple

of reasons, one of which is that while some households subscribed

to the distant network signals that clearly were not eligible to do

so, there were millions of households around the country that subscribed to distant network signals over the satellite that were eligible and are eligible today. And these are the homes that live in

rural areas.

I note in your testimony you say that for the services to be subject to this loan guarantee, to be viable, and for those programs to

succeed and not wind up costing the government money, there

would have to be millions of subscribers to the service.

And I would suggest to you that there are going to be millions

of subscribers. You can start with these millions who are eligible

to get network signals delivered by satellite under the Home Satellite Viewer Act. Given the choice of being able to get their local

TV signals by satellite, as compared to distant network signals by

39

satellite, the vast majority of them would opt to get the local TV

signals, for the reasons that many have indicated today in terms

of the importance of local television.

There’s another source for those millions of subscribers that you

say would be required, and that is people who are subscribing to

cable television today throughout the balance of rural America and

in the medium sized cities and in the small cities across the U.S.

Who will not be receiving the local into local service offered by the

commercial companies. These will be the people who will be part

of the primary audience for the local into local service that will be

subject to these loan guarantees.

I wonder if in compiling this estimate you have looked at the

phenomenal rate of growth in the DBS industry just over last several months. I really wonder if you have examined that. One of

those companies in 1988 had a market capitalization of $9 billion.

Last year it had a market capitalization of $29 billion. Why? Because Wall Street believes these services are going to grow phenomenally. One of the reasons for that, one of the major reasons

is the ability to offer local into local service.

Do you happen to know the rate of growth in subscribers per

month of these major DBS companies today? Do you know that figure?

Mr. CRIPPEN. I wouldn’t. But it’s—— Mr. BOUCHER. I can tell you what it is. It’s 100,000 per month.

The fact that you don’t know what that figure is suggests to me

that you haven’t adequately examined the circumstances that underlie your conclusions, because that rate of growth is directly related to the advent of the new local into local service.

Mr. CRIPPEN. That may well be, which suggests that Wall Street

will probably finance into rural areas, because if it’s worth it—— Mr. BOUCHER. I haven’t suggested that, Mr. Crippen. That’s not

a reasonable extension of a conclusion from what I’ve said, either.

Mr. CRIPPEN. If I can respond to your comments so far—some of

the comments you made about the available audience base, for example—if the current people who are getting satellite signals want

to get local signals, 97 percent of them have the ability to subscribe

to cable, so they could take it from cable.

Mr. BOUCHER. That’s not true, Mr. Crippen. You simply don’t understand the market. I’m sorry to say that, with all due respect,

you just don’t understand the market. In my district, which I’ll cite

as the example, most of the people can’t get cable. Why? Because

it doesn’t extend out beyond the towns.

All of America is not towns and cities. A vast part of America is

rural terrain where cable services are not provided. In my Congressional District most of the people cannot subscribe to cable. Well

over half of the people there can’t get cable. Those same people

cannot get local TV stations, and in large part because of the

mountainous terrain. Much of rural America is exactly like that.

Let me come back to my other point, if I may, and that is that

you I think in constructing this analysis have undervalued the

attractiveness of the new local into local service. Let me underscore

again for you that this tremendous rate of growth of 100,000 per

month for each of the major two DBS companies and their subscriber base reflects the power of that new service.

40

And I would hope that you would go back and reconsider your

estimates in light of what is happening today in the market with

regard to what now amounts on an annual basis to about 2 million

people per year largely deserting cable and signing up with the

DBS services driven by the new local into local service. I would

hope you would consider that and perhaps rethink your estimate

as to what the success of the services subject to this loan guarantee

would be.

Mr. Chairman, my time has expired. I thank you for your patience.

Mr. CRIPPEN. Mr. Chairman, may I respond? The point is, Mr.

Boucher, 97 percent of the households in this country are passed

by cable. That’s not in your district; I understand that. But what

we’re talking about is the economic viability of a very large loan

program. Residents of your district who might subscribe are not

going to be enough to support this venture in a financial way,

which is precisely why we’re here.

If the market were able to support this activity, we wouldn’t

need a loan guarantee. But again, that’s not to argue this is not

the right thing to do or it’s inappropriate. Rather, it’s just to say

there isn’t going to be enough of a market to provide a commercially viable vehicle. If there were, it would happen already. So we

have to recognize we’re here because we want to subsidize the services; appropriately so, it may well be. But the point is it will cost

something.

Mr. BOUCHER. Mr. Crippen, it doesn’t have to be commercially

viable for it not to cost the government money. I think you’re missing the key point here. The purpose of the loan guarantee itself is

to buy down the cost of capital sufficiently that the service can

then be viable with no lower cost of capital. And a viable service

at that point has revenues coming in it. It’s what the subscribers

pay every month in order to get the signal.

It can then sustain the service at whatever level is necessary to

advertise that cost of capital. It doesn’t wind up costing the government anything in that scenario. That’s where we’re trying to—

that’s the goal we’re trying to——

Mr. SHIMKUS. I’ll reclaim the time. We need to go to the gentlewoman from Wyoming, Mrs. Cubin, for 5 minutes.

Mrs. CUBIN. Thank you, Mr. Chairman. I would like to direct my

comments and questions to Mr. Crippen. I think that there might

be some facts that are pertinent here that may not have been considered in the conclusions that your report put forth, and I think

they’re important things.

One thing I want to tell you. I represent Wyoming, as you probably know. It’s 100,000 square miles with 470 or 80,000 people in

it. We have just outside of the town where I live a mountain that’s

considered to be a real small mountain. It’s 8,300 feet in elevation.

And then the mountains go up from there. In Wyoming what we

consider foothills and hills are equivalent to mountains out here in

the east where people ski.

And the point that I’m trying to make is that while I appreciate

your graph here with what grade B over-the-air service provides,

I wanted to ask you, did you look at the difference in the scope of

a grade B picture? For example, a grade B picture can actually be

41

clear and acceptable, or it can be nothing but black and white snow

with shadows in it. And that’s really what this graph represents,

not only, but inclusive.

Would you agree with that?

Mr. CRIPPEN. Sure.

Mrs. CUBIN. And did you happen to look at the differences in the

grade B?

Mr. CRIPPEN. It wouldn’t change our analysis any because, again,

97 percent of the households are passed by cable already. Plus

there’s obviously a large number of the U.S.—whether it is 90 percent or some lesser number; we think it’s about 2 million—who

can’t receive signals at all.

Mrs. CUBIN. Well, that’s another reason that, you know, your

statement that so many people in so many areas aren’t covered by

cable, that’s another reason I brought up the hundred thousand

square miles. In Wyoming a small proportion of the people, I don’t

want to say small, but comparatively speaking much smaller than

in other parts of the country, can receive cable. There are lots of

areas where the only thing they can get is satellite.

And even then it takes special arrangements to get that signal.

So your statement in your report, I guess the point I’m trying to

make is that the statement on page 3 at the bottom, where it says,

‘‘In addition, unlike companies that provide rural electrician or

telephone services, those borrowers would immediately confront

competitors in the marketplace.’’ But not where I live. And I know you said to Mr. Boucher, well,

you don’t have enough constituents to make up the difference. And

I don’t have enough constituents. But you know what? Collectively

we might.

Mr. CRIPPEN. If I might say, we don’t disagree. You might. But

the point is, on its face the market is going to be hard to penetrate

and be relatively small, which makes it risky. Not that it might not

succeed. Indeed, if we thought it wouldn’t succeed, we would say the estimate is $1.25 billion. But there is a high degree of uncertainty here, because you’re going into established markets that

have competition where you aren’t going to have price leverage.

