Statement by FCC Chairman William Kennard to the House Judiciary Committee. Re: HR 2533, the Fairness in Telecommunications Act, HR 2636, the Taxpayer's Defense Act, and other matters. Date: November 3, 1999. Source: House Commerce Committee. This page was created by scanning a paper copy, and converting to HTML.

STATEMENT OF WILLIAM E. KENNARD
CHAIRMAN, FEDERAL COMMUNICATIONS COMMISSION

Before the

U.S. HOUSE
COMMITTEE ON THE JUDICIARY

On

H.R. 2533, the "Fairness in Telecommunications Act,"
H.R. 2701, the "Justice for MAS Applicants Act," and
H.R. 2636, the "Taxpayer's Defense Act"

November 3, 1999

Thank you Chairman Hyde and Members of the Judiciary Committee. I appreciate the opportunity to testify before the Committee on the "Fairness in Telecommunications Act," the "Justice for MAS Applicants Act" and the "Taxpayer's Defense Act." Let me begin first by addressing some of the issues raised in the "Fairness in Telecommunications Act."

For the past 65 years, the Federal Communications Commission (FCC) has been ensuring that the American people have a "rapid, efficient, Nation-wide and world-wide wire and radio communication service with adequate facilities at reasonable charges." American families who collectively spend billions of dollars on communications services have a huge stake in how this industry develops. When Congress drafted the landmark Telecommunications Act of 1996, it understood this concept, and that is why competition is at the heart of the 1996 Act. Congress knew that through a robust, open marketplace, consumers would benefit from more choices, better services and lower prices.

As an important part of its core responsibilities to the public, the Commission processes many transfers and assignments of licenses, authorizations and telecommunications lines each year. Firms that hold spectrum licenses, or other types of authorizations to provide interstate and international services, are required by sections 310 and 214 of the Communications Act of 1934, as amended, to seek Commission approval before consummating a transfer of ownership or control. During the past fiscal year alone, we completed processing of several thousand transfer and assignment applications filed pursuant to section 310(d) of the Communications Act.

The Commission's approach to evaluating transfers and assignments of licenses and authorizations is well established. After determining whether the proposed assignee/transferee is eligible to hold the licenses or authorizations, and that approval would not violate any provisions of the Communications Act or the FCC's rules, we must determine whether the public interest is served by approval of the request. Mergers are but one of the many types of transfers and assignments of licenses or authorizations that the Commission is charged to consider. The necessity of obtaining Commission approval to complete communications mergers is not new; nor is the Commission using new procedures or applying new standards of review to the applications before it.

The new development that has caught the attention of so many people is the number and size of transactions involving communications firms in the late 1990's. We are witnessing unprecedented numbers of communications mergers, and many of them are breathtaking in size and scope. A single communication merger often involves transfers of thousands of licenses and lines, and the Commission has handled a number of these complex transactions. Others are currently before the Commission. Still more are likely to be filed in the future.

The Commission has dealt comparatively well with the increased volume and size of transfers of control. Most are routinely and quickly handled. The Wireless Telecommunications Bureau, for example, handles around 30,000 license transfers and assignments a year. Even so, it was able to process MCI-WorldCom's acquisition of SkyTel in nine weeks; ALLTEL's acquisition of Liberty Cellular in 10 weeks; and AT&T's acquisition of Vanguard in three and one-half months.

A few of the big transactions that have been presented to the Commission since passage of the 1996 Act are truly cases of first impression. The market-opening changes inspired by the Act made possible many kinds of mergers that would not have been legally permissable before. Naturally, the public has raised many questions about these new mergers. For example, over 10,000 pages of comments were filed by over 50 commentors and thoroughly reviewed by Commission staff in the SBC-Ameritech transaction alone. As required by the Administrative Procedure Act, the applicants, opponents, and the public have the opportunity to make known their views and have their perspectives taken into account. The process is open, the Commission explains its decisions in writing, and all decisions are subject to judicial review. If the Commission were not already following adequate procedures and adhering to consistent legal standards, the courts would have reversed its decisions.

It is important to note that there is considerable risk to adopting a uniform "shot clock" approach to the review of license transfers. When so many difficult issues are presented, a "shot clock" can deny applicants the opportunity to amend their filings to address problems. More importantly, the Commission is overworked and has too few resources, so a uniform short time period for review could lead to substantial mistakes under current funding levels. If the 1996 Act is to succeed, the Commission will need more resources to ensure that the restructuring of communications industries does not thwart the development of competition. (The Senate recognized this need when it appropriated the funding requested by the Commission; the House did not, however, leading the President to veto the bill in part because it failed to provide sufficient funds for the continued operation of the FCC.)

