APPENDIX Hon. JOHN STENNIS, U.S. SENATE, COMMITTEE ON INTERIOR AND INSULAR AFFAIRS, Chairman, Preparedness Investigating Subcommittee, June 14, 1966. DEAR MR. CHAIRMAN: Having had an opportunity to review carefully the bill, S. 2444, and study the implications of enactment of legislation authorizing the Department of Defense to dispose of the Alaska Communications System, I would like to present the following comments for the consideration of the Preparedness Investigating Subcommittee. At the outset, I should like to make it clear that I believe the operation of the Communications System by a qualified commercial firm would be of greater benefit to the people of Alaska than retention of this important utility by the Defense Department. All the disadvantages of government operation of an essentially commercial enterprise lead to the conclusion that operation by private entrepreneur could be more efficient, and potentially less costly. However, the bill, which has been introduced by my colleague, Senator Bartlett, in my judgment requires additional elements which I consider to be essential for the protection of the people of Alaska. The authority of the Department of Defense to dispose of the Communications System is very broadly described and does not contain the kind of safeguards which should be included in any bill such as this. My concern is that the people of Alaska who will subscribe to a communications system must be assured that the operators of the system will provide service under conditions and at rates which will not only match those now in effect but represent an improvement in service and reduction of costs. Therefore, I would like to recommend that S. 2444 be amended to include the following provisions: (1) That before a sale of the System is consummated that the Department of Defense be required to publish an official statement of the specific facilities to be transferred and an evaluation of such facilities computed in accordance with recognized standards of public utility accounting procedures. (2) That a hearing procedure for public examination and review of proposals of potential purchasers in advance of the sale be written into the law for the purpose of allowing the general public knowledge of and an opportunity to be heard on conditions of service and rates to be applied by the purchaser before the sale is consummated. (3) The establishment of a special commission to be composed of representatives of the Secretary of Defense, the Governor of Alaska, and the Federal Communications Commission to conduct the hearings on qualifications of potential purchasers of the system. Such a commission should be given authority, possibly with right of appeal to another forum, to select the purchaser or purchasers of the communications facilities which will provide the best service at lowest rates to the people of Alaska. In effect, what I propose is the establishment of a body authorized to issue a certificate of convenience and necessity to the successful purchaser in advance of the sale of facilities. It is the recommendation of Governor Egan that the objectives outlined above be accomplished by a requirement that the Department of Defense conduct an economic and engineering study of the Alaska Communications System and the probable effects of private operation before a sale can be made. This is an approach which should be given careful consideration. As I am sure you understand, my interest is that of insuring the protection of Alaska telephone and telegraph subscribers. I understand the Federal Field Committee for Development Planning in Alaska and the Department of Defense feel certain the requirement of S. 2444 for action by the Secretary of Defense "in the public interest" is sufficient to insure the negotiation of a contract on terms which will adequately protect that interest. My own view is that the contracting authority of the Department of Defense, although exercised with the highest standards of integrity, cannot substitute for legislative provisions guaranteeing the right of Alaska consumers to protection of their interests. With best wishes, I remain, Cordially yours, ERNEST GRUENING, U.S. Senator. Hon. JOHN STENNIS, STATE OF ALASKA, Chairman, Preparedness Investigation Subcommittee, Committee on Armed Services, United States Senate, Washington, D.C· DEAR SENATOR STENNIS: We appreciate very much the time you and other members of the subcommittee devoted to the hearing on May 31, 1966, on S. 2444, a bill to authorize the disposal of the Government-owned long-lines communications facilities in the State of Alaska. Mr. Robert E. Sharp, Assistant Commissioner of Administration, has briefed me on the hearing and reviewed the Report of Proceedings which your General Counsel, Mr. Kendall, was kind enough to furnish for our review. I think it is appropriate for me, with this further information, to make clear the State's position on this bill and the subject generally of long-lines communications services to and in Alaska. It was noted that none of the private firms showed any interest in the purchase of the total communications complex. Therefore, I want to withdraw the recommendation in the testimony of the State of Alaska for an engineering feasibility study as to whether a portion or all of the facilities should be sold. However, the need for professional engineering services