Mrs. CUBIN. I would like to make two points to you, then. Aren’t

there protections that are built into this project for the American

taxpayer, like first, any entity is going to have to demonstrate they

have a business plan that will allow them to pay for the loan? And

if the satellite is a solution, and I don’t know that it will be in all

cases, that this entity would need spectrum and orbital slots, which

are very serious investments, they’re big investments, and that

they also have to purchase insurance for the satellite, and purchase

credit risk premiums that would also protect the taxpayer.

It seems to me that this bill is carefully crafted to ensure that

local signals would not be putting the telephone at risk. And the

second point I would like to make is that this loan guarantee proposal was based on a similar plan for short line railroad, and the

CBO said that there would be no impact to the Treasury for that.

And with the credit risk premium, why should this legislation be

any different?

Mr. CRIPPEN. I’ll respond to your last question. In the case of

short line railroads, the economics were very much different. They

42

were very likely to succeed. They were taking up established rail

lines from larger railroads who wanted to consolidate their rail

lines. But the short lines were also monopolists who were entering

markets where they didn’t have competition from other railroads,

certainly, and were much more economically viable on its face, so

that the risk was very small in terms of default.

Here, again, all we’re suggesting is that there is a risk that these

loans ultimately will be in default.

Mrs. CUBIN. Again, the assumption is that they’re moving into a

competitive market. And my assertion would be that that isn’t necessarily the case. And to Mr. Parsons, I would like to associate myself with Chairman Tauzin’s remark that certainly absolutely the

first choice needs to be over-the-air.

Thank you for just tapping that lightly.

Mr. GOODLATTE. Mr. Chairman, may I respond to the question?

Mr. SHIMKUS. Sure.

Mr. GOODLATTE. I thank you very much. I just want to say to

Mrs. Cubin that we strongly disagree with the assertions of the

CBO regarding the extent of this market. We think that the true

market is 70 to 85 million Americans who will now have an alternative to choose from cable, and that there will be a great many

customers who will choose a satellite package that includes these

five network channels in that package who would not choose satellite as an alternative without that, because they don’t want the

inconvenience of switching back and forth between the antenna

and the satellite.

And so we think that the risk is much, much smaller than they

have analyzed. And we hope to continue to work with them on that

issue.

Mrs. CUBIN. Thank you.

Mr. SHIMKUS. Mr. Crippen, take a deep breath. The calvary is

coming to the rescue. Now we’ll recognize Mr. Largent for 5 minutes.

Mr. LARGENT. Thank you, Mr. Chairman. Mr. McLean, how

would you define rural? We’re talking about—you are the Administrator of the Rural Utilities Service, is that correct?

Mr. MCLEAN. Yes, sir.

Mr. LARGENT. How would you define rural?

Mr. MCLEAN. As defined in our statute, there are several different definitions. In telecommunications, the original loan has to

be 5,000, a community of 5,000 or less. However, as a community

grows, it remains eligible as long as there is a continuous mortgage.

Mr. LARGENT. How long has it been since Washington, D.C. Has

been classified as rural?

Mr. MCLEAN. I don’t say that the District of Columbia was ever

classified as rural, although Northern Virginia Electric Cooperative

is an eligible entity under our act and under the regulations of the

agency. And the economic growth in Northern Virginia I think has

partly—can claim that part of the credit for that has been affordable power.

Mr. LARGENT. But you’re talking about this Rural Utilities Service offering services to Washington, D.C. And Arlington, isn’t that

what you said in your testimony?

43

Mr. MCLEAN. Northern Virginia Power is an eligible entity, because at the time they applied for the REA loan they were within

the population criteria.

Mr. LARGENT. Offering services to Washington, D.C.?

Mr. MCLEAN. No, to rural Virginia.

Mr. LARGENT. Who is the guarantor of an RUS loan?

Mr. MCLEAN. The full faith and credit of the United States.

Mr. LARGENT. And who is that?

Mr. MCLEAN. Taxpayers.

Mr. LARGENT. Exactly.

Mr. SHIMKUS. Will the gentleman yield for a minute? Mr.

McLean, if you could move that microphone so that everyone can

hear you——

Mr. LARGENT. Your Inspector General has said that in $11 billion

of loan guarantees that you’re administering currently, I guess

that’s in electricity, that only one half of 1 percent is actually invested in infrastructure in rural America.

Mr. MCLEAN. I’ll let Roger speak for his study. Every dollar of

our $32 billion portfolio goes for electric infrastructure. Roger’s report speaks to the co-ops’ own money, and co-ops are owned by

their members. And as we discussed in the exhibit on Northern

Electric Power——

Mr. LARGENT. Wait a second. We are talking all the time in this

committee about the fungibility of money. Why should the American taxpayer loan $11 billion to anybody who already has nearly

$11 billion, just short of it, $61 million worth of assets that they

own themselves? I mean, investment assets.

Mr. MCLEAN. Cooperative equity does not equal cash available

for investments.

Mr. LARGENT. According to Mr. Viadero—let me see. I’ve got the

testimony here. He’s talking about it being invested in stocks and

bonds and mutual funds and the like. Why should the American

taxpayer have to loan money to people that could—basically they’re

getting commercial lending, or could finance it of their own ability?

Mr. MCLEAN. We’ve had a principle in this nation that we are

one nation indivisible, and that we——

Mr. LARGENT. I understand that. What I’m saying is, why are we

loaning money to people who don’t need it? That’s the question.

Mr. MCLEAN. We have a fundamental disagreement with the

conclusion of Mr. Viadero’s study, that people don’t need those

funds. It’s three times on average more expensive to serve rural

America, in both telecommunications and electricity. If it were not

for the Rural Utilities Service, if it were not for that affordable capital which is the largest part of large infrastructure investments,

that’s exactly the reason that this committee is considering legislation to finance with loan guarantees a very large infrastructure investment, is that it reduces the cost to the people, the 25 percent

of the people who live in the 75 percent of the geography of this

country.

That is our mission. We follow our statute. Roger in his—both reports have acknowledged that these are not illegal activities, that

these are in fact—in the telecommunications report he says to have

a credit elsewhere test would require a change in the statute.

44

We don’t agree with that conclusion that a credit elsewhere test

would further the purposes of the Rural Electrification Act and

rural telecommunications, because we know there is a digital divide in rural America. We have to do everything possible to bring

down the cost of service so we can all be part of this growing economy.

Mr. LARGENT. But in reality what’s taking place is this: You have

Rural Electric Service or Rural Utilities Service that is borrowing

money from you at a low cost, and it’s a low cost because the taxpayer subsidizes the difference, they take that money and they borrow at 3, 4, 5 percent, whatever, at something below market, and

then they take that money and they invest it in the market and

get 2 or 3 points above that.

That’s good business sense, but it’s at the expense of the American taxpayer. That’s exactly what’s taking place, is it not?

Mr. MCLEAN. Every dollar that is borrowed, that is lent for rural

electric, rural telephone, is tied to actual infrastructure and investment.

Mr. LARGENT. Then why should we loan money to people who

don’t need it? Because they have the same amount of assets that

we’re loaning to them invested, and they don’t need the money

from the American taxpayer. They can either self-fund it or get it

on the commercial—— Mr. MCLEAN. The consequence of that decision, if the Congress

should make that decision, would be the people who live in rural

America will have higher electric rates, higher telephone rates,

lower levels of investment in infrastructure, lower levels of reliability in electricity, lower levels of quality in telecommunications.

Mr. LARGENT. But point in fact, in rural Oklahoma today their

electric rates are lower than my rates in Tulsa, Oklahoma. Why?

Because the American taxpayer subsidizes their electric bill and

their phone bill and soon to be their cable bill and DBS bill.

