Copyright 2002 Federal News Service, Inc.  
Federal News Service
March 7, 2002, Thursday
SECTION: CAPITOL HILL HEARING

LENGTH: 10275 words

HEADLINE: SENATE APPROPRIATIONS COMMITTEE HEARING OF THE COMMERCE, JUSTICE, STATE AND THE JUDICIARY SUBCOMMITTEE OF THE SENATE APPROPRIATIONS COMMITTEE APPROPRIATIONS FOR THE SECURITIES AND EXCHANGE COMMISSION AND THE FEDERAL COMMUNICATIONS COMMISSION
 
CHAIRED BY: SENATOR ERNEST HOLLINGS (D-SC)
 
LOCATION: 253 RUSSELL SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:
 
MICHAEL K. POWELL, CHAIRMAN, FCC;
 
HARVEY L. PITT, CHAIRMAN, SEC
 


BODY:
SEN. ERNEST HOLLINGS (D-SC): The committee will come to order.

And we're pleased this morning in our appropriations oversight to welcome Mr. Michael Powell, the chairman of the Federal Communications Commission. Mr. Powell, we'd be delighted to hear from you, sir.

MR. MICHAEL K. POWELL: Certainly. Thank you, Mr. Chairman, Senator Gregg.

It is my understanding that we're interested in getting into some of the policy issues and in deference to your wishes, I would ask that my full testimony be presented into the record.

SEN. HOLLINGS: That will be included and you can summarize it as you wish.

MR. POWELL: Thank you. I'd like to read a brief statement concerning the commission's appropriations. It's fitting that we have this hearing on March 7, a day marked by important historical milestones for the telecommunications industry. On this day Alexander Graham Bell received a patent for the telephone. Fifty years later on the same day the first successful trans-Atlantic radio telephone conversation took place between London and New York. In retrospect, 50 years seems like a very long period of time between these achievements. Today we develop new communications products and services at a more rapid speed than ever before in an exponential fashion that makes science fiction a matter of science fact within just a handful of years.

Less than nine months ago I appeared before this subcommittee for the first time and made a personal commitment to effectuate fundamental change within the commission. I guaranteed that the commission as an institution would complete a thorough self- examination and develop a reform plan designed to make the FCC more responsive, efficient, effective and capable of facing the technological and economic opportunities and challenges of the new millennium. And, as always, you do so in a fashion that attempts to protect consumer welfare and the public interest. I believe the commission delivered on this promise and sent you a reprogramming request for three organizations six months later in January 2002, and we deeply appreciate the chairman's rapid assent to our request.

I also pledged to enhance the commission's independent technical and engineering expertise. The commission dedicated resources to recruiting, training and retraining a solid technology oriented workforce under our excellent in engineering program. We have, I'm happy to report, hired 18 mid and senior level engineers and five entry level engineers this year; more than the FCC has hired in nearly 20 years. We instituted training programs to keep them current and future engineers up to date in their profession and we have improved the environment for engineers by purchasing equipment to facilitate the spectrum management process and to upgrade the Columbia, Maryland, lab testing capabilities. Our ongoing efforts in this regard, coupled with the agency's FCC university and excellence in economic analysis initiatives, hopefully will preserve our existing wealth of FCC staff knowledge and expertise and enhance and extend the collective knowledge into the new millennium.

When I first appeared before this subcommittee I pledged to make the commission a model of solid management. As such, the commission moved forward to continue to streamline agency processes and procedures, automate agency process, provide improved access to agency information and modernize its information technology infrastructure. During our January 2002 open agenda meeting the commission staff delivered, with statistics showing substantial improvement in backlog reduction levels and other management benchmarks.

Finally, I also vowed that the commission would use the remainder of its Fiscal 2001 and expected 2002 funds to implement its statutory mandates. In this regard the commission has demonstrated during the past calendar year the continuation of steadfast commitment to its regulatory purpose. The fundamental mission of the commission as a constructive and fair independent agency is to implement the Communication Act of 1934, as amended, in a matter that promotes competition, innovation, deregulation and the availability of high quality communication services for all Americans. I'm confident the commission has met this and the rest of our commitments and in doing so has achieved significantly higher levels of benefit and policy management performance.

The commission has made these achievements, however, against the backdrop of tragic and dramatic national events. The events of September 11 provided us with an important lesson in the significance of the FCC's portfolios and the networks that it oversees. We now know that our society has developed more than just an appetite for communication services. America is heavily dependent on these services in times of crisis and in times of peace. A strong and competitive communication network is essential to a healthy economy and our nation depends on both, whether to bolster its ability to defend itself or to communicate in times of normalcy.

I am unwavering in my commitment to implement the long-term business plan outlined in my full written statement. To effectuate our stated goals, however, the FCC has requested $278 million and 1,975 FTEs for Fiscal Year 2003. This request includes $9.7 million to fund the administration's government-wide proposal to fully fund retirement costs in each agency's budget. The commission's requested operating costs are $268.3 million. These operational costs requested by the commission for Fiscal Year 2003 is the bare minimum needed to allow us to continue the progress made during the past year. In order to achieve our goals and stay abreast of communications developments, the commission must keep ahead of changes in technology, economics and the law. Accordingly, we are requesting $15 million for critical programmatic initiatives. An additional $8 million would be dedicated toward uncontrollable cost increases related to salaries, benefits and inflationary cost increases for rent and supply.

The administration's request of $9.7 million for the retirement costs brings the total budget to $278,092,000. The Fiscal Year 2000 regulatory fee offset for the commission would be 89 percent of the proposed Fiscal Year 2003 budget, making our direct appropriation request from this committee a 9.5 percent increase over total fiscal year budget last year, or 13.5 if you include the administration's pension costs.

From the perspective of funding commission objectives, the critical segment of the overall budget is the $15 million dedicated to these initiatives. Of that amount, 4.9 will be dedicated toward commission employee training, enforcement initiatives and spectrum management initiatives.

