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In re Proposed TAT-5 project

FEDERAL COMMUNICATIONS COMMISSION

11 F.C.C.2d 957

RELEASE-NUMBER: FCC 68-212

February 18, 1968

OPINIONBY: [*1]

HYDE

OPINION:

RICHARD R. HOUGH, Vice President, American Telephone & Telegraph Co., 32 Avenue of the Americas, New York, N.Y. 10013.

DEAR Mr. HOUGH: We have reviewed all of the data submitted, as well as the considerations advanced by your company and the other interested entities, regarding the proposed TAT-5 project. In our review we took the following factors into consideration. The projected traffic volume; the capacity of existing and proposed facilities designed to meet requirements; the time when each of such proposed facilities may reasonably be expected to be available; the potential benefits of the availability of different media to furnish service; investment and operating costs; the revenue requirements which might be reasonably expected to be applicable to the various proposed configurations of facilities; the proposals made with respect to charges to the public for telecommunications services; the established U.S. policy favoring the earliest possible implementation of a global communications system via satellite; the views of interested foreign entitles insofar as available; and the long-range needs for adequate and efficient facilities to provide communications services [*2] to all parts of the world. There has, of course, been appropriate coordination among the interested governmental agencies.

We are of the view that, subject to the three conditions set forth below, it would be appropriate, on the basis of the considerations applicable to this specific situation, to file an application for authorization to lay a submarine cable between the United States and Spain. We have, of course, reached no final decision on this matter and could not appropriately do so, until there has been consideration of the application itself and any developments subsequent to its filing, particularly with respect to the earliest possible establishment of the global commercial communications satellite system. But we did think it appropriate to inform you, at this stage of the matter, of our view that such an application, aside from containing the usual data in support thereof, should:

(a) Give details of a construction program which would clearly demonstrate that, if authorized, the cable would be operational during the first quarter of 1970 to meet foreseeable traffic requirements;

(b) Incorporate agreements, arrived at between all entitles who will share in the ownership [*3] thereof or will have indefeasible rights of user therein, providing that rates for telephone message service will be reduced no later than the time this cable is opened for service by at least 25 percent from the rates applicable immediately prior to such reduction and that rates for leased service shall simultaneously be reduced by more than 25 percent from the levels applicable immediately prior thereto; and

(c) Show that the entitles owning the cable or having indefeasible rights of user therein have agreed to use satellite circuits for the handling of traffic in numbers sufficient to assure that this cable and the satellite facilities provided to handle traffic between the United States and their respective countries shall each be filled at the same proportionate rate.

By proportionate fill was mean that the unfilled capacity of the satellites shall be leased at a rate (with appropriate adjustments), so that, when added to the use made by other entities who do not use TAT-5, unused satellite capacity is leased by all users at the same rate as the cable is filled to the end that both types of facilities reach the 100-percent fill figure at approximately the same time.

Any [*4] application which may be filed satisfying the conditions set forth hereinabove will receive prompt consideration and as set forth above, such action as is appropriate in light of all the factors then called to our attention or of which we are otherwise aware from the data heretofore presented. As shown by the enclosed letter to Mr. McCormack and in line with the above, we expect the Communications Satellite Corp. to move forward expeditiously with the introduction of high quality, large capacity satellites to implement the prompt creation of the global satellite system.

This letter was adopted by the Commission on February 16, 1968, with Commissioner Cox concurring and issuing a statement in which Commissioner Lee joins and Commissioner Johnson dissenting and issuing a separate statement.

BY DIRECTION OF THE COMMISSION, ROSEL H. HYDE, Chairman.

CONCURBY: COX

CONCUR:

CONCURRING STATEMENT OF COMMISSIONER KENNETH A. COX IN WHICH COMMISSIONER LEE LOEVINGER JOINS

I shall not attempt to make a detailed response to Commissioner Johnson's dissent to the issuance of our letters regarding the TAT-5 matter. There are, however, a few basic misconceptions which deserve attention and a brief reply.

First [*5] of all, we did not premise our letters solely on what he calls an "insurance policy" against a possible temporary shortage in facilities. Instead, we listed some nine different considerations which we took into account in reaching our determination in this matter. Commissioner Johnson specifically states that he is not considering anything other than this one issue and then proceeds to discuss some of the other factors with a declaration of belief, untainted by any supporting facts, that, if he were to take them into account, they would at best be neutral or would militate against authorization of the cable. I do not believe that requirements of national security, potential advantages of diversity, substantial rate reductions, the concerns of our major traffic partners, or the potential effect on future cable development deserve such cavalier treatment. It is not necessary to evaluate each with a specific percentile figure, but it is reasonable to conclude that collectively they are sufficient to justify consideration of the cable proposal. n1

n1 While it is ironic, as Commissioner Johnson states, that trawlers cut two of the four present transatlantic cable in the very week we were considering whether satellites were reliable, it is pertinent to note that the satellites are far from trouble free. The first of the Intelsat II series failed to reach synchronous orbit and had very little commercial use. The second and third have had a series of problems so severe that we authorized Comsat to participate in building an extra spare satellite in the Intelsat II series at a cost of some $2 million to provide insurance against a possible failure of the current satellites in the 4-month period of March through June 1968, the then scheduled date for the launch of the next generation of satellites. [*6]

