SPEAKERS CONTENTS INSERTS
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63–848
2000
NOVEL PROCEDURES IN FCC LICENSE TRANSFER PROCEEDINGS
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
MAY 25, 1999
Serial No. 59
Printed for the use of the Committee on the Judiciary
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
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JOE SCARBOROUGH, Florida
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Commercial and Administrative Law
GEORGE W. GEKAS, Pennsylvania, Chairman
ED BRYANT, Tennessee
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LINDSEY O. GRAHAM, South Carolina
STEVE CHABOT, Ohio
ASA HUTCHINSON, Arkansas
SPENCER BACHUS, Alabama
MARY BONO, California
JOE SCARBOROUGH, Florida
JERROLD NADLER, New York
TAMMY BALDWIN, Wisconsin
MELVIN L. WATT, North Carolina
ANTHONY D. WEINER, New York
WILLIAM D. DELAHUNT, Massachusetts
RAYMOND V. SMIETANKA, Chief Counsel
SUSAN JENSEN-CONKLIN, Counsel
JAMES W. HARPER, Counsel
C O N T E N T S
HEARING DATE
May 25, 1999
OPENING STATEMENT
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law
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WITNESSES
Furchtgott-Roth, Harold, Commissioner, Federal Communications Commission, Washington, DC
Moir, Brian, Esquire, Moir & Hardman, Washington, DC
Noah, Lars, Professor, University of Florida College of Law, Gainesville, FL
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Furchtgott-Roth, Harold, Commissioner, Federal Communications Commission, Washington, DC: Prepared statement
Gekas, Hon. George W., a Representative in Congress from the State of Pennsylvania, and chairman, Subcommittee on Commercial and Administrative Law: Prepared statement
Moir, Brian, Esquire, Moir & Hardman, Washington, DC: Prepared statement
Noah, Lars, Professor, University of Florida College of Law, Gainesville, FL: Prepared statement
NOVEL PROCEDURES IN FCC LICENSE TRANSFER PROCEEDINGS
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TUESDAY, MAY 25, 1999
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The subcommittee met, pursuant to call, at 10 a.m., in Room 2141, Rayburn House Office Building, Hon. George W. Gekas [chairman of the subcommittee] presiding.
Present: Representatives George W. Gekas, Ed Bryant, Steve Chabot, Mary Bono and Tammy Baldwin.
Staff present: Jim Harper, Counsel; Ray Smietanka, Chief Counsel; Sarah Zaffina, Staff Assistant; Julian Epstein, Minority Chief Counsel and Staff Director; and Sampak Garg, Minority Counsel.
OPENING STATEMENT OF CHAIRMAN GEKAS
Mr. GEKAS. The hour of 10 o'clock having arrived, the committee will come to order. Pursuant to our custom of beginning the hearings on time, we have met that commitment, and now we must recess until a working quorum, a hearing quorum shall appear. That consists of two members. So we will bang the gavel again when the next member appears for the committee hearing. Until that time, we recess.
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[Recess.]
Mr. GEKAS. The committee will come to order. We note the presence of the lady from Wisconsin, Ms. Baldwin, who, by her presence, constitutes a quorum along with the chairman, and we can begin the hearing.
Today's hearing is postulated to reflect this committee's ongoing jurisdiction under the Administrative Procedure Act. It is an oversight hearing; that is, that we have the responsibility, every committee on Capitol Hill does, to continuously look at the agencies of the Federal Government for the purpose of viewing their actions within the confines of the statutes and the regulations of the Federal bureaucracy.
The particular situation that we are viewing here is a proposed merger that seems to be taking place or at least being debated or constituted within the Federal Communications Agency, which for a long time has had the special and unique feature of reviewing licenses, and transfers of licenses. Whether or not they should be able to delve into the higher responsibility of determining whether a merger is proper, that is not verbatim a part of what the Administrative Procedure Act in this case would allow.
Further complicating the matter is the fact that from a quick perusal of this particular proposed merger, there seems to be no set of guidelines or regulations or interpretations of regulations within the Federal Communications Agency which would allow a clear and defining set of procedures in the process of approving or disapproving that merger.
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Further complicating in my mind, and I have not been able to straighten it out yet, and there are a lot of things I haven't been able to straighten out in my own mind—is why the Department of Justice abdicated its responsibility in handling this particular merger; and if they did divest themselves and engage the Federal Communications Department for the purpose of reviewing this merger, that is still murky in my head, and I hope to be better acquainted with the issue after we finish this particular hearing.
We are a bit chagrined, shall we say in mild terms, at the fact that the chairman of the Federal Communications Commission will not be with us today, even though he is the best suited, although the others are not minor players, to explain to the Congress why this has been happening and how what we consider the flaunting of the Administrative Procedure Act is a part of the ongoing life of the Federal Communications Commission. We perhaps will await a further reply from Chairman Kennard on that question, and if that fails to satisfy at least the chairman of this committee, we may have to reposition ourselves for further hearings to try to bring about a kind of predictable process in the Federal Communications Commission.
[The prepared statement of Mr. Gekas follows:]
PREPARED STATEMENT OF HON. GEORGE W. GEKAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA, AND CHAIRMAN, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
Today, we review an area that is of growing interest—the process by which the Federal Communications Commission reviews license transfers.
My interest in the subject is growing in no small part because the Chairman of the FCC—and all commissioners but one—have declined our invitation to discuss the agency's practices. The unwillingness of the FCC's Chairman to appear before us and defend his agency is as powerful an indictment of the FCC as any critic could level.
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Ameritech has also declined to testify. This is probably an exercise in prudence, and I accordingly do not fault that company. If the FCC deals with the public in a way that requires parties to resist freely discussing their views in a public meeting, this too is an indictment of the agency.
More than a year ago, Ameritech and SBC Communications agreed to join their operations. This is one of several mergers in the rapidly evolving telecommunications industry. The Federal Communications Commission took public comments on license transfers within the merger until last November.
More than four months later—and nine days after the Justice Department approved the merger—Chairman Kennard started an unprecedented round of ''discussions'' on the license transfers. These ad hoc discussions, and whether or not there is a legal standard underlying them, is our area of inquiry.
Regular administrative procedures are an essential protection for Americans. They force the government to play by rules that are known in advance. They give the public a chance to be heard, and they give the public finality. They allow Americans to organize their affairs in compliance with the law.
When procedures change, all the benefits of regular order disappear, and the stink of unfairness begins wafting.
We are also interested in whether the FCC's ''public interest'' standard is a legal standard, or something different. A legal standard can be learned from public sources of law. It is written clearly so that the regulated public can predict what the agency will do. And a legal standard can be reviewed in court. It's unclear that the public interest standard meets any of these tests.
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I have called for clear regulation again and again. This Congress, I again introduced the Regulatory Fair Warning Act (H.R. 881) to require federal agencies to make their rules clearly known. The FCC's ''public interest'' standard is supposed to guide regulated parties when they structure their affairs. It does not. The Regulatory Fair Warning Act would protect the public from unclear rules. Even large, heavily regulated companies should get the benefits I intended for small businesspeople and homeowners when I wrote the bill.
I call on the FCC to promulgate clear regulations, both procedural and substantive, so that the telecommunications industry can continue to evolve at a rapid pace. If the FCC fails to deal with the telecommunications world even-handedly, fairly, and with a light touch, I will be prompted to join those in Congress who are calling for a top-to-bottom review of the agency's authority.
TO:
MEMBERS, SUBCOMMITTEE ON COMMERCIAL AND ADMINISTRATIVE LAW
FROM:
JAMES W. HARPER, COUNSEL
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RE:
HEARING ON NOVEL PROCEDURES IN FCC LICENSE TRANSFER PROCEEDINGS
Chairman George W. Gekas has scheduled a hearing on ''Novel Procedures in FCC License Transfer Proceedings'' for Tuesday, May 25, 1999 in 2141 Rayburn House Office Building. Witnesses scheduled to appear include Harold Furchtgott-Roth, Commissioner, Federal Communications Commission; Professor Lars Noah, University of Florida College of Law; and Brian Moir, Esq., Moir & Hardman, on behalf of the International Communications Association.
BACKGROUND
On May 11, 1998, SBC Communications, Inc. and Ameritech Corporation agreed to merge their operations, one of several recent mergers in the rapidly evolving telecommunications industry.
The Justice Department's Antitrust Division agreed not to challenge the merger under the Clayton Act after negotiating a consent decree with the companies that was filed on March 23, 1999.(see footnote 1) According to a Justice Department press release, the consent decree resolved antitrust concerns by requiring Ameritech to divest cellular telephone systems in a number of markets.(see footnote 2) The Justice Department's press release noted that other government agencies would review the SBC/Ameritech transaction under the laws those agencies enforce.(see footnote 3) The Federal Communications Commission's review of the transaction is the subject of the hearing.
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The Federal Communications Commission (''FCC'') reviews license transfers under the Communications Act.(see footnote 4) A number of such transfers would be caused by the merger. The FCC is charged with determining whether ''the public interest, convenience, and necessity will be served'' by such transfers.(see footnote 5)
SBC and Ameritech filed joint applications requesting FCC approval for transfer of licenses on July 24, 1998.(see footnote 6) The FCC's public notice of the applications stated that interested parties could file comments or petitions until September 16, 1998, and any opposition to such comments or petitions until October 15, 1998.(see footnote 7) On September 1, 1998, the FCC extended the deadlines for these filings to October 15 and November 16, 1998 respectively.(see footnote 8)
Four-and-a-half months after the close of this comment period—and nine days after the Justice Department approved the merger—Chairman Kennard wrote a letter to the Chairmen-CEOs of Ameritech and SBC. Chairman Kennard's letter proposed ''discussions'' about the license transfers and indicated that FCC staff would inform the companies of the ''ground rules''(see footnote 9) for the discussions. Apparently taking a broad view of the FCC's authority to review license transfers, Chairman Kennard said that ''the Communications Act requires that the Commission determine whether the proposed merger is in the public interest. . . .''(see footnote 10) After reciting his concerns about the merger, Chairman Kennard noted that if the companies did not wish to ''engage in this dialogue,'' he would ask staff to present recommendations to the full Commission as soon as possible.(see footnote 11)
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The ''discussions'' are currently underway. One highlight was Commission staffer Thomas Krattenmaker's declaration at a May 6 public meeting that the transaction ''flunks the public interest test.''(see footnote 12) This provoked a strongly worded letter to Chairman Kennard from Senate Commerce Committee Chairman John McCain.(see footnote 13)
ISSUES
This license transfer proceeding raises two issues relating to administrative practice and procedure. The first is whether the FCC has, or should have, a regularized procedure for considering license transfers. The second is whether there is an identifiable legal standard by which the FCC considers such transfers.
Regularized Procedure
The Communications Act gives the FCC broad power to investigate matters within its jurisdiction.(see footnote 14) The FCC has promulgated rules of practice and procedure that complement this broad authority: ''Procedures to be followed by the Commission shall, unless specifically prescribed in this part, be such as in the opinion of the Commission will best serve the purposes of such proceedings.''(see footnote 15)
Open-ended procedures serve the interests and convenience of an agency because they neither require nor limit agency action. These benefits accrue, however, in direct proportion to harms and inconvenience to the regulated public. If an agency expedites a proceeding, for example, regulated parties must respond in haste and a full record may not be developed. If an agency draws out a proceeding, the interests of regulated parties may be frustrated while they hang in limbo.
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Either situation creates the appearance that the agency is treating the proceeding in a materially different way from others.(see footnote 16) This may prompt speculation about the agency's motives that undermines the credibility of the process, the agency, and the federal government.(see footnote 17) Open-ended and irregular procedures also give agencies and their officials actual opportunities for malfeasance.
Legal Standard
Whether the FCC considers license transfers under a true legal standard is subject to debate. In a series of letters, FCC Chairman Kennard and Commissioner Furchtgott-Roth have differed over whether there is a definitive ''Public interest'' standard. In letters to the Chairmen-CEOs of SBC and Ameritech, Commissioner Furchtgott-Roth noted that Chairman Kennard's concerns about the SBC-Ameritech transaction ''are not based on standards to be found in any specific provision of the Communications Act or in any FCC rule. . . .''(see footnote 18) Responding to Congressional inquiry, Chairman Kennard has written, ''The standards are to be found in cases rather than in written rules. This is entirely consistent with, and contemplated by, the Administrative Procedure Act, and may be superior to writing volumes of rules attempting to explain the application of a legal standard to every conceivable fact pattern.''(see footnote 19)
One of the most recent cases—the FCC's September, 1998 approval of license transfers in the MCI-WorldCom merger—laid out the public interest standard as follows:
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The public interest standard of sections 214(a) and 3 1 0(d) is a flexible one that encompasses the broad aims of the Communications Act. These broad aims include, among other things, the implementation of Congress' pro-competitive deregulatory national policy framework designed to . . . open[ ] all telecommunications markets to competition, preserving and advancing universal service, and accelerat[ing] rapidly private sector deployment of advanced telecommunications and information technologies and services. The public interest analysis may also include an assessment of whether the merger will affect the quality of telecommunications services provided to consumers or will result in the provision of new or additional services to consumers. In evaluating whether the proposed transaction furthers the aims of the Communications Act, the Commission may consider the trends within, and needs of, the telecommunications industry, the factors that influenced Congress to enact specific provisions of the Communications Act, and the nature, complexity, and rapidity of change in the telecommunications industry. Of course we note that this list of considerations is not exhaustive, and an assessment of other factors may be appropriate in the future.(see footnote 20)
Members may want to consider whether this standard has the hallmarks of legality.
As stated in MCI-WorldCom, the standard does not, for example, foster predictability. Given a list of considerations that is ''not exhaustive,'' regulated parties must have prescience bordering on the divine if they are to structure their affairs to meet the standard. To satisfy the standard, regulated parties would have to anticipate the Commission's interpretations of ''trends within, and needs of, the telecommunications industry,'' then tailor their activities to either foster and satisfy, or frustrate—depending on the Commission's view—those trends and needs. Regulated parties would have to go beyond even the legislative history of the Communications Act and discover what ''factors . . . influenced Congress'' when it wrote the Act, then surmise correctly what meaning the Commission would give to such factors.
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The standard also may be unreviewable as a practical matter. A court would have extreme difficulty determining whether the Commission had considered the ''broad aims'' of the Communications Act as required by the standard, or whether the Commission had arbitrarily and capriciously failed to consider certain aims or considered aims not within the Act.
The absence of a predictable and reviewable standard—a legal standard—serves the interests and convenience of an agency because it allows the agency to respond freely to emerging priorities. As with open-ended procedures, however, these benefits accrue in direct proportion to harms and inconvenience to the regulated public. Regulated parties—the public—cannot structure their affairs in a way that anticipates agency decisions.