in conjunction with the disposal and subsequent regulation will be discussed later in this letter. It is further noted that none of the testimony covers the cost of specific capital improvements required to provide adequate long distance services or a projection of rates. The lack of rate projections is understandable in the light of certain unknown factors. There was general speculation that rates can be reduced under private ownership of those facilities used primarily for commercial traffic but such speculation is not supported by an engineering analysis or study. If such reductions are to be token in amount, the wisdom of disposing of these facilities becomes very questionable. However, it appears to us this question will have to be finally answered subsequent to authorization for disposal of the facilities. We feel the "key" as to whether the long-distance services are improved and rates substantially reduced lies in the sales price of the facilities to be sold and the charges to be made for use of the circuits and facilities which would remain in Government ownership. By a "substantial reduction" in rates we mean from 25 to 50 percent for both intra-state and inter-state service. A number of the private firms who have expressed an interest in the acquisition of the commercial facilities have experience in providing long-lines communications services and the financial ability to assume the service obligation. Given a pre-determined "purchase price" they would have an opportunity to compete on improved services and rates. Otherwise, we feel the real competition will be on price, and the higher the price the less opportunity there will be to effect a "substantial reduction" in rates that are two and three times greater than in the contiguous United States for the same service. For example, it would be most difficult for the Secretary of Defense to disapprove a sale to the high bidder, say 15 percent above the second high bidder, proposing basically the same improvements in service and promotional rates which may or may not initially pay the cost of service. If the sale to the high bidder was approved under these circumstances, the purchaser could justify in a few years an increase in rates and state and federal regulatory agencies could not arbitrarily disapprove such increase. The testimony of Government witnesses does not reveal what they consider "adequate consideration," which is basic to the feasibility of private ownership. An ACS official speaking in Cordova just after the hearing on S. 2444 referred to a "price tag" of $25 to $30 million and stated that under current Defense policy this was not going to be a give away program. This same speaker quoted a figure of $35 million a few days later in an address at Anchorage. The Bureau of the Budget assured me in March, 1966, that "the 1967 Budget, includes, as a contingency item, the receipt of about $30 million from the sale." One testimony of Government witnesses at the hearing was to the effect that the commercial facilities had an acquisition cost "slightly in excess of $30 million." Government witnesses further stated that their best estimate of potential revenue to the Government from the sale to be in the "magnitude of $30 million," depending on what facilities are actually sold. These figures indicate an intent to recover most of the Government's investment in these facilities which, in many cases, have been installed for many years. It is not reasonable to expect such a high recovery and certainly inconsistent with assurances elsewhere in the testimony that the public interest will be protected. A sales price in the $25 to $30 million range, in our opinion, will leave little room for a "substantial reduction" in rates which we believe is the common objective of both the federal and state governments. This disposal is entirely different than the sale of surplus property where a fast profit can be made through low Government sales prices. The purchaser of these facilities will be limited as to the profit that can be made on his investment by both state and federal regulatory agencies. Furthermore, an appropriate clause can and should be written into the sales contract limiting the price of these facilities in the event of resale. The prime beneficiaries of a relatively low sales price will be the users of the service, both private and government. We believe the proper approach for the disposal of the commercial facilities is a modified fixed price sale. The steps we envision in this approach are as follows: (1) Pre-sale Conference. All interested parties would be invited to a conference at which the facilities the Government is generally interested in disposing of would be outlined and discussed. The circuits and other facilities available for lease would be discussed. Interested parties would then be asked to submit within a specified time written proposals as to the facilities they wished to purchase and circuits and facilities they wished to lease. (2) Fized Price. Based on the information obtained in Step (1), the Government would fix the sales price and lease rentals to be charged. The sales price and rental charges should be fixed after a professional engineering analysis of the effect of such price on rates. In other words, the engineer would assume a fixed price and analyze the cost of capital improvements needed to provide