The Commission's review is very transparent. The rules covering applications to transfer control of licenses and telecommunications lines are found in the relevant parts of the CFR governing the various types of licenses, such as broadcast licenses. For every spectrum license or authorization issued by the Commission, there are specific rules governing the submission, consideration and processing of applications for their transfer or assignment. Section 1.77 of our rules (47 CFR Section 1.77) provides a general cross-reference to certain of the rule parts that contain specific procedures for the prosecution of applications to transfer or assign Commission licenses. In addition, there are other provisions of our rules setting forth procedures for transfer or assignment of interstate or international lines or other facilities, and transfers of interests in affiliated routes or affiliated entities.

Like the common law-the law of property or contracts -- the public interest test proceeds on a case-by-case basis. This is more efficient, and much less regulatory, than writing extensive rules attempting to anticipate every way in which any possible transaction might violate any part of the Communications Act or the Commission's rules. The public interest is a fundamental legal concept, akin to "good faith," "reliance," "negligence," and "compensation." As such, its meaning is inherently fact specific and can only be defined based on the circumstances of each individual case.

The public interest test is not a broad, vague inquiry into all possible aspects of a transaction, such as possible effects on the securities laws or automobile consumers. Instead, it is an inquiry into the extent to which a particular transaction may affect the principles served by the Communications Act. Congress directed the Commission to execute and enforce the provisions of the Act consistent with the principles set forth, particularly the pro-competitive, de-regulatory public policy framework of the 1996 Act.

In its review, the Commission must consider whether the proposed transaction would violate individual provisions of the Communications Act and the Commission's rules. For example, if a local exchange carrier and cable company were to attempt to merge in an area where such a buyout is prohibited, the Commission would have to deny the requested transfer of licenses.

Similarly, a transaction may violate the Communications Act if it prevents enforcement of one or more of the Act's requirements. In particular, the "public interest" standard requires the Commission to take into account the likely effect of the transfer on other provisions of the same Act and on Commission rules promulgated under the Act. Were this not the case, we could find a transaction to be in the public interest under one provision of the Communications Act, even if the transferee of the licenses in question intended to use those licenses to violate another provision of the Communications Act.

The same public interest standard applies to all transfers of licenses or lines, and the standard of review is the same in every case. The fact that some transactions are considered at greater length or with more resources does not indicate that the public interest standard is different in those transactions. Instead, it simply means that some transactions require more analysis to determine whether the standard is met. This method is no different than when a judge grants summary judgment rather than conducting a full trial.

In the future, the application of the public interest test will be even more clear and predictable than today. I have asked our General Counsel, Christopher Wright, to organize an inter-agency transaction team that will be in place by January 3, 2000 to streamline and accelerate the transaction review process. The new inter-agency transaction review team will establish deadlines for rapid processing of transfers of control associated with transactions. The new team also will work to make the transaction review process even more predictable and transparent, so that applicants know what is expected of them, what will happen when, and the current status of their application. This is consistent with the focus of the restructuring of the Commission to operate in a flatter, faster, and more functional manner. Finally, the team will look into supplementing the case law explicating the application of the public interest test with written guidelines.

The Commission also will be establishing a merger conditions oversight team comprising of members of the Common Carrier Bureau and the Enforcement Bureau. Its purpose will be two-fold. First, the team will actively monitor compliance with the merger conditions and ensure that companies subject to conditions are executing the conditions consistently with the Commission's stated intent. Second, the team will serve as a point of contact for state commissions, competitors, and other interested parties to report any instances of noncompliance. In this manner, there will be an informal process, in addition to our formal enforcement mechanisms, by which parties can resolve quickly disputes that arise surrounding compliance with the conditions.

The review of transfers of control is inherently quasi-judicial in nature-it must be a case-by-case process because the object is to apply existing rules to individual sets of facts. Accordingly, Commission procedures will naturally continue to resemble those used by courts. Therefore, the information needed, the questions presented, the specific deadlines for filings, the timing of the decision, and the ultimate decisions will ultimately differ from case to case. Each determination, however, will continue to be fully consistent with the Administrative Procedure Act and reviewable in an appropriate court of law.

