Hearing on Loan Guarantees and Rural Television Service


Prepared Testimony of Mr. Bob Phillips
CEO
National Rural Telecommunications Cooperative

10:00 a.m., Tuesday, February 1, 2000 - Dirksen 628

Introduction.

My name is Bob Phillips, and I am President and Chief Executive Officer of the National Rural Telecommunications Cooperative. NRTC is a not-for-profit cooperative association with a membership of nearly 1000 rural utilities (550 rural electric cooperatives and 279 telephone systems) located throughout 48 States. Our Members provide electric or telephone service to underserved, low population density areas of the country.

NRTC's mission is to meet the advanced telecommunications needs of American consumers living in underserved areas. In furtherance of that mission, in 1992 NRTC paid DIRECTV more than $100,000,000 to capitalize the launch of the nation's first Direct Broadcast Satellite (DBS) business. In return, NRTC received program distribution and other rights to market and distribute DIRECTV programming services throughout large portions of underserved, oftentimes rural America. NRTC, its members and affiliates currently market and distribute DIRECTV programming to more than 1.4 M households (more than 20% of all DIRECTV subscribers) using digital DBS technology. NRTC also distributes C-Band or large dish satellite programming to some 50,000 subscribers.

In my Testimony today I intend to address two problems not addressed by last year's Satellite Home Viewer Improvement Act: first, the unavailability of local television service in rural America, and, second, the lack of competition to cable. I'm going to propose a satellite solution to both of these problems, and it will require your assistance in the form of a loan guarantee.

Local Service Is Unavailable Throughout America.

By authorizing the retransmission of local broadcast signals by satellite, last year's Satellite Bill paved the way for the satellite industry to become a meaningful competitor to cable in some of the nation's top markets. But the Bill did nothing to close the Digital Divide throughout much of the rest of America, where there is no "profit" to be made in delivering local service by satellite.

Because of the bleak economics, the for-profit satellite companies have announced their intention to provide local digital satellite service only to the top 33 Markets out of a total of 210. That means that more than half of the nation's households will not have access to local digital satellite service. At least 20 States will be left out entirely, including eight of the States represented by Members of this Committee. That's unfair, and it's contrary to the public interest.

Americans located in these Unserved Areas will be disenfranchised from the modern Information Age simply as a result of where they live. This is unacceptable to NRTC. And I believe it will be unacceptable to your constituents when they learn that as a result of the Satellite Bill passed by Congress last year, their urban neighbors are already receiving service they may never receive.

Satellite Technology is the Only Comprehensive Solution.

It is no coincidence that satellite penetration rates in rural America are 6 times higher than in urban parts of the country. Satellite is an ideal distribution technology for less populated areas. Unlike other technologies, satellite is "distance insensitive." At a fraction of the investment, satellites can reach where cable and other broadband technologies will never go.

Satellite is ubiquitous. It can cover wide, remote spaces that ground-based technologies will never reach. In fact, any technology other than satellite will be ineffective and piecemeal as a tool to bring local service to the Unserved Areas.

The cable industry will never build-out the entire country. More than 90% of NRTC's 1.4M satellite subscribers do not even have access to cable. Why? Because it costs too much to serve these homes with cable.

It's estimated that in urban areas the capital costs to build out a cable system are more than $1,200 per subscriber. In unserved and rural areas with low population densities and rough terrain, these costs could easily be four or five times as much or more. However, even with substantial start-up costs, the necessary capital per subscriber to provide local digital satellite service in unserved areas should be less than $300. Distance, terrain and population density are irrelevant.

We estimate that there are at least 10M homes that do not have access to cable. Cablevision, the cable industry publication, cites statistics from the National Cable Television Association to verify that there are nearly 9M households unserved by cable.

How much is the cable industry willing to spend to extend their lines to serve these unserved homes? Apparently, not much. According to the FCC, cable companies spent $7.7B in 1998. But the great bulk of that money was for upgrades and rebuilds of existing plant…not for the construction of new plant. Many of the large cable companies spent more than half a billion dollars each on ugrades and rebuilds. And while $600M of the $7.7B was spent for new plant, it was not spent to bring service to previously unserved markets. Their "new builds" simply kept pace with the increase in the number of TV Households.