However, even if we were to accept Commissioner Johnson's single test approach and his premise that we should employ "the most economic and efficient communications facilities for international use" our conclusion, rather than his, is supported by the facts presented. First of all, satellites are not now, and will not for at least the next 5 to 7 years be, the most economic means of providing international communications service. The present revenue requirement, including all operating expenses, maintenance, depreciation, return and applicable taxes, for a half circuit in the existing cables is about $28,000 per year. Comsat charges the carriers $45,600 per half circuit in the satellite. Thus if costs were to be the only test we never should have authorized Early Bird (Intelsat I) or Intelsat II (the present satellites in orbit). We recognized, however, that initial satellites would not, by their very nature, give us the economies we hoped to realize from later generations. A start must be made, and Comsat is building on that start. By the middle of the 1970's we hope and expect that satellites not yet authorized, much less built, will enable us to begin to realize some of [*7] the hoped for economies.

Intelsat III, the generation of satellites due to be launched this fall, will still be considerably more expensive than TAT-5. Comsat's own figures show that revenue requirements per half circuit will be between $25,000 and $40,000 per year, whereas the TAT-5 revenue requirements, by any test, are less than $15,000 per year per half circuit.

Comsat figures also show that until as late as 1973 its revenue requirements per half circuit, with the then planned Intelsat IV program, will still exceed $19,000 per half circuit per year. Part of the reason for these much higher satellite costs results from the fact that Comsat has constructed and placed into orbit successive generations of satellites before prior generations have been depreciated, so that the new generations are required to carry the unrecovered investment and return requirements of previous generations.

We have authorized Comsat participation in such seemingly uneconomic endeavors for several reasons. First, as already noted, any new venture, particularly one which pushes the limits of technology, is necessarily uneconomic, and this high-cost period must be passed in the hope of future benefits. [*8] Secondly, our national policy requires prompt establishment of a truly global system. Thirdly, satellites offer benefits to those areas which have no cables and provide a means for the direct interconnection of many points via a single satellite, or small number of satellites. However, there is a vast difference between supporting a technology which offers these benefits and hopes for economies in the more distant future and denying ourselves immediate, current benefits from the alternative tried and more certain cable technology in the form of lower costs and substantial rate reductions. What Commissioner Johnson urges is that if we are committed to a satellite program which is admittedly more costly now, we should also forgo the savings available from the cable for the next decade because the satellites can handle the traffic, albeit at a higher cost.

Commissioner Johnson's suggested alternatives to TAT-5 to fill the gap in circuit capacity are deficient for several reasons. First, there is no indication that our carriers' partners abroad would be willing to install the additional earth stations needed to meet the requirements in question. Secondly, if they were, the immediate [*9] impact on users would be considerable. Instead of being reduced, charges would have to be increased by some 10 percent a year for the 5-year period. And thirdly, we would forgo the benefits that a cable offers in the areas of national security, diversity, and potential for future cable development. We cannot say, on the one hand, that we do not intend to stake our all on satellites, and then authorize four successive generations of satellites in a 4-year period, but turn our backs on a request for employment of the next generation in cable technology which would provide us with the positive factors set forth above.

Commissioner Johnson does not address himself to one of the major considerations which were before us when we issued our letter, namely the rate reduction of at least 25 percent to the using public which would flow from the cable. This benefit is of importance not only to the users, who will enjoy immediate and substantial savings, but also to Comsat. Past experience has shown that substantial rate reductions are followed by large increases in demand. Thus, the installation of the cable, accompanied by concurrent major rate reductions, can reasonably be expected [*10] to result in a demand for more satellite circuits than if there were no additional cable, and no rate reductions, or only smaller rate reductions at a later period in time. Since revenue requirements, and therefore rates to the public, are largely governed by the rate of fill of high-capacity satellites, total costs to the public may reasonably be expected to be lower for the entire 20-year period with the cable than without it. In short, the high investment in the lower cost cable, with the benefits described above, would appear to be an economically sound method for employing our resources in this area.

