Statement of Reed E. Hundt Chairman Federal Communications Commission before the Subcommittee on Commerce, Justice, State and the Judiciary Committee on Appropriations House of Representatives April 18, 1994 Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to review with you the Federal Communications Commission's Fiscal Year 1995 Budget Estimates. This opportunity is a special privilege for me as it is my first appearance before the Subcommittee since becoming Chairman last November. Our 1995 Budget Estimates propose a total of $167,400,000 and 1,964 full time equivalent positions. Over half of the $167,400,000, $95 million, will be obtained from fees assessed against parties subject to the Commission's regulatory authority, as specified in legislation enacted by Congress in 1993. The fees collected are considered offsetting receipts. The estimate of $167,400,000 represents an increase of $7,100,000 over our fiscal year 1994 appropriation. The increase is confined to uncontrollable fixed cost increases. Approx- imately $6.1 million or 86% of the requested addition, relates to increased personnel costs, including annualization of the FY 1994 locality pay, an anticipated 2% pay increase for all employees during FY 1995, and step in grade increases. Funds to cover increases in health insurance and worker's compensation accounts are also included. The remaining $1.0 million reflects anticipated inflationary increases in travel, printing, miscellaneous rentals and supplies. We have not adjusted our original request to reflect the proposed amendment to the FY 1995 Budget to be submitted by the President. This amendment would reduce government rental costs of approximately $568,000 as well as procurement costs of $197,000. Since final action on this proposal is pending, our original request remains unchanged. The Commission is responsible for regulating interstate and foreign telecommunications and managing the licensing of common carrier and broadcast radio and television services. This includes the licensing and administration of the broadcast spectrum as well as those entities providing interstate common carrier communications services. We exercise regulatory supervision over telecommunications markets that are not competitive in order to replicate, as nearly as possible, the results that a competitive market would produce. Equally important, we seek to promote competition wherever and whenever possible and to enhance access to markets by consumers and providers of services and products. In carrying out our responsibilities, the Commission seeks to further two fundamental public interest goals: providing the public with broad access to telecommunications services and encouraging domestic economic growth. We strongly embrace the Administration's commitment to manage government more efficiently and effectively. Virtually every item before the Commission, ranging from the regulation of interstate and international telephone rates and services, to the rules governing the emerging technologies, requires extensive analysis. Our commitment to consumer access and economic growth involves the development of initiatives that will foster competition in markets that are presently non-competitive and increase competition in markets that are in transition. These responsibilities demand a rigorous and integrated pursuit of several disciplines that ultimately must be merged in the actions of the Commission. For example, we must evaluate the engineering and technical merits of particular technologies, calculate the economic impact of their proposed use and determine the extent of any legal restrictions involved. The dramatic growth of the telecommunications and information industry and its increasingly significant role in the national economy underscores the vital importance of the Commission's deliberative decision-making process. The incredible expansion of the telecommunications industry over the last decade, including equipment, services, communications and information sectors, affirms our Nation's global leadership in this area. In constant dollars, the industry has grown from $478 billion in 1982 to $783 billion in 1993. This remarkable growth has occurred during a period of unmistakable and fundamental industry transformation. Once reflecting discrete and separate enterprises, the telecommunications industry has become a model of how technology and competition can create economic advancement. The Commission's ability to structure sound policies, to review applications expeditiously, to promote the deployment of new technologies and services, and to undertake prompt, fair adjudication and enforcement actions directly relates to the viability of the industry. The movement of various telecommunications markets toward a more competitive environment demands that the Commission fashion policies that will encourage this development while protecting consumers from unreasonable prices and practices during the transition. The manner of regulation has also changed dramatically. The engineering and scientific, economic and legal analysis required is not limited solely to present circumstances, but is linked to the direction of technological advances and entrepreneurial initiatives. The Commission must continue to establish regulatory policies that will promote creativity, innovation, efficiency and growth. The historic and present role of the Commission is reflected in its oversight of interstate communications services. The telephone company of yesterday was thought to be a classic, natural monopoly. Because it was thought economically infeasible to have multiple service providers, all services, facilities, rates and practices were subject to regulation. Technology and entreprise have shattered this preconception. The telephone company of today faces competition as well as being a source of it. Today, a single company may offer services in a market for which there is little competition, such as regulated local telephone service, alongside competitive services, such as data processing, which is not regulated. The Commission has established safeguards to ensure that ratepayers of the regulated service do not subsidize the unregulated data processing service. Through audits and enforcement actions, the Commission ensures the effectiveness of these safeguards. The Commission and state authorities have developed a regulatory regime that offers incentives to local telephone companies to reduce costs and increase efficiency by replacing traditional rate-of-return regulation, which requires establishment and enforcement of an elaborate set of cost allocation rules, with regulation that caps prices. With "price caps", a benchmark is established that reflects a fair estimate of a company's costs over time for standard service. If the regulated company is efficient and innovative and lowers its costs, it keeps any additional earnings generated below the benchmark