Due to national security needs identified on September 11, the commission will also spend a million dollars to improve internal security and support other security efforts. The remainder of these funds, $9 million, will improve information technology critical to supporting program performance initiatives. With these funds the commission will improve existing systems to ensure compliance with government-wide standards pertaining to security, accessibility and financial management.

This year, Senators, you have my personal pledge to continue driving forward in a patient and deliberate manner to handle the expected and the unexpected from homeland and internal security, to biannual reviews and an expected influx of 271 long distance applications, as well as pending major merger reviews, just to name a few. The commission intends to use its expected funding to continue its campaign to upgrade the facilities, as well as to initiate the complete critical rule makings.

The present request is the minimum amount necessary to continue to capitalize our past success and to carry us through the immense challenges of the next fiscal year. Already Fiscal Year 2002 has been marked by a tidal wave of expected and unexpected events and policy and regulatory issues. I expect 2003 fiscal year to be at least as opportune and challenging. For that reason, I respectfully request that this subcommittee grant the commission its full funding request for Fiscal Year 2003. I thank you for your indulgence and I'm happy to answer any questions the subcommittee might have.

SEN. HOLLINGS: Chairman Powell, we have no doubt about your management abilities. But when you again state you're going to drive forward and take care of all of these challenges, all you need do as the chairman of the FCC is to take care of the law that we pass, and you have just that responsibility. Instead, you seem to abandon that responsibility and assign it to the market. And you state to this chair 10 days ago, "My religion is the market." You don't care about these regulations. You don't care about the law or what Congress sets down. Working for the public interest, you are the entity that's to look out for the public interests and you say the public interest is about as empty a vessel as you can call a regulatory agency.

That's the fundamental. That's the misgiving I have of your administration over there. It just is amazing to me -- you just pell- mell down the road and seem to not care at all and got some -- I think you'd be a wonderful executive vice president of a Chamber of Commerce, but not a chairman of a regulatory commission at the government level. Are you happy in your job?

MR. POWELL: Extremely.

SEN. HOLLINGS: And you do think that your religion is the market. Is that right?

MR. POWELL: I don't recall ever saying that, but --

SEN. HOLLINGS: Well, you were quoted in USA Today just on February 25, and the other quote I used was from the American Bar Association. Specifically, the submission that you made was with regard to Next Wave. I'm reading to you the law. I don't get -- this bothers me because we've got an important appeal by the Federal Communications Commission before the United States Supreme Court and it's disturbing that perhaps the commission won't make an authoritative kind of appeal. Let me read from you. You're talking with all that history and Ma Belle, and whatever thing.

Let's go back 68 years ago to the 1934 Communications Act: "It is the purpose of this Act" -- I'm reading section 301: "It is the purpose of this Act, among other things, to maintain the control of the United States." That's the word, control. Not to distribution and taking care of all the new challenges and everything else that you might think of, but rather the Congressional control has been assigned to you: "The control of the United States over all the channels of radio transmission and to provide for the use of such channels, but not the ownership thereof" -- not the ownership thereof -- "by persons for limited periods of time on the licenses granted by federal authority, and no such license shall be construed to create any right beyond the terms, conditions and the periods of the license."

Yet you're going along with the market. Good arrangement and everything else like it had absolutely nothing to do with -- do you think that's the law?

MR. POWELL: I absolutely think that's the law. I also think that the law sees that there are benefits in market economics for the public interest.

SEN. HOLLINGS: What's that?

MR. POWELL: I think that the law also recognizes that the use of market forces can be concomitant with the public interests. My --

SEN. HOLLINGS: But there's no public interest feature to that particular categorical provision, is it?

MR. POWELL: Certainly it --

SEN. HOLLINGS: Do you think, in other words, with the public interest you can amend that law?

MR. POWELL: No, sir. But I think that the public interest confers on the commission the duty and obligation to implement the statute where there are ambiguities and to look for the mechanisms using regulatory tools, including uses for fostering competitive market economics that will overall enhance the consumer welfare. I could also quote provisions of the statute that speak in those terms.

SEN. HOLLINGS: Yeah, that's a wonderful statement for a Chamber of Commerce executive. But being the chairman of the regulatory body, where in there is any discrepancy or vagueness or anything else like that? I don't know how to categorically state it more. In other words, assuming we lose the case -- I've thought about that and if we lose the case, I don't know how to state it better here when it says, "the control of the United States over all the channels and to provide for the use of those channels, but not the ownership thereof." Now, you want to divest the ownership into -- and the Next Wave case into a bankrupt agency and they could have no ownership whatsoever. They only had a license and the license was automatically revoked under the terms of the auction.

Where was all that at the big hearing you had and the big brief you had and the testimony you gave up on the House side?

MR. POWELL: I think it was there. Senator, I'm the one who sought certiorari from the --

SEN. HOLLINGS: You did what, sir?

MR. POWELL: I am the individual who sought certiorari in the Supreme Court in the Next Wave matter. I'm the one who argued for it vociferously, was quite pleased to see it granted. If you'll recall, you called me last summer on vacation and we discussed this matter and I committed to you the continued pursuit of the litigation. But --

SEN. HOLLINGS: But you went in both directions. Yeah, you pursued the litigation but you got rid of the litigation and a deal that vest ownership.

MR. POWELL: Not accurate. Nothing in the deal led to the termination of the Supreme Court case. I absolutely insisted that any effort to sell the matter would not moot the Supreme Court case, and nothing in that agreement did so.

SEN. HOLLINGS: Well, I could go -- I can see I -- we've just got a fundamental difference of opinion. But I was pleased this morning when I saw the article by the most conservative of conservative writers, William Safire, in The Urge To Converge with the -- quote, "with the round-heeled Michael Powell steering the Federal Communications Commission toward terminal fecklessness.