Mr. MCLEAN. But throughout America, and I’m very proud of the

co-ops in Oklahoma that they are doing a very good job, but

throughout America in general rural Americans pay higher rates

already.

Mr. LARGENT. Mr. Viadero, I guess I would like to ask you the

question, how you’ve come up with—reached the conclusion in

terms of one half of 1 percent of the loans are actually used for infrastructure.

Mr. VIADERO. That’s an easy one. That was self-reported by the

companies. They reported it. And I would also——

Mr. LARGENT. Sir, what is your response to Mr. McLean’s answers to my questions?

Mr. VIADERO. Well, what I find, and I would like to, if I can, bear

with me, this is a response to——

Mr. SHIMKUS. This is the last question. You need to do it relatively succinctly.

Mr. VIADERO. Yes, sir. This is the RUS response to the audit report. It’s on page 46 of the report.

I read, ‘‘RUS agrees that its borrowers should be making a conscious effort to provide for and facilitate rural development in these

areas. As stated in the audit and the regulation, RUS assumes,’’ underlined, ‘‘assumes that borrowers will use the latitude afforded

45

to them by Section 312 of the Rural Electrification Act to make

needed investments in rural community infrastructures. RUS will

strategically develop and implement policies and procedures that

strongly encourage borrowers to meet the intent of the Congress.’’

Mr. Largent, your question is the exact same question we have.

We don’t see any investment in rural America. And I’m from the

rural part of the South Bronx, which is very close to the rural part

of Wall Street, where the bulk of these funds seem to be going.

Mr. SHIMKUS. And the chair now will turn to the gentleman from

Georgia, Mr. Deal, for his 5 minutes.

Mr. DEAL. Thank you, Mr. Chairman. My first question, in light

of this discussion about the financial status of the telephone borrowers and the electric program borrowers, is can either of those

entities or both carry out the purposes of this legislation under current law and without further authorizations as provided in this legislation?

In other words—I suppose I should direct it to RUS. Can these

two sets of borrowers who come to your agency, could they under

current law use proceeds of loans from RUS to expand into the

rural areas to provide the kind of service we’re talking about in

this legislation wanting to provide?

Mr. MCLEAN. No.

Mr. DEAL. Why not?

Mr. MCLEAN. Because the eligible investment, the eligible purposes for an RUS loan is the electric, telecommunications, water infrastructures.

Mr. DEAL. Why is this not telecommunications?

Mr. MCLEAN. We have a restriction in our statute that specifically lists CATV and broadcast television. I don’t believe that I

have the authority to make a loan for delivery of television services

at this time.

Mr. DEAL. Has anybody ever researched that question?

Mr. MCLEAN. Yes, we have, in determining the comments on this

legislation.

Mr. DEAL. Mr. Viadero, do you have an opinion on that?

Mr. VIADERO. I have an opinion on most things, Mr. Deal, unfortunately.

Mr. DEAL. Do you have a good opinion on that?

Mr. VIADERO. That’s a much smaller list. I would like to say,

though, that we don’t—and we haven’t gone into the exact legislation, but we don’t see any prohibition that the companies can’t use

the $11 billion that they’re holding of our money right now for that

purpose.

Mr. DEAL. That would be their accumulated surpluses outside of

a new loan, is that what you’re saying?

Mr. VIADERO. That’s correct, sir.

Mr. MCLEAN. In fact, if you look at how satellite services have

been rolled out throughout rural America, they have been through

rural electric co-ops and rural telephone companies and rural telephone co-ops. And in fact Roger’s comments cited Northern Virginia participating in the roll-out of satellite services. The National

Rural Telecommunications Cooperative is a cooperative of cooperatives that has invested in the original launch of DBS.

46

And so that’s how you have the rural service in satellite right

now, where cooperatives have used their own money to roll out the

service.

Mr. DEAL. So they’re not prohibiting you from using your own

money, they’re just not allowed to use your loan money for that

purpose?

Mr. MCLEAN. Correct. However, under the legislation that Roger

cites, if the investments of the rural electric cooperative exceeded

15 percent for nonelectric purposes, they would have to seek a

waiver or seek permission from the Rural Utilities Service. And

that is the point of the legislation, to move that threshold from 3

percent to 15 percent.

Mr. DEAL. That leads to my next question. I really directed it to

Mr. Goodlatte, but perhaps some of the panel members could answer it. As I was leaving to vote, he was asked a question related

to existing cable providers being able to qualify and to expand their

services into the rural areas. I believe his answer was he thought

the legislation would authorize that. Is that correct?

Mr. MCLEAN. That is correct.

Mr. DEAL. Is that the answer?

Mr. MCLEAN. That is correct. It’s the position of the administration that if the legislation is adopted, it should be technologically

neutral. I should observe RTS and NTIA are about to publish a report on availability of advantaged telecommunication services in

rural areas. And we’ve tried to research your 97 percent figure

from the National Cable Association. We found out that there are

about 91 million homes passed by cable out of a universe of about

105 million homes. Both from our observation and the arithmetic,

we think it is closer to the low 90 percent.

Mr. DEAL. Let me ask the next question. If the money could be

used by existing cable operators to expand their service to rural

customers who are now being bypassed or not served at all, would

this legislation also authorize loans under this program from RUS

to rural electric cooperatives, for example, to purchase existing

cable network operations and expand those?

In other words, could the loan be used to purchase a system that

is not providing the service that this legislation anticipates, but

with the idea that by purchasing that you make it financially solvent enough to then perform the purposes under this legislation?

Would that be a possibility?

Mr. MCLEAN. I think that might fit in the——

Mr. SHIMKUS. Again, if you can speak into the microphone.

Mr. MCLEAN. I think that might fit in the acquisition section of

the bill. But where that example would be problematic is in the priority section of the bill. In other words, we interpret what the Agriculture Committee is saying in this legislation is that you basically

start from the bottom up. Then, all things being equal, you try to

get the most service to the most underserved.

Mr. DEAL. I understand that. But to counter the arguments that

CBO and others have made about the financial viability of this

being possible, without that kind of a solid base of customers, don’t

you really have very, very jeopardized loans where you are reaching out to only those that are underserved and have no foundation

of a current customer base?

47

Mr. MCLEAN. And I think that is the concept that Congressman

Boucher has talked about and Congressman Goodlatte has talked

about, is that in aggregating the demand of the lower urban markets, that the private sector has clearly said in three different

hearings that I’ve participated in that they have no plans to serve,

that by aggregating that demand plus the rural demand, this may

be a feasible project. Now—— Mr. DEAL. Excuse me for interrupting, but I have one very quick

last question, and my time is running out. Mr. Parsons, I’m just

interested to know, do any of your NTA members qualify for RUS

loans? Have they ever qualified?

Mr. PARSONS. I would not be sure about that. But I think Mr.

Largent asked a question that needs to be answered more thoroughly, what really is rural.

That is one of the stumbling blocks, why we were not able to

produce or get additional applications through the FCC, is because

that particular thing was never identified, what is rural. We’ve

heard numbers all the way from 50,000 down. I don’t know what

is rural. Until we get that defined, then it’s a pretty broad brush.

Mr. DEAL. Your membership, who are they?

Mr. PARSONS. The licensees of the translators would generally be

counties, cities, towns, Lions Clubs, nonprofit groups. They are

nonprofit, I’ll guarantee you that.

Mr. DEAL. Do they use their own money then in order to provide

this service?

Mr. PARSONS. It generally comes from recreational fees in the

counties. It comes from small fees that’s attached to the sets. One

study that I run, three different counties in our state, it runs from

38 cents a month to 48 cents a month for eight channels of television.

Mr. DEAL. Thank you, Mr. Chairman.