Because the agency has freedom of action and control over the fate of the regulated party, the agency and regulated party are placed in a ''bargaining'' mode. The regulated party may offer, or the agency may demand concessions that the agency could not require by law. In its worst iteration, the upshot of this ''bargaining'' relationship is that a regulated party may make a (policy-related) ''payment'' in exchange for official action. Whether or not such practices exist or are explicit, the bargaining relationship created by indefinite standards may create the appearance of backroom dealing, which in turn may undermine public confidence in agency decisionmaking.
Mr. GEKAS. Does the lady from Wisconsin have an opening statement?
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Ms. BALDWIN. Yes. Thank you, Mr. Chairman.
I have a keen interest in this morning's hearing. A large number of my constituents currently receive their local phone service from Ameritech, which has been seeking approval from the FCC to merge with SBC for almost a year now. The Antitrust Division of the Department of Justice has decided not to challenge the proposed merger, but the Federal Communications Commission is taking a slower approach.
I am currently learning a lot more about this merger. I have not weighed in with an opinion one way or another as to whether that merger should proceed. I want to know, of course, that it will benefit, rather than harm, the people that I represent.
I do know, though, that Ameritech, SBC and my constituents deserve a thorough, yet efficient, merger process and consideration from the FCC. To that end, I have several questions that I will be asking the upcoming witnesses in the hopes that I can learn more about why it has been taking so long in this particular situation.
Thank you, Mr. Chairman, for holding this oversight hearing.
Mr. GEKAS. And we thank the lady, and we invite to the witness table the entire Panel I, which consists of one individual, Harold Furchtgott-Roth, who was the Chief Economist for the U.S. House Committee on Commerce. He was a senior economist for Economists, Incorporated, from 1988 to 1995, and before that he served as a research analyst for the Center for Naval Analyses.
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Born in Knoxville, Tennessee, Commissioner Furchtgott-Roth holds an SB in economics from the Massachusetts Institute of Technology and a Ph.D. in economics from Stanford University. He is a member of the American Economics Association and the Econometric Society. He is, of course, now serving as FCC Commissioner, having accrued that title on November the 3rd, 1997.
With that, we invite the gentleman to try to bring about an oral presentation of his written testimony, which will be made part of the record, and to try to review it in about 5 minutes, more or less, preferably less, but we understand. You may proceed.
STATEMENT OF HAROLD FURCHTGOTT-ROTH, COMMISSIONER, FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, DC
Mr. FURCHTGOTT-ROTH. Thank you, Mr. Chairman. It is a great honor and a great opportunity to appear before this committee. I spent many years just across the hall and have a great deal of affection for this committee.
At the outset, I would like to emphasize that debates about process are not trivial debates. To the contrary, regularity and fairness of process are central to a governmental system based on the rule of law. As the law has consistently recognized, the denial of a procedural right can result in the abridgment of a substantive right. The Administrative Procedure Act is grounded in the notions that fair processes result in better regulations and that participatory processes result in regulations that people can accept, even if they disagree with them.
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Under the APA, process is paramount. It is no secret that I have been and remain deeply concerned about the novel procedures currently being employed by the FCC in license transfer proceedings. My concerns arise out of the legal problems with the processes and standards or, more precisely, the lack thereof, that the Commission uses to evaluate applications to transfer licenses. The aggregate effect of these problems, described in detail in my written submission, is to create an administrative scheme that undermines the principles of fundamental fairness and procedural due process, the hallmarks of the Administrative Procedure Act.
As a threshold matter, I would like to correct a common misperception about the scope of the Commission's authority when reviewing license transactions involving merging parties. Contrary to its frequent assertions, the Commission, as you noted, Chairman Gekas, does not possess statutory authority under the Communications Act to review at large the mergers or acquisitions of communications companies. Nothing in the Communications Act speaks of jurisdiction to approve or disapprove mergers per se. In fact, the act does not even mention the word ''mergers.'' What the act actually requires is that the Commission determine whether the transfer of station licenses or carrier operational authorizations serves the public interest, convenience and necessity. That is a much narrower and more modest task than contemplating the competitive effects of a merger.
The Commission does have some limited Clayton Act authority to review mergers, but we choose never to exercise that authority, perhaps because it does not have an expansive public interest standard. Beyond the threshold question of statutory authority to regulate mergers as opposed to license transfers, I have grave concerns about the process employed in the FCC merger reviews. The Commission annually approves tens of thousands of license transfers without any scrutiny at all or comment, while other license transfers receive minimal review and a few, usually high profile ones, are subjected to intense regulatory scrutiny. This happens because there are no established commission standards for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not.
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Nor does the Commission have any established procedures for the handling of applications of license transfers. Any particular application on any particular day could be adopted at a commission meeting, voted by the Commission on circulation, processed with or without a formal hearing, processed with or without so-called public fora, handled with or without additional private talks between the companies, interested parties, commission staff and even individual members of the Commission, put out for one, two, three rounds of extra public comment or no further comment at all, granted with or without conditions, finalized after 90 days, 90 weeks, 90 years, who knows when.
Since the Commission has no meaningful procedural rules, the Commission is free to change the procedural rules of the road from transaction to transaction and even in the midst of a single transaction. Individual companies can be dragged through long and expensive proceedings with full fledged commission action while others have their applications promptly granted by the staff with no rationale for the gross and disparate treatment except for perhaps the cynical one that the Commission is favoring certain industries or companies.
To make matters worse, individual companies can be subjected to unprecedented processes at the direction apparently of the chairman himself without consultation or agreement by the full Commission. Also, the unpredictability of the Commission's procedures casts a pall on the Commission's impartiality. When the Commission subjects parties to a novel, extended and unwieldy process to which it has not previously subjected similarly situated applicants, a reasonable person might think that the decision makers possess a bias, a bias that manifests itself in the unusually high and numerous procedural hoops through which decision makers force certain companies to jump. Unfortunately, the manipulation of procedural rules can often be a cover for discrimination on the merits.
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Finally, the Commission has not promulgated rules regarding the substantive standards to be applied to license transfer applications, and it certainly has no published rules for substantive tests of mergers.
In short, regulated entities and even unregulated entities have little basis for knowing ex ante how their applications will be treated either procedurally or substantively. The FCC license transfer process is lacking in any transparent, fixed and meaningful standards. A person, even a well-trained lawyer, which I am not, who wished to prepare for this process could find scant guidance in public sources of law. Rather, one would have to be trained in the unwritten ways of this Commission to know what to expect, and those expectations unfortunately would have little relation to Federal administrative law.
I need not explain to the members of this subcommittee that this situation presents a high risk of arbitrary and capricious rulemaking, lack of fair notice to regulated entities and an appearance of partiality. Furthermore, when agencies fail to provide clear rationales for their decisions, it is difficult for aggrieved parties to obtain meaningful judicial review of those decisions.
These issues are of prime concern under the APA. The statutory test to be applied to license transfers is, of course, the public interest standard. As noted, the Commission has failed to place any outer limits whatsoever on this concept. I have always believed that it was incumbent on the Commission to fashion some limits on its discretion as a matter of simple fairness, but under a recent D.C. circuit decision, American Trucking v. EPA, it would appear that the Commission also has a constitutional duty to do so in order to avoid possible violation of a nondelegation doctrine.
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Finally, I express some general apprehension about the conditioning of grants for license transfer applications. All too often the FCC places conditions on license transfers that have no basis in the text of the Communications Act. The Commission requires companies to do certain things, things that it could not for lack of statutory authority require outright in a rulemaking, as a quo for the quid of receiving a license. This is a transgression of the Commission's statutory limits and thus a violation of the APA, and, as Mr. Dingell recently observed, it could also constitute an evasion of the notice and comment provisions of the APA.
In sum, I believe the Commission's failure to establish pursuant to notice and comment public and intelligible principles to channel the exercise of delegated authority raises serious questions under the APA and the Constitution. In particular, the use of extraordinary procedures in discreet cases undermines the statutory rights of regulated entities. I further believe that the Commission's practice of attaching conditions to license transfers that lack a basis in the Communications Act or extant commission rules is also legally troublesome.
As an independent agency composed of unelected officials who have no direct accountability to the American public, I believe that we should proceed with reserve when exercising congressionally-delegated functions at the FCC. If we did so, we could better stay within the bounds of our statutory authority, mitigate the potential for arbitrary decision-making, provide regulated entities with fair notice of the procedural and substantive rules governing their applications, avoid the appearance of partiality, safeguard the right to judicial review and steer clear of the nondelegation doctrine. In short, we could better serve the law.
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Thank you for this opportunity to appear before this committee. I am available to answer any questions.
[The prepared statement of Mr. Furchtgott-Roth follows:]
PREPARED STATEMENT OF HAROLD FURCHTGOTT-ROTH, COMMISSIONER, FEDERAL COMMUNICATIONS COMMISSION, WASHINGTON, DC
NOVEL PROCEDURES IN FCC LICENSE TRANSFER PROCEEDINGS
Thank you for the opportunity to appear before your distinguished Subcommittee on Commercial and Administrative Law. The topic for today's hearing is ''Novel Procedures in FCC License Transfer Proceedings.''
At the outset, I would like to emphasize that debates about process are not trivial debates. To the contrary, regularity and fairness of process are central to a governmental system based on the rule of law. As the law recognizes in many different areas, the denial of a procedural right can result in the abridgment of a substantive right. Not the least of these areas is administrative law, the jurisdiction of this Subcommittee. The Administrative Procedure Act (APA) is grounded in the notions that fair processes result in better regulations, and that participatory processes result in regulations that people can accept, even if they disagree with them. Indeed, procedural fairness is so fundamental a principle in our legal system that the Framers expressly guaranteed it in the Constitution. See U.S. Const. Amdmt. V (''No person shall . . . be deprived of life, liberty, or property, without due process of law. . . .'').
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It is no secret that I have been, and remain, deeply concerned about the novel procedures currently being employed by the FCC in license transfer proceedings. My concerns arise out of the legal problems with the processes and standards—or more precisely, the lack thereof—that the Commission uses to evaluate applications for the transfer of licenses. The aggregate effect of these problems, described in detail below, is to create an administrative scheme that undermines the principles of fundamental fairness and procedural due process, the hallmarks of the APA.
The FCC Lacks ''Merger'' Review Authority Under the Communications Act
As a threshold matter, I would like to correct a common misperception about the scope of the Commission's authority when reviewing license transactions involving merging parties. Contrary to its frequent assertions, the Commission does not possess statutory authority under the Communications Act to review, writ large, the mergers or acquisitions of communications companies. Rather, that Act charges the Commission with a much narrower task: review of the proposed transfer of radio station licenses from one party to another and review of the proposed transfer of interstate operational authorizations for common carriers. Nothing in the Communications Act speaks of jurisdiction to approve or disapprove the mergers that may occasion a transferor's desire to pass licenses on to a transferee.(see footnote 21) Under that Act, the Commission is, at most, required to determine whether the transfer of licenses serves the public interest, convenience and necessity.(see footnote 22)
To be sure, the transfer of radio licenses and common carrier authorizations is an important part of any merger. But it is simply not the same thing. A merger is a much larger and more complicated set of events than the transfer of FCC permits. It includes, to name but a few things, the passage of legal title for many assets other than radio licenses, corporate restructuring, stock swaps or purchases, and the consolidation of corporate headquarters and personnel.
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Clearly, then, asking whether the particularized transaction of a license transfer would serve the public interest, convenience, and necessity entails a significantly more limited focus than contemplating the industry-wide effects of a merger between the transferee and transferor. For instance, in considering the transfer of licenses, one might ask whether there is any reason to think that the proposed transferee would not put the relevant spectrum to efficient use or comply with applicable Commission regulations; one would not, by contrast, consider how the combination of the two companies might affect other competitors in the industry. One might also consider the benefits of the transfer, but not of the merger generally. And one might consider the transferee's proposed use and disposition of the actual licenses, but one would not venture into an examination of services provided by the transferee that do not even involve the use of those licenses, as the Commission often does.
By using the license transfer provisions of the Communications Act to assert jurisdiction over the entire merger of two companies that happen to be the transferee and transferor of licenses, the Commission greatly expands its organic authority. Certainly, in the context of a merger, license transfers occur as a result of the merger, but the Commission should not use this causative fact to bootstrap itself into jurisdiction over the merger. If control of licenses were to be transferred ''as a result of'' a licensee's bankruptcy, would the Commission assert jurisdiction to review the legal propriety of the declaration of bankruptcy? That would be preposterous, as that is a job for a bankruptcy court. Review of the merger of two communications companies which, just like the bankruptcy in my hypothetical, is an underlying cause of the transfer in question, is a job for the Department of Justice. Expanding our review of license transfers to a review of the event that precipitates the transfers—whether that event is a merger, a bankruptcy, or any other event that might lead a licensee to cede control of a license—is off the statutory mark.
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Despite the Commission's effort to exercise power over ''mergers'' under sections 214 and 310 of the Communications Act, it must be remembered that, in the end, the Commission can only refuse to permit the transfer of the relevant licenses. While such action would no doubt threaten consummation of a proposed merger, the Commission cannot—despite its threats to do so in licensing orders(see footnote 23)—directly forbid the stockholders of one company from selling their shares to the other.
Put simply, the scope of FCC review ought to accord with the scope of our remedies: that is, it ought to be limited to considering (i) whether the public would suffer harm if radio licenses are transferred from Party A to Party B, and (ii) whether the public convenience and necessity would be served by allowing Party A to convey authorizations to operate carrier lines to Party B. The fact that most orders involving mergers do not even identify the radio licenses or section 214 authorizations at issue or discuss the consequences of their conveyance, but instead move directly to a discussion of the merger, reflects how far the Commission has strayed from the provisions of the Act.
The exercise of power not authorized in the Communications Act is not just an independent wrong: it also creates a violation of the Administrative Procedure Act. As the members of this Subcommittee well know, the APA requires a reviewing court to ''hold unlawful and set aside agency action'' that is ''in excess of statutory jurisdiction, authority, or limitations.'' 5 U.S.C. section 706(2)(C). This critical provision of the APA provides enforcement of the statutory limits on agency action and recourse for their transgression. Should the Commission ever purport to prohibit a ''merger''—as opposed to the simple transfer of licenses—I believe that action would violate this linchpin of the APA.
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Moreover, if the Commission stuck closely to its statutory authority, the adverse affects of the procedural practices that you have asked me to testify about today, while still legally problematic, would be greatly mitigated as a practical matter.
Potentially Arbitrary Review: Choice of Transfers for Full-Scale Review, Procedures to be Employed, and Substantive Standards To Be Applied
Beyond the threshold question of statutory authority to regulate mergers, I have grave concerns about the process employed in FCC merger reviews, the subject of today's hearings.
The Commission annually approves tens of thousands of license transfers without any scrutiny or comment, while others receive minimal review, and a few are subjected to intense regulatory scrutiny. For example, mergers of companies like Mobil and Exxon involve the transfer of a substantial number of radio licenses, many of the same kind of licenses as those at issue in other high-profile proceedings, such as AT&T/TCI, and yet we take no Commission level action on those transfer applications. I do not advocate extensive review of all license transfer applications, but mean only to illustrate that we apply highly disparate levels of review to applications that arise under identical statutory provisions.