Expedited processing also depends on the parties seeking approval for their transfers of licenses and lines. Applicants can have a major impact on the timing of the license review process. When the Commission receives a complete application that contains the information that is needed for review and fully addresses the public interest co ncerns, the review naturally proceeds more quickly than it does when parties file minimal applications that require the Commission and other parties to expend considerable effort to develop a record of the facts and rationale. Similarly, where there are public interest concerns, such as where the transfers will violate the Communications Act, applicants can greatly speed the processing of their applications by acknowledging the problem and proposing viable solutions at the outset.

Justice for MAS Applicants Act H.R. 2701

You have asked me to address the issues raised in H.R. 2701, the "Justice for MAS Applicants Act." Multiple Address Systems (MAS) constitute narrowband frequencies in the 900 MHz band that originally were envisioned to be utilized by private businesses to support data, paging and alarm services. The nature of this service, and the regulatory framework for licensing this band has evolved over time as Congress has changed our licensing authority under the Communications Act.

The Commission originally decided to award MAS licenses in the 932/941 MHz spectrum band on a first-come, first-served basis and utilize lotteries to resolve "mutually exclusive" (i.e., equally meritorious) applications. In the early 1990's, the public expressed a tremendous amount of interest in acquiring these licenses. So much so that in January and February of 1992, when the Commission opened five, two-day application filing windows for parties proposing to use newly allocated channels pairs in the 932/941 MHz bands of MAS spectrum, we received 51,183 applications and $7,987,155 in license application fees. Since these licenses were awarded on a "site specific" basis, reviewing these applications to determine which applicants were mutually exclusive as an engineering matter represented an enormous task.

On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted. The Act authorized the Commission for the first time in its history to employ competitive bidding, i.e., auction procedures, for certain classes of licenses, in order to choose among mutually exclusive applications for initial license grants or authorizations. The principal criteria for employing competitive bidding was whether users of the spectrum would provide subscriber-based services and whether auctioning would promote the public interest. The Commission had authority to use either auctions or lotteries as a means to award licenses for subscriber-based services.

In response to the Act, the Commission initiated a proceeding to review the licensing schemes of many FCC services, including MAS, to determine whether certain services would be subject to competitive bidding under the new statute. Based on the information the Commission had on the nature of MAS, it preliminarily concluded that the band was not subscriber-based in nature and would not be subject to auction. Later, upon further evaluation of the applications received in response to the 1992 filing windows, the Commission determined that the majority of the applicants proposed to use their licenses principally to provide subscriber-based services. As a result, the Commission initiated a rule making proceeding in February 1997, among other things, to revisit its licensing approach for MAS and reexamine the uses of, and demand for, MAS spectrum. Among the licensing issues under consideration at that time was whether to license for service on a geographic area basis rather than a site-specific basis.

Congress subsequently eliminated the Commission's authority to use lotteries in the Balanced Budget Act of 1997. Because the Commission no longer had authority to use lotteries, the Commission's Wireless Telecommunications Bureau in 1998 dismissed the pending MAS applications received in 1992, indicating that applicants were free to re-file under the new licensing approach for this service. Recognizing the hardship imposed by the lengthy decision-making process, the Commission established a process for applicants to seek a refund of the application filing fees paid to the FCC. On October 1, 1998, the Office of the Managing Director released a Public Notice informing applicants about the procedures that would expedite the processing of the refunds.

Additionally, the Balanced Budget Act required the Commission to award all mutually exclusive licenses, with certain exceptions, by using competitive bidding procedures. One of those exceptions exists for "public safety radio services," which include radio services used by utilities, pipelines, and railroads. Because of the changes contained in the Balanced Budget Act, the Commission released a Further Notice of Proposed Rule Making on July 1, 1999 to build a sufficient record and fully examine the impact of the Act on the MAS Service. The comment period closed on October 19, 1999 and we are acting swiftly to resolve all outstanding issues concerning spectrum allocation and licensing for this service.

As of October 28, 1999, the Office of the Managing Director has processed requests for refunds from 795 applicants representing half of the original license applications (i.e., 25,294) and funds constituting more than half of the amounts originally deposited with the FCC (i.e.,$ 3,928,425). Indeed, there are no pending requests for refunds at this time. Significantly, only four of the 795 refund requests received included a demand for the payment of interest or "other costs." All four were for "private" and not "commercial" applications. For example, three of the four requests for "other costs" appear to be from related parties. In the three cases, the "other costs" requested represent 50 percent of the cost of the license application fees. The fourth applicant requested payment of interest "at the rate which the IRS would collect on money owed to the Government."