improved services; and from these assumptions compute the cost of service and the rates necessary, after projecting potential traffic, to pay the cost of service. We believe projections as to traffic, cost of service and rates should cover a minimum of five years, and preferably ten years. This study would not only provide a method of determining an adequate consideration for the Government from the sale of these facilities, but also would provide a yardstick to later evaluate proposals received for the purchase. In the course of fixing the price, the adequacy of the facilities proposed for purchase to provide long-distance service could be analyzed. The scope of this analysis would be sufficient to provide guidelines for the use of the regulatory agencies concerned with this matter. This phase of the disposal procedure permit the balancing of the Government and public interest in this sale. (3) Invitation to Bid. Following Step (2) the Government would complete its bid specifications, including the price for facilities to be purchased and leased, and invite proposals based on (a) Proposed capital improvements, including cost, over a five-year period. (b) Cost of service, including a plan of operation and data supporting the cost of service. And, in addition, indicate the number and classes of ACS civilian employees that would be offered employment and the basis for such offer. (c) Proposed rate schedules, including connecting carrier charges. The proposed rate schedules should include basic rates projected over a five-year period, as well as promotional rates which the bidder intended to employ to increase the volume of traffic. We believe this is a sound approach that would protect the Government from a charge of "give away" and at the same time provide assurance that "substantial rate reductions" over a reasonable period of time would result from the sale. The bids could be realistically evaluated under this approach. I appreciate the sales procedure cannot, and should not, be written into the bill. For this reason, I am sending a copy of this letter to Mr. Perry, who represented the Defense Department at the hearing, with the request he advise you and me if this approach to the sale is generally acceptable to the Defense Department. If it is acceptable, I will withdraw all of the State's recommendations for amendment of the bill and urge its immediate passage. Another important factor to the private operator in providing long-lines services in Alaska is the availability of circuits for commerical use over the facilities retained by the Government. We understand from testimony given that circuits excess to the Government's needs would be leased to the private operator at a reasonable rate, and the number available should be sufficient except in the event of an emergency. We can envision the need for additional circuits, short extensions of the Government-owned system, terminal and other facilities which could not be economically provided by the private operator, particularly to serve the more remote areas of the State. Therefore, to clarify this matter, we request there be included in the Committee report on this bill the following or similar language: "Notwithstanding the authority contained in this bill for disposal of long-lines communications facilities in the State of Alaska, by passage of this bill it is not intended to impair the existing authority of the Defense Department to provide facilities for handling commercial traffic in those areas in which it may continue to own and operate long-lines communications facilities." We feel this clarification of the record is important to assure service to remote areas of the State. This is a highly important bill to Alaska. For this reason, I feel duty bound to exert every effort to insure that the sale of these facilities will produce both improved services and substantial rate reductions over a reasonably predictable period of time. We have no desire to either delay action on this bill or the disposal process in the event Congress enacts it into law. However, we think the procedure which is to be employed should be known and that it should be designed to safeguard the interests of both the Government and the general public. Copies of this letter are being forwarded to the other subcommittee members and the Alaska Delegation. In closing, again let me express my appreciation for not only the time but the intense interest of the subcommittee in making sure the best interests of the Government and user of this service will be served by the enactment of this bill. Sincerely, WILLIAM A. EGAN, Governor. Hon. JOHN C. STENNIS, DEPARTMENT OF THE AIR FORCE, Chairman, Subcommittee on Preparedness Investigating, Committee on Armed Services, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: Governor Egan has sent to me a copy of his recent letter to you concerning S. 2444 and has asked that I advise you of our views concerning his suggestions. Attached is a copy of my response to Governor Egan summarizing the concepts we expect to apply in disposing of the Alaska Communication System if S. 2444 is enacted. Briefly, we agree that rates to be charged the general public and capital improvements to be made must form a very important part of the basis for selecting the private company to take over long-lines-communication service in Alaska. To this end we recognize