Unfortunately, there is no established Commission standard for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not. Nor do any of the Commission's orders in ''merger'' reviews elucidate the standard. Unfortunately, the orders tend to conclusorily assert that some mergers warrant heavy review and others do not.(see footnote 24) This is not a very helpful explanation. Regulated entities and even their often sophisticated counsel are left to wonder: Is the question whether the merging firms are large, successful corporations? (That is one of the obvious differences between the mergers that receive heavy attention from the Commission and those that do not.) Does the level of review depend on the type of services offered by the merging companies, i.e. a telephone/cable merger (such as AT&T/TCI) gets one sort of review, while a telephone/telephone merger (such as SBC/Ameritech) gets another? In short, merging parties have no clear notice as to the threshold showing for determining the scale of FCC license transfer review.
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If the answer is, as some have suggested, that the Commission reviews extensively only a subclass of license transfer applications—those occasioned by mergers with the potential to affect the telecommunications industry—that response is incomplete. Whatever the soundness of this theory for distinguishing among transfer applications, it is not written anywhere, whether in agency rules, regulations, policy statements, or even internal agency guidelines. While the Communications Act does allow the Commission to make reasonable classifications of applications, see 47 U.S.C. section 309(g), the Commission has in no way done so, much less in a way that puts the public on notice as to what those classifications are. Agency decisions regarding which license transfers to review, even as among license transfers occasioned by mergers, are entirely ad hoc and thus run a high risk of being made arbitrarily.
Nor does the Commission have any established procedures for the handling of applications for license transfers. Any particular application on any particular day could be: adopted at a Commission meeting; voted by the Commission on circulation; processed with or without a formal hearing; processed with or without so-called ''public fora''; handled with or without additional private ''talks'' between the companies, interested parties, Commission staff, and individual, especially interested members of the Commission; granted with or without conditions; finalized after 90 days or 90 weeks, etc. The list goes on almost indefinitely.
Section 1.1 of the Practice and Procedure subpart of the Commission's rules, entitled ''Proceedings before the Commission,'' does nothing to remedy the open-ended nature of Commission processes. It states that ''[t]he Commission may on its own motion or petition of any interested party hold such proceedings as it may deem necessary from time to time'' and ''[p]rocedures to be followed by the Commission shall . . . be such as in the opinion of the Commission will best serve the purposes of such proceedings.'' 47 C.F.R. section 1.1. This rule, written by the Commission, establishes only that the Commission can do essentially whatever it wants. There is nothing constraining or useful about this section.
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Moreover, this rule—the only general one about procedures on the Commission's books—is routinely flouted. Section 1.1. allows ''the Commission'' to decide on appropriate procedures. Under the Communications Act, ''the Commission'' is defined as being ''composed of five Commissioners appointed by the President, by and with the advice of the Senate, one of whom the President shall designate as chairman.'' 47 U.S.C. section 4(a). During my tenure, however, important procedural issues have not been decided upon by the full Commission, as section 1.1. requires; rather the Chairman seems to believe that he can set procedural rules on his own. This is contrary, however, to the little that section 1.1 actually does require—namely, full Commission action.
The extraordinary process to which SBC and Ameritech are now being subjected—which includes ''discussions'' between the companies and Common Carrier Bureau staff unauthorized by the full Commission, with Chairman-set ''ground rules'' that are wholly unenforceable and thus subject to change at his personal whim—is illustrative of what happens when there are no limits on Commission discretion with respect to procedures.(see footnote 25)
Since there are no rules governing procedures (I do not think section 1.1 can fairly be said to be a rule of anything except unfettered discretion), the Commission (or even just the Chairman?) is free to change the procedural rules of the road from transaction to transaction, and even in the midst of a single transaction. Individual companies can be dragged through long and expensive proceedings, with full-fledged Commission action, while others have their applications promptly granted by the staff, with no rationale for the grossly disparate treatment—except for perhaps the cynical one that the Commission is favoring certain industries or companies. And individual companies can be subjected to this unprecedented processes at the direction, apparently, of the Chairman himself, without consultation or agreement by the full Commission. This is simply not the right way to run a licensing agency or to deal with the licensees who pay the regulatory fees that fund this agency.
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Finally, if the Commission did establish a threshold test for determining which license transfer applications should receive strict scrutiny, and what kinds of process it should utilize, the Commission would still need to set out the substantive tests for the differing scrutiny levels. As a general matter, our decisional precedents provide little concrete guidance on the substantive standard for approval of Title II or Title III license transfers: the proposition that a merger is in the ''public interest'' if it is not anti-competitive (or if it is also pro-competitive) is too generalized to be of any real help. Moreover, there is clearly a different ''public interest'' test being applied, sub silentio, in different cases under the same statutory provisions, usually sections 310 and 214. The cases that undergo extensive inquiry exhaustively discuss all kinds of service areas and issues ancillary to the use of the actual radio licenses, and the decisions that are granted at the Bureau level are relatively perfunctory in their public interest analysis. We should, after identifying the threshold test for license transfers that warrant thorough inquiry, articulate clearer substantive criteria to guide the Commission's inquiry
The long and short of it is this: regulated entities have little basis for knowing, ex ante, how their applications will be treated, either procedurally or substantively. The license transfer process at the Commission is lacking in any transparent, fixed and meaningful standards. A person—even a well-trained lawyer—who wished to prepare for this process could find scant guidance in public sources of law, such as the Code of Federal Regulations or the Commission's adjudicatory orders. Rather, one would have to be trained in the unwritten ways of this Commission to know what to expect, and those expectations unfortunately would have little relation to federal administrative law.
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While obviously troublesome on an intuitive level, such a license transfer process suffers from at least four particular flaws under the APA. First, the wholly ad hoc nature of this process makes it all too easy for decisionmakers to discriminate among industries and even companies—in other words, to engage in arbitrary and capricious review. Protecting against such decisionsmaking is, of course, a core function of the Administrative Procedure Act. See 5 U.S.C. section 706(2)(A) (reviewing court must '''aside agency action . . . found to be arbitrary [and] capricious'').
Second, and relatedly, by failing to state clearly the principles that it uses to judge license transfers, the Commission decreases the viability of meaningful judicial review. The net result is to undermine the statutory right of aggrieved parties to judicial review. See id. section 702 (''A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.''). That right of review is an interested party's primary defense against arbitrary agency decisions.
Third, the nonascertainable nature of the license transfer process means that interested parties have no fair notice as to the regulatory constraints on their conduct. Notice of what the law requires—i.e., which behavior is prohibited and which is permissible—is a bedrock element of fairness in our legal system, derivative of the Due Process Clause. No person should be penalized for violating a rule that is either so vague as to give no clear indication of the prescribed conduct, or entirely unpublished and thus unavailable to the public, residing only in the minds of regulators. The notice and comment procedures of the APA are designed to safeguard against lack of fair notice. They require notification, and an opportunity to participate in the making, of the standards that govern interested parties. See id. section 553(b)-(c). Indeed, the whole rulemaking system of the APA is based on the assumption that governing standards will be published and public before they go into effect, allowing regulated parties a certain amount of time to conform their conduct to the new federal standards. See id. section 553(d) (''The required publication or service of a substantive rule shall be made not less than 30 days before its effective date. . . .'').
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Finally, as Senator McCain recently pointed out in a letter to Chairman Kennard to concerning the pending SBC/Ameritech applications, the unpredictability of the Commission's procedures cast a pall on the Commission's impartiality. Specifically, when the Commission subjects parties to a novel, extended, and unwieldy process to which it has not subjected similarly situated applicants, a reasonable person might think that the decisionmakers possessed a bias—a bias manifesting itself in the especially high and numerous procedural hoops through which the decisionmakers were forcing the companies to jump. Unfortunately, the manipulation of procedural rules can be a cover for discrimination on the merits. The appearance of partiality created by the use of such highly unusual procedures contravenes the core principle of the APA (again based on the constitutional concerns of procedural due process) that decisionmakers be neutral. See 2 Davis & Pierce, Administrative Law Treatise at page 67 (3d ed. 1994) (''Due process requires a neutral, or unbiased, adjudicatory decisionmaker. Scholars and judges consistently characterize provision of a neutral decisionmaker as one of the three or four core requirements of a system of fair adjudicatory decisionmaking.'').
To quote Senator McCain:
A proceeding of . . . importance and potential consequences must be attended, not only with every element of fairness, but with the very appearance of complete fairness. That is the only way its conduct will meet the basic requirement of due process. Amos Treat and Co., Inc. v. SEC, 306 F.2d 260 (D.C.Cir. 1962). The Commission's objectivity and impartiality are unavoidably opened to challenge by the adoption of procedures from which a disinterested observer may conclude that it has in some measure adjudged the facts as well as the law a case in advance of fully hearing it. See, e.g., Gilligan, Will & Co. v. SEC, 267 F.2d 461 (D.C.Cir. 1959).
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Letter from Sen. John McCain to Chairman William E. Kennard, May 12, 1999.
For the above reasons, it seems to me that the Commission's lack of guidelines regarding the process and substance of license transfer proceedings is in serious tension with the principles that undergird the APA.
Potential Constitutional Problems With A Boundless ''Public Interest'' Test
The statutory test to be applied to license transfers is, of course, the ''public interest'' standard. As noted above, the Commission has failed to place any outer limits whatsoever on this concept, freely reinterpreting the standard in each new case. Not only does the Commission's lack of clear guidelines with respect to standards governing license applications present issues of arbitrary decisionmaking and of fair notice, as discussed above, it may also create constitutional issues with respect to the non-delegation doctrine.
This month, the United States Court of Appeals for the D.C. Circuit ruled in American Trucking Ass'n v. EPA, 1999 WL300618 (May 14, 1999) that the EPA's failure to adopt ''intelligible principles'' for implementing its statutory mandate to regulate air pollution effected an unconstitutional delegation of legislative power. The Court explained that ''[w]here . . . statutory language and an existing agency interpretation involve an unconstitutional delegation of power, but an interpretation without the constitutional weakness is or may be available, our response is not to strike down the statute but to give the agency an opportunity to extract a determinate standard on its town.'' Id. at *6. According to this case and its precedential forebears, see International Union, UAW v. OSHA, 938 F.2d 1310 (D.C. Cir. 1991), this agency has a constitutional duty to choose interpretations of statutory language that avoid, rather than create, non-delegation doctrine problems.
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I believe that the FCC has not satisfied its obligation under American Trucking to adopt ''determinate, binding standards,'' 1999 WL 300618 at *6, in order to channel its discretion under the ''public interest'' provisions. Putting aside the question of the breadth of the statutory standard itself, the Commission has not articulated any clear principles about what that standard means in the context of merger review; how it applies to different entities; and what justifies a departure from standard practice, to name just a few of the major outposts on the license transfer trail. In short, there are no self-defined limits—at either end of the spectrum—on the Commission's consideration of whether to grant or deny a license transfer when mergers are involved, or otherwise. To my mind, this is arguably the kind of ''free-wheeling authority [that] might well violate the nondelegation doctrine.'' International Union, UAW v. OSHA, 938 F.3d at 371.
I have always thought that it was incumbent on the Commission to fashion some guidelines to place limits on its discretion as a matter of simple fairness. Under American Trucking and International Union, it would appear that the Commission also has a constitutional duty to do so. This duty it has not even attempted to carry out.
''Conditional'' Approval of License Transfer Applications
Finally, I express some general apprehension about the ''conditioning'' of grants for license transfer applications and section 214 authorizations. I think it is entirely appropriate, under the Commission's organic statute, for the Commission to condition license transfer and line extension applications on compliance with existing FCC rules or statutory provisions. See 47 U.S.C. section 303(r) (''Commission shall . . . prescribe such . . . conditions, not inconsistent with law, as may be necessary to carry out the provisions of this Act''); id. section 214(c) (Commission ''may attach to the issuance of [214] certificate such terms and conditions as in its judgment the public convenience and necessity may require'').
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All too often, however, this Commission places conditions on license transfers that have no basis in the text of the Communications Act. That is, the Commission requires companies to do certain things—things that it could not for lack of statutory authority require outright in a rulemaking—as a quo for the quid of receiving a license. Again, this represents a transgression of the Commission's statutory limits and thus a violation of the APA. See 5 U.S.C. section 706(2)(C). It could also constitute an evasion of the notice and comment provisions of the APA, if the Commission (assuming it follows its own decisional precedent) uses its licensing orders to create standards that logically apply industry-wide. See id. section 553.
I am also concerned about situations in which this agency becomes an enforcer of the rules and regulations of other governmental agencies. We have no jurisdiction to enforce rules not promulgated under the Communications Act, see id. section 303(r) (referring to conditions needed to ''carry out the provisions of this Act''), and we cannot and should not do the enforcement work of others. This is not to say that we should not take official notice, in the course of making licensing decisions, of findings by another agency that an applicant has violated a regulation in its bailiwick. We should certainly consider such findings in determining whether to grant or deny a license application. But we should not condition such a decision on compliance with another agency's regulation, thus putting ourselves in the position of potential enforcer of non-FCC rules should the transferee fail to conform to that regulation. For instance, if the Department of Justice enters into an antitrust agreement with a party, we have no business attempting to enforce the obligations created thereunder in our licensing orders.
I am doubly concerned about conditional FCC approval when the rule at issue is not just that of another agency, but when that agency has made no formal, final, and material findings of a violation. That is, I do not think we should take official notice of alleged violations, including matters under investigation or in litigation, or of informal concerns that an agency is not yet ready or willing to pursue through their own established procedures. When we give formal weight to anything short of formal, final findings by other agencies, we create a situation that is rife with incentives for inter-agency gaming of the system, e.g., registering an objection with an agency about a matter that the complaining agency is not prepared to pursue itself, and requires the Commission to do extensive reviews in areas where it simply has no experience or authority.
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In sum, at the intersection of two areas—non-FCC rules and no final determination of a violation by a responsible entity—our authority to impose conditions on a license or 214 authorization transfer is at its weakest. Where non-FCC rules are at issue but there is a final, record finding of a material infraction thereof, there is a middle ground: we should take notice of that fact in deciding upon the application but not condition approval upon compliance. Finally, where extant FCC rules are involved, our power to condition a proposed transfer upon compliance with those rules and to enforce compliance, if necessary, is at its apex. We should never, however, impose conditions that have no basis in the text of the Communications Act, thus using our license transfer authority to impose new substantive obligations that Congress never contemplated.
Conclusion
For the reasons discussed above, I believe that the Commission's failure to establish, pursuant to notice and comment, public and intelligible principles to channel the exercise of authority delegated by Congress raises serious questions under the APA and the Constitution. In particular, the use of extraordinary processes in individual, high-profile cases threatens to undermine both the procedural and substantive rights of regulated entities. I further believe that the Commission's practice of attaching ''conditions'' to license transfers that lack a basis in the Communications Act or extant Commission rules, or that purport to enforce the judgments of other federal agencies, is also legally troublesome.