to invest in new services. Ratepayers benefit from the development of new and better services while potentially enjoying lower prices than with rate of return regulation. In a current proceeding, the LEC Price Cap Performance Review, the Commission is considering how to ensure that consumers share in the benefits of these efficiency gains. In fulfilling its responsibility to maintain the viability of affordable telephone service, the Commission must ensure that regulatory barriers do not artificially preclude competition. In the previous era, one company provided equipment, local or long distance service. Access by competitors remained limited even after the 1982 judicial consent decree, the Modified Final Judgement (MFJ), which divested the Bell system. Recently, the Commission has undertaken actions to bring about a more competitive environment. In both the long distance and telephone equipment markets, the Commission has played a critical role in the evolution toward competition by removing regulatory barriers to entry for new competitors and taking steps to ensure that consumers have access to competing products and services. It has resulted in the availability of more services as well as decreased prices. Lack of competition in cable and the presence of unreasonable prices lead to passage of the Cable Television Consumer Protection and Competition Act of 1992. This month, the Commission completed its revision of regulations implementing this law. The regulations assess whether rates for cable services are reasonable, and provide a structure for consumers and cable operators to resolve complaints. The future compatibility of cable systems and consumer electronics equipment is also addressed. Inherent in the Commission's responsibility was the need to achieve quality cable service at a reasonable price while ensuring the cable operator's ability to earn a return sufficient to encourage continued investment in the business. The Commission's orders establishing the appropriate rate formula reflect the diversity of the industry as well as our obligation to explain fully the Commission's decision. Notably, in addition to the full orders, the Commission presented a streamlined explanation to cable operators on how to use the formula, computer spreadsheet programs that perform the rate calculation, and a facsimile center wherein the Commission can compute the calculation for the cable operator. The Commission has undertaken action to increase competition in the cable area. While restricted by law from providing direct video programming, local telephone companies are authorized by the Commission to furnish non-discriminatory access to multiple video programmers within their territory. This program access has the potential of providing a competitive alternative to present cable monopolies. In 1993, Congress mandated that the Commission design and implement an auction procedure for the licensing of personal communication services (PCS). The wireless PCS technology has the potential of creating new markets, enhancing competition in present ones, providing greater public access to myriad communication services and raising billions of dollars for the U.S. Treasury. The Commission is presently engaged in the complex and delicate task of structuring a fair auction process that will fully realize the potential of PCS and ensure access of competitors into the wireless communications markets. Another area where competitive opportunities exist involves a previously separate sector of communications called broadcast television. Through the advent of Advanced Television Service, in particular High Definition Television (HDTV), many telecommunications uses are possible, including forms of PCS. In the context of spectrum allocation and licensing, the Commission has structured a process where the many significant technical issues involving scanning and transmission techniques, as well as economic and legal issues, can be raised and resolved. The digital technology that HDTV offers can greatly improve the quality and quantity of communications services available to viewers. By carefully drafting the parameters for these advancements to flourish and ensuring that the public trust responsibilities of broadcasters remain, the Commission stimulates entrepreneurial initiative and encourages pursuit of economic growth. The need to combine engineering and technical expertise, with economic and legal concerns, goes beyond telephone, PCS and HDTV. Implementing digital audio services for improved radio sound quality, modernizing the Emergency Broadcast System (EBS), instituting Mobile Satellite Services (MSS) (with its wide range of new and low cost voice and data transmission services), and "refarming" Private Land Radio Mobile Services are but a few examples of other significant items before the Commission. In the last example, new technology can improve quality, efficiency and capacity of the radio broadcast spectrum. We at the Commission should implement a transition that comprehends the economics of change while ensuring an environment that fosters competition. The Commission has broad responsibilities in international communications, including allocation and coordination of radio frequencies, licensing of international transmission facilities and services and development of standards and operating procedures in international fora. The Commission's actions in the international area are intended to fuel U.S. economic growth through the creation of new businesses abroad for U.S. companies by promoting worldwide development of new wireless technologies and infrastructure development. We are encouraging the licensing of United States service providers in overseas markets and promoting private investment, competition, and regulatory reform both in developed and developing countries. The Commission has played a major role in several recent discussions with foreign governments by advocating the benefits that accrue from privatization, competition, and regulatory reform. By pursuing open communication markets throughout the world, U.S. companies that have firsthand experience in the competitive environment will benefit dramatically. We are witnessing an evolution of convergence of networks and markets, whether it be telephone, broadcast, cable, wireless or satellites, domestic and international. A range of companies, once segregated by product or service, will soon compete to provide voice, data, and video services. The products and services generated can offer great benefits to the consumer and the economy. The movement toward a competitive environment, however, is not accomplished overnight. It falls to the Commission to be able to structure the transition, monitor progress, and undertake corrective measures if the transition falters. With each effort, the Commission balances carefully the burdens that are imposed on industry with such important decisions. Moreover, we