Mr. TAUZIN. The gentleman’s time has expired. I turn now to the

gentleman from California, Mr. Cox, for 5 minutes.

Mr. COX. I thank the Chairman. I apologize, at least I have a

microphone here so I’ll get my voice across, for sounding a little bit

like Stephen Hawking today, with one of those little voice devices.

I wonder if I might ask Mr. Viadero, do you have opinions that you

might have expressed when I was not in the hearing room about

the legislation itself? Are you supportive or opposed to the legislation?

Mr. VIADERO. We don’t have an official position on that, Mr. Cox.

Mr. COX. Do you feel free to express one, or do you feel constrained because of your role as IG to not comment on pending legislation?

Mr. VIADERO. Yes, I would prefer to see the pending legislation

to come from the Department which we would review in the normal

process. We would just as soon not be violative, if we could wait

for the Department’s position to come out and comment on it.

Mr. COX. And Mr. Parsons, assuming that the legislation did not

permit access to these credit facilities by any of your association’s

members, which I take it it may not as presently written, would

you support or oppose the legislation?

Mr. PARSONS. Well, I think there’s been some reference made to

the quality of pictures in the grade B contours. If you were to look

48

at the map on the document I submitted, we go through as high

as six and seven relay stations to get to the small hamlets. Better

reception could be utilized had we had access to some of these satellite feeds. At the present time we’re not allowed to do that, nor

are the cable systems.

Also, I would like to say at this time that once you get out of the

metropolitan area of Salt Lake City, all of the cable systems rely

on our translators. So if we can’t improve them, it’s not going to

be a very level playing field, where you have DBS signals coming

into the homes and signals that’s picked up through our translator

relays who are denied the rights to use the satellite signals. It’s

kind of an unlevel playing field.

Mr. COX. Mr. Crippen, you have told us that Federal assistance

for this venture would likely be costly, and that you would present

to us options to reduce the cost. And you have then stated that the

best way to reduce the cost is to reduce the size of the program.

Are you specifically suggesting that $1.2 billion is not the right

level then, some smaller amount would make more sense?

Mr. CRIPPEN. No, actually we’re just trying to make the point

that obviously the less you cover, the less exposure to the taxpayer.

Rather, or I should say, in addition, to compare the House bill with

the Senate bill, which provides an 80 percent guarantee, we estimate a much lower subsidy rate, because it covers 80 percent of the

loan and not 100 percent. Obviously the lower that is, the lower the

cost would be, no matter what the total guarantee, but the lower

coverage as well reduces the subsidy rate.

Mr. COX. The purpose of this legislation, as I understand it, is

to jump-start industry participation. What are the odds that once

commenced this program would ever go away?

Mr. CRIPPEN. I don’t know that I have any way of answering

that.

Mr. COX. Well, using your experience as an evaluator of government programs, is it your experience that once started, a program

like this sunsets itself, or that alternatively Congress routinely

comes in and sunsets the program?

Mr. CRIPPEN. That’s more a question for the General Accounting

Office. I can tell you from my non-CBO experience—I tell this story

often—my doctoral dissertation was on a program called general

revenue sharing, which shortly after I finished my dissertation was

eliminated. But it’s one of the few that I know of.

Mr. COX. We had a hearing in here just a few days ago where

we were considering the 3 percent Federal telephone tax, which

was put in place for the purpose of financing the Spanish American

War in 1898. Of course, because that tax now collects $6 billion a

year, it has made the Spanish American War the most expensive

war in American history.

My concern is that this legislation as presently written uses taxpayer resources to finance not the kind of things that Mr. Parsons’s

members provide, which are free over-the-air services, but rather

subscription services only. So that’s breaking from our tradition of

subsidizing this industry through the provision of free spectrum,

for example, on the grounds that it’s available to the public, the

taxpayers who support it.

49

Here we would be levying a tax, implicitly the principal amount

of the loans, on the taxpaying public at the rate of $10 a head, if

you consider there are 120 million taxpayers in the country, and

in return they would get nothing unless they paid for it. They

would have to pay a fee for subscription service only.

What is the justification for that, for breaking from this longstanding Federal tradition of saying Federal subsidies go to provide

services for the public good, whereas here we’re providing only subscription services? You can build a cable system with this legislation, as I see it.

And so we’ve got cable TV providers who are going to come in

and charge $40 a month, whatever they charge, and they’re doing

it with a Federal subsidy. What is the justification for that, Mr.

McLean?

Mr. MCLEAN. I think the determination for this committee and

the Congress to make, the fact that you charge for electric service,

charge for telecommunications service, charge for the Internet, or

charge for cable or satellite delivery of services is not the critical

issue.

The question is whether the marketplace will serve that part of

the market that is rural America. And from the record that’s been

developed, I have not heard a single witness in now four hearings

which I’ve had the privilege of participating in where anybody has

said they would be willing to go below market, 67. There are 211

television markets in America.

And we’re facing an additional problem as we convert to digital

where there could be a further digital divide between rural and

urban access to broadcast signals.

Mr. COX. And yet the question that you put is answered only in

the context of rather substantial Federal impositions on people that

would be willing to provide this service. We’ve had hearings where

we have the satellite providers, for example, come in and tell us

the cost of the regulations that we impose on them. If they want

to provide certain channels to rural subscribers, they’re told they

have to provide all the junk as well, they have to use up all of their

capacity providing things that the market may not want.

Wouldn’t we be wiser, if we were trying to provide access to rural

customers, to make it more efficient for the market to do that and

lift these Federal regulations?

Mr. MCLEAN. I believe that Congress spoke in passing the Satellite Home Viewer Improvement Act on those very issues. But the

model that’s being pursued here is what we pursued in rural electrification. In 1935, 10 percent of farmers had power.

Mr. COX. That’s the reason I asked the question I did to the Director of the Congressional Budget Office, because the REA, now

renamed, having long since provided electricity to rural America, is

still around, bigger than ever.

Mr. MCLEAN. There are plants that need to be replaced. The cost

of service is still competitive. As we’re working in telecommunications since 1949, we still need to modernize. There’s always the

next generation of technology. Whether the promise of the Telecom

Act is kept or not is determined by whether there’s going to be resources available to those thin markets.

50

There’s a statistic I find in my business all the time. Seventy-five

percent of the geography is rural. Twenty-five percent of the population is urban. Most businesses get 75 percent of their business off

of 25 percent of their customers. There’s always 25 percent of the

marketplace that is always hard to crack. And it’s the same thing

that we see recurring in the satellite issue. The 67 markets that

the private sector has said they’re willing to serve without any government assistance represents about 75 percent of the population.

The markets from market 67 to 211 is about 25 percent of the

population and 75 percent of the geography. And this has been a

time-honored model that has worked. And it’s a success. And the

very fact that we’re being criticized for—taking co-ops from being

financially troubled to be financially strong is a good thing for

America.

Mr. COX. On that last, if I could just conclude by asking Mr.

Viadero for your thoughts, on whether or not the track record of

the lending programs that you have just reported on justifies expanding the charter of the same people who have made the mistakes you’ve talked about.

Mr. VIADERO. Based upon Mr. McLean’s statement prior to this,

we totally agree that RUS has done just a great job in getting electrification and telephones out to rural America. And there’s a pot

of money that’s available for use, and it’s just not being used, that pot of money being the $11 billion. And it just appears that once

you start getting this money, albeit in 1935, you’re still in it in

2000.

I mean, I moved into—and I’m a proud resident of the Commonwealth of Virginia for the last 18 years, and the county I moved

into 6 months prior to that, in 1982, still had a party line system,

telephone. And almost 20 percent of the county, which is less than

50 miles from the capital, didn’t have electricity. So it’s done a

great job.