As an ''independent'' agency, composed of unelected officials who have no direct accountability to the American public, I believe that we should proceed with heightened reserve when exercising discretionary functions. If we so proceeded, we could better stay within the bounds of our statutory authority, mitigate the potential for arbitrary decisionmaking, safeguard the rights of judicial review, provide regulated entities with fair notice of the procedural and substantive rules governing their applications, avoid the appearance of impartiality, and steer clear of the non-delegation doctrine. In short, we could better serve the rule of law.
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| Federal Communications Commission, |
| Office of the Chairman, |
| Washington, DC, April 1, 1999. |
Mr. RICHARD C. NOTEBAERT,
Chairman and Chief Executive Officer,
Ameritech Corporation,
Chicago, IL,
Mr. EDWARD E. WHITACRE, JR.,
Chairman and Chief Executive Officer,
SEC Communications, Inc.,
San Antonio, TX.
RE: Applications of SBC Communications Inc. and Ameritech Corp. For Transfer of Control (CC Docket No. 98–141)
GENTLEMEN: In reviewing your proposed merger, the staff of the Commission has raised a number of significant issues with respect to potential public interest harms and questions about the claimed competitive and consumer benefits of the proposed combination. As you know, the Communications Act requires that the Commission determine whether the proposed merger is in the public interest and, at this stage, I have serious concerns about whether your proposal satisfies this requirement.
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Among the actions which the Commission could take are to set your application for a full hearing or to approve it with conditions. In order to ensure that the record is complete with respect to these possible outcomes, I have asked the Commission's staff to explore with you and the other parties, on a cooperative and public basis, whether it would be possible to craft conditions that address the public interest concerns.
I would like the discussion about such conditions to begin as soon as possible and to be of limited duration so that a further decision with respect to the viability of your application can be made within 90 days. I have designed a team of senior representatives from the Commission staff to undertake these discussion with your companies and with the other parties to this case. Thomas Krattenmaker, Director of Research in the Office of Plans and Policy, and Robert Atkinson, Deputy Chief of the Common Carrier Bureau, will head the team for the staff.
The staff team will be contacting you shortly to set the ground rules and the schedule for discussions. Parties to the proceeding will also be invited to learn the ground rules and to present their views to staff. To facilitate the process, I have attached an outline of how I foresee the discussions progressing. This outline calls for a decision regarding the disposition of your application by the end of June.
The staff has reviewed the record developed in this proceeding. Based on that view, among the public interest issues raised by staff which cause me to be concerned are the following:
How can the Commission be assured that the merger will not interfere with the companies' willingness and ability to fully open their local markets to competition in accordance with the Communications Act (Act)?
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How can the Commission be assured that the merger would promote the objective of the Telecommunications Act of 1996 to encourage competition to all telecommunications markets?
How can the Commission be assured that the public will promptly receive the claimed benefits from the proposed ''nation/local strategy'' in view of section 271 of the Act?
How can the Commission be assured that the merger will not adversely affect the Commission's ability to fulfill its responsibilities under the Communications Act by reducing its ability to ''benchmark'' the performance and capabilities of telecommunications carriers?
How can the Commission be assured that the proposed combination will serve the communications Act's public interest mandate by improving overall consumer welfare?
I assume that you are interested in pursuing discussion with the Commission staff. If so, please advise my office by Wednesday, April 7. However, if you prefer not to engage in this dialogue, I will ask the staff, based on the current record, to present its recommendations for further action to the full Commission as soon as possible.
Thank you for your attention to this matter.
Sincerely,
cc: parties in CC Docket No. 98–141
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PROPOSED SCHEDULE FOR DISCUSSIONS TO EXPLORE CONDITIONS NEEDED TO AMELIORATE PUBLIC INTEREST CONCERNS
(ALL DATES APPROXIMATE)
Early April:
Discussion commence
Late April:
Public forum
— Commission staff and Applicants report status of discussions, including tentative conditions, if any, in as much detail as possible
— Public is invited to comment on tentative conditions, proposed additional conditions
Early May:
Further discussions to determine final proposed conditions
Late May:
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Commission releases Public Notice of proposed conditions
— Comment cycle (late May-early June)
Late June:
Discussions conclude
*Parties must file written ex parte reports for each day on which discussions are held so as to inform the public of developments.
| Federal Communications Commission, |
| Washington, DC, April 5, 1999. |
Mr. Richard C. Notebaert,
Chairman and Chief Executive Officer,
Ameritech Corporation,
Chicago, IL.
Re: Applications of SBC Communications Inc. and Ameritech Corp. For Transfer of Control (CC Docket No. 98–141)
DEAR MR. NOTEBAERT: I would like to take this opportunity to share with you my thoughts regarding the letter that you recently received from Chairman Kennard.
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FCC ''MERGER'' Review: Outside the Law
According to the letter, the Communications Act requires the Federal Communications Commission (FCC) to ''determine whether the proposed merger (between SBC Communications and Ameritech is in the public interest.'' The Act, however, does no such thing. It does not speak of mergers at all, only of license transfers. The Clayton Act, on the other hand, gives the FCC a limited role in reviewing certain combinations. But the Chairman does not rely on the provision, indeed, the Commission almost never relies on that direct source of statutory authority, choosing instead the less constraining ''public interest'' provision.
Ad Hoc and Discriminatory Standards of Review
During my tenure at the FCC, I have frequently noted the wholly ad hoc nature of the license review process. The Commission annually approves tens of thousands of license transfers without any scrutiny or comment, while others receive minimal review, and a few are subjected to intense scrutiny. We clearly apply highly disparate levels of review to applications that are filed under the identical statutory provision. Unfortunately, there is no established Commission standard for distinguishing between the license transfers that trigger extensive analysis by the full Commission and those that do not. Outside parties thus have little basis for knowing, ex ante, how they will be treated. This lack of transparent standards makes it all too easy for decisions makers to discriminate among industries and even companies in other words, to engage in arbitrary and capricious review.
Moreover, given that the Commission has failed to articulate any classifications to distinguish applications that merit scrutiny from those that do not, the ''public interest:'' standard would currently appear to apply to all applicants on an equal basis. Yet applying different standards to different license transfers is precisely what the FCC has been doing for years.
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Statutorily Unfounded ''Concerns''
Regrettably, your companies are now experiencing just how ad hoc and arbitrary the ''merger'' review process at the Commission can be. Consider the ''public interest'' concerns raised in the Chairman's letter. These concerns are not based on standards to be found in any specific provision of the Communications Act or in any FCC rule; the Commission, of course, has no published rules for merger reviews. As I have pointed out in other contexts, this kind of quid pro quo—if you do X, which I may not be able to require outright in a rulemaking, I will grant your license transfer—is damaging to the integrity of this institution.
Furthermore, these standards are not even remotely similar to the information provided in the Chairman's recent response to Chairman McCain's inquiry regarding the criteria used to process license transfer applications. Simply stated, it is impossible that you or any other party could have divined in advance the concerns and implied standards that Chairman Kennard now raises, nearly a year after the submission of your applications.
While five ''public interest'' concerns are listed in the letter, they boil down to three points. The first three amount to qualms about whether the proposed merger will undermine the pro-competition policy of the Telecommunications Act. I take a back seat to no one when it comes to advocating competition. I believe firmly in the virtues of competition and the evils of government created, government-regulated monopolies. But we cannot go beyond our statutory authority in pursuit of this goal. That is, we cannot impose new substantive burdens on companies simply in the name of ''competition'', rather, we should be able to point to a section of the Act indicating that Congress at least envisioned the imposition of the duties at issue. Also, we must regulate in a non-discriminatory, reasonable manner, applying the law equally to similarly situated parties. Put another way, we must not create stricter tests for some companies and lesser ones for others, or set higher standards for merging parties than for other transferors and transferees.
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Even if ''pro-competition'' had been properly established as the Commission's test for license transfers, the Commission has not been consistent in applying any such standard. The Commission reviews tens of thousands of license transfer applications every year. It cannot be said that each one demonstrates a clear pro-competitive effect. In the vast majority of cases, we do not even ask the question.
Moreover, we cannot, based on speculation, impute to license transfer applicants future behavior that might result from the fact of the merger. A merged party might hypothetically want to cheat on its taxes, but that theory must be tested. Why would not two separate companies want to cheat? Similarly, a merged company might want to thwart competition, but so too would the unmerged parties. Ironically, the very questions that this letter asks are the same questions that DOJ staff undoubtedly asked during its merger review. Would the merged entry significantly lessen competition? DOJ must have reached a negative conclusion, or at least a conclusion that could not be defended in court. Otherwise, DOJ would certainly have opposed the merger, but they did not.
The second concern expressed in the Chairman's letter is a novel one regarding the Commission's ''ability to fulfill its responsibilities under the Communications Act by reducing its ability to 'benchmark' the performance and capabilities of telecommunications carriers.'' This language is not to be found anywhere in the Communications Act. Nor is it an issue that has been raised in the context of any other license transfer reviews, to my knowledge. Furthermore, in my view, it is an odd policy position indeed which holds that an otherwise legitimate merger will be prohibited if it impairs the government's ability to regulate.
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The third concern is the letter pertains directly to the public interest standard, expressing the proposition that the public interest is associated exclusively with consumer welfare. This definition of the public interest standard has never been expressed in these terms. Nor has any prior Commission review of a license transfer required or provided any quantitative or qualitative estimate of enhancement of consumer welfare. Moreover, the standard is fundamentally circular: Consumer welfare is a laudable goal, but I for one believe that such welfare is not maximized by governmental regulation.
Finally, although the letter lists many concerns bout the merger, it appears that there are none with respect to the transfer of the licenses. Of the hundreds of licenses for which transfer of control is sought, not a single one is listed as problematic.
Abandonment of Established Procedures & Unilateral Creation of Unpredictable Process
I am also troubled by the unilateral nature of the attempt to seek a dialogue ''on a cooperative and public basis'' in order to determine ''whether it would be possible to craft conditions that address the public interest concerns.'' This plan has not been shared with, much less considered or voted upon by, the Commission. At this point, I cannot say whether placement of conditions on the license transfers is a good idea or not. I am certain, however, that embarking upon ''talks'' regarding conditions sets a dangerous and legally problematic precedent for the consideration of license transfer applications.
The Commission has issued a public notice on the licenses that your companies propose to transfer. The period for public comment on the notice has expired. It is unclear to me why certain parties should be permitted to create an additional private record before the Commission. Even if this practice comported with the Commission's ex parte regulations (and this is open to doubt), that does not make it fair. We should either reopen the comment period, or close the record and proceed to a final decision by Commission vote and order. Assuming that the imposition of conditions is permissible here, I fail to see why the Commission would need to consult the parties to determine whether it ''would be possible to craft conditions'' that would allay any public interest concerns we might have. Surely the Commission knows how to do so on its own.
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In my opinion, the Chairman proposes a process that would require full Commission authorization. For example, the Commission would have to agree to attend a public forum in late April; the Commission would have to approve a public notice in late May; and the Commission would have to vote on final license transfer approval. In my view, the questions whether and how to proceed, as well as the details of any future process, are not subject to either private or public negotiation between one Commissioner and two private parties. With all due respect to you and the Chairman, I do not believe that the three of you can agree to, or enforce, the proposed process. Even if pursued, you cannot be assured that the schedule will not ''slip'' or that the rules of the road will not change midway.
To his credit, the Chairman has proposed that some of the meetings in conjunction with his proposed procedures be publicly held. For that, I sincerely commend him. The public nature of the meeting is indeed a positive step, but I remain concerned about the above-discussed issues.
Alternative Proposal
Rather than discussing the license transfer process with only the Chairman, I would urge you to discuss this issue with all of the Commissioners. We collectively must decide whether to approve or deny the license transfer applications. Not all of us have had the benefit of hearing the Common Carrier Bureau's conclusions about possible problems with the license transfers or their commendation as to how to proceed from here on out. All the Commissioners must be fully informed of the staff's concerns and possible solutions prior to any decision to impose conditions or even to engage in settlement discussions.
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Specifically, only when we have all been fully informed should we even consider whether: (1) the Bureau should immediately grant the license transfers, as it does for tens of thousands of other applicants; (2) a sufficient basis exists for the Commission as a whole to move immediately to consideration of the license transfer applications; or (3) the Commission needs to collect further information, perhaps in the manner outlined by the Chairman or in some other manner.
Accordingly, I have asked the Bureau to present to the Commission its recommendations in this matter. The Chairman's letter implies that the Bureau could be prepared very soon to present its recommendations based on the existing record. If the Chairman is correct in this regard, my request would not delay this review. Indeed, making recommendations to all of the Commissioners would speed the process, as all of those ultimately responsible for voting on the license transfers would be engaged in the dialogue and could ensure that any concerns they have are addressed. Without such a process, I fear that any conditions ultimately agreed to by the parties and the Chairman may not satisfy the concerns of the other Commissioners.
As I have yet to be briefed on the final staff finds, I cannot speak to the underlying ments of the concerns reflected in the Chairman's letter, i.e., whether your proposed license transfer is ''procompetitive.'' It is clear to me, however, that it would be both premature and inappropriate for conclusions to be reached in private conversations between you and Chairman Kennard by April 7 about how this Commission ought to proceed.
Sincerely yours,
Original letter also to:
Mr. Edward E. Whitacre, Jr.
Chairman and Chief Executive Officer
SBC Communications, Inc.
Copy:
Chairman William E. Kennard
Commissioner Susan Ness
Commissioner Michael K. Powell
Commissioner Gloria Tristani
| United States Senate, |
| Committee on Commerce, Science, |
| and Transportation, |
| Washington, DC, May 12, 1999. |
Honorable William E. Kennard,
Chairman Federal Communications Commission,
Washington, DC.
DEAR CHAIRMAN KENNARD: Regrettably, recent Commission staff statements about the SBC-Ameritech merger request now pending before the Commission call into question the competency of the Commission's management and the credibility of its processes.
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The circumstances that necessitate this letter are presented in a Bloomberg report dated May 6, 1999. The pertinent portions of this report, titled ''SBC-Ameritech Fails FCC Staff Merger Review Test,'' are as follows:
SBC Communications Inc.'s 584.2 billion purchase of Ameritech Corp. Would be anticompetitive and should be rejected unless changes are made, according to tentative conclusions reached by U.S. Federal Communications Commission staff.
The transaction currently ''flunks the public interest test,'' Tom Krattenmaker, who heads the agency's review of the transaction, said at an agency hearing today...
Krattenmaker said that the staff has tentatively concluded that ''SBC and Ameritech do not need to merge to compete outside of their regions.''. . .
An agency spokeswoman said that three of the five commissioners agree the accord shouldn't be approved...
SBC shares fell 1 5/16 to 53 3/8 in late trading and Ameritech shares fell 1 9/16 to 65 3/4. . .