that prices for the facilities to be sold and rentals which the Government will charge for the use of facilities which it retains must be made known to all offerors in advance so that they can prepare meaningful offers. To assure full understanding by all offerors of what we desire, we agree with the Governor that we should hold a conference with all prospective offerors immediately after issuing our request for offers. We would hope to have participation by State representatives at that conference and we would expect to have the assistance of representatives designated by the Governor in evaluating the public interests aspects of the various offers ultimately received. I believe that the concepts described in my letter to the Governor are consistent with the objectives described in his letter to you and I hope that consideration of S. 2444 can proceed with the goal of enactment this year. Sincerely yours, JOHN W. PERRY, Deputy for Transportation and Communications. Attachment. Hon. WILLIAM A. EGAN, Governor of Alaska, Juneau, Alaska. DEPARTMENT OF THE AIR FORCE, DEAR GOVERNOR EGAN: I appreciate your kindness in letting me review the thought provoking suggestions which you have forwarded to Senator Stennis with regard to protecting the interests of the public in Alaska in connection with any transfer of our commercial long-lines activities to a private company. At the outset let me assure you that I am disturbed as you are at the statements concerning sale price and future rates made by two Air Force officers in answer to questions arising after recent speeches in Cordova and Anchorage. These officers were not authorized to speak for the Air Force on these subjects, and indeed, we in Washington were completely unaware of their statements until Joe FitzGerald and you called them to our attention. Any implication in statements of these officers that the sole purpose of the sale of the ACS is to obtain as much revenue as possible for the Federal Government is completely inconsistent with the views of the Department of Defense on transferring the ACS to private operation and the procedures which we believe should be followed to protect the interests of the people of Alaska. We agree with you completely that a competitive sale seeking to obtain the highest possible price, which the purchaser would seek to recoup through the rates charged to the public for service, would not be in the public interest. We also agree that the rates and capital improvements proposed by the offerors should be major determinants in evaluating the various offers. Accordingly, we plan to require each offeror to specify the exact scale of rates at which it proposes to provide service and to specify in detail the modernization and expansion actions which is will undertake during an initial period of operation. In evaluating these public interest aspects of the sale, the Department of Defense would fully expect to work closely with the people whom you would designate to represent the interests of the State and the several communities in Alaska served by the long-lines system, with the Federal Field Committee for Developing Planning in Alaska, and with representatives of the Federal Communications Commission. To enable the offerors to make firm proposals on rates and capital improvements, we expect to establish in advance the fair and reasonable prices which we expect to receive for the facilities offered for sale, basing this price on the original acquisition cost, the appropriate depreciation, the degree of obsolescence, the probable replacement cost, and other appropriate guidelines. Moreover, the the offerors will not be required to purchase all of the equipment and facilities offered for sale, but will be free to reject any items of equipment which they feel should be replaced at the outset with more efficient modern equipment. Much of the long-lines equipment in Alaska, used predominantly for Defense purposes, will be retained by the Department of Defense and the offerors will also be advised of the rates which the Government will charge for capacity in these Government-retained systems. Again, we would expect to allow each offeror to decide for himself the amount of capacity which it would need in the Government-retained systems in order to provide adequate service to the publie throughout the State. We expect to establish both rates for dedicated circuits, which would be appropriate where a relatively high volume of commercial business is anticipated, and message rates which would allow the commercial operator to obtain service at reasonable prices over circuits where the volume of public business is small. As you suggest, we would expect to have a presale conference to which all interested parties would be invited. At that conference we would discuss our request for offers thoroughly to assure that all perspective offerors understood exactly what was expected from them. We would hope to have participation from representatives of the State of Alaska whom you might designate. I believe that these procedures are fully consistent with the objectives outlined in your letter to Senator Stennis to protect the interests of both the Government and the people of Alaska, and I hope you will agree that disposition under these criteria will be in keeping with the concepts expressed in your letter and with the intent of S. 2444. |