FTC Picks Fight with Appropriations Committee Chairman

(February 12, 2000) FTC Chairman Pitofsky, who is seeking a huge increase in the FTC's budget to expand its activities, started a brawl on February 2 with Sen. Stevens, the Chairman of the Senate Appropriations Committee, over oil company mergers. The dispute, ironically, could impact the FTC's regulation of Internet activity.

The FTC's application of arcane antitrust laws to oil production companies on the North Slope of Alaska could have a major impact on FTC's regulation of Internet fraud, online privacy, and antitrust enforcement against high tech companies. By adopting a litigation policy which could diminish the State of Alaska's revenues, and reduce jobs in Alaska, the FTC has crossed the Senator most capable of cutting its budget.

Robert Pitofsky is the Chairman of the Federal Trade Commission (FTC), an agency with two distinct functions: consumer protection and enforcement of antitrust laws. The FTC is expanding its level of activity in both areas. The advent of the Internet has opened up new avenues for fraud artists to perpetrate consumer scams. The FTC has been devoting increased resources to deal with this.

The FTC is also positioning itself to be the agency to regulate online privacy practices. To date, it only has statutory authority in the area of children's privacy, but many bills to expand its authority are pending in Congress. One such bill, S 809, the Online Privacy Protection Act of 1999, is cosponsored by Sen. Conrad Burns (R-MT) and Sen. Ron Wyden (D-OR).

The FTC is also moving towards a more interventionist interpretation of federal antitrust laws. The FTC used a novel interpretation of its antitrust authority to bring a complaint against chip maker Intel in 1998. On February 11, it announced that it would be the agency to review the merger of AOL and Time Warner.

On February 2, the FTC brought suit against BP-Amoco (BP) and Atlantic Richfield Company (ARCO) to stop their pending merger. Some people, including Sen. Ted Stevens (R-AK), see this as a test case to create new law expanding FTC antitrust authority. These two companies operate oil production facilities on the barren tundra and Beaufort Sea in the far north of Alaska.

The State of Alaska owns the Prudhoe Bay oil field. A considerable portion of the state budget is funded by royalties and taxes on oil companies and support companies. The State approved, and supports, the merger. (The merger has also been approved by shareholders and by the European Union.)

The cost of exploration and development on the North Slope of Alaska is very high, due to its remoteness, harsh climate, and geographical features. The State of Alaska, and Sen. Stevens, believe that without this merger, and the economies of scale associated with it, these companies would have less incentive to engage in further exploration and development. And this means fewer jobs for Sen. Stevens' constituents.

There is no high tech industry in Alaska. This oil industry matter has nothing to do with the FTC's pursuit of online fraud artists, enforcement of childrens' online privacy, online privacy generally, or application of antitrust law to high tech companies.

FTC Chairman Robert Pitofsky

However, for Robert Pitofsky to carry through on these new and expanded high tech missions, he needs many more lawyers, investigators, and economists; he needs office space; and he needs equipment and services to support this expanded staff. But mostly, he needs a huge increase in funding to pay the salaries of these people.

He runs an agency which, by federal government standards, is small, lean, and stretched thin. The FTC had 884 full time employees in FY 1999 for all of its activities -- consumer protection, antitrust, and support staff. In comparison, the Justice Department's Antitrust Division alone had 804 full time employees in FY 1999.

Accordingly, the FTC has asked for a 50% increase in funding in its FY 2001 budget request. This request is supported by the Clinton administration.

However, appropriations for the FTC, like all other government agencies, must be approved by the House and Senate. The appropriations committees play a crucial role In these bodies.

This brings us back to the aggrieved Sen. Stevens.

Sen. Ted Stevens (R-AK)

He is the powerful Chairman of the Senate Appropriations Committee. While Members of Congress are becoming increasingly ideological and partisan, Sen. Stevens, who first came to the Senate in 1970, is a throwback to an earlier style. He is largely non-ideological and often non-partisan. He works towards compromise and accommodation. In his view, Senators represent the interests of their states, and Senators defer to each other on matters affecting their own constituents.

While younger members of Congress engage in inflated partisan rhetoric and personal attacks, Sen. Stevens believes in decorum, civility, and courtesy: that is, except when you mess with his constituents.

Sen. Stevens is famous for zealously pursuing the interests of his state with single minded determination. Decreasing funding for an agency which is harming the interests of his state is an option.

He takes little interest in issues which do not affect his constituents. To date, he has had very little involvement in most issues affecting the Internet, including Internet fraud, online privacy, and antitrust law application high tech companies. Yet, by decreasing funding for the FTC, or denying an increase, he could cause the FTC to adopt a new litigation policy in the BP ARCO case. Even if the FTC stands its ground, he would serve notice on other agency heads that there is a huge price to pay for injuring his state.

Chairman Pitofsky has a dramatic sense of timing. On February 2 he filed suit, thus sending notice to Sen. Stevens that he is going to harm his state. Five days later he sent Sen. Stevens a request for a huge budget increase.

Sen. Stevens is livid. He used a Senate Commerce Committee hearing on FTC reauthorization on Wednesday, February 9 to grill and berate Pitofsky about the suit.