You will recall that last December I emphasized that it is your responsibility as Chairman to assure that your staff's public statements do not compromise the fundamental fairness due to all the parties to this proceeding. My concern at that time was prompted by the fact that Mr. Krattenmaker, with the apparent acquiescence of the Office of Public Affairs, had expressed his views on the merits of the pending merger to the Wall Street Journal. In light of your duty to assure public confidence in how the Commission conducts its business, I asked that you take the steps necessary to assert control over your staff's predecisional public ruminations.
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Since that time Mr. Krattenmaker has been named to co-direct the unusual ''public forum'' process that you have seen fit to convene in this matter. It is almost beyond belief that, notwithstanding the prior occurrence and notwithstanding his newly-designated role, Mr. Krattenmaker remains seemingly oblivious to the appearance and effect of publicly stating his opinions on the merits of this proceeding. And it is equally incredible that notwithstanding the prior occurrence, an ''unnamed agency spokeswoman'' is seemingly oblivious to the appearance and effect of divulging the opinions of a majority of the Commission on the merits of this proceeding.
Having invoked an extraordinary process to examine the merits of the parties' arguments, I would expect you to be scrupulous in assuring the fundamental fairness of that process. However, the statements made by Mr. Kratenmaker and the anonymous ''agency spokeswoman'' cast indelible doubt on the fairness of this proceeding and on my recommendations that may come from it.
A proceeding of such importance and potential consequences must be attended, not only with every element of fairness, but with the very appearance of complete fairness. That is the only way its conduct will meet the basic requirement of due process. Amos Treat and Co., Inc. v. SEC, 306 F.2d 260 (D.C. Cir., 1962). The Commission's objectivity and impartiality are unavoidably opened to challenge by the adoption of procedures from which a disinterested observer may conclude that it has in some measure adjudged the facts as well as the law of a case in advance of fully hearing it. See, e.g., Gilligan, Will & Co., v. SEC, 267 F.2d 461 (D.C. Cir., 1959).
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Both concerns are clearly raised by the staff statements made on may 6. Nor are these concerns ameliorated by the participation of Mr. Atkinson, Deputy Chief of the Common Carrier Bureau, as staff co-director of these proceedings. I understand that Mr. Atkinson's immediate prior employment was as an executive with AT&T. AT&T is a principal proponent of denying this merger, or at least imposing extremely stringent conditions on it. Moreover, AT&T has submitted lengthy ex parte filings detailing the precise nature of the conditions it advocates. And the nature and extent of conditions is, of course, precisely the issue that the ''public forum'' is so assiduously—if not impartially—exploring and on which it will make recommendations to a Commission which has ostensibly—if not actually—reserved judgment.
Although it may be too early to predict the precise impact of this administrative irresponsibility on the merits of the Commission's ultimate decision, it is certainly not to early to state what your immediate response must be. You must do whatever is necessary to remove the institutional unfairness and prejudgment that has been permitted to taint this proceeding. It is impossible to imagine that the head of any federal agency would permit the fairness of the agency's decisionmaking personnel, and the integrity of the agency's decisions, to appear so compromised.
In view of the seriousness of this situation, I would ask that you respond to this letter no later than May 14, 1999. The Committee will find it necessary to pursue this matter further if your response does not contain the specific steps you have taken to resolve this problem and to restore public confidence in the integrity of this, and other, Commission proceedings.
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Please treat this letter in compliance with all applicable Commission rules.
Sincerely,
cc: All Commissioners
| Federal Communications Commission, |
| Office of the Chairman, |
| Washington, DC, April 19, 1999. |
Hon. W. J. ''Billy'' Tauzin, Chairman,
Subcommittee on Telecommunications,
Trade, and Consumer Protection,
Committee on Commerce,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: Thank you for your April 8, 1999 letter concerning my recent letter to Edward E. Whitacre, Jr., Chairman and Chief Executive Officer of SBC Communications Inc. (SBC), and Richard C. Notebaert, Chairman and Chief Executive Officer of Ameritech Corporation (Ameritech). I welcome the opportunity to explain the Commission's review of applications for transfer of control of licenses or lines pursuant to the Communications Act.
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The Communications Act requires the Commission to determine whether a proposed application to transfer licenses or lines is in the public interest.(see footnote 26) The parties seeking the Commission's approval bear the burden of showing by a preponderance of the evidence that the requested transfers are in the public interest.(see footnote 27) This determination necessarily involves a balancing process that weighs potential public interest harms against public interest benefits.(see footnote 28) In particular, the ''public interest'' standard requires the Commission to take into account the likely effect of the transfer on other provisions of the same Act and on Commission rules promulgated under the Act. Were this not the case, we could find a merger to be in the public interest under one provision of the Communications Act even if the transferee of the licenses in question intended to use those licenses to violate another provision of the Communications Act.
Where necessary to ensure that the transaction serves the public interest and does not run counter to any individual provisions for the Communications Act or Commission rules, the Commission may attach conditions to its approval.(see footnote 29) The Commission has done so on many occasions.(see footnote 30) Imposing conditions to ensure that the public interest is served by a transaction produces a consistency that would otherwise be absent—it would be highly inconsistent for the Commission to enforce a provision of the Communications Act or its rules generally and then approve a license transfer that subverts that same provision.
In the SBC/Ameritech proceeding, many parties have raised substantial concerns about whether the proposed transaction would serve the public interest. Among the unique characteristics of the proposed transaction that give rise to some of these concerns is the fact that the merged entity would control approximately one-third of the access lines in the nation. I believe the Commission should address these concerns in a manner that is transparent to all. My letter to Messrs. Whitacre and Notebaert outlines a process for expediting consideration of these concerns, while ensuring that all parties are able to be heard. Consulting with all of the parties and giving the applicants the opportunity to present additional facts that might improve their application seems to be the sensible and fair procedure, which is why it is our standard method of operation. When the possibility of conditions has become an issue in past proceedings, both the applicants and interested parties have had the opportunity to submit comments and proposed conditions.(see footnote 31) It would not seem fair or appropriate to deny this same opportunity to the applicants and interested parties in the SBC/Ameritech matter, and I expect the same opportunity to be made available to parties in future proceedings.
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As part of this process, all interested parties, including, of course, your chief counsel, are welcome to meet with FCC staff. It is generally within the discretion of the party making an ex parte presentation to decide who (other than Commission staff) will attend the meeting. Thus, your chief counsel may wish to discuss with SBC and Ameritech his interest in attending their ex parte meetings with Commission staff. Each of the meetings that Commission staff has with SBC and Ameritech, as well as staff meetings with interested parties, is followed by an ex parte notice that is placed in the public record and that describes who attended and what was discussed. In order to keep you and your chief counsel fully informed as to the progress of all meetings, Commission staff would be happy to send you copies of all ex parte notices that are received, if you so desire. You and your chief counsel are, of course, also welcome to attend the public forum we have planned.
Your letter raises concerns about the potential for overlapping jurisdiction between this Commission and the Department of Justice. As you recognize in your letter, the Commission is charged with enforcing the Communications Act and not the antitrust laws.(see footnote 32) As indicated above, the Commission must consider whether the proposed merger would violate individual provisions of the Communications Act and the Commission's rules. For example, if a local exchange carrier and cable company were to attempt to merge in an area where such a buyout is prohibited, the Commission would have to deny the requested transfer of licenses. Similarly, a merger may violate the Communications Act if it prevents enforcement of one or more of the Act's requirements. This concern was addressed with considerable specificity in the Bell Atlantic-NYNEX Order,(see footnote 33) and has been central to the Commission's review of mergers at least as far back as the 1970s.(see footnote 34)
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Another important consideration in the public interest test arises where a transaction may substantially impact the development of competition in one or more communications markets, particularly where those markets historically have been monopolies. The Supreme Court has held that ''There can be no doubt that competition is a relevant factor in weighing the public interest.''(see footnote 35) The Commission is thus required to consider the effect of a transaction on competition, or else risk reversal of its decision by a reviewing court.(see footnote 36)
In considering the competitive effects of a merger under the Communications Act, the Commission does not duplicate the work of the Department of Justice. Again, the standards of the Communications Act and the Clayton Act are different. The Clayton Act empowers the Department of Justice to challenge a merger that ''may substantially lessen competition.'' This is fundamentally different from the mandate in the Telecommunications Act of 1996, which amended the Communications Act to create a ''pro-competitive, de-regulatory national policy framework. . . .'' Therefore, in making its public interest determination, the Commission must consider whether the proposed transfer will impair or frustrate its ability to achieve the procompetitive, deregulatory goals of that Act. A particular transaction that may not immediately lessen competition may have dramatic adverse consequences with respect to the future development of the marketplace. It may be the case, for example, that all incumbent local telephone companies could merge into one national local telephone company (even bigger than the Bell System was before divestiture) without violating the antitrust laws, even though the merger would violate the Communications Act by substantially frustrating and delaying the development of competitive and deregulated local telephone markets.
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The same public interest standard applies to every transfer of licenses or lines, and the standard of review is the same in every case. The fact that some transactions are considered at greater length or with more resources does not indicate that the public interest standard is different in those transactions. Instead, it simply means that some transactions require more analysis to determine whether the standard is met. The Commission's application of the public interest test is also very transparent. The standards are to be found in cases rather than in written rules. This is entirely consistent with, and contemplated by, the Administrative Procedure Act, and may be superior to writing volumes of rules attempting to explain the application of a legal standard to every conceivable fact pattern.
I hope that this letter addresses all of your concerns. As always, I will be glad to discuss this matter further if you would like.
Sincerely,
| William E. Kennard, Chairman. |
Mr. GEKAS. Yes. We will avail ourselves of the 5 minutes that we generally allot to members for a first round of questions.
I would like to dissect some of what actually happened here. Are we saying that the Department of Justice signed off on the merger, the proposed merger, by a direct order, saying that they are no longer interested in it or that the companies involved are in no way impeded from proceeding to merge? How did that occur?
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Mr. FURCHTGOTT-ROTH. Mr. Chairman, I cannot speak on behalf of the Justice Department. I know nothing more about what they have done than what I have read in the papers and the trade press. I assume you are speaking of the SBC-Ameritech transaction.
Mr. GEKAS. Yes.
Mr. FURCHTGOTT-ROTH. And what I read in the papers is that it has completed review at the Department of Justice but I am in no position to comment on what has happened there.
Mr. GEKAS. I am just pondering in my own mind that if the Department of Justice looked at it, how it is that the next thing we know is that we are waiting for a decision from the Federal Communications Commission. What bridged that little gap which to me appears between the duty of the Department of Justice and what has now happened? I know that the license thing could be and was initially sent to the FCC for review, as it should have been, but what is this hands-off thing in which the Department of Justice is engaging? That is what I don't understand, you don't understand, and we don't understand.
But in any event, the other thing that is puzzling to me from a practical standpoint is if the two companies involved, SBC and Ameritech, are eager to merge, as they are, and they receive some sort of approval from the Department of Justice, or at least not a denial, why not exercise judicial review or at least some court proceeding to proceed along the lines of merger rather than to succumb to the FCC? Do you know the answer to that or is there an answer or is that not a proper question?
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Mr. FURCHTGOTT-ROTH. Mr. Chairman, the Commission has a statutory obligation to review license transfers, and I believe we are in the process of doing that, and I believe there is a way the Commission could do that, consistent with the law and in an expeditious manner and in a manner that would treat these applicants for license transfers no differently from the tens of thousands of other applicants we receive every year. That is what could happen. That is not what is actually happening. What we are seeing is the license transfer application process turn into a review of issues that go outside of the license transfer and——
Mr. GEKAS. In other words, the companies know that the license transfer must be approved by the FCC, so they apply for that?
Mr. FURCHTGOTT-ROTH. Yes.
Mr. GEKAS. They also know if that doesn't occur they can't merge, which is their stated object. So they themselves prostrate themselves in front of the FCC in effect, it seems to me, and say, well, you have power of life and death over the license transfer, therefore, whatever you do to speed this up we will be very grateful to accept, meaning that even if the object of the FCC now is to review the merger, they are ladies in waiting, the two companies are, and they must allow that process to be completed even though the Department of Justice may have already signed off. Is that the state of affairs?
Mr. FURCHTGOTT-ROTH. Yes, sir.
Mr. GEKAS. We were involved personally in the trucking case that you talked about in the EPA rules, and we were very much at that time taken aback by what we considered the heavy hand of the EPA going way beyond its allocated statutory power: It seems to me that this is almost on all fours like that case, meaning that all of us have to work to make the APA work so that people can have predictable standards on which to seek the aid or withstand the pressure of Federal Government.
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So we may come back to you for another couple of questions. In the meantime, we will yield to the lady from Wisconsin.
Ms. BALDWIN. Thank you, Mr. Chairman. Several questions. First of all, in the absence of promulgation of rules within the FCC for license transfer, I assume you have statutory standards. I looked ahead in your testimony to the part that you didn't get to verbally today. The public interest test, tell me how that works. How does the FCC apply that?
Mr. FURCHTGOTT-ROTH. Ms. Baldwin, the Commission receives tens of thousands of license transfer applications every year. They are handled in different bureaus, the Commission has five bureaus and several independent offices. We have as a commission no written rules for license transfers with the exception of broadcast licenses which are only a very small percentage of the total number of license transfers.
I was very puzzled about this, and earlier this year sent a letter to the bureau chiefs of each of the bureaus asking them for what formal rules they had to review licenses, and if they didn't have formal rules, what informal rules, and after a great deal of the effort to actually get some responses, I did get some responses from the bureaus, and they are different standards. I guess what I found most troubling is what I received in writing had never been made available to the public, and those standards are not very tight. There is a great deal of bureau discretion.
So the vast, vast majority of license transfers never receive much scrutiny. They are put out for some sort of pro forma public notice, and they potentially might receive comments and based on those comments they potentially might receive some greater scrutiny, but it is a highly discretionary matter.
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Ms. BALDWIN. In light of your testimony, have there been any challenges in the recent past to drawing any concerns of arbitrary decision making in the FCC?
Mr. FURCHTGOTT-ROTH. Not that I am aware of.
Ms. BALDWIN. The chairman of the FCC wrote a letter dated April 1st to the CEOs of each of the corporations that are proposing a merger in the case that we are looking at today. Attached to that was a proposed time line for FCC consideration of the license transfer, and a series of questions. I understand there was going to be a public forum, and a time for public comment.
Do you know whether that time line has been adhered to and whether there is still promise that this will be concluded by the end of June?
Mr. FURCHTGOTT-ROTH. Ms. Baldwin, I would respectfully suggest you might ask Chairman Kennard that question. I was quite taken aback when I first saw the letter of April 1st and sent a letter of my own to the parties saying I am not quite sure of the legal basis for the initial letter. I am told there have been some discussions that have been held in private and in secret. I don't know what progress has been made. There was a bureau level public forum a couple of weeks ago, but again, this is just the bureau level. Chairman Kennard, I believe, has indicated that he would like to have this issue resolved quickly, perhaps in June, but whether the details of the time line that he laid out in his letter have been met I am not in a position to say.
