COMSAT OBLIGATION TO RESPOND

Mr. HORTON. Why did you feel compelled as a corporation to bid on this proposal in the first instance? This goes back to the question Mr. Roback asked, that I did not think had a completely responsive answer, and that was the question, as I express it, as to why you felt you had to bid on this contract. You did not have to bid on it. You get the same price from the carriers that you get from the Government. It is well for you to be concerned about economy, and we are all concerned about that, but I wonder why you felt that you had to bid on this contract and put yourself in competition with these other carriers? Mr. McCORMACK. The position of the executive branch, shared by the corporation, is that the executive branch does have legal authority to come directly to us. They had come directly to us. We had been requested to submit a proposal. We had done quite a bit of background work on it an, as the executive officer of the corporation, I do not see how we can walk away from a request of the Government like that.

We are responsible corporate citizens, and the executive branch says, "We are legally entitled to come to you, we do come to you, will you submit a proposal?" and so we did.

Mr. HORTON. That is the question that is open right now. Whether or not they have the legal capacity to come to you has not been determined.

Mr. McCORMACK. That is true.

Mr. HORTON. And the question I am asking is whether you had an obligation, or whether there is anything in your corporate structure which requires you, to bid on a Government contract or Government proposal just because they offer the proposal.

You do not have to bid on it, do you?

Mr. McCORMACK. We could, at least in theory, Mr. Horton, have declined. We had bent every effort to find the ways to make the Defense Communications Agency's requirement come into practical fact. We included fairly high-risk offers on our part to provide on temporary lease the transportable stations which will be needed to get the service in being earlier, although we had made it clear to the foreign entities, to all of the members of our broad, and I think to all of the industry generally, that if anyone else, and this was months in advance of the quote, if anyone else could produce transportable earth stations, and this could be done at an earlier date on terms acceptable to the national entity at the other end, they had our free license to go ahead and do it. We were not seeking this particular job.

Mr. HORTON. Well, you do not have any more of an obligation to the Government to bid on these proposals than you have to other carriers, do you?

Mr. McCORMACK. Well, sir, that is a matter of definition of corporate obligation. I think our public shareholders deserve a management which is responsive to requests from large customers, and

Mr. HORTON. You had that request from the carriers. The carriers asked you for the service, did they not? They asked you to give them a quote as to what you could do, and you said, "We can do it for $48,000."

You are going to get $48,000, and let's don't talk about the difference between $45,600 or $48,000 or that other problem. Let us assume the Government is going to go through with the contract and is going to pay $48,000. You are going to get $48,000 from the Government, or you are going to get $48,000 from a carrier, so what difference does it make to your corporation?

Mr. McCORMACK. Well, it is a responsibility as a corporate citizen. Mr. HORTON. You are an unusual corporate citizen. You are not like the average run-of-the-mill corporate entity. You are a special type of corporate citizen. You have a monopoly and the Congress has permitted you to have this monopoly. And, as I understand it, the Congress had the intent that you were a carrier's carrier, and so you have some obligation in that respect. Or do you look at it differently?

Mr. McCORMACK. We have a very definite obligation not to disrupt in any inordinate way the communications structure of the country, I could not agree more, Mr. Horton. But if you take this particular question of why, when we actually came down to the point here, why did we submit a quote to the Government, even though the Government had asked us for one, I agree with you that in theory we could have declined, despite the background work we had done.

But, on the other side stood DCA and, as Dr. Charyk was just reading the first quotes from the other carriers, they were a great deal higher than the better quotes now are, so the executive branch could have held us somewhat derelict in our duty of really bringing out the economic advantages of the satellite.

Mr. HORTON. Well, the executive branch cannot do anything to you for that.

Dr. CHARYK. Well, I think that we have a responsibility to provide an opportunity to the Government to consider the service offering which represents the most favorable conditions to the Government. Mr. HORTON. Then do you think you are

Dr. CHARYK. I think that the value of our position is attested to by the fact that the Department of Defense, in its conclusion, indicated that its evaluation of the entire situation was that our proposal offered the greatest advantage to the Government and afforded the greatest assurance of providing the earliest possible service. Now, I think that is a good enough reason for us to deal with the Government. Mr. HORTON. In other words, you consider yourself an arm of the Government?