I believe the Commission's course of action is consistent with the mandate of law, and our expressed policy. If implemented, it may be expected to benefit the users, the carriers, and Comsat as well -- not only for the short run, but into the far future.

DISSENTBY: JOHNSON

DISSENT:

DISSENTING OPINION OF COMMISSIONER NICHOLAS JOHNSON

I dissent to the issuance of a Commission letter which informs American Telephone & Telegraph that we will look favorably upon their application to lay a new transatlantic cable -- "TAT-V."

Decisions like this neatly illustrate the significance of the FCC's regulatory [*11] role. Normally competitive market forces would be adequate to protect the public interest in wise corporate capital investment. If A.T. & T. wants to invest in an uneconomic cable why not let them? If a manufacturer invests in uneconomic plant he will suffer competitive disadvantage, may lose money, and may even go out of business. A.T. & T., however, suffers no such risk. A.T. & T.'s investments, once approved by the Commission, go into its "rate base." Forever after its charges for telephone service will be fixed by the Commission at levels adequately high to provide a "rate of return" on that investment. Thus, unless uneconomic capital investments are challenged by the Commission they will go unchecked, for the public has no opportunity to reward the more efficient operator in the marketplace. In this instance, the public will be required to pay for a cable for 20 years that is not needed for more than 5, and will cost more, even for that period, than satellites.

It should be made clear precisely what the Commission is called upon to decide in passing upon A.T. & T.'s desire to proceed with its proposed cable. We are not now making decisions regarding the most desirable [*12] satellite-cable mix for the 1970's and 1980's in the Atlantic basin -- a major new communications system. What we are doing is simply ordering an insurance policy -- insurance against the possibility that there may be a temporary shortage of communications circuits across the Atlantic until Intelsat and Comsat are able to put up higher capacity satellites in the early 1970's. I dissent because we are saddling the American people with premium costs for this insurance far in excess of available alternatives.

There are many important issues and questions which could have an impact on a decision as to how best to insure against a shortage. I do not intend to discuss foreign policy considerations -- such as the impact of a new cable authorization on Intelsat and the Intelsat negotiations; the impact on foreign partners of A.T. & T. who are seeking the cable; nor the likelihood that the partners in Intelsat would agree to the less costly alternatives. These are matters which the State Department is best able, and expressly required, to judge.

Nor do I intend to discuss questions of impact on new technology, cable and satellite; defense considerations; and the needs for diversity, [*13] redundancy, reliability and quality that a new cable might provide. It is my belief that these aspects either militate in favor of not authorizing the cable, or are neutral to the resolution of that question.

If defense reasons were to be overriding in this decision, then the costs above the most efficient alternative should be borne by the Defense Department, not the private users of Atlantic circuits. Though perhaps more ironic than relevant, it is worth noting the two of A.T. & T.'s previous cable (TAT-III and TAT-IV) went out of service the very week the Commission was considering whether satellites were adequately reliable. The Early Bird satellite, already a year or two beyond its predicted life, had to carry the additional load until the cable could be repaired.

It is my position that this Commission ought to encourage the most economic and efficient communications facilities for international use. And if there are reasons why other than the most economically efficient alternative should be chosen, then the assets of that alternative must be carefully weighed.

Here is the problem the Commission must address. From roughly the beginning of 1969 to the end of 1973 (5 [*14] years) there is a possibility that there will be a shortage of transatlantic circuits. The probability, size and duration of the gap is dependent upon uncertainties, such as how fast demand will grow and how soon Comsat can place in service satellites with much higher capacity. (The Intelsat III satellites, scheduled for launching this year, have 1,000 circuits each. The next series, Intelsat IV, will have 5,000 per satellite. The TAT-V cable, involved in today's action, will offer 720 channels.) I don't propose to address the question of the likelihood of a real gap, or what problems it might raise. (A gap does not, of course, mean that communications would be cut off between the United States and Europe. A shortage merely implies that waiting for lines during peak periods would longer and more frequent, and that the international carriers would have greater incentive to better utilize the existing circuits.) I am willing to assume for purposes of discussion that such a shortage is possible and that we want to insure against it. The question then becomes, assuming that the potential shortage requires an additional 700 channels or so in 1970, is cable or an additional satellite [*15] the least costly insurance policy?