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Ms. BALDWIN. One of the pieces of information in that letter of April 1st related to compliance with section 271 of the Communications Act, which I believe, relates to long distance carriers. These entities are not proposing, as I understand, to compete at that level. Do you know why the FCC would subject those two corporations to comply with those sections of the Communications Act?
Mr. FURCHTGOTT-ROTH. I honestly cannot speak for the chairman on this matter, and I am quite certain, Ms. Baldwin, that neither he nor I would think my answer would do him justice as to why he included that in the letter.
Mr. GEKAS. All right. We thank the lady. We acknowledge the presence now of the lady from California, Mrs. Bono, a member of the committee, and the gentleman from Tennessee, Mr. Bryant, a member of the committee. We have indications from Mrs. Bono she has no questions to pose. Does Mr. Bryant wish to ask any questions?
Mr. BRYANT. Mr. Chairman, I do not have any questions at this time and would possibly be submitting a statement for the record.
Mr. GEKAS. Without objection, that statement will be included for the record. I have one other question. We have pending this great cloud of the universal service tax situation which is in front of the Commission; is that correct? It seems to me that this situation should be guided by what happened in the trucking case, in the EPA decision. Can you tell us whether, first of all, the decisions in the trucking case are being superimposed on this universal service tax inquiry?
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Mr. FURCHTGOTT-ROTH. I am not aware of the Commission staff directly incorporating the most recent decision in current proceedings of the FCC, although they may very well be working on that.
Mr. GEKAS. But you yourself have not been memo'd to that effect by staff or——
Mr. FURCHTGOTT-ROTH. No, sir.
Mr. GEKAS. Would you, at our request, request a memo from the chief staff personnel on that question—what consideration are they giving in the universal service tax inquiry, to the recent decision, the one to which we both alluded and which seems to me to impact on that; and so let the committee have a memo from you about your memo and their memo to you, making a big memo?
Mr. FURCHTGOTT-ROTH. Yes. I will look into that.
Mr. GEKAS. I thank the gentleman. The gentleman from Tennessee.
Mr. BRYANT. Thank you, Mr. Chairman. You have gone into an area of questioning, and I realize our witness may not be completely prepared to talk about that, but on this universal tax or universal charge, it just came to my attention that as a commissioner you may be facing a vote this very week about perhaps increasing that charge. Is that the case?
Mr. FURCHTGOTT-ROTH. Yes, sir.
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Mr. BRYANT. What type of increase are we talking about, and why would such an increase be necessary?
Mr. FURCHTGOTT-ROTH. I believe that Chairman Kennard has on the public record requested in essence a billion dollar increase in the schools and libraries program.
Mr. BRYANT. And do you have an opinion as to why that is necessary?
Mr. FURCHTGOTT-ROTH. Mr. Bryant, the Universal Service Administrative Corporation has received applications from schools and libraries across America that are quite large. The schools and libraries program is one element of a much broader universal service section of the Communications Act that has many elements, and I have personally been very troubled that many of these other elements have not received as much attention, as much emphasis, as much money as the schools and libraries program has. So I think there is a question of emphasis, and there are also questions, frankly, with some of the legality of some of the funding requests, whether they are permissible under the statute. To answer your question—why the request for an additional billion dollars—is that there has been that much in additional requests from schools and libraries.
Mr. BRYANT. Heretofore who are making those determinations as to whether these requests are legal, for example, or is this all within the FCA's bailiwick?
Mr. FURCHTGOTT-ROTH. Yes, sir.
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Mr. BRYANT. Now, as I understand, it is much more complicated than this, but generally there are three corporations that have been set up. Is that still the case for hospitals, libraries and schools? Is that generally the breakdowns?
Mr. FURCHTGOTT-ROTH. After the '96 Act, in 1997 the FCC established a Universal Service Administrative Corporation as an umbrella organization and then, within that, two separate corporations, the Schools and Libraries Corporation and Rural Health Care Corporation. Earlier this year, the two subsidiary corporations were subsumed in the larger corporation. So there is now just one Universal Service Administrative Corporation which handles, in essence, four separate universal service programs: One for high costs and support, one for low income support, one for schools and libraries and one for rural health care.
Mr. BRYANT. Thank you very much.
Mr. GEKAS. We thank the witness, and as you can imagine, we may be coming back to you for further questions which we know you will try to answer for us. Thank you very much.
We invite the second panel to enter the witness area. Professor Lars Noah has been twice selected Teacher of the Year at the University of Florida College of Law in Gainesville. He earned his BA in government from Harvard College and his law degree from Harvard Law School, both magna cum laude. After a clerkship with Judge Mikva on the D.C. Circuit, Professor Noah worked at Covington and Burling where he specialized in food and drug law. He has written more than 20 law review articles on administrative law and other topics.
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Brian Moir is a partner in the firm of Moir & Hardman. His practice areas include telecommunications, antitrust, administrative and international law. He earned his BA from Parsons College and his JD from the University of Denver. In the past he has served as a staff attorney at the Federal Communications Commission, from 1972 to 1973, and as senior legal counsel for the House Committee on Energy and Commerce, from 1973 to 1975. He appears on behalf of the International Communications Association.
Let the record indicate that the gentleman from Ohio, Mr. Chabot, has joined the committee, and we will proceed with Professor Noah, and we ask each to conform as best as is possible to the 5-minute rule, and the written statement that is submitted will also be submitted for the record without objection.
Professor Noah.
STATEMENT OF LARS NOAH, PROFESSOR, UNIVERSITY OF FLORIDA COLLEGE OF LAW, GAINESVILLE, FL
Mr. NOAH. Thank you for the invitation to testify before your subcommittee this morning. I will speak quickly to fit in my allotted time.
My interest in the subject of this morning's hearing is entirely academic. I am in no way associated with any of the interested parties in this case.
More than a year ago, I published a law review article on administrative arm twisting, a common but rarely studied aspect of the interaction between Federal agencies and regulated parties. Arm twisting refers to an agency's use of threats either to impose a sanction or withhold a benefit in hopes of encouraging nominally voluntary compliance with a request that the agency could not impose directly on a regulated entity. This informal method of regulation often saddles parties with more onerous regulatory burdens than Congress had authorized, accompanied by a diminished opportunity to pursue judicial challenges.
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Administrative agencies enjoy numerous opportunities to pursue indirectly ends that they could not impose directly. Arm twisting may occur during licensing, government contracting and enforcement proceedings. It may reflect formally announced agency policy or, instead, result from informal ad hoc bargaining. Agencies may threaten to delay or deny licenses, refuse to enter into procurement agreements, disseminate adverse publicity or impose other sanctions against uncooperative parties.
Often such threats simply represent a more efficient method of achieving ends explicitly authorized by Congress, but in some cases they may allow agencies to pursue extra statutory goals seemingly in contravention of the limits of their delegated authority.
I was invited to present this paper at last fall's meeting of the ABA's Section on Administrative Law and Regulatory Practice, and my thesis seemed to strike a nerve. Some of the academics in the audience were intrigued, some of the agency officials were naturally quite defensive, and private practitioners offered wonderful anecdotes about their experiences in bargaining with regulatory officials on behalf of their clients. More than once I heard the lawyer use the word ''extortion.''
It comes as no great surprise that the FCC might be trying to exercise some leverage in this case. Indeed, licensing provides one of the most powerful opportunities for extracting concessions because the government effectively exercises monopoly power over the issuance of permits, and the Commission has long been in the arm twisting business, though in the 1970's their behavior was denominated as jawboning or raised eyebrow technique aimed at influencing programming content.
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Such bargaining carries with it obvious risks of abuse, especially because courts are rarely in a position to supervise it. Arm twisting succeeds and often evades judicial or other scrutiny, in part because companies in pervasively regulated industries believe that they cannot afford to resist agency demands. Among other things, my article urged that agencies adopt guidelines to limit the range of bargaining. Undue reliance on individualized negotiations undermines consistency and invites the standardless and largely unaccountable exercise of administrative discretion, especially when staff are left to secure side deals. Hammering out conditions prior to full Commission consideration of the application as originally filed I think is troubling. Unlike other Federal agencies, it appears that the FCC does not have any guidelines about how and when to seek voluntary commitments during licensing.
To my mind, even if bargaining is carefully structured and supervised, the more interesting question is whether an agency may legitimately extract voluntary concessions from regulated parties that it cannot impose directly. In other words, can regulatory officials get around statutory limits on their power by cutting deals that license applicants simply cannot refuse? To oversimplify, the test that I have proposed would ask whether the ends pursued were germane to the enabling statute, thus, in this case, one might conclude that the FCC may impose conditions that are germane to the licensing standard, even if not specifically authorized by statute, as it did when approving the TCI–AT&T license transfer requests earlier this year, conditioned on compliance with existing FCC regulations concerning wireless spectrum caps, but that the Commission could not request concessions that have no relevant relation to the statute, no matter how malleable the public interest standard might be; for instance, promises to set aside additional green space in the course of constructing new transmission facilities or to donate equipment and services to the public schools. I do not mean to suggest that the FCC had such nongermane conditions in mind, but other agencies have in the past crossed this line.
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I hope that this has provided you some useful background and context for considering the questions presented by this particular case and would be happy to answer questions that you may have. Thank you again.
[The prepared statement of Mr. Noah follows:]
PREPARED STATEMENT OF LARS NOAH, PROFESSOR, UNIVERSITY OF FLORIDA COLLEGE OF LAW, GAINESVILLE, FL
Thank you for the invitation to testify before your subcommittee today. My name is Lars Noah, and I'm a professor at the University of Florida College of Law. My interest in the subject of your hearing is purely academic—I am in no way associated with any of the parties. Let me also note that I'm not an expert in telecommunications law; I focus instead on administrative procedure.
More than a year ago, I published a law review article about ''administrative arm-twisting,'' a common but rarely studied aspect of the interaction between federal agencies and regulated parties (Lars Noah, Administrative Arm-Twisting in the Shadow of Congressional Delegations of Authority, 1997 WISCONSIN LAW REVIEW 874–941). In this context, ''arm-twisting'' refers to an agency's use of threats either to impose a sanction or to withhold a benefit in hopes of encouraging nominally voluntary compliance with a request that the agency could not impose directly on a regulated entity. This informal method of regulation often saddles parties with more onerous regulatory burdens than Congress had authorized, accompanied by a diminished opportunity to pursue judicial challenges.
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Arm-twisting may be even more insidious than the frequently discussed tendency of agencies to develop informal but essentially binding policies without adhering to APA notice-and-comment rulemaking procedures. The use of informal mechanisms to evade increasingly burdensome procedural requirements and searching judicial scrutiny—the so-called ''ossification'' of the informal rulemaking process—has attracted significant scholarly attention in recent years. In contrast, the use of informal mechanisms to evade the substantive limitations on an agency's delegated authority has gone largely unnoticed. Because the problem often is not amenable to judicial control, greater agency self-restraint and congressional oversight may offer the only realistic prospects for curbing improper uses of administrative arm-twisting.
Administrative agencies enjoy numerous opportunities to pursue indirectly ends that they could not impose directly. Arm-twisting may occur during licensing, government contracting, and enforcement proceedings. It may reflect formally announced agency policy or instead result from informal, ad hoc bargaining. Agencies may threaten to deny licenses, refuse to enter into procurement agreements, disseminate adverse publicity, or impose other sanctions against uncooperative parties. Often such threats simply represent a more efficient method of achieving ends explicitly authorized by Congress, but in some cases they may allow agencies to pursue extra-statutory goals, seemingly in contravention of the limits on their delegated authority.
Without going into details, my article catalogued examples of arm-twisting by more than half a dozen federal agencies (in contexts ranging from licensing and government contracting to product recalls and settlements of enforcement actions by consent decrees); then it drew comparisons to similar behavior in securing land use exactions and criminal plea bargaining (as well as economic regulation in Japan); and, finally, it suggested various procedural and substantive reforms designed to counteract the risk of administrative overreaching. I was invited to present this paper at last fall's meeting of the ABA's Section on Administrative Law & Regulatory Practice, and my thesis seemed to strike a nerve: some of the academics in the audience were intrigued, some of the agency officials were naturally quite defensive, and private practitioners offered wonderful anecdotes about their experiences in bargaining with regulatory officials on behalf of their clients (more than once I heard a lawyer use the word ''extortion'').
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It comes as no surprise that the FCC might be trying to exercise some leverage in this case. Indeed, licensing provides one of the most powerful opportunities for extracting concessions (because the government effectively exercises monopoly power over the issuance of permits), and the Commission has long been in the arm-twisting business, though in the 1970s their behavior was denominated as ''jaw boning'' or ''raised eyebrow technique'' aimed at influencing program content (see Noah, supra, at 877 n.10). There is nothing necessarily wrong with this form of bargaining. Indeed, differentiating inappropriate inducements or threats from entirely legitimate (''win-win'') offers represents one of the most difficult tasks in identifying and perhaps attempting to restrain administrative arm-twisting.
Such bargaining carries with it obvious risks of abuse, especially because courts are rarely in a position to supervise it. When private parties settle disputes, they bargain in the ''shadow'' of the law, with the prospect of judicial review serving to constrain the range of potential outcomes. When administrative agencies bargain with regulated entities, it is less clear that they operate in the shadow of the law, in particular the constraints on the power delegated by Congress. Arm-twisting succeeds, and often evades judicial or other scrutiny, in part because companies in pervasively regulated industries believe that they cannot afford to resist agency demands. For these reasons, I wanted to commend you for engaging in some oversight in this case—congressional inquiries of this sort may provide the only meaningful opportunity for disciplining agencies that overreach. (It is not, for instance, clear that the opportunity for public proceedings will counteract these tendencies—on the contrary, they may facilitate a whole different form of gamesmanship, in this situation between regulated parties, a subject about which I have also written. See Lars Noah, Sham Petitioning as a Threat to the Integrity of the Regulatory Process, 74 N.C. L. REV. 1, 58–59, 66–69, 72 (1995).)
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Among other things, my article urged that agencies adopt guidelines to limit their range of bargaining. Undue reliance on individualized negotiations undermines consistency and invites the standardless (and largely unaccountable) exercise of administrative discretion. Unlike other federal agencies, it appears that the FCC does not have any such guidelines about how and when to seek voluntary conditions during licensing. The now-defunct Administrative Conference of the United States (ACUS) once recommended that the Federal Reserve Board publish guidelines describing the sorts of conditions and commitments it may request in the course of reviewing proposed mergers under the Bank Company Holding Act (see 53 Fed. Reg. 26,028, 26,029 (1988); see also Alfred C. Aman, Jr., Bargaining for Justice: An Examination of the Use and Limits of Conditions by the Federal Reserve Board, 74 IOWA L. REV. 837 (1989)). The FDA long ago promulgated regulations governing voluntary recall procedures (21 C.F.R. pt. 7(C)), and the EPA has published guidelines for its ''Supplemental Environmental Projects'' policy, identifying the sorts of voluntary eco-friendly actions that might lead the agency to reduce a civil sanction (60 Fed. Reg. 24,856 (1995)). OSHA had announced a similar policy, in its ''Cooperative Compliance Program,'' but the U.S. Court of Appeals for the D.C. Circuit invalidated that initiative just last month for failing to comply with the APA's notice-and-comment rulemaking requirements (see Chamber of Commerce v. United States, 1999 U.S. App. LEXIS 6367 (D.C. Cir. April 9, 1999)).