" I don't set out to hurt your feelings and all, but I'm trying to denote there's a disturbing sense in the Congress that your particular administration -- particularly now that we've got this hiatus going on relative to the deregulation of the bailed companies, they invariably voted it in the Tauzin-Dingell bill over on the House side, and we'll be considering it here and have a hearing on the 20th with Mr. Tauzin himself.

But it seems like you're trying to get, with the notices you've given to the commission on hearings in this regard, that you're trying to outdo the Congress before we can get to that or before even Tauzin can get to it.

MR. POWELL: I don't think so. The broadband item that I think you're making reference to has a very fundamental difference from anything being considered by the legislature. I think, as you point out, it can only do what it can within the context of the law; it cannot change the law. The Congress is free to modify the statute itself, we are not. And I don't generally agree with some of the characterizations put forth in media that the item is the functional equivalent of currently pending legislation in the commission.

I think that we have stated for many, many months, long before the heated aspects of this particular legislation, that there were areas that presented severe and important regulatory questions. We have a number of judicial courts around the country who have criticized the commission for not clarifying the regulatory classification of these new emerging services, and I think it would be irresponsible for us to continue to leave those questions unanswered in the context of the increasing growth of new Internet access services.

SEN. HOLLINGS: Senator Gregg.

SEN. JUDD GREGG (R-NH): Mr. Chairman, I guess I'd like -- could continue this discussion.

I do find it ironic that members of the other side of the aisle are suddenly outraged that there may be someone who has -- they perceive is pursuing regulatory over-reach. I mean if they're -- it is the philosophy, it appears to me, of the other side of the aisle that most of the regulatory agencies that were run by the prior administration for there to be dramatic regulatory over-reach. But I don't see your agency doing that anyways, so I don't think it's necessary to defend you on that turf.

I do have some questions, however. I would be interested in your giving us your analysis of the Tauzin-Dingell bill if you wish to.

MR. POWELL: I think I'm enough of a politician not to do too much of that. The best that I can say is that I think the Tauzin bill, to the extent that I understand it, and I would have to confess that I'm not intimately aware of its most recent details, is an effort to modify the statute itself with respect to specific limitations and regulations in an effort to dramatically stimulate and in some cases require the deployment of new and advanced infrastructure and architecture.

I don't have an opinion about whether those sweeping efforts are as meritorious or as compelled by the market conditions. I think that we can, at the commission, make substantial progress in clarifying the regulatory environment and introducing incentives to stimulate broadband deployment that will be meaningful and will have a consumer benefit, even within the context of the statute unchanged by legislation.

SEN. GREGG: Well, you've sort of initiated something here which is called a -- I think it's actually been referred to as a national broadband policy within the FCC. How do you see that staying within the context of the present law?

MR. POWELL: I think that the present law was quite thoughtful and at least being anticipatory of these kinds of changes. For example, one only needs to look at the preamble to the '96 act, section 706, to find support for those objectives. An act to promote competition, reduce regulation in order to secure lower prices and high equality service for American telecom consumers and encourage the rapid deployment of telecom technologies.

Under section 7 were tariffs to encourage the deployment on a reasonable and timely basis of advanced telecommunication capabilities to all Americans utilizing regulatory methods that remove barriers to infrastructure investment. We believe that one of the central things the commission needs to do in this space is to clarify the regulatory classifications of new and emerging services that have characteristics of different definitions; not our definitions but those that exist in the statute.

The statute covers multiple classes of communications and attaches different regulatory treatment to them. If you're a cable service provider, certain regulatory obligations exist, certain don't. The statute defines information service providers -- certain obligations apply to them, certain don't. And it defines telecommunications carriers -- same thing.

When we begin to have convergent and new services entering the space with new characteristics, questions arise as to which proper classification should be applied to them and then subsequently what are the consequences for regulatory policies and concerns. This item is designed to be responsive to that first question principally: how should we classify under the statute's definition these new emerging broadband services? And I think just as importantly, which I think often is omitted in the anxiety expressed in press reports, the commission tees up ways to protect all the kinds of regulatory policies and concerns that are implicated by that definition.

So I think we are operating within the statute because we're trying to figure out which of the statute's classifications govern the service and then it's our duty to figure out which of the provisions of the statute would continue to apply and how they would continue to apply.

And I would conclude by emphasizing -- and if there are problems including market power and anti-competitive and access concerns, the commission also has extensive power that Congress conferred to it 1934 under title 1, and in fact the commission has regulated access terms and conditions of information services for the better part of two decades using its title 1 authority and has been upheld by the cause to do so. So to the extent that there are categories of services that won't have specific title 2 attached to them, one authority to exercise in order to protect important governmental interests.

SEN. GREGG: Well, trying to reduce that to a simple statement --

MR. POWELL: I'm sorry.

SEN. GREGG: -- what happens to the last mile?

MR. POWELL: What happens last mile?

SEN. GREGG: Yes.

MR. POWELL: The last mile is the most important part. A number of things can happen increasingly because that last mile loop, depending on its construction, may be capable of doing any number of things at the same time. One of the things I think Congress thought about is, let's focus on the services being provided and not the nature of the technology underlying it. So what will start to happen, I think, if we continue in this direction is begin to try to classify regulatory treatment not by the nature of the technology that is that last mile, but the nature of what services are being offered over it.

So, for example, when America Online or Earthling or Juno or any number of the major ISPs now offer high speed internet access service over that infrastructure, they're being regulated as information services and they're doing so in a much less regulated way than the provision of telecommunication services over that. So what happens is greater granularity on regulatory treatment depending less on the architecture and more on the nature of the service that's being provided.

SEN. GREGG: Does that mean you're going to end up asking them to share the last mile?