Dr. CHARYK. We do not. We consider the Government as a responsible customer. The Government is entitled to get the service under the most favorable conditions. We do not see any reason why the taxpayers should pay a premium for the service.

Mr. HORTON. Why is that something for you to determine?

Dr. CHARYK. It is not. It is up to the Government, and it made its decision, and it made its decision having all of the facts, and it is the only one in possession of all the facts.

Mr. HORTON. I am speaking now just from your corporate standpoint. It does not seem to me that you have any obligation as a corporation to make these types of decisions insofar as the Government is concerned. If you are going to get the same amount of money and

you are going to provide the service and it goes through a carrier, it seems to me insofar as the corporation is concerned, that you are not going to be subject to any punitive action by the corporation.

Dr. CHARYK. I think your premise is unfounded, because I think there is a relationship between the number of satellite circuits that the Government is going to procure and the cost of the circuits; therefore, there is an incentive for us to deal with the Government and an incentive for the Government to deal with us if thereby it can acquire necessary communications circuits at a more favorable price. This turned out to be the case in this instance.

So the total procurement by the Government of satellite circuits is certainly going to be related to the price of these circuits.

Mr. HORTON. Was this an executive decision or did you submit this question as to whether or not you would bid to the board of directors? Dr. CHARYK. The board of directors approved the submission of the proposal.

Mr. HORTON. On the question as to whether you would or would not make the offer?

Dr. CHARYK. Absolutely.

Mr. HORTON. OK.

GOVERNMENT CONTROL OVER COMSAT

Mr. DICKINSON. Let me ask one question.

Mr. Charyk or either of you gentlemen, as a matter of fact, taking Mr. Horton's premise a little further, the Government does have life and death power over your corporation, does it not?

Mr. McCORMACK. Its business also has a very large impact on the economic welfare of all the overseas record carriers in particular, too. Mr. DICKINSON. I understand that, but actually in the final analysis

Mr. McCORMACK. The Government has more controls over Comsat than it has over any other carrier; yes, sir.

MR. DICKINSON. And if the Government did not want you to put up any more satellites you could not put up any more satellites, could you? Mr. McCORMACK. I suppose that is true; yes.

Mr. DICKINSON. You would be pretty well out of business then, would you not? You have only one satellite now. If you did not put up any more you would be pretty well out of business. So, in fact, the U.S. Government does have just about life and death power over your corporation, and you are, I suppose, by virtue of this, very responsive to the wishes of the Government and DOD.

Mr. McCORMACK. I would place the emphasis a little differently, Mr. Dickinson, if I may, and try to respond to a part of Mr. Horton's question at the same time.

Why did the corporation, having gotten to this point, feel it absolutely incumbent upon us to put in the proposal? If the executive branch had only had before it the proposals that the overseas record carriers turned in, it would not have had a choice among prices as low as it finally got.

If, through an example like this and, perhaps, in subsequent ones, the Government were encouraged to move away from commercial communication satellite services and move more strongly toward pro

viding its own services, then I think our public shareholders would have a real case against us. I hope this is responsive.

Mr. DICKINSON. Thank you.

Mr. HOLIFIELD. Mr. Roback.

FCC JURISDICTION OVER COMSAT

Mr. ROBACK. The corporation frequently is identified as having several hats. It is a carrier, a carrier's carrier, a member of Intelsat, and manager for Intelsat.

Now since you have to, as a corporation, perform with these various modes of attire, are you in the position of setting aside, really, the jurisdiction of the Federal Communications Commission whenever you want?

You are dealing with an international entity of some sort, and I might ask first-and perhaps this is a legal question you have referred to this at one time or another as an international joint venture. Is it also an international organization, and if it is an international organization, does it have the privileges and immunities of an international organization?