The more interesting question (which wasn't resolved by the D.C. Circuit in the OSHA case) is whether an agency may legitimately extract voluntary concessions from regulated parties that it cannot impose directly. In other words, can regulatory officials get around statutory limits on their power by cutting deals that license applicants can't refuse? One rather unforgiving position would limit agencies to the precise terms of their enabling statutes, not allowing them to use bargaining as an opportunity to take short cuts or introduce flexibility unless Congress so specified in advance (some statutes invite agencies to impose ''any other conditions deemed necessary,'' as does the Communications Act, 47 U.S.C. §214(c), or else to waive otherwise applicable requirements). Although such a clear statement approach seems appealing as an abstract matter, the result may be undesirable from the perspective of both the agency and a regulated party—after all, applicants for a license may dislike the all-or-nothing option when making some minor concession might have reassured the agency, and they often take the initiative in seeking to bargain. Companies no doubt prefer negotiated outcomes (with strings attached) to the outright denial of a license, the rejection of a contract bid, or the imposition of a formal sanction. In this case, however, it seems that some members of the agency approached the regulated parties about possibly making a deal.
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My article staked out a middle position. To oversimplify, the test that I proposed would ask whether the ends pursued were ''germane'' to the enabling statute? This standard resembles the ''essential nexus'' and ''rough proportionality'' requirements applied by the U.S. Supreme Court in land use exaction and other unconstitutional conditions challenges. Thus, in this case, one might conclude that the FCC may request concessions that are germane to the licensing standard even if not specifically authorized by statute, but that it could not seek to impose conditions that have no relevant relation to the statute (for instance, promises to set aside additional green space in the course of constructing new transmission facilities or to donate equipment and services to the public schools), no matter how malleable the ''public interest'' standard might be. I do not mean to suggest that the FCC had such non-germane conditions in mind, but other agencies have crossed this line in the past. Because extra-statutory bargaining seems inevitable, it would be unrealistic to condemn it altogether (the best we can hope for, I think, is channeling negotiations away from impermissible deals).
I hope that this has provided some useful background and context for considering the questions presented by this particular case, and I would be happy to answer any questions that you may have. Thank you again.
Mr. GEKAS. Yes. We will return to you for a set of questions.
Mr. Moir.
STATEMENT OF BRIAN MOIR, ESQUIRE, MOIR & HARDMAN, WASHINGTON, DC
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Mr. MOIR. Thank you, Mr. Chairman. In case we run short of time, both you and Congressman Bryant asked some questions of the Commissioner about the USF taxes. I have had the misfortune of being deeply involved in those matters, and I think I could give you some specifics if you were interested in the Q and A session.
I think we have to recognize that much of what has been said about the FCC as far as lack of specificity in its review process are accurate. You have to juxtapose that, though, with the Commission's public interest mandate which often doesn't exist before other regulatory bodies, and therein lies either the ability of the Commission to do good on behalf of the public interest or, as was just commented on and has been mentioned in some of the opening comments by you, Mr. Chairman, also can be a source of abuse. Anything that you all might recommend as a result of your process should not limit the ability of the Commission to weigh the public interest standards, needs and objectives on a case-by-case basis.
As has been shown in volumes of congressional hearing records throughout the decades, the public interest standard is not something that Congress ever wants to specifically tie down in detail. Both its vitality and effectiveness lie in having that standard and the Commission's implementation of that standard vague constantly subject to congressional and industry review.
One thing that was noted by the Commissioner in response to questions and despite much of the process that is involved in the controversy, none of these cases have been overturned. In essence, if we really look at what happens, the jawboning occurs as a way for the Commission to let applications through that otherwise it would overturn and say no to. A subtlety that is lost on many, I think this situation that the Commission's in right now is made significantly worse by the change in administration at the Antitrust Division. What do I mean by that? As a practical matter there appears to be no local exchange mergers that the Antitrust Division would have trouble with. By first not objecting in any way, shape or form to the original Bell Atlantic-NYNEX merger, they set in motion a situation where all ILEC mergers will continue unimpeded.
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You point out, as you did in your opening statement, the concerns raised by the Antitrust Division. If you look at what the Antitrust Division did, if you read their press releases, you will note that they cite spectrum issues. Nowhere do they mention that those spectrum issues in essence were issues covered (and I have mentioned it in detail in my written statement) in FCC rules, and the changes required by the Justice Department were merely preventing violations of FCC rules (basically 45 megahertz limit per cap per geographic area) and as a consequence, one really wonders whether the Antitrust Division was begging to look like it was doing something when as a practical matter had it done nothing since the FCC would have done the same thing to enforce its own rules.
So there is an awful lot of problems with what the FCC is not doing, and hopefully the FCC can come up with some reasonable conditions that will make some of these mergers work due to the fact that the Antitrust Division hasn't been doing its job. With that, I look forward to our Q and A session.
[The prepared statement of Mr. Moir follows:]
PREPARED STATEMENT OF BRIAN MOIR, ESQUIRE, MOIR & HARDMAN,
WASHINGTON, DC
My name is Brian R. Moir, and I am a Partner at the Washington, D.C. law firm of Moir & Hardman. I am pleased to have been invited to submit testimony for the Subcommittee's hearing on ''Novel Procedures in FCC License Transfer Proceedings'' on behalf of the business, educational, and institutional user membership of the International Communications Association (''ICA'').(see footnote 37)
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From my discussions with Subcommittee staff, it appears the today's hearing has been trigger by the Federal Communications Commission's handling of the SBC and Ameritech applications for transfer of control. I have been asked to specifically comment on the open-ended nature of the FCC's transfer of control procedures and the legitimacy of its public interest standard.
In preparing my comments for the FCC's recent May 6th Public Forum on the SBC and Ameritech merger, I thought about these questions. But before I forget, let me mention that, unlike most of the participants that were invited to speak at the FCC's Public Forum, my comments were not funded by any telecom vendors. I think it is important that I emphasize that ICA's public policy activities have never been funded either directly or indirectly by telecom vendors. ICA's views are strictly those of the telecom end user community.
ICA has long believed that competition is the ultimate safeguard for the telecommunications industry. Unfortunately, while earlier Commissions, Congress, and the Courts made significant progress in developing competition in the long distance and equipment markets, meaningful competition has proved elusive in the local exchange marketplace. Therefore, any and all FCC actions affecting the entrenched players in this area, the incumbent local exchange carriers (''ILECs''), must take this fact into consideration.
With the change in antitrust leadership during the second term of the Clinton/Gore Administration, the FCC has been put in a more difficult position in carrying out its public interest responsibilities since recent Administration local exchange telecom antitrust policy appears to be any local exchange telecom merger is okay.
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FCC Procedures for Considering License Transfers
In reviewing license transfers as a result of mergers, the Communications Act of 1934 wisely allows the FCC wide latitude in establishing procedures. Mergers raising complex issues warrant different procedures than mergers which raise few concerns. The timeliness of FCC action has been a long-standing concern. As a consequence, the 1996 Telecom Act imposes numerous time deadlines regarding FCC conduct. For instance, while the imposed 90 day time restrictions on RBOC long distance applications under Sec. 271, Congress remained silent on the issue of merger time deadlines because the FCC had not abused its jurisdiction in this area.
Applicability of FCC Public Interest Standard in Mergers
The FCC's public interest standard has been left intentionally vague since 1934. Despite occasional differences with FCC decision making and after some debate during the evolution of the 1996 Telecom Act, Congress decided not to change the FCC's public interest mandate. Typically, the FCC has very detailed rules in place that govern the rules of the road for each of the industries that it regulates. For instance, the FCC's wireless rules [47 CFR 20.6(a)] place limitations on the amount of spectrum that a licensee may own in any particular geographic area. If a merger would result in the combined parties owning more spectrum in a market than is allowed, such a merger would be prohibited by the FCC's rules. In fact, I was particularly surprised to see that the U.S. Antitrust Division's sole concerns in both the SBC-Ameritech and Bell Atlantic-GTE merger applications was the very issue covered by this existing FCC rule. More surprising is the fact that the Division would go to the trouble of filing a Section 7 Clayton Act lawsuit in both instances when the issue a hand would clearly have been handled by the FCC. [See Attachment A for copies of Division press releases and 47 CFR 20.6(a).]
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Local Exchange Competition
The SBC/Ameritech merger application has made very commendable statements and commitments regarding local service entry into 30 out-of-region cities. The FCC should require that these out-of-region local service business plans be explained in detail. SBC should be required to submit confidentially to the FCC detailed business plans.(see footnote 38) If the FCC's review of these plans does not clearly show that SBC will become a real and actual competitor in these markets than the FCC should deny SBC's merger application.
Long Distance Competition
As ILEC mergers increase, the pressure increases on the FCC to fix the interstate access problem sooner than later. During the debate on the 1996 Telecom Act, the ratepayer community cited an add placed by NYNEX in Arizona newspapers as an example of the problem. [See Attachment B.] Since much of the industry and a vast majority of the Commission recognize that interstate access rates are priced well above real costs, the greater an ILECs footprint, the greater their ability to cross-subsidize their entry into long distance. Unless the FCC acts quickly to fix its access rate problem, two decades of work by Congress, the FCC, and the Courts to create long distance competition would be undermined by FCC inaction!
Again, thank you for the opportunity to present the views of the telecom end user community.
Mr. GEKAS. The lady from Wisconsin is recognized for 5 minutes.
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Ms. BALDWIN. Thank you. Professor Noah, one of the interesting thoughts I had in listening to your testimony and position is that you concluded with a germaneness test that might be appropriate to look at some of the administrative action that has occurred. After hearing the second testimony, what would your opinion be about that test being applied to germaneness of any statute that might apply to the merger? For example, if the Antitrust Division had not presented any sort of detailed findings at the time that they signed off, the FCC appears to be looking at some of the issues under their other departments' jurisdiction, even though they have a much narrower jurisdiction of license transfer.
Mr. NOAH. I would still have a problem with that. First of all, there has been some confusion about what exactly DOJ did. In this case, I believe there is a consent decree that they entered into with the merging companies, and part of that consent decree required, I think, the divestiture of wireless services in 17 of the markets that they would otherwise have overlapped in. Now, I am not saying that that is everything that should have been done. I am not familiar enough with the particulars of this case, but for another agency to take it upon itself to enforce what it views and may incorrectly view as the right reading of the Sherman or the Clayton Act, I think is troubling.
Now, there is authority, as the Commissioner on Panel I has already indicated, for the FCC to exercise genuine merger review under the Clayton Act. There is shared jurisdiction, but there are also very different procedures required for exercising that jurisdiction, and this, to my mind, is an end run around those very explicit statutory procedures for challenging a telecommunications merger.
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Now, I do agree that if there are particular FCC rules that this merger would violate or at least create unforeseen inconsistencies with, as I think I mentioned the AT&T–TCI merger did with wireless spectrum caps, that is the ideal of the condition that the full Commission would impose. What I am talking about or what I'm concerned about in the course of reviewing what a number of Federal agencies do is the effort to seek concessions that may not even be expressed in the terms of any formal order that because the companies are at the mercy, really, of the agency reviewing the license applications they will do just about anything, and that anything can go well beyond what this agency has been established to undertake, and it may, in fact, not even be consistent with what other sister agencies have been set up to undertake.
Ms. BALDWIN. I wonder if you have any examples that might be illustrative with regard to FCC concessions that have been extrastatutory, as you indicated in your testimony. I know that I have been reading about some of the competitive concessions imposed on Bell Atlantic of late, but I don't know if those are illustrative of the point you are trying to make.
Mr. NOAH. Again, because much of what happens here isn't always open to easy public scrutiny, it is hard to know what sorts of commitments have been made that are not reflected in some sort of public FCC order. My reference to the FCC's behavior in the 1970's did result in a number of D.C. Circuit and I think one Ninth Circuit opinion where the courts were reviewing claims that the agency had managed to leverage concessions about the content of programming or the number of minutes of advertising time out of license applicants, even though that was inconsistent with statute and, arguably, also inconsistent with the first amendment.
So there is some evidence that this has happened in the past. I just don't know of anything in the last year or two.
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Ms. BALDWIN. On that point, if this isn't occurring in any sort of public document, is it private contracting? How would it even be enforced if it is not appearing?
Mr. NOAH. Well, technically, it can't be but that is not important. As the Chair indicated, my background is in the FDA, and the olestra approval has a wonderful example of precisely this, where Procter and Gamble has a letter on file with the agency promising to do something that FDA cannot require them to do, and the preamble to the final regulation approving olestra in effect says if they don't live up to their commitments in that letter, which is part of the docket but is not part of the preamble, we are going to yank this regulation. Procter and Gamble would be crazy to try to litigate whether or not, in fact, they are legally obligated to do that, and that is part of what this sort of behind the scenes process is all about. It would be impolitic to risk generating anger by an agency that has not just one time but continuing authority over your operations.
So that is why much of this can happen behind the scenes, and you don't get into the issues you are describing.
Mr. GEKAS. The time of the lady has expired. The Chair allots to itself time for examining the witnesses.
Following up on the exchange between you and the lady from Wisconsin, I said in my opening statement and now I am more thoroughly convinced, that the Congress is powerless to do anything about companies who would, in seeking approvals of any sort from any agency, find themselves in a position where they could fight it—perhaps on the basis that the agency doesn't have the authority to ask for this or condition a transfer on this—but simply on an economic basis, does not engage in testing the agency's authority. What can the Congress do?
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Mr. NOAH. Exactly what you are doing here. That is one of the thing——
Mr. GEKAS. Oversight?
Mr. NOAH. Absolutely.
Mr. GEKAS. Then we leave here and go for a cup of coffee and wait for the next oversight hearing.
Mr. NOAH. Bring the chairman the next time.
Mr. GEKAS. I said at the outset that that is going to be a very important element for this member to try to determine from the chairman how he views his domain and the exercise of his powers. It is very important to me because I do believe that the end runs you are talking about and what I call the lie down and prostrate position in front of the king, the FCC chairman, serves no one well. Right?
Mr. NOAH. There is one other valuable brake on this sort of behavior, and that is agency self-restraint, and Commissioner Furchtgott-Roth has taken up and challenged colleagues on the Commission, and I think that is important, that somebody put them to the test if you will. It is not in the courts, and that was your question to him earlier. This is the sort of thing that would never be litigated. Indeed, there is nothing to challenge right now. They could sit on these applications for license transfers for months still if they were so inclined, and there would be nothing that the companies could do or frankly would want to do to take that up in the courts, but between congressional oversight and agency self-restraint, especially on a collegial independent agency, I don't think there is that much to be worried about, but there are the occasional examples of abuse as may be occurring here, but I don't know that because I am not familiar with exactly what concessions they are hoping to extract that deserves everyone's attention.