MR. POWELL: Yes. I think that to some degree they have to share the last mile and I think that's the part that's faithful with the statute as well. Section 251, that compels access to those unbundled elements for particular kinds of services, will have to still be available.

If there are questions about other kinds of services that don't have those obligations attached to them, our computer inquiry decisions -- sorry, to use more historical regulatory approaches -- continue to affix to those services and they, at least for the moment, will have to be provided on an unbundled basis as well.

SEN. GREGG: I know I don't have all the time in the world. I'd like to pursue this into the long distance question also. But let me switch and go on to the question which is more parochial and more to my own interests, which is the next wave issue that the chairman raised.

This committee has kept its finger in the dyke on that issue through a number of Congresses, and then was replaced by the court system and by the FCC carrying the ball on this question. But at risk here is somewhere in the vicinity, depending on whose estimate, of $12 to $16 billion of what I believe are taxpayers' monies. And my question is when the FCC files its briefs, is it -- what will be the theory of the brief, if you're willing to disclose them at this time, and will it be based on the belief that the ownership of the spectrum is a taxpayer asset?

MR. POWELL: Absolutely. The commission I think has fought this long consistently on that principle. The belief that we are not another creditor in bankruptcy and that no property rights attach to that. I don't even think that's a disputable proposition under the statute, which expressly states that there are no property interests or ownership interest rights in the statute.

The difficulty in the context of options is we have been treated by the court system as a creditor and subject to the bankruptcy limitations thereof. I thought very strongly that the DC Circuit opinion was wrong. I thought it was wrong because I think it denied the regime that Congress established for the allocation of public spectrum and the commission's rights under that statutory provision to reclaim its property, the property of the public, when a person defaults on the terms and conditions established for their permissive use.

I have always believed the license automatically cancelled. Everything that we've done has preserved that principle. So in the context of the Supreme Court case, and you can see some of this in our petition for cert that was granted, we argued quite strongly that the DC Circuit failed to have the appropriate deference with regard to the telecommunications policies of the United States, and that the bankruptcy code should not be interpreted as in conflict with that. Hopefully that got the court's attention and hopefully that will be the basis of an overturn.

SEN. GREGG: Well, I certainly hope so too and I believe that the Congress has a legitimate interest here too as the protector of the taxpayers' rights here, and that I hope we will file an Amicus brief on behalf of your position.

One last question, then, and I will yield my time. The North Point issue. I guess I just don't understand why it's taken so long to get a decision, number one. And number two, I don't understand why you would have to, under any consideration, go back to auction since, as I understand it, the technology is only -- it is agreed that the spectrum can be shared and the technology is understood to exist, and there's only one person who met -- one group that met the requirements of filing the technology necessary to reach the -- to use it. So why aren't we just making a decision on this thing and moving forward?

MR. POWELL: Well, I don't really want to offer any excuses. I had hoped that the commission would be done with this at the end of last year. It has failed to do so. I think that's unfortunate. I would say that we did put an item on the floor in November. I personally have voted the item. I am waiting for the votes of some of my colleagues who are continuing to wrestle with particular questions. I continue to urge them to do so expeditiously.

Regrettably, it's not appropriate for me to talk specifically about the merits of pending issues including to auction or not to auction, which candidly have not been resolved, until there has been a majority conclusion asked of those questions. I continue to hope and push hard for a decision. And I'd still like to characterize it as imminent. I would love to talk to you in more detail, perhaps privately or in the context consistent with our ex parte rules, of the specific merits of the pending claims, but I'm not permitted to do so in this forum.

SEN. GREGG: I appreciate that.

SEN. HOLLINGS: Senator Stevens?

SEN. TED STEVENS (R-AK): Thank you very much.

Mr. Chairman, I commend your notice of inquiry on ways to finance the universal service Fund. I am a little worried about that, as we've talked about privately. I do think that the fund was created originally to assure that rural America was kept up with the continuing developments as far as telecommunications are concerned and now the major drains on the fund are for the inner city applications of the E-Rate.

There is a proposal pending to increase the fund by $500 million to provide additional resources to schools and libraries, and that's again inner city money. It's coming down at an enormous rate. Can you tell me: what do you see for the future of the universal service under these circumstances?

MR. POWELL: Well, as we've discussed -- I mean I think the commission too shares some of your concerns. And, indeed, it has initiated a number of proceedings to begin to explore perhaps modifications to the collection and contribution regime in order to ensure, as the statute requires, the preservation and advancement of the objectives, as well as sufficiency.

I also think that the commission has been somewhat bold in willing to start to entertain whether the threats to the universal service program are sufficient to begin to justify us to consider exercising the discretionary authority that you gave us to extend the contribution obligations to carriers who are not specifically telecommunication carriers, but use telecommunications. Heretofore, we have never done that and it may not yet be warranted. But it seems to me that under section 254(d) that the Congress anticipated that possibility and gave us discretionary authority to extend the pool of people that contribute in order to protect sufficiency.

Indeed, in the broadband item, as controversial as it may be, more ink is dedicated substantively to the questions about universal service than any other subject in the item. Indeed, we openly ask questions about to what degree universal service will be impacted by the rise of advance services, and whether some honest consideration of whether the extension of contributions is warranted.

We don't reach any tentative conclusions, but we do put those important questions on the table, and I would note, over some dissent. That's an area in which I think that we have one of our most sacred regulatory obligations. And I think we do continue to push for new and creative ways to allow the program, and the objectives, to continue to flourish.

I also think one of the values of the promotions of some of the newer and advanced technologies is they have enormous cost benefits, many of them. They in many ways have the potential for solving parts of our universal service anxieties by virtue of their much more efficient infrastructure and architecture.

So I think in some ways a pro new technology approach is also a universal service approach in that we at least see the possibilities through getting companies to migrate to more advanced architectures to lower the cost of the provision of those services, which has always been the problem for rural America and places like Alaska. As you know, and fought so hard for, DBS Services providing video components to the state of Alaska was vital, but through the use of new high technology, has allowed it to lower the traditional cost associated with having to wire such a large region.