But to add to what Mr. Boucher said, my son lives on a mountaintop in West Virginia. He doesn’t get television, because unfortunately, Ms. Cubin would probably say it was just a bump in the

road, but it’s a mountain out there, he’s blocked by a larger bump

in the road. He doesn’t get television. But it just appears to us that

once you’re getting the money, there’s no way we’re going to stop

them from getting more money.

Mr. COX. And as a result, what do you infer?

Mr. VIADERO. It needs a legislative fix.

Mr. COX. Such as?

Mr. VIADERO. RUS cannot stop granting money to these people

because of the statute. If they qualify, we have to give them the

money.

Mr. TAUZIN. Will the gentleman yield on that? Why? Does any

law say that they can’t—I’ve heard there’s no law specifically that

says they can’t. Is there?

Mr. VIADERO. I’m going to ask Mr. Ebbitt, if I can, to join me.

Mr. TAUZIN. Mr. Ebbitt, will you tell us whether there’s a statutory prohibition against deciding not to make a loan to an entity

that doesn’t need one?

Mr. EBBITT. Mr. Chairman, it’s our reading of the legislation on

the telephone side and our understanding from working with RUS

51

that on the telephone side, if you’re in the program, you came in,

1935 or 1940 or whenever, that if they come back you to today,

they’re still an REA, an RUS co-op, and if they present a financially strong case and need money, yes, they have to make the loan.

Mr. TAUZIN. Is that a matter of law, or is that a matter of practice?

Mr. EBBITT. It’s our understanding it’s a matter of law.

Mr. TAUZIN. I would please ask that you submit the language of

the statute that is definitive in this area for the committee.

Mr. EBBITT. May I suggest, Mr. Chairman, that Mr. McLean and

the Department’s general counsel really need to get that for you.

I mean, I would be happy to, but you really need to get the position

of the USDA.

Mr. TAUZIN. I thank the gentleman for yielding.

Mr. COX. Thank you. Mr. Chairman, I’ll just conclude by saying

that I think there are serious problems with this legislation as

presently written. It would, for example, encompass application of

the proceeds of the lending not only to construction but to the

launch of the service, by which I understand the statute or the bill

to mean even the advertising costs and promoting the service to

people.

This Internet economy that we live in is generating spectacular

amounts of capital. The market capitalization of many of the companies in a 6-block radius of my district office is enough to pay for

this program 10 times over. The notion that credit is not available

to the telecommunications industry is rather odd. And so we have

to ask ourselves what is the Federal Government doing to the market that’s causing it to be unattractive to this industry.

I’m not surprised that if my colleagues are willing to propose a $1.2 billion credit facility to an industry, taxpayer subsidized, that

industry is in favor of that. I would be too. I wouldn’t mind

leveraging my private dollars on the taxpayers’ backs. And we

shouldn’t begrudge the industry’s support for legislation like this.

But as Members of Congress I would hope we would be a little

bit more wise in the expenditure of taxpayer funds and look to see

what it is we’re doing to these industries that makes it unprofitable

for them or makes it not as attractive as other investments to serve

rural customers. And I’ve mentioned just a few of the areas.

I think the burdens we’ve placed on satellite providers are without justification. And even if we’re unwilling to lift those burdens

perhaps in urban areas, we should consider lifting them in rural

areas. I would try each of those in turn before I laid out an amount

of money that CBO has told us is about a third of a billion dollars

in terms of the risk. I think that is such a mismatch with this industry, which has as its chief characteristic the ability to generate

capital in today’s markets.

Mr. TAUZIN. I thank the gentleman.

Before I recognize you, Mr. Pickering, with unanimous consent,

if I might ask one question. I want to read you Title VII, Section

930. This is a declaration of congressional policy. Here’s what it

says specifically. ‘‘Declared to be the policy of the Congress that adequate funds

shall be made available to rural electric and telephone systems

through insured guaranteed loans at interest rates which allow

52

them to achieve the objectives of this chapter, and that such rural

electric telephone systems should be encouraged and assisted to develop their resources and abilities to achieve financial strength

needed to enable them to satisfy their credit needs from their own

financial organizations and other sources at reasonable rates and

terms consistent with the loan applicant’s ability to pay and the

achievement of this chapter’s objectives.’’ Isn’t that clear congressional intent for your Department to in

fact graduate these loans down when in fact people become financially capable of going out and making the loans themselves somewhere else?

Mr. MCLEAN. Well, in fact we meet that congressional statement,

No. 1, when Congress created the Rural Telephone Bank in 1972,

public private ownership. And we lend in concurrence with—— Mr. TAUZIN. Where in your rules and regulations do you prohibit

financially strong companies from borrowing?

Mr. MCLEAN. We will have prepared for the Office of General

Counsel a brief on this very issue. But even in Roger’s report he

acknowledges that to have a credit elsewhere test would require a

change in the statute. Now, I—— Mr. TAUZIN. Wait. Stop there. Why is that true, in light of the

congressional policy statement? Why do you have to have a credit— why is a credit elsewhere test illegal, when the statement of congressional policy is exactly the opposite, that if you can go get credit elsewhere, the congressional intent is that you encourage and enable them to do so?

Mr. MCLEAN. And in fact we do that. One of the things—— Mr. TAUZIN. Where in the rules and regulations—— Mr. MCLEAN. [continuing] is a regulation to facilitate ‘‘swifter,

leaner’’ accommodations—— Mr. TAUZIN. I want you to send us the rules and regulations

wherein you carry out the policy of that section of Congress. And

we’ll submit a letter request to that effect, if you don’t mind.

Mr. MCLEAN. Yes, sir.

Mr. TAUZIN. Mr. Pickering is recognized.

Mr. PICKERING. Thank you, Mr. Chairman.

Mr. McLean, welcome to the committee. It’s good to see you

again. We had a prior life working together, and now it’s good to

see you in your new role and responsibilities.

Mr. MCLEAN. Thank you very much.

Mr. PICKERING. I’m speaking as one who represents a very rural

district in Mississippi. If we look at RUS and the Rural Telephone

Bank, what it has done for the deployment of broadband technologies and capabilities is fairly impressive. I don’t know if many

of you know this, but in the heart of my district, Decatur, Mississippi has the first fully digital telecommunications network,

funded through RUS, I believe, and it’s a great example of the good

work that RUS does.

But today we’re asking ourselves to take a new step, and we’re

confronted with possible issues of can we make the program more

effective and make sure that the resources that we’re targeting for

our policy objective is actually accomplishing our mission.

And so, Mr. McLean, to that end I would like to ask you to comment. In the IG’s report, toward the end, he says, ‘‘We recommend

53

that RUS develop and implement a strategy to encourage electric

borrowers to use some of their $11 billion portfolio to make discretionary investments in rural America. RUS has agreed to develop

and implement policies and procedures to strongly encourage borrowers to meet the intent of Congress.’’ What are those policies and procedures that RUS is adopting to

accomplish that?

Mr. MCLEAN. We just received Roger’s report I guess the day it

appeared in the Wall Street Journal. And so we concur with the

recommendation. We work with our borrowers, and my predecessor, Administrator Wally Beyer, and then in the few months I’ve

been in the position of Acting Administrator, we have gone all over

this country and encouraged our borrowers to participate in rural

development and to participate in economic development for their

communities.

And I think if you look at your own experience in your own

hometown, you’ll find that that in fact is happening. We agree with

Roger’s recommendation. The disagreement is the figure of $11 billion. There may be a problem with our reporting forms that we

would certainly like to work with Roger to make sure that they

fully reflect the level of investment.

But, you know, in the next couple of weeks here I think you’re

going to have rural electrics from all over the country visiting

Members of Congress. And ask them, what are you doing for rural

economic development, are you investing in infrastructure, are you

too rich to borrow from RUS. I think that their answer is going to

make you very proud. They’re doing a good job.