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Mr. GEKAS. Yes. And speaking of restraint on the part of the FCC, is there any restraint, for those of us who are wondering about the universal service tax, Mr. Moir, being exercised in the FCC on what we consider to be a new tax unauthorized by Congress; that is, not passed by Congress?
Mr. MOIR. Well, I would make one correction, when the Telecom Act of '96 was passed, there was a provision which when it was offered in the Senate by Senators Rockefeller and Snowe talked about giving discounted access to the network for two categories, schools and libraries, and rural health care. If you had the misfortune of sitting through that very brief debate when it occurred, you would have been led to believe that they were talking about cheaper access instead of $100 a month, maybe $75 a month or $50 a month for a private line. That is what we were led to believe as that provision went all the way through the Congress and was passed.
When the FCC articulated that provision, the majority all of the sudden made it a two and a quarter billion dollar program for schools and libraries primarily to set up not just wire inside the schools but cutting edge networks inside the schools with Cisco routers and state of the art education because no teacher's going to know how to run these networks. Most companies don't know; that is why they contract with people on the outside to run them. So this thing became a two and a quarter billion dollar goldberg. We got upset, the business end user community that is, because they were going to put almost the entire tax on us. We screamed; a thousand businesses screamed to Congress. Congress then screamed to the FCC, and they kept the two and a quarter billion dollar cap in place but ran it at 50 percent funding for the first year, calendar year of 1998. Then they kept it at half cap again through the first half of 1999.
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The FCC chairman has now unilaterally proposed, without any comment from the rest of us, although clearly with considerable discussion with those who will benefit (the schools and libraries community) to double the size of the fund up to the two and a quarter billion dollar cap.
The answer for you that was not forthcoming from the Commissioner because he has wisely not had the misfortune of dealing with this issue because we get taxed as business users almost entirely with this, is that if the Commission does nothing but raise it to the cap, that will increase the size of the entire USF fund by 28 percent. It will double—there are four components to the universal service fund, high cost aural which is getting no attention and which the Commissioner mentioned; the lifeline program for a small category of people; schools and libraries; and rural health care. So the overall fund would increase 28 percent in order for the schools and libraries fund to basically double, and that tax would be not offset by anything.
We will see bigger line change charges on our bills, and I think what the Commission clearly did was wait until the very last moment. Remember, the FCC chairman didn't make this speech 2 months ago. He made it at the last moment so that the letters that are starting to go out to people and industry to let them know what is going on are only just getting out there, and the Commission is going to meet Thursday this week and try to vote it through despite objections from Commissioner Furchtgott-Roth.
Mr. GEKAS. What is being litigated at the moment on that issue?
Mr. MOIR. Well, nothing's being litigated because there is nothing on the table for us to litigate. There's no docket or ongoing proceeding for us to look at. No filings or anything. So there is nothing for us to file on until Thursday, and because you already have a statute that vaguely authorizes a program, you have a classic example in this case of an FCC gone run amok by a simple majority——
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Mr. GEKAS. Doesn't the trucking case provide rationale for either the self-restraint that we all hope will occur with the FCC or, secondly, as a basis for litigation to prevent repetition of the EPA's runaway authority in that case?
Mr. MOIR. The specific difference in this case would be that one of the subcomponents, the school and library program was specifically authorized under the Communications Act in '96. I think it is section 254, and so the FCC took this very vague language when you take a look at it and turned it into a two and a quarter billion dollar tax.
Mr. GEKAS. You are saying that the way you look at it that does not constitute a prima facie case of overreaching of the power granted to the FCC; is that correct?
Mr. MOIR. I think if you look at the language and you look at the legislative history, the Commission clearly stretched its authority.
Mr. GEKAS. Well, the final promulgation of the increase—the doubling of the tax you are talking about—that has to be, in effect, a promulgation of a regulation, does it not?
Mr. MOIR. Well, basically they have—the cuteness of the way they worked it is, they have a regulation in place which was established in May 1997, and they are operating on an interim basis. The regulation established in 1997 would you have run at two and a quarter billion dollars a year for this subprogram for schools and libraries. The interim rules have you running at a half level. So they will merely allow the interim rule to expire on the last day of June, and unless the Commission does something as it has done twice before, those moneys will immediately double.
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The staff clearly knew what they were doing when they put this together with the previous commission hopefully, Members of Congress will raise concern about this, but time's very, very short, and those aren't the only charges they are going to increase. They are going to propose a series of PICC charges. At the moment they are going to raise them for business users 50 percent. That is what we were told.
Mr. GEKAS. Any suggestions?
Mr. MOIR. As was said, that is what congressional oversight is all about. I only wish there was more congressional oversight going on across the hall, and this is welcome because clearly the FCC has run amok due to lack of stern congressional oversight.
Mr. GEKAS. It seems to me that the Congress has to act on this proposed regulation.
Mr. MOIR. I agree.
Mr. GEKAS. The next step?
Mr. MOIR. I am surprised that an FCC chairman would turn down your polite invitation to come. That is very troubling.
Mr. GEKAS. I am going to check my ego on that and see what it really means, but I am not going to let that go. I want to be able to confront him.
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I thank the members of the second panel. I think we have learned a great deal, and at least we have exercised our right to oversight, and I think it has been very beneficial. It may lead to some corrective action, let's hope. I thank the panel, and this hearing is now at an end.
[Whereupon, at 11:10 a.m., the subcommittee was adjourned.]
(Footnote 1 return)
See 64 Fed. Reg. 23,099 (1999).
(Footnote 2 return)
See Department of Justice, Justice Department Requires SBC to Divest Cellular Properties in Deal with Ameritech and Comcast, Mar. 23, 1999 (press release).
(Footnote 3 return)
Id.
(Footnote 4 return)
''No . . . station license . . . shall be transferred, assigned, or disposed of in any manner . . . except upon application to the Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby.'' 47 U. S.C. §310(d) (Supp. 1994).
(Footnote 5 return)
Id.
(Footnote 6 return)
Federal Communications Commission, SBC Communications, Inc. and Ameritech Corporation Seek FCC Consent for a Proposed Transfer of Control and Commission Seeks Comment on Proposed Protective Order Filed by SBC and Ameritech, July 30, 1998 (public notice).
(Footnote 7 return)
Id.
(Footnote 8 return)
In re Applications of Ameritech Corp. and SBC Communications, Inc. for Consent to Transfer Control of Corporations Holding Commission Licenses and Authorizations Pursuant to Sections 214 and 310(d) of the Communications Act and Parts 5, 22, 24, 25, 63, 90, 95 and 101 of the Commission's Rules, CC Docket No. 98–141, Order (Sept. 1, 1998).
(Footnote 9 return)
Letter from Chairman William E. Kennard to Richard C. Notebaert, Chairman & CEO, Ameritech Corp., and Edward E. Whitacre, Jr., Chairman & CEO, SBC Communications, Inc. (Apr. 1, 1999) (emphasis added) (copy attached). See also letter from Commissioner Harold Furchtgott-Roth to Richard C. Notebaert, Chairman & CEO, Ameritech Corp (Apr. 5, 1999) (copy attached).
(Footnote 10 return)
Letter from Chairman William E. Kennard, supra note 9.
(Footnote 11 return)
Id.
(Footnote 12 return)
See Barnaby J. Feder, F.C.C. Staff Cites Flaws in Phone Deal Plan, N.Y. Times at C2 (May 7, 1999); Kathy Chen, FCC Staffer's Negative Remarks Hurt SBC and Ameritech Shares, Wall Street Journal at B7 (May 7, 1999).
(Footnote 13 return)
See letter from Senator John McCain to Chairman William E. Kennard (May 12, 1999) (copy attached).
(Footnote 14 return)
See 47 U.S.C. §403 (1994) (''The Commission shall have full authority and power at any time to institute an inquiry on its own motion, in any case and as to any matter or thing concerning which complaint is authorized to be made, to or before the Commission by any provision of this chapter, or concerning which any question may arise under any of the provisions of this chapter. The Commission shall have the same powers and authority to proceed with any inquiry instituted on its own motion as though it had been appealed to by complaint or petition under any of the provisions of this chapter, including the power to make and enforce any order or orders in the case, or relating to the matter or thing concerning which the inquiry is had, excepting orders for the payment of money.'').
(Footnote 15 return)
47 C.F.R. §1.1 (1998).
(Footnote 16 return)
See letter from Senator John McCain to Chairman William E. Kennard at 2 (May 12, 1999) (calling FCC's SBC-Ameritech proceeding ''extraordinary'').
(Footnote 17 return)
See id. (''The Commission's objectivity and impartiality are unavoidably opened to challenge by the adoption of procedures from which a disinterested observer may conclude that it has in some measure adjudged the facts as well as the law of a case fully in advance of fully hearing it.'') (citation omitted).
(Footnote 18 return)
See letter from Commissioner Harold W. Furchtgott-Roth to Richard C. Notebaert, Chairman & CEO, Ameritech Corp. at 2 (April 5, 1999) (copy attached).
(Footnote 19 return)
Letter from Chairman William E. Kennard to Hon. W.J. ''Billy'' Tauzin at 4 (April 19, 1999) (copy attached).
(Footnote 20 return)
Application of WorldCom, Inc. and MCI Communications for Transfer of Control of MCI Communications Corporation to WorldCom, Inc., CC Docket No. 97–211, Memorandum Opinion and Order, 13 FCC Rcd 18025, 18030–31 9 (1998) (quotations and citations omitted).
(Footnote 21 return)
Section 310(d) provides: ''No . . . station license . . . shall be transferred . . . to any person except upon application to Commission and upon finding by the Commission that the public interest, convenience, and necessity will be served thereby,'' i.e., by the license transfer. Section 214(a) states: ''No carrier shall undertake the construction of a new line or of an extension of any line, or shall acquire or operate any lines, or extension thereof, or shall engage in transmission over or by means of such additional or extended lines, unless and until there shall first have been obtained from the Commission a certificate that the present or future public convenience and necessity require or will require the construction, or operation, or construction and operation, of such additional or extended line.'' Notably, section 214(a) contains no ''public interest'' language at all.
(Footnote 22 return)
The Commission does possess authority under the Clayton Act, which prohibits combinations in restraint of trade, to review mergers per se. See 15 U.S.C. section 21 (granting FCC authority to enforce Clayton Act where applicable to common carriers engaged in wire or radio communication or radio transmission of energy). That power is rarely invoked by the Commission, however. If the Commission intends to exercise authority over mergers and acquisitions as such, it ought to do so pursuant to the Clayton Act, not the licensing provisions of the Communications Act.
(Footnote 23 return)
See, e.g, In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from Tele-Communications, Inc., Transferor, AT&T Corp., Transferee, CS Docket No. 98–178 (released Feb. 18, 1999), at para. 112 (purporting to prohibit the applicants from ''consummat[ing] the merger'').
(Footnote 24 return)
See, e.g., Applications for Consent to the Transfer of Control, supra n. 3, at para. 16 (stating, without elaboration, that ''the face of some merger applications may reveal that the merger could not frustrate or undermine our policies'').
(Footnote 25 return)
I express, of course, no view on the merits of this application. My exclusive focus here is on the process that employed to evaluate it. Accordingly, nothing in my testimony should be taken as reflective of any opinion on the question whether SBC and Ameritech are in compliance with Commission rules.
(Footnote 26 return)
47 U.S.C. §214: 47 U.S.C. §310.
(Footnote 27 return)
E.g. 47 U.S.C. §309(e): Application of World Com. Inc. and MCI Communicaitons for Transfer of Control of MCI Communications Corporation to WorldCom.Inc., CC Docket No. 97–211. Memorandum Opinion and Order, 13 FCC Rcd 18025. 18031 10 (1998) (MCI-WorldCom Order) (and cases cited therein).
(Footnote 28 return)
See e.g., Bell Atlantic-NYNEX Order, 12 FCC at 20063 157 (1997)
(Footnote 29 return)
47 U.S.C. §214(c): 47 U.S.C. §303(r): MCI-WorldCom Order, 13 FCC rcd at 10832 10.
(Footnote 30 return)
See. e.g., GTE-Telenet Order, 72 FCC 2d at 135–70, 76–173: Bell Atlantic-NYNEX Order, 12 FCC rcd at 20069–91 177–232.
(Footnote 31 return)
Id.
(Footnote 32 return)
The Commission does share jurisdiction with the Department of Justice under Section 7 and Section 11 of the Clayton Act to challenge mergers and acquisitions of ''common carriers engaged in wire or radio communications or radio transmissions of energy'' where ''in any line of commerce . . . the effect of such acquisition may be substantially to lessen competition, or tried to create a monopoly.'' See 15 U.S.C. §18: 15 U.S.C. §21(a). The Commission generally does not exercise this authority because doing so would duplicate the review performed by the Department of Justice.
(Footnote 33 return)
Applications of NYNEX Corp and Bell Atlantic Corp for Consent to Transfer Control of NYNEX Corp. and its Subsidiaries, File No. NSD–1–96–1012. Memoranda Opinion and Order. 12 FCC Rcd 19985. 20058–63 147–56(1997) (Bell Atlantic-NYNEX Order).
(Footnote 34 return)
Application of General Tel. And Elec. Corp. to Acquire Control of Telenet Corp. and its Wholly-Owned Subsidiary Telenet Communications Corp. File No. W–P–C 2486. Memorandum Opinion and Order. 72 FCC 2d 111(1979) (GTE-Telenet Merger Order) (the concern is reflected throughout and in the many conditions placed on the transfers).
(Footnote 35 return)
FCC v. RCA Communications Inc., 346 U.S. 86. 93–95 (1953).
(Footnote 36 return)
E.g., SBC Communications v. FCC, 56 F. 3d 1434, 1489 (D.C. Cir. 1995) (rejecting SBC's challenge to Commission approval of the merger between AT&T and McCaw Cellulary): United States v. FCC, 652 F. 2d 72, 81–82 (D.C. Cir. 1980) (on homo)
(Footnote 37 return)
ICA is the largest and most broadly-based organization of telecommunications and information services end users in the United States. ICA is a not-for-profit league of almost 600 corporate, educational, institutional, and governmental users of telecom and information service equipment, facilities, and services. ICA's members do not include firms predominantly engaged in the production, sale, or rental equipment or services in these areas. Collectively, ICA members spend over $32 billion per year in these areas. Two-thirds of the ICA member organizations employ over 10,000 persons and only 2% have work forces under 1,000. Over 86% of these firms conduct business from fifteen or more locations. ICA speaks from a telecom and information service customer perspective that is broadly informed on the state of the telecom and information service industries, both here and abroad, and its participation in public policy deliberations is not directly or indirectly funded by telecom vendors. Consequently, the FCC's merger deliberations could deeply impact ICA members.
(Footnote 38 return)
These plans should include, but not be limited to, infrastructure, OSS systems and human resources, as well as intended customers markets to be targeted, i.e., residential, small business, medium sized business, large business.