The Commission lacks the legal authority to pay interest to the dismissed applicants and has not compensated applicants in the past for either interest or "other costs." In many cases, interest or "other costs," which would include items such as legal fees, engineering fees, and application preparation fees, could be very substantial. As an example, the Commission does not pay interest on deposits made in advance of an auction. It is also important to note the costs associated with filing an application could include fees to third party "application mills." An "application mill" is an entity whose sole purpose is preparing and filing FCC applications for a fee. Compensating applicants for such third party filing costs might encourage consumer scams involving FCC applications and could significantly increase the government's financial liability.

If the Commission had authority to compensate MAS applicants for interest from January 1992 until the fall of 1998 (when the applications were officially rejected), at the rate the United States Treasury Department has approved for payment of late invoices, the amount to be paid would be approximately $2.7 million. Using the only requests for "other costs" received to date, if the Commission were granted the legal authority to reimburse applicants up to 50% of the application fee for "other costs," then the payments would total an additional $4 million. It is important to note, however, that these three were "private" use applications and "commercial" use application costs would likely be much higher. In any case, the interest and "other costs" which would total in excess of $6.7 million would have to be obtained through a subsequent request for an additional appropriation since no agency funding has been included in the FY 2000 budget for this activity.

Mr. Chairman, I look forward to working with your Committee to help fashion a result that is fair for all those involved.

The Federal Communications Commission does not impose taxes by the promulgation of rules. Moreover, if the Commission is directed by the United States Congress to perform or not perform a specific task, we will comply with that directive. I recognize that Representative Gekas specifically referred to the universal service fund as an example of an administrative tax when he introduced this measure. In the case of universal service funding, I should point out that this program is not a "tax," even under this legislation's definition of the word, but a congressionally mandated fee system, which was upheld as such last summer by the Fifth Circuit Court of Appeals in Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 )5th Cir. 1999). The court specifically dismissed a claim based on the Taxing Clause (see U.S. Const. Art. I § 8, cl. 1). The court explained that in light of the clear nexus between the payments made by telecommunications carriers and the program they supported, "the universal service contribution qualifies as a fee." 183 F.3d at 427 n. 52.

Today's universal service programs are the embodiment of the universal service principle that has been a cornerstone of telecommunications policy in this country for decades. In 1996, Congress codified this principle so that for the first time in history it is the law of the land that we are better off when each American has access to phone services.

Our universal service program has many facets. First, universal service provides reduced-price monthly local service and phone connections to poor Americans throughout the country through our Lifeline and Linkup programs.

Second, universal service helps pay for local service in those areas where the cost of providing phone service is prohibitive, such as rural and other high cost areas. Just two weeks ago, we took a major step in the reformation of this facet of the program for those areas served by the large phone companies. Large carriers serving rural and other high cost areas will receive funding based on the costs of building a network in high cost areas in comparison to the costs of building a network nationally, Funds are targeted to the specific communities that are high cost, and any eligible telecommunications carrier serving that customer can receive the support. Small telephone companies also receive high-cost support.

Third, universal service provides discounts to schools, libraries and rural health care providers for all telecommunications services, including advanced services like high speed Internet access. This program provides access to advanced capabilities to all communities. Students of every income and location can have the advantages of the Internet. Libraries throughout the country can connect their communities to the World Wide Web. People in rural America can improve the quality of their health care. By the end of 1999, we expect three-quarters of the nation's classrooms to be connected to the Internet.

Congress provided for the continuation and expansion of universal service in the 1996 Act, codifying for the first time a longstanding telecommunications policy. Congress recognized that competition might come in different ways and different times to residential and business customers, and to urban and rural customers. Ensuring that the benefits of the 1996 Act extend to all Americans, regardless of geography, requires a universal service program that facilitates reinvestment in the network and the expansion of benefits of an advanced network to all Americans. It further understood that all Americans, regardless of income, should be connected to the information age and that ensuring that America's children have access to the vital telecommunications tools of the future is what's best for America.

Overall, I'm proud of the universal service fund and I feel privileged to administer Congress' mandate to fund this program.

Thank you.