When you cite the sample of RUS funding for telecommunication,

the consequence of pushing people out of the program would be the

loss of the bargain that we have with those borrowers to deploy

modern, affordable services, and to deploy them in a way that provides area wide coverage, to deploy them in a way that has rates

that are affordable, that doesn’t have high connection fees.

As I said earlier, no one in an RUS financed system has said to

me, boy, we sure would like to be served by one of the big telecommunications companies that don’t have the RUS standards and

the RUS engineering, the RUS effort.

Mr. VIADERO. Mr. Pickering, if I might, for a point of clarification, this report I signed out on the 13th, it was hand-carried to

the RUS front office. The RUS response which was included in this

report was dated February 28. They had the draft report. Just for

point of clarification, Mr. McLean had this available before the article appeared in this morning’s paper.

Mr. PICKERING. Thank you. Mr. McLean, just to follow up again,

and again, as a believer in the program, as a supporter of the legislation, but as someone who wants to make sure that Federal dollars are used as intended and used most effectively to accomplish

the objectives of the missions we both share, and since the IG has

said, and I quote again, ‘‘has agreed to develop and implement policies and procedures to strongly encourage borrowers to meet the intent of Congress,’’ can you give specific examples of any reforms or

any new policies or procedures that RUS is adopting?

Mr. MCLEAN. We are going to be communicating with our borrowers, bringing these issues to their attention. We’re going to be

54

reviewing our reporting forms to make sure that they accurately

reflect what we believe in fact is happening. Roger and I have absolutely no disagreement on the purpose and the ideal of investing

in rural America with funds that are generated by the co-ops.

Mr. PICKERING. Mr. McLean, let me just say, for the credibility

of the program, if you could just get back to the committee on those

specific policies and procedures and incentives that you will be providing those who use the program and who borrow, so that we can

assure our colleagues that appropriate steps are being taken to

make sure that the funds are used in the targeted approach that

we want to rural America.

And I guess as a follow-up question, there’s reform that RUS administratively can take. Do you recommend any legislative reform

or language that would either give greater incentive as a criteria

for receiving an RUS loan to invest a portion of their portfolio into

rural and economic development?

Mr. MCLEAN. We’ll certainly consider that suggestion, Congressman Pickering. We have to be very careful, particularly in electric

restructuring. Right now, co-ops and small companies, municipalities face uncertainty at this moment.

And to have a mandated quota for a level of use of funds we

think would not be well advised, given the unsettled nature of the

regulatory scheme that electric co-ops face right now.

Mr. PICKERING. You can understand the concern, if we’re authorizing $1.25 billion which will then leverage—what would it leverage in the capitalization of a loan guarantee program?

Mr. MCLEAN. The loan guarantee would be a $1.25 billion loan

guarantee.

Mr. PICKERING. We just don’t want to see 1.25 come in one door

and go out another door, not into rural America. And so we want

to make sure we maximize resources to my district and to others.

And so that’s—and how we do that, what kind of incentives, what

kind of policies. That’s how I want you to interpret my comments,

in that way. And I don’t know if there’s any—we’ve struggled with

this in the Telecom Act, do we have a definition of what is rural

and what is not, do we need to address that for this program or

any other program, again, to make sure that what we are authorizing here does not go to areas that by yours and my definition

would clearly be urban or suburban.

Would the rest of the panel like to comment on any of my—Mr.

Crippen, do you have any recommendations from the legislative

perspective to make sure that we honor the intent of this legislation?

Mr. CRIPPEN. One thing that we talked about in the testimony

was that you can reduce the potential exposure to taxpayers by the

structure of the loan. And one thing I would encourage you to think

about is having the private sector exposed as well as taxpayers in

a very real sense, whether it’s by collateral or, more appropriately,

a guarantee of less than 100 percent of the loan—the point being

that private lenders will then have to scrutinize these projects

much more closely than they might otherwise. And they’re better

able, frankly, than we or anyone we know to do the credit-risk

analysis.

Mr. PICKERING. Thank you, Mr. Chairman.

55

Excuse me, Mr. Parsons, do you have a response?

Mr. PARSONS. Yes, just one comment, in going back to the definition of rural. I have constant contact with Salt Lake broadcasters,

and they have had way more requests for waivers for Salt Lake,

Ogden, and Provo than they had for the rest of the State put together.

Mr. PICKERING. Thank you, Mr. Parsons.

Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you.

Mr. Parsons, I want to know a little bit more about translators.

Obviously the FCC can pull their license, it’s a secondary license,

right, they can re-action that spectrum. They’ve done it in the past,

right? So making you eligible for loans may not be the best idea

in the world, because if they pull your license you’re sure to default, right?

Mr. PARSONS. Yes. It would be nice to be able to have that. But

the economics of an area, somebody has to pay the satellite to deliver.

Mr. TAUZIN. Let me ask you, what are the economics of a translator right now? If you provide free over-the-air boosting of the signal for customers, how do you get paid? How does a translator

make money?

Mr. PARSONS. In the county I live in there is a portion of the recreational tax that’s paid that ends up being, like I said, 38 cents a family a month. And it comes to like $38,000, $40,000 a year for

the budget. And from that, once in a while we get enough money

to buy another translator.

Mr. TAUZIN. Are all the translators backed up by local taxes, is

that the way they’re funded?

Mr. PARSONS. Most of them are.

Mr. TAUZIN. So the voters themselves vote to support a system

that will boost and deliver the free over-the-air broadcast signals

to these rural areas?

Mr. PARSONS. That’s correct.

Mr. TAUZIN. And literally I assume this occurs in areas where either they can’t get a good, great signal from the local stations, or

they get none at all, right?

Mr. PARSONS. Yes. I don’t know whether you have a copy of the

Exhibit 1 I have there.

Mr. TAUZIN. Describe that to me, if you don’t mind.

Mr. PARSONS. The round circle up near the top, that is the—

where the 80 percent of the people in this State live is within that

circle. But if you notice, Park City, which most of you are familiar

with, depends completely on translators and is financed by the

county. The rest of that whole geographic area depends on translators.

The rest of that whole geographic area provides the input signals

to the cable systems, which is a very, very key thing. So if the

translators go dark, the cable systems have no inputs.

Mr. TAUZIN. So I would take it then that both the broadcaster

and the cable companies have an interest in maintaining the translator structure in rural America.

Mr. PARSONS. You just struck a very sensitive nerve. We have

been known for a long time for being orphans. Nobody really wants

56

to accept an orphan. And as long as it’s part of the DMA, and as

long as it’s being done by somebody else, let’s not do anything

about it. So almost everything is done by the local people.

Mr. TAUZIN. Now, in your translator world, are you subject to

FCC rules that require you to carry all the local channels? Can you

carry the ones you want?

Mr. PARSONS. No. If you noticed on this map, there are 100 locations. We have about 600 translators, which averages out to six

per. It depends on the community and how much economic funds

they have. And if they have enough money to buy another $5,000

translator down the road, sell cookies or whatever, then they add

to the system.

But many of these don’t have the full complement, simply because of two things; we’ve not been able to file, and the other one

is they have to budget money, a county has to budget money as it

goes along. So it’s been very difficult to budget the money in correlation with the applications.

Mr. TAUZIN. And the other problem you have of course is getting

the licenses to operate. Now, how do you get the spectrum to operate a translator? Do you go through auctions, is that formally just

granted to you by the FCC?

Mr. PARSONS. Not up to this point, we have not gone through

auctions. If you look at a small county who is attempting to come

up with 5, 10, $15,000 to put in another station, they’re not going

to be the high bidder in an auction. That’s why I said in my statement it was not to the best benefit to include translator areas into

the auction.