A.T. & T. wants to build a new transatlantic cable with 720 circuits at a capital cost of about $60 to $70 million. The cable is to have a 20-year "life" (A.T. & T. suggested 24 years) and thus will require a "return on investment" for that period. Comsat will have two Intelsat III satellites in operation over the Atlantic before the cable is built -- each with an actual circuit capacity in excess of the cable. Their capacity is already planned for, and is inadequate to deal with the possible 1970 gap. The cost of adding an additional Intelsat III satellite and building two additional earth stations to handle all the traffic that would go on the point-to-point cable would be roughly $35 million. (This is the outside cost. Perhaps present earth stations will be adequate. Perhaps minor antenna modifications would do. We don't know. But the costs could be considerably less than $35 million.) Of course, by depreciating the cable over 20 years it appears that the per-year cost of the cable is lower than the per-year additional satellite cost over its projected 5-year life. The point is that -- based on the record before us -- neither will [*16] be needed as insurance for more than 5 years. It is acknowledged that Intelsat IV (now scheduled for late 1970) and successor satellites will be more than adequate to handle projected channel demand in the mid-1970's and early 1980 's. If we compare the total cost of the cable to the total cost of the additional satellite the extra cost to consumers of using the cable circuit will be in the neighborhood of $85 million ($85 to $150 million depending upon whose figures are used). This cost will be paid by those who use international circuits, whether they use cable or satellites. There is simply no economic justification for meeting any possible channel shortage by laying a new transatlantic cable. Even if there were any reason to have the extra 720 circuits that the cable will provide beyond 5 years we would still be better off to meet that need over 20 years by continuing to orbit what will then be obsolete satellites. If the Intelsat IV is on schedule (late 1970) then the duration of any gap will be short indeed -- a further reason why we should choose the most economical insurance.

Moreover, the longer we can forestall the decision to buy insurance without incurring any risk, [*17] the more accurate our projections of need will be. A cable requires 2 years lead time. A satellite requires weeks or months. If the gap fails to materialize the cable insurance premiums will have already been lost; by contrast, the costs of launching an additional satellite can easily be avoided entirely at the last moment if not needed.

There may be other, even cheaper ways of providing additional capacity to insure against potential shortage. Comsat will have two Intelsat III satellites in the Atlantic. Instead of using the Intelsat III Comsat could use the improved Intelsat III 1/2 satellite -- on which it has just asked for bids. Thus, instead of a 1,000 circuit capacity for the second Intelsat III in the Atlantic, Intelsat III 1/2 would provide 2,000 circuits -- an additional capacity (over Intelsat III) in excess of TAT-V's 720 circuits. This additional circuit capacity (by substituting a III 1/2 for a III) would be achieved for much less than the $35 million cost of a third Intelsat III -- perhaps no more than $6 to $20 million. There are, then, at least two satellite programs that could meet the gap problem at costs substantially less than the $60 to $70 million [*18] cable.

Why does the Commission recommend a new transatlantic cable? Its reasons can be found in the letter to A.T. & T. It is widely believed that the price of international circuits is undesirably high. (The cheapest rate from Washington to Paris or Rome is $9 for 3 minutes. The cheapest rate from Washington across the 3,000-mile-wide North American continent is 75 cents.) The FCC would like to see those rates come down. We don't think that our regulatory capabilities are adequate to reduce them. Accordingly, we are requiring A.T. & T. to persuade its foreign partners to lower rates in return for our approval of TAT-V. (It should be noted that A.T. & T. offered to reduce the rates 25 percent without our intervention. The Commission now seeks no more in exchange for TAT-V than A.T. & T.'s first offer.) As a commentary on the regulatory capacity of the FCC, the point is obvious. We do not know what the rates should be. Perhaps they should be reduced 50 or 75 percent. In any event, even the 25 percent lowering of rates is a Pyrrhic victory, since in the end consumers will have to pay at least $80 million in unwarranted costs.

I dissent from this decision. I believe we [*19] should recommend to the State Department that A.T. & T. not build a new transatlantic cable. If the State Department and Comsat formally indicate that no alternative to TAT-V could insure against channel shortage, then I believe we should more closely examine what the carriers can do to better utilize existing capacity.

The proposed TAT-V would have 720 channels -- a mere 570 more than TAT-IV. By contrast, Intelsat IV's 5,000 channels constitutes a substantial advance over Intelsat III's 1,000 channels. I do not believe, in this age of revolution in communications technology, that we should stake our all on satellite technology -- or any other. Future cables, or other technology, may well offer a technological and economic advance over future satellites. If A.T. & T. shares that belief it is presumably developing such cables. Until that day, however, I believe the American people are entitled to the most effective technology, and cheapest insurance, available.

While I disagree with the Commission's decision, for the reasons stated, I find the conditions attached to its approval generally desirable. Thus, we are requiring (1) proof that the cable will be operable in the [*20] first quarter of 1970, (2) agreements by all parties to rate reductions of at least 25 percent and (3) "proportionate fill" of the cable and satellite facilities. I assume the Commission will hold to these conditions, and thereby attempt to gain some benefit (however inadequate), and minimize the impact on satellite development from this unfortunate decision.