So those are the major things we are doing. And we do share some of your concerns.

SEN. STEVENS: Well, you are proposing new rules for broadband, as I understand it. And I think that those two have a real impact on the continuing expansion of demand on universal service.

But, I've got to tell you, when I look at some of the places up our way which never had communications service before, and are now getting communications services with schools, libraries and health facilities, but they're not getting it in the rest of the city or village at all, I wonder seriously about the policies we've set to extend so much money to the inner core cities while we still have many places in the country that have no service at all, except for schools, libraries and health facilities in those communities. And we're leaving a lot of people behind.

And, as you know, there's some deviation now, thinking that the E-Rate connection to a small area is a pipe, and if that pipe isn't full then maybe they can lease that pipe out to someone else. We're seeing some things which are fudging on the concepts of E-Rate in order to extend service to those that are left behind. I think we ought to be right up front and admit that somehow we've got to have two funds, one for rural America and one for the inner city. The inner city, really, is a way to take money from your fund and put it to areas where the Congress has not provided enough money to assist the inner core cities for schools. I've heard of portions of schools actually being rebuilt with the E-Rates in inner core cities.

So, I don't want to belabor it, but I do hope that the future of universal service remains one of the really predominant goals of the commission, to assure that rural America keeps up with the rest of the country as we progress.

You did comment on Senator Gregg's question about the basic Supreme Court case on Next Wave, and the position there. I don't know if we're going to file an Amicus brief or not. But what about the problem of the delay, the further delay, extends, the less merit there is to whatever the court decides is going to -- if it agrees with you, it's going to go back, really, to the bankruptcy court, and we will be all over again getting a decision, it will be appealed right back up through the chain again. And meanwhile the money is sitting there and the spectrum is tied up, which is vital really to the recovery of the whole industry.

Have you given thought to asking us to find some way to resolve this issue, as we almost did last year, with the approval of some form of a mechanism that would bring about a settlement so that this matter could be resolved within the industry itself with your approval?

MR. POWELL: Yes, sir. As we have asked, I think, repeatedly for any number of years, and I'm looking at three members who have been extremely supportive of our efforts to try to avoid this problem with the law, and change it. I still think that the public interest is served in some ways if Congress altered the law and made the modification. Because if they could do that, I believe that we could get the spectrum into use much more expeditiously.

I believe 100 percent in my case. And I believe I have the opportunity to win it. I also know it's going to come at a huge cost because I can't do anything about the extraordinary delay that will be a consequence of it. This case is not likely to be argued until next term. At best, we're going to have a decision in January 2003, perhaps as late as June 2003. There were very critical issues that the D.C. Circuit did not decide because it thought this took care of everything. So I would anticipate even if we won, we'll be remanded to the D.C. Circuit for resolution of those issues. And then even when we get through that, we're in bankruptcy court again for the allocation of rights under the statute.

I think that one of the reasons I did, somewhat reluctantly, but willingly accept an effort to try to sell the case previously was I think the public's interest isn't exclusively in the money that it would provide, it's also in having spectrum put to productive use. And while again I believed in the case, I believed that that would cost the consumer the ability to make use of that spectrum for a very long time perhaps two and three years more.

We only have two options though. I agree with Senator Hollings that first and foremost this legal principle has to be rectified and I don't think there's any real opportunity for a good, productive resolution of the claims without being assured that that component is completed. And there are only two ways: either our continued pursuit of the case or an act by the Congress that removes that risk for future options and would allow us to pursue other options to get the public its money and the public its spectrum. But we're committed to the long course of the case if that's the preference of this institution.

SEN. STEVENS: I'm still committed to try and work it out so that spectrum can be put into use. I remember too well the meeting we had that indicated the status of our industry in the global economy that telecommunications is severely limited because of the availability of spectrum right here at home. I really think we should do something about it. Let me shift gears though.

When the World Trade Towers came down, KNET, the public station went down and it's not been able to go back up. It tried to get other providers like satellites to help them but that was refused. Do you have the authority to require other platforms for carriers to broadcast signals in times of emergency or in post emergency periods? If you don't, do you think Congress should give that to you?

MR. POWELL: That's a good question. I don't know the full range of that. To some extent the answer is partly yes in advance because the cable companies, for example, under the must carry obligations carried them. For example, in New York, we lost a lot of broadcast stations initially. But a lot of consumers still had access to that local broadcast feed over the cable architecture which they were watching as opposed to over the air. That was a benefit.

I would have to look specifically at questions like whether we have the authority to direct broadcast satellite carriage although Congress has required, must carry, there as well and that's progressing. The commission though recognize this concern. We have long had federal advisory committees that helped us with these network security emergency issues in the phone system. We recognize that we did not have the functional equivalent in the broadcast or communication news kind of system.

And one of the things we've just announced is that we are creating a companion to the telephone services systems called INRIC. We're creating a network reliability group to focus on media issues in time of emergency and look for ways to develop mutual assistance planning so that if there was critical news and information that was not available because of an outage, there would be perhaps some effort to shift coverage and responsibility.

A number of other major cable channels fortunately also were willing to convert capacity to broadcast signals. So for example the VIACOM properties that covered the normally carried things like MTV and other of their tailored programs, switched to the local broadcast feed for coverage in the New York City area. We're looking at -- for ways to make that not coincidental and gratuitous but hopefully a little more planned for and anticipated.

SEN. STEVENS: Well I hope you notify this committee, as also the Congress committee if there's something that we need to do to extend your powers in order to meet those emergency situations.