Mr. TAUZIN. And finally, in terms of the broadcast stations going

digital, once they make the transition from analog to digital, were

you going to have to upgrade all these translators to carry a digital

signal?

Mr. PARSONS. There are already two stations on the air in Salt

Lake City with the digital stations. At this point there has not

been one test made by anyone about a translator repeating a digital signal.

Mr. TAUZIN. Are the broadcasters not interested in making sure

that you can carry their signal further into these rural areas by

being capable of carrying the digital signal?

Mr. PARSONS. They seem to have their hands full trying to get

up to speed with what they’re doing. And so being a secondary

service, that thing has haunted us since 1955, that secondary service has haunted us, because initially we were only secondary to creating interference with primary stations. Now we’re secondary to

anything.

Mr. TAUZIN. Anything. Interesting. But in many places in America you are the only alternative to pay services from cable or pay,

if in fact we ever get a second carrier such as a satellite?

Mr. PARSONS. I don’t understand that one.

Mr. TAUZIN. Let me say that again. In many places of our country you are the only service available to bring over-the-air free television to people other than them having to buy in from a cable system or perhaps 1 day from an alternate provider?

57

Mr. PARSONS. That is true. And also, again, I repeat, if we didn’t

have the translators, many of the cable systems wouldn’t have the

local.

Mr. TAUZIN. The cable system wouldn’t even have the local.

Thank you very much.

Mr. McLean, I want to ask you some questions. We’ll go back to

that audit again, because there are some interesting numbers in it.

Going to the audit, the Iowa Telephone Association has as an interest payment ratio of 4,330 to one. That’s a pretty strong company,

wouldn’t you agree?

Mr. MCLEAN. Mm-hmm.

Mr. TAUZIN. If that company, strong as it is, were to go out and

make private capital contracts, working through RUS, would that

company be subject to the same rules other companies are subject

to? It’s a telephone company. Wouldn’t it be subject to universal

service, reliability and affordability standards set by the PUCs and

the FCC?

Mr. MCLEAN. You’re assuming they have no RUS status?

Mr. TAUZIN. Yes.

Mr. MCLEAN. They would have to comply with the minimum

standards of the Public Service Commission and the—— Mr. TAUZIN. FCC?

Mr. MCLEAN. FCC.

Mr. TAUZIN. It doesn’t matter where they get their lending,

they’re going to have to comply with those things, right?

Mr. MCLEAN. But very different quality of service you’ll find in

the RUS finance system.

Mr. TAUZIN. Why wouldn’t a commercial lender be just as concerned about a quality system that he’s loaning to that’s strong financially and is going to keep a nice return on money, why

wouldn’t the private lender be just as interested in that as RUS?

Mr. MCLEAN. That’s a very good question. But the facts are that

there is a differential in quality in rural America. There’s a huge

debate about the digital divide.

Mr. TAUZIN. Where are those facts?

Mr. MCLEAN. You can look at the digital divide report. In rural

areas there’s lower quality service. We have a design philosophy at

RUS that makes access to services more plausible. In 1993, one of

the reasons we think the Congress has spoken very clearly to us

in the English amendment to the Rural Electrification Loan Restructuring Act, it said there should be—RUS’s design should facilitate advanced services, should be capable of—— Mr. TAUZIN. But Mr. McLean, what I don’t understand is, why

wouldn’t a private lender be just as interested in making sure that

the person he’s loaning the money to is providing good, strong, reliable service to their customers so they can make sure they get

their money back? What makes RUS special in that regard?

Mr. MCLEAN. It’s a difference between minimum standards,

which of course the private lender would meet the minimum regulatory standards, and the high quality standards that—again,

that’s the bargain for the loan. That’s the agreement between lender and the borrower.

Mr. TAUZIN. What troubles me with your argument is, I can’t

imagine a commercial lender not being equally interested in makVerDate 11-MAY-2000 09:34 Feb 16, 2001 Jkt 066878 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HEARINGS\64021.TXT pfrm02 PsN: 64021
58

ing sure that the person he loans it to is the best around. If I’ve

got a choice between loaning somebody who’s got some minimum

quality service and somebody who’s got a high quality, and I’m

guaranteed a return on my money from that system, I’m going with

the second every day. What’s different between them and you?

Mr. Viadero, I want to get your comments on that. Am I right

about that or am I wrong?

Mr. VIADERO. We have the same questions you do. We asked

your questions, Mr. Chairman.

Mr. TAUZIN. Did you get a good answer?

Mr. VIADERO. No.

Mr. MCLEAN. The vice president of a very large telecommunication company says capital goes where capital grows. That is, the

private market will invest into the urban area, into the high

growth areas. If you look at large telecommunications companies,

you see a very clear difference—— Mr. TAUZIN. Mr. McLean, I think you are mixing apples and oranges. Let me just make a point. I’m a rural guy. I’m always for

the co-ops, rural telephone. But for me to be able to support subsidized systems like that for rural customers, I can’t bump into

audit reports that tell me that rich fat companies with a lot of

airtime who don’t need the support are getting it, because it makes

it harder for me to defend the program and to keep it alive for people who need it.

I just want you guys to think about that. If this audit report is

right, and if you have authority to carry out the intent of Congress,

which was to wean these systems off of the government guaranteed

loan when they didn’t need it anymore, and you’re not doing that

adequately, so that we’ve got a report that says you’ve got companies with a 4,330 to one equity to interest payment ratio, then it

makes it very hard for us to defend rural co-ops and subsidy programs, to defend that to the folks who are putting up the subsidy.

Why should the taxpayers of some other State put up with that

system for very long? They’re going to ask for all of it to go away

at some point. We’re going to lose the baby with the bathwater.

Mr. MCLEAN. We certainly don’t want to do that. We do have

three products which are graduated, and we have the hardship

rate, which is available to the most neediest, that’s our 5 percent

fixed, to the Treasury rate of interest loan, which is at no subsidy

rate in the budgetary policies. We have a loan guarantee program

which if you lend from the Treasury Department it’s a Treasury

plus an eighth, which is actually a negative subsidy. So in fact we

do embrace that idea.

In fact we’re also trying to facilitate private investment in partnership with our supplemental lenders like CFC and COPEC.

Mr. TAUZIN. Let me ask the IG’s office here, if we included a loan

graduation provision in this bill which would require the borrowers

to move to private credit when they are financially able, what impact if any would that provision have on lowering the projected cost

of the government subsidy, and would it have a beneficial impact

on the program? Gentlemen?

Mr. VIADERO. Mr. Chairman, I think it’s safe—I was not prepared for that question here, I think I’ll need some further analysis, and we’ll be happy to get back to you.

59

Mr. TAUZIN. Mr. Crippen?

Mr. CRIPPEN. I have to confess I don’t know what’s in our baseline assumptions about what the RUS loan rates are going to be

to these kinds of companies. Presumably there would have to be

some savings, although loans made to those companies, of course,

are not nearly as risky as some of the others.

Mr. MCLEAN. Right. Exactly right, Mr. Chairman, because if we

were—— Mr. TAUZIN. Take the mike, please.

Mr. MCLEAN. If we were restricted to lending to only

uncreditworthy borrowers, the risks that CBO and OMB assess to

our program to determine our budget authority would go up. I

mean, it’s the very security that the members of this committee

have asked to secure in the legislation of the satellite bill that

we’re doing in the telephone program to keep the costs down.

Mr. TAUZIN. We’re talking about a provision that provides for

companies that become creditworthy over time. We’re obviously

talking about loaning them money when they need it, not the only

criteria, in my view, not loaning them money when they don’t need

it. I’ve got something in my craw, you’ve got a lot of members who

have got something in their craw about that. I think you heard it

today.