Cable has little or no economic incentive to build new plant to serve homes located in more remote, less densely populated areas. For any given large number of subscribers, satellite is by far a cheaper delivery technology per household than cable. Compared with any terrestrial system, wired or wireless, a satellite system has much greater economic leverage because of its much lower incremental cost in serving subscribers located anywhere in the United States.

The rural electric cooperative members of NRTC have a history of serving remote, rural and underserved areas. Unlike the cable industry, they have traditionally constructed electric plant and brought electric services to areas with 5 or fewer homes per mile. Their motivation and mission is to bring service to the underserved areas…not to cream-skim the lucrative markets.

Competition to Cable.

Mr. Chairman, NRTC fought the cable industry for nearly 10 years here in Congress to obtain access to programming so we could help build a digital satellite industry to serve rural America. Throughout that debate, the cable industry argued in favor of the Digital Divide. They testified that rural and underserved consumers should pay more for their programming because of where they live. We disagreed then, and we disagree now.

Not only can satellite technology extend local service to the unserved markets where cable is not available, it can also provide competition to cable in the underserved markets where cable is available. For the satellite industry to provide effective competition to cable and fulfill the goal of the Satellite Home Viewer Improvement Act, we need to provide local signals.

Every cable consumer in America needs a choice in service providers. Satellite technology can provide that choice. That's why Congress passed the Satellite Bill last year. But if local digital satellite service doesn't reach every home in the U.S. and cable becomes the only choice in the markets not served by DIRECTV and EchoStar, cable will never be subject to effective competition. Cable rates will continue to increase, and additional regulation will be required.

Mr. Chairman, access to local service should not be driven solely by concerns of profitability. It's a much bigger issue. All Americans should be entitled to receive the benefits of the modern Information Age…even those living on the other side of the Digital Divide, where the delivery of local service is not a money-maker.

To bring local service to unserved areas across the country and to provide competition to cable, we need to agree on a comprehensive, universal plan based on the right technology -- not a patchwork of different and incompatible ground-based systems. Only satellite technology holds the promise to serve everyone and to provide much needed competition to cable.

Recommendation.

As you said last year, Senator Gramm, "…there are some social goals that are not necessarily met by market forces…". That's true here. The marketplace will not fix these problems because there is no money to be made in delivering local satellite signals to these areas.

With your support, we can construct, launch and operate a satellite system to provide local digital service to all areas not served by the for-profit satellite companies. Through a common industry platform, we can solve the problems not addressed by last year's Satellite Bill. We can make local service a reality for consumers across the country and provide meaningful competition to cable.

Getting this job done will require a loan guarantee of at least $1.25B, to be supplemented by the satellite industry as needed.

We also strongly recommend that the loan guarantee program be implemented on a not-for-profit, cooperative basis. A not-for-profit approach would ensure that the federal loan guarantee is not used to enrich large, private or corporate interests.

Not-for-profit, cooperative utilities have used loan guarantees to bring electric services to unserved areas since the 1930's. The United States Department of Agriculture, through the Rural Utility Service, is intimately familiar with the challenges facing rural and underserved markets. Rural utilities operating under the RUS program have an excellent record of federal loan and loan guarantee repayment. Through the loan guarantee program, these cooperatives can ensure that these same areas are brought into the modern Information Age.

We recognize that an administering body most likely will need to be created for this purpose. We urge you to establish strong criteria to ensure not only that any loan guarantee will be repaid, but that preferences will be given to plans which will provide the most comprehensive solution and utilize the federal guarantee in the most efficient manner possible. In this way, you and the Committee can ensure that the public interest will be best served by the use of federal support.

Mr. Chairman, I also recognize that some of these communications issues are beyond the purview of this Committee. To accomplish our goals, we will need the assistance of other Committees as well as the FCC. However, left to its own devices, the FCC will handle this problem the same way it has handled countless others: by relying solely on "competition" to fix it. But as you recognized last year, competition will never fix this problem. So we will be working with the Congress, and hopefully the FCC, to obtain the necessary spectrum and orbital location(s) for this project.

Mr. Chairman, if we can get Congress' help and approval soon, we can use satellite technology to bring service to the last mile and to provide meaningful competition to cable. It's a big job, and we need to get started.

Thank you.




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