My last question, Mr. Chairman, pertains to digital conversion. The public and commercial television -- public and commercial broadcasters in my area of Alaska, Anchorage, have developed a plan to allow them to meet additional conversion deadlines by providing full service to the vast geographic area in the Anchorage area. Because of our unique geographic conditions, it will require the use of two towers and both digital and analogue spectrum. Now, we were told yesterday that Mr. Stewart (sp) has indicated the commission may not have legal authority to prove this plan. We think this is a crisis for our area and we would like to move forward as rapidly as possible.

I'd appreciate it if you would contact your people and see if there is a change in the law that's required in order to approve this rather unique partnership that's been formed in our state with public and commercial broadcasters. It ought to be a model for the rest of the country but I'm disturbed to learn that what they've worked on now maybe beyond your legal authority and I'd appreciate it very much if you would look at it and give us a report on it.

I don't expect an answer now but I do -- would appreciate it very much because I think they've worked very hard and have got a format now that allows conversion for public and digital broadcasters at a much lower cost and within the timeframe anticipated by Congress.

And it would be very difficult for us to wait for Congress to act in the future, if that is the case.

MR. POWELL: We will get you at least an answer on whether we think the legal authority exists, very quickly.

SEN. STEVENS: Thank you for your patience, Mr. Chairman.

SEN. HOLLINGS: No, thank you, Senator.

Chairman Powell, reference has been made to a political view of your regulatory commission and I readily acknowledge that there is that view we ought to just abolish the FCC. In fact you referred to Section 251 of the Tauzin-Dingell bill that abolishes your oversight responsibility. You, the FCC and the State Commission under Section 4N, no longer will have authority over the access of -- to the Bell monopolies. But be that as it may, I want to emphasize, since you brought in the history of the thing, that you do not abdicate or abandon your regulatory authority to the market.

We know what market forces does to communications. Back in 1912, that's when Sarnoff (sp) got on top of the Wanamaker Building at the sinking of the Lusitania and then everybody got into wireless and by the mid-twenties the communications industry begged Herbert Hoover, then Secretary of Commerce, please regulate us because everybody was using all the same frequencies and otherwise, and they were nothing but they were jamming. Nobody could hear anybody. So that resulted in the '34 Act.

Otherwise, I think of our distinguished chairman's loss here, Howard Cannon, who chaired this Commerce Committee here the day before yesterday. We had the airline deregulation and we thought it wise that -- there should be no question that we'd not only deregulate, we got rid of the deregulatory entity, namely the Civil Aeronautics Board. And there's been bankruptcies and takeovers in fact a regulated European takeover so the unregulated American airlines, many of them facing bankruptcy, and you would get the wiseacres that will come up and say, well deregulation is fine. But it's ruined the airline industry.

Knowing that in 1996, that's why we did not do away with the so- called CAA, being namely you -- the Federal Communications Commission. We wanted a regulatory body to oversee in a deliberate way, total deregulation. Now, of course the bottleneck in it is the Bell companies that lied. They begged and begged and begged, I know, because I helped write that thing and I met on the Bell Atlantic that represented all seven of the monopoly bells and it was a four year hiatus getting that bill out. And at all times they said, we want to get into long distance, we want to get into long distance. Just by gosh, deregulate it because we want to compete, we want to compete.

And we passed the '96 Act and they were the only ones that instead of competing, combined. And that's exactly what's written about in the New York Times, a merger mania, that seems to me has approved again and again by the commission. And so we just got bigger monopolies and if it continues we will be back to AT&T.

And my bell, we maybe have to if we can't get it done in the Congress, we'll have to get a federal judge. That's what goes through a lot of minds here in the Congress. You can look at that debate, they got me as you know, that I'm adamantly against it and got how much I got -- I'm a big friend of AT&T. I told AT&T just last week -- "Mr. Armstrong," I said, "you know, I know intimately the Bell South crowd down in South Carolina. I can't name who represents you down there in South Carolina." I've gotten contributions from both, but I do have a feel for the wonderful Federal Communications Commission. I've been working with it now for over 35 years, since we started. And to see it just go pell-mell down the road with these statements made that the market is your religion and you don't know anywhere in the world can anybody discern a finer public interest. That's about as nebulous as anything, and that kind of thing.

And then the rulings that we have, it's hard to play catch up all over here at the congressional level with your administration of the Federal Communications Commission. We don't want to cut you short on money. We'll give you all the money because you've got many, many questions before you, but just mind you me, we're passing the rules and regulations and the policies and it's your responsibility to administer those regulations and those policies, not the market. That's why we got you. There's some want to get rid of you and in part that's what Tauzin-Dingell does, that's what bothers me.

The FC -- or AT&T and Bell South don't -- in fact, I got a lot of friends in the AT& -- F -- Bell South, I'd like to get one of their retirement policies and get on their board. They've got wonderful -- and they're in 22 countries. They're very competitive and I've followed them and they're making money. I don't know why their stock is down but if they ever get this monopoly extended, it'll go through the ceiling. You buy some, call me and we'll both buy it.

But let's look at this thing objectively. Competition does count and we've got a dynamic, competitive situation all over communications save 93 percent of that last line into the home and business is still by those Bell monopolies. They squatted in the middle of the road. They questioned the constitutionality of the Act. They've taken as through a legal gymnast of six year period and we're not getting anything done and if they go forward, they've gotten so bold now with Tauzin-Dingell, they've got no idea of deregulating or competing.

We appreciate your appearance this morning.

MR. POWELL: Thank you, sir.

SEN. HOLLINGS: Thank you very much. The committee will next hear from Harvey L. Pitt, the Chairman of the Securities and Exchange Commission.

The committee welcomes you and we're delighted to receive your statement at this time in its entirety if you wish, or you can file it and highlight it as you wish.

MR. HARVEY L. PITT: Well, thank you, Mr. Chairman and Senator Gregg.

I would ask that my full statement be included in the record and I have a few opening remarks if that is okay.

SEN. HOLLINGS: Yes, sir.