We’re talking about taxpayer guaranteed loans to people who

don’t need them. That kind of gets in your craw. But if you’re talking about loaning them to people who need them, but then wean

them off as they become creditworthy and don’t need it anymore,

that ought to affect the cost of the program and ought to affect

positively, in a very positive way, the impact of this program on the

budget and therefore make it a more desirable program, I think.

Mr. Viadero. Mr. VIADERO. Mr. Tauzin, your point, if I can support it, you just mentioned the one co-op in Iowa with a time interest rate earnings in excess of 4,300. In our exhibit D we have a

total of 28 loan applications that couldn’t be funded, that were

hardships that couldn’t be funded.

Mr. TAUZIN. You’re telling me you couldn’t make loans to people

that really needed them because the people that didn’t need them

had soaked it all up?

Mr. VIADERO. That’s correct.

Mr. TAUZIN. Is that what you’re telling me?

Mr. VIADERO. That’s correct.

Mr. TAUZIN. That’s not good testimony. I mean, it’s correct testimony, but it’s not a good message.

Mr. VIADERO. That’s on page 44.

Mr. TAUZIN. How do you answer that, Mr. McLean?

Mr. MCLEAN. I’m trying to understand the statement.

Mr. TAUZIN. Let me say it again, because I kind of paraphrased

it for him. But I think what Mr. Viadero said was, on page 14, was

that certain loans to people who needed it under the program were

denied because there was no longer loan money available, because

it had been soaked up in effect by people who didn’t need it.

Mr. MCLEAN. Are you saying—I’ll address through the Chair, if

Roger is saying that hardship funds are going to those companies,

or that the total budget authority—hardship is targeted to the most

needy and the lowest entities and the highest cost.

60

Mr. TAUZIN. Well, we don’t need——

Mr. MCLEAN. Hardship——

Mr. TAUZIN. We don’t need to beat this thing. What I would suggest is for the record, again, I’ll ask you this officially, if you will

look at that page of the audit report which indicates that loans

could not be made to folks who needed them because somehow they

weren’t available because they had been used by people who needed them, look at that and comment in writing to the committee in

answer to it, I would appreciate that.

Let me yield to Mr. Pickering.

Mr. PICKERING. Mr. Chairman, I was wondering if I could ask

you to yield just a second.

Mr. TAUZIN. You’ve got it. Go ahead, Mr. Pickering.

Mr. PICKERING. Just to participate in the conversation, it seems

to me there are two dilemmas here. One is possibly the issue being

raised that funds are not being made in those hardship cases because funds are being soaked up by those who don’t need it. But

you have the larger question, the dilemma that I think this bill is

trying to address is that those companies that are financially capable are looking at investment decisions.

As they make those decisions, they’re going to be looking at the

rate of return. That’s the way the market works. The problem we

face or the dilemma we face in rural America is our rate of return

in rural areas will not be as high as the rate of return for investment in urban areas or more dense markets. And so by giving subsidized loans, in essence lowering the cost of capital, you’re increasing the rate of return so that those investments are made.

I think we need to look at both ends of it, just because financially

able companies are using the subsidized capital to meet our objective of deploying broadband or other technology into rural areas is

not in and of itself a bad thing. But we should have a priority of

helping those who need it most first. That’s a legitimate issue

being raised.

Mr. MCLEAN. I absolutely share that priority. In fact in the last

fiscal year we used up all of our hardship money, $75 million. But

we turned back money, Rural Telephone Bank, loan guarantees. In

the last 3 years since the passage of the Telecom Act, in total appropriations we have turned back under-utilized funds. So the

crowding out argument, I’m a little bit—I would need more clarification on it.

We’ll work together to get that. And the consequence of moving

from the RUS loan interest rates to a private market rate would

reflect higher rates for consumers.

Mr. PICKERING. Mr. Chairman and Mr. Shimkus, I need to leave,

and I was just going to ask Mr. McLean one final question.

Mr. TAUZIN. The gentleman may proceed.

Mr. PICKERING. Mr. McLean, I just wanted to take this time to

extend an invitation to come to my district and take a broadband

tour of the third district of Mississippi. My former District Director

was the REA Administrator in the Bush administration, and I’m

sure you all would share a lot in common. We look forward to having you come our way.

61

Mr. MCLEAN. I would love to do that. And he is a very, very good

man, and the program is in good shape in part because of his leadership, and we appreciate that.

Mr. TAUZIN. The gentleman from Illinois, Mr. Shimkus.

Mr. SHIMKUS. Thank you, Mr. Chairman. The charter of a CEO

is to maximize shareholder equity in corporate America, and actually a lot of my questions were put more succinctly by my colleague

from Mississippi, and the challenge is, how do we incentivise corporate America to provide in those areas that aren’t covered. I

think we’ve asked a lot of the questions, and really some of the

hard questions were asked by actually sponsors of the legislation,

the chairman, myself, Mr. Pickering, who want to represent rural

America well, but we also want to do it in a response manner.

And a question was raised of the risk pool, how big is it, do you

lower the actual risk by having more versus do you have a smaller

pool, higher risk; in the end, through a CBO scoring, would that

be less risky. We don’t know. But I would ask Mr.—I would ask

the chairman, the individuals who are not represented are for the

most part the corporate entities, and we have to ask that question,

what will incentivise you to get into that area too, because I think

that’s where we’re trying to get a full spectrum.

So I just want to—I, again, don’t have any follow-up questions.

This has been a good experience. I appreciate the Chairman for

calling the hearing. I look forward to working with him to rectify

our cosponsorship with being responsible fiscal conservatives.

I yield back my time.

Mr. TAUZIN. I thank the gentleman. Actually we did hear, as you

know, from quite a number of the companies last year when we

were taking up HSVA. So we’ve got a good, wide body of information about potential use of this bill.

One thing I would like to know is, perhaps, Mr. Crippen, you

could help me on this, if we did make translators the first line of

defense to make sure that no one was left in a yellow area without,

you know, over-the-air free television, if that’s what they wanted

to choose, would that reduce the CBO’s cost estimate of the bill?

Mr. CRIPPEN. I’m not sure. I would have to think about it probably more than 10 seconds. If it were only for translators in those

areas, if they had a revenue source—lots of ifs—it probably would.

Mr. TAUZIN. All right. Well, look. We’ve got some things we’ve

left for you to respond back to us. Let me ask you to—you’ve listened to the questions. Sometimes you can learn more by hearing

a question than you can by—just learn where people are by the

questions they ask than any other thing. I think you got a sense

that there are a lot of members who are still troubled, who want

to do this thinking, who want to do it right, as I said in the opening statement.

What we are going to need is some help. You made some suggestions to us in your report, you made some, you know, some ideas

about, if we changed it, how you might look at the bill. It would

be very helpful if you would leave this hearing and think about a

supplemental statement after you’ve learned, you’ve learned from

these questions, learned from the testimony, your colleagues here

at the dais, and perhaps give us a supplemental report on how we

might make this bill accomplish its purposes in a way that, as Mr.

62

Shimkus said, is something fiscal conservatives feel comfortable

with, recognizing that we’re asking Americans to generally back up

service for some citizens of our country who without this bill may

in fact be left behind and be not part of this new world of extraordinary opportunities. If you’ll do that for me, we’ll keep the record

open for 30 days.

I’ve also asked some specific questions of you. Please respond to

us in writing within the next 30 days on the specific inquiries, the

questions I’ve asked you about the rules and regulations and the

statutory sites. If you’ll get those back to us.

Again, I thank you very much for the testimony.

The hearing stands adjourned.

[Whereupon, at 12:51 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116