"This is a matter of survival for my state," Stevens told him.

Senators, including Sen. Stevens, normally treat agency heads who testify before them with great respect and deference. Not at this hearing. Sen. Stevens, who was once the U.S. Attorney in Fairbanks, cross examined Pitofsky like a two bit alibi witness.

Pitofsky defended his lawsuit. Stevens examined Pitofsky on why this action was not inconsistent with prior FTC decisions approving oil industry mergers. "I believe you started this because you want to set up a new milepost ... a new standard," declared Stevens.

Sen. Stevens did not reference the appropriations process. Yet, he told Pitofsky, "I can assure you, you are going to be before more hearings before this is over."

The FTC's review has already delayed this merger, which was announced on April 1, 1999. Even if BP and ARCO win in the courts, it would likely delay them for years. This might also delay any new activity on the North Slope.

Stevens yelled at Pitofsky: "My state goes bankrupt if you delay this for three or four years."

Many of the other participants at the hearing saw the freight train coming and got off the tracks. FTC Commissioners Sheila Anthony and Mozelle Thompson, who support Pitofsky on this matter, declined to make opening statements. Commissioner Orson Swindle, who voted against bringing suit against BP and ARCO, made clear his opposition.

Sen. Ernest Hollings (D-SC), the ranking minority member, made an opening statement, which focused in part on the Federal Communications Commission's handling of Section 271 applications (a matter irrelevant to the FTC), and then left for another engagement.

Even though the Subcommittee also heard from a panel of privacy experts, Sen. Burns and Sen. Richard Bryan (D-NV) both skipped the hearing. Sen. Burns is cosponsoring a privacy bill with Sen. Wyden. Sen. Bryan sponsored the Children's Online Privacy Protection Act in the last Congress, which gave the FTC authority regulate children's privacy.

Sen. Sam Brownback (R-KS) also participated in the hearing, but focused his comments and questions solely on TV marketers who create violent programming for children, and fraud in the sale of pharmaceutical products on the Internet. He declined to ask any questions until Sen. Stevens had received all the time he wanted to grill Pitofsky.

Sen. John Ashcroft (R-MO), the Chairman of the Consumer Affairs Subcommittee of the Commerce Committee, presided. He too stayed out of the fight.

Only Sen. Wyden defended the FTC. He stated that he is concerned about the effect of the merger on the price of gasoline at the pump in Oregon.

Sen. Wyden is the cosponsor, with Sen. Burns, of the Online Privacy Protection Act. He also tied his support for the FTC oil industry lawsuit to his support for privacy legislation. He threw a rhetorical jab at Sen. Stevens by suggesting that if his bill were not passed there would be an "Exxon Valdez" of privacy.

Perhaps a recent conflict between the Federal Communications Commission and Sen. Stevens is relevant to this matter.

When the FCC, and Chairman William Kennard in particular, established the e-rate program, they had only tenuous statutory authority for their actions. While Chairman Kennard states that the e-rate is based on Section 254 of the Telecom Act of 1996, the program is essentially an FCC creation. It taxes phone users to subsidize Internet access, phone service, and computer networking for schools and libraries. The FCC also set up the Schools and Libraries Corporation to run the program. This corporation was under the control of the FCC, beyond Congressional oversight, and of questionable legality.

The schools and libraries program subverts both the taxing authority of the House Ways and Means Committee and Senate Finance Committee, and the appropriations authority of the two Appropriations Committees.

Initially, Sen. Stevens was very upset with the arrangement. It was Sen. Stevens who requested the report from the GAO which found that the FCC's formation of the Schools and Libraries Corporation was illegal.

FCC Chairman William Kennard is deeply committed to the e-rate program. But he also understands how policy is made, and unmade. So, in July of 1998 he traveled up to Alaska, where he spent a few days flying into small remote native villages to learn about universal service concerns. He testified in Anchorage to a field hearing of the Senate Communications Subcommittee -- that is, Sen. Stevens and Sen. Burns. He even posed for a picture with Sen. Stevens and a stuffed Alaskan King Salmon.

He also terminated the Schools and Libraries Corporation, ditched its President, and rolled its e-rate operations into the Universal Service Administrative Company (USAC).

Sen. Stevens has been supportive of Chairman Kennard on e-rate issues ever since.

What transpired between Sen. Stevens and Chairman Kennard is not public record. However, when statistics were released last May showing the distribution of e-rate subsidies by state, it was revealed that Alaskans paid $4.5 Million into the e-rate, while Alaska schools and libraries received back $11.9 Million. Alaska received far more in e-rate subsidies than it paid in e-rate taxes.

The FTC's decision to sue BP and ARCO, like the FCC's Order creating the e-rate, was more policy than law. In a government with a system of separation of powers, elected officials have a constitutional role to play in policy making. If Pitofsky continues to act as though he is strictly enforcing the law, the courts might stop the merger, and give him the expanded antitrust authority he seeks. He might even get expanded online privacy authority. But, he may not get the funding he needs to follow through. Regulated companies would soon figure this out, and act accordingly.