MR. PITT: Let me say first that I appreciate the opportunity to testify on Fiscal Year 2003 appropriations for the Securities and Exchange Commission. This is my first appearance before this subcommittee since I became SEC chairman six months ago. I want to express my gratitude, and that of the entire SEC, for the bipartisan support this subcommittee and its staff have given the commission over the years and I look forward to continuing this strong and positive working relationship.

The events of the past six months have tested the mettle and resiliency of our country, our capital markets and the Securities and Exchange Commission. At the same time, they've put the investing public's confidence in our capital markets to the severe test. September 11th and the Enron tragedy demonstrate how critical the nation's capital markets are to national security and economic growth.

Because the agency I am privileged to chair is integral to the success of our capital markets, it is vital that the SEC have the resources it needs to fulfill its multiple missions. We need these resources even more if we are to restore the public's full confidence in our capital markets.

The president's budget for Fiscal 2003 requests an appropriation of nearly $467 million for the commission. It is clear to me from recent events, including the program the president is announcing this morning to improve and strengthen the duties of those whose conduct is at the core of our securities markets, that the SEC critically needs to receive additional money in fiscal 2003 to fully fund pay parity and that we should be authorized to add additional staff to address some pressing immediate needs.

Let me address pay parity first. The Investor and Capital Markets Fee Relief Act, enacted this January, authorized pay parity for the employees of the Securities and Exchange Commission. Our commission has been subject to extremely high attrition, with the principal reason being the fact that our employees earn substantially less than their counterparts in the other financial service regulatory agencies, not to mention the private sector. The OMB proposed funding level, $467 million, did not provide any money to implement pay parity. A disappointment to our most valued employees.

We estimate that an additional $76 million is needed to provide for a modest implementation of pay parity for the agency in fiscal 2003.

At this critical time for the nation's financial markets, we must rely on our most experienced, talented, valuable and productive employees. The only way to do that is for us to be able to provide our staff with pay parity at levels comparable to those received by colleagues with whom they regularly work at the other federal financial regulatory agencies. If we receive funding for pay parity I can assure you that the commission intends to make responsible increases in staff salaries and benefits with a significant component of the increases subject to true merit pay.

In addition to the absence of funds to implement pay parity, we were originally given a new growth budget which means that we were not going to add any new personnel. Indeed, under current funding levels for 2002, we are effectively precluded from hiring any new personnel. I do not believe that the solution to every problem starts and ends with larger and more expensive government. I am committed to doing a thorough review of our deployment of personnel to see whether and how we can effectuate meaningful efficiencies. But the events of 9/11 and tragedy of Enron, have made any contemplative review of our needs impossible. Given the enormous surge in our enforcement activities, the desire to do a better job than has been previously at reviewing public company filings and overseeing a restructured accounting profession.

Even before looking for efficiencies I must request that SEC staffing be increased by 100 positions in fiscal 2003. These are the minimum staffing levels I believe we require to deal with our immediate post Enron needs. Under a pay parity system, this increased staffing level would require an additional $15 million. This additional staff will start helping us meet our immediate enforcement needs as well as address initiatives we are undertaking to improve financial reporting and disclosure.

I might add that the commission has not received a staffing increase in the last two years despite additional responsibilities the agency has received as a result of the Commodity Futures Modernization Act, and the Gramm-Leach-Bliley Financial Services Modernization Act. A staffing increase is even more critical in light of recent events. I am very happy to be able to say that yesterday I spoke with OMB Director Daniels who advised me that OMB is receptive to our request for additional staff, and will work with us to meet our resource needs.

In the coming months, I will be examining closely our need for resources throughout the agency in preparation for the fiscal 2004 budget with the goal of identifying efficiencies we can employ. However, given current events, it is very likely that we will have to come back and ask for resources over and above what I have requested here today. If there is one message that I can leave you with today, it is please, please fully fund pay parity for the SEC in fiscal 2003.

I thank you for this opportunity to testify and I look forward to trying to respond to any questions the subcommittee may have.

SEN. HOLLINGS: Well, I thank you for talking to Mitch Daniels.

I notice by morning paper that evidently the head of the Corp of Engineers didn't, and he's gone, and you asked for $76 million more in your statement than OMB gave for pay parity, $15 million more for increased staff. Let the record show that this subcommittee approved on yesterday, the reprogramming request of $24 million. Yes, I'll agree, and I take it my distinguished colleague will also on both pay parity and the additional personnel, because we've got the GAO report that came out yesterday, and it talked about over the last decade, corporate filings have increased 60 percent.

Related review staff has only increased by 29 percent. The number of complaints and inquiries received increased by 100 percent, while the staff dedicated to investigate complaints and other matters increased by only 16 percent, thereby the imbalance between workload and resources has resulted in SEC and the Securities Exchange Commission taking longer to process filings, issue guidance and review applications. These delays could effect industry competition and efficiency, and the imbalance between workload and resources has raised concerns that the Securities and Exchange Commission cannot properly carry out its enforcement rule.

The number of cases pending as of the end of the year increased 77 percent from '91 to 2000. So those are the two things that concern me, Chairman Pitt, and I wanted to make sure that we comply because we know the Securities and Exchange Commission generally is highly respected and is working around the clock, and it's us who try to even give more than the president asks, and every year more than OMB would allow. So I'm glad you've ironed that out with the oppose management and budget.

Senator Gregg?

SEN. GREGG: Mr. Chairman, I want to second your comments. And I think they're right on point, and I appreciate the chairman testifying today about the needs of the SEC.

This committee has been sensitive to that need for a long time. We fought the battle for pay parity, it was a fight that required us to go up the hill a number of times. It was successful, now it needs to be funded. There's no question about that, and I appreciate the chairman's commitment to do that. The additional personnel is also obvious in the present climate. I hate for us to have to wait until the next appropriation cycle, I would hope that we could put all this in the supplemental. And since you've already signed on, Mr. Daniels, I would hope that you would sign them on for that extra size also.