are also reexamining each Commission regulation, process and procedure to determine whether it should exist or be scaled back. We are reviewing the degree to which licensing areas can be performed more efficiently, or perhaps eliminated, while upholding the underlying intent of the law. We are examining the number of offices we have to determine whether any may be consolidated. We look forward to working with the Congress, particularly this Committee, in making the Commission more efficient and effective. In detailing, albeit briefly, the responsibilities of the Commission, I have sought to relate the complexity of the issues, and more importantly, the enormity of the task before us. To execute the law properly, virtually every matter involves an extensive analysis of technical, economic and legal issues. The substantial financial interests at stake dictate fair, competent and thorough decisions. The ramifications of the Commission's actions draw strenuous advocacy from those affected. That which is advocated, while aggressive and extensive, usually reflects a particular private interest, not the public interest. Notably, while businesses welcome competition, the welcome mat is usually laid only before its suppliers and distributors. It falls to the Commission to foster entry into all markets so that the public interest is the ultimate beneficiary. The Commission has a fundamental responsibility, therefore, not simply to discern the various arguments, but to analyze the law, the economics, and the technology applicable to particular facts; only then can reasoned judgment prevail and the premise of a decision be clearly articulated. This is at the foundation of a government agency's ability to carry out its mission, and to make that mission understood. To meet this standard, the agency draws on its most important resource, its employees. The Commission is comprised of an impressive cadre of honest, committed, energetic and highly competent professional and support staff who take seriously the responsibilities of the public trust. The Commission's capacity, however, to act decisively, with clearly articulated rationale, is subject to extreme strain as the quality of work is challenged by its quantity. While telecommunications has grown tremendously, the Commission's real resources have actually decreased. During an era of ever increasing responsibilities, the number of full time equivalent positions has dropped by almost 500 positions, from 2,200 in FY 1980 to 1724 in 1994, excluding those positions added as a result of the 1992 Cable Act. A parallel scenario is reflected in the Commission's infrastructure, whether it be engineering equipment, its communications capability, its facilities or the backlogs that plague virtually every component of the agency. Informal complaints regarding telephone rates and service grew to 32,024 in 1993, as compared to 16,988 in 1992. 6,656 of these informal complaints remained pending at the end of 1993. While the average resolution time is 315 days, over 5,000 took over one year to resolve. Pending applications for land mobile service licenses increased from 8,000 to 42,000 in the last year, doubling the processing time from three to six months. Private microwave licenses require up to 80 days for review, 20 days longer than the previous year. The backlog of pending applications for Instructional Television Fixed Service rose from 251 in 1990 over four times to 945 in 1993. Of the 4,000 authorization applications applications in FM broadcasting filed in 1993, 25% were contested and taking 24 months to resolve. Finally, while the Commission's efforts to process requests for information has been assisted by placing documents on the Internet, we continue to face over 4,000 requests per month. There is no short cut method to analyze the technology, the economics and the law as they relate to a particular issue. The Commission must have the resources to listen, gather information and analyze competing views. The arduous process by which our decisionmaking yields actions must be clearly articulated, rational and comprehensive. While resources alone cannot produce this result, the result cannot be achieved without resources. If the Commission is to fulfill its responsibilities and the telecommunications industry is to be a growing sector of the American economy, the Commission must have a larger resource base. The Commission must move expeditiously on a range of matters. It must enhance its capability to confront, analyze and resolve the myriad technical, economical and legal issues placed before it. Not only is the future of a vital industry at stake, but substantial revenues to the United States Treasury depend upon the Commission's effectiveness. We are discussing with the Office of Management and Budget how the request before you can be revised. As part of that process we are delineating those areas where the Commission needs additional resources, as well as examining how the Commission's workload can be affected by possible amendments to the law, the regulatory changes under consideration and emerging competition. The tremendous advances in telecommunications are subject to intense Congressional scrutiny. Legislation reported in the House of Representatives and pending in the Senate would, by overhauling the Communications Act of 1934, give substantially expanded responsibilities to the Commission. H.R. 3626, H.R. 3636 and S. 1822 would do more than allow the Regional Bell Operating Companies to enter previously restricted markets. The bills seek to introduce or enhance competition in a broad range of telecommunications markets including local and long distance. The legislation will establish a comprehensive, concrete set of rules and guidelines, as compared to the present rules which are issued on a piecemeal basis by various federal courts, federal agencies and state authorities. The legislation follows a careful format for monitored and regulated transition by the Commission to protect consumers from unreasonable price increases as competitive markets evolve. The legislation also includes provisions relating to education that provide significant telecommunications advantages for a vital constituency of our nation, our children. The expanded responsibilities of the Commission under these proposals will impact its resource needs to a significant degree. The remarkable growth in the telecommunications industry, its innovative future and technology driven markets, along with pending legislation of historic proportions, makes this a time of immense opportunity for the Commission. This Subcommittee's support of its efforts, particularly the establishment of the offsetting fee structure in 1993, has been crucial. It makes for an era of much excitement and optimism. This completes my statement Mr. Chairman. I would be pleased to respond to any questions you or the Members of the Subcommittee may have.