Mr. McCORMACK. I believe there has been a tax ruling that the Intelsat accounts are relieved from liability for U.S.Federal income tax. Other than that I think mostly we are waiting around for the definitive arrangements to come in in 1969. But, to take your

Mr. ROBACK. Are you immune from Federal income tax because you are a member of Intelsat ?

Mr. McCORMACK. We are not subjected to Federal income tax at the moment mainly because we are not making any money. But, no, we are a completely regulated U.S. corporation subject to all of the laws of the United States. We do not have immunity from the Federal Communications Commission, to answer your lead question.

In our position as manager of Intelsat, the Federal Communications Commission is quite clear on this, they do not intend to regulate Intelsat, but there is a preceding set of circumstances here which have to be taken into account in one of our other sets of garments you have referred to, where we represent the United States in the so-called Interim Communications Satellite Committee, the executive board of Intelsat.

We represent the United States there, and-with a few bobbles in the past we have all been on a learning curve as to how to make this entirely new organization, Comsat, work-we now have a set of prodecures supplied to us formally by the State Department, but having the concurrence of the Federal Communications Commission and Mr. O'Connell's office, a set of procedures giving step by step what Comsat does with the U.S. Government to get the proper guidance and instruction before going to the board meetings, the committee meetings, of Intelsat.

But when the Intelsat vote is over and, of course, with a majority vote Intelsat cannot act without the United States.

On the other hand, the United States cannot act without a substantial number of other votes to go with it. But by whatever way we work out the solution within the Interim Committee when its decision is made, that becomes an instruction to Comsat, which is not regulated.

But we come back to the Federal Communications Commission again, as we close the loop, because Comsat's part of this in due course ends up as rate, tariffs, approval of launch satellites, the concurrence of the National Aeronautics and Space Administration in the Federal Communications Commission action as to the technological validity of the proposal, and so forth. We are always subject to the Federal Communications Commission except specifically that in acting as manager for the consortium carrying out directives in which we have concurred on behalf of the United States, this is not regulated.

COMSAT SUBJECT TO INCOME TAX

Mr. HORTON. Just for clarification, earlier you said that some part of this was not subject to income tax, and then subsequent to that you said that you were not making any money. They are two different situations. Are you or are you not subject to Federal income tax?

Mr. McCORMACK. Comsat is completely subject. I may have had a slip of the tongue. I was talking about Intelsat as such, our partners in Intelsat. Intelsat owns the space segment. The Interim Committee decides on what the charges shall be for that space segment. It decides on the assessment to be put on the member nations, the capital required to buy the satellite, to launch it, to keep it in orbit. This is a financial transaction within Intelsat. This, I believe, has been ruled by the Treasury Department to be not subject to U.S. tax. However, whatever comes out of this for Comsat is. It so happens that it won't be until the next calendar year when Comsat breaks into the black, and then we have our past expenses to pick up. I do not know just when Comsat will have procured enough income to overcome the initial expenses, and to be in a taxable position, but it will not be right away.

STATUS OF INTELSAT

Mr. HORTON. Who owns Intelsat?

Mr. McCORMACK. Intelsat is owned by, at the moment, 53 nations. Approximately 55 percent of the undivided shares in Intelsat rests in Comsat as the U.S. representative, which means we put up 55 percent of the costs of getting the space segment going, and we get 55 percent of the revenues therefrom, and it is this transaction, that is the international transaction, which would not in any normal circumstances be considered a U.S. taxable operation.

Mr. HORTON. Well, will Intelsat then own all the satellites that you put up?

Mr. McCORMACK. That pertain to the global system; yes, sir.

Mr. HORTON. Do you have some sort of a chargeback or some way of reimbursing the Federal Government for whatever services it renders in putting up these satellites?

Mr. McCORMACK. Yes, sir. That is in the law. The National Aeronautics and Space Administration is required to launch satellites for us, to come back to Mr. Dickinson's question, but at prices which they set to cover their costs.

Mr. HORTON. Could Intelsat be a bidder on a contract, similar to the one that you bid on recently, with DCA?