In any event, I'll certainly support the chairman in however he wants to pursue this funding, and aggressively pursue it, because we all understand that the cornerstone of our capital markets is transparency and integrity of the numbers, and that comes down to the SEC's disciplining the marketplace and the accounting firms that are responsible for producing those numbers. And if we don't have a strong capital market, we don't have a strong economy, we don't have prosperity because we don't have creation of economic activity and jobs. So you really -- you could argue that the essence of our prosperity starts with having a strong SEC. So we certainly want to support you in this effort.

I would be interested to hear your analysis of the president's proposal relative to the new responsibilities that they're suggesting that the operating officers and executive officers of corporations have, almost putting them in a fiduciary position. If not, actually putting them in a fiduciary position, whether you feel that's an appropriate step.

MR. PITT: Well, I think the president has laid out this morning, a very serious and substantive and thoughtful approach to the problems that we are receiving or have been witnessing. I think that one of the concomitant on factors with the president's proposals is that we intend to sit down and analyze those proposals and move just as quickly as we can to implement those elements of the proposal that are within our power to implement, and I believe most of them are within our power, and things that we will be anxious to try and bring to fruition in reality.

I think that what he has outlined is sort of a tri-part type approach to the problems we've witnessed. The first is to improve the functioning and dedication and loyalty of corporate officers and executives and directors to the investing public, who are, after all, the true owners of every corporation. This proposal that the president has put forth would place greater responsibility on chief executive officers. And one of the things that runs throughout the president's announced program is the fact that people who think they can get by or get away with mere technical compliance aren't truly committed to the functions their offices require them to serve, but will be sorely disappointed.

In terms of our own enforcement efforts, we intend to make that a reality, and we will start as soon as we can, looking at companies where executives have profited from illusory or sham earnings that ultimately get restated, where the shareholders wind up holding an empty bag, and the executives walk away with millions and millions of dollars. We will go into court and we will seek the return of those moneys to the corporation and those investors, as the president has suggested.

The second prong has been with the disclosure process in general. And here I think we have had the unfortunate occurrence of having a statute which is almost 70 years old and has not been revitalized in most of that timeframe in terms of its disclosure obligations, so it is approaching. Many of the issues today, the way they were approached in 1934, when we didn't have the kind of technology and communications that we have today.

In my view, many of the problems which the Enron situation has evidenced have been evident for five to 10 years and they have not been dealt with. It is our intention, and the president has made it clear that he expects of us that we will in fact turn our attention to that, improve the disclosure system not so that shareholders are just given detail on detail on detail, many of which -- at least speaking for myself, and I read corporate filings -- appear to me to be designed to avoid liability, rather than being designed to inform.

We have a very committed approach to revitalizing disclosure in this country and giving shareholders the same view of the companies they own as the people who manage and run those corporations. And this final area which is quite significant is dealing with the accounting profession. The accounting profession has very noble origins in this country and it performs an incredibly important public service. At some point it is required, I guess, that we step back and make sure that everyone in the profession and everyone who depends on the profession is assured that the profession is acting in the public interest and not self-interest.

I believe that we have the capacity and we have the inclination and the commitment to develop a strong private sector regulatory system that will provide for the first time meaningful regulation of the accounting profession from outside the profession, which is what the president has suggested. In addition, we will seek to reform the way in which accounting standards are articulated and we will seek to provide for shareholders not just the protection of the law, not just the avoidance of illegal acts, but the establishment of the highest ethical and competent standards which will be enforced by a truly independent body that will have the authority to make certain that individual accountants and entire accounting firms live up to their public responsibilities.

SEN. GREGG: To what extent are you going to need legislative action to pursue those three goals?

MR. PITT: I'm sorry, sir?

SEN. GREGG: To what extent are you going to need legislative action to pursue those three goals?

MR. PITT: I do not believe that we need legislative action to pursue those. We have been working closely in both Houses of Congress and on both sides of the aisle to lend our expertise, because we understand that some members of Congress believe that legislation is the appropriate way to go. And I have made clear that we will work to support whatever Congress believes is the appropriate approach. But I think the needs we have are pressing and I believe it is imperative that we not spend excessive amounts of time worrying about how this will be done, but instead work together to try and get it done. And so we are in the process of soliciting views from the public. We will put out some proposals which we will discuss with Congress and our oversight committees before we ever put them out, and we will work with the Congress to come up with a package that I think lives up to the president's challenge.

SEN. GREGG: Thank you.

SEN. HOLLINGS: Chairman Pitt, the testimony is strong regulatory protection outside the industry. We see in Business Week and other headlines that the regulatory protection that you have considered so far is weak. The SEC prescribes weak cures for accounting industry's ills.

As a result, I'm wondering whether we're getting a sort of update appropriation and within the authorizing committees I think there are three bills that are to go in today, and they wouldn't want to allow and tell me the cost because they've got their news conferences probably going on while you and I are testifying.

So let's check with them because you -- this subcommittee of appropriations will have to respond to the authorization and what's worked out. But mind you me, the responsibility isn't a lack of the law, and the chief executives and those in charge are all coming up, either taking the Fifth Amendment or can't remember. There's no law to make everybody remember. It's very, very unfortunate because it had been a sort of weak operation all the way around with respect to the accountants also being the consultants, as you have already indicated in some of the comments that you made.

So that's got to be corrected and it's got to be -- and I would emphasize that to outside the industry, supported by fees. We want to make sure that they're not part and parcel of financial interest enforcement, but rather that fees are paid, they're fully supported and that's why we have the appropriations hearing this morning.

We thank you for your appearance at the committee. The record will stay open for any further questions.

Thank you very much.

END

LOAD-DATE: March 9, 2002