because they are essential to our local system of broadcasting. but that television is an important part of today and tomorrow's video ecosystem. american broadcasters are prepared to play a major role in the advancement of video services as we look down the road. i look forward to answering your questions. my remarks are concluded. >> thank you. the next witness is the chairman of disch network. thank you for being here before the subcommittee. we look forward to your testimony. >> renton members, members of the committee, thank you for the opportunity to testify about the future of video. i am co-founder of dish network. we employ over 27,000 people. i believe the teacher of video

goes hand-in-hand with two rules. first, always try to understand the customer wants. second, change is inevitable -- to embrace it. what do they want? they want to be able to watch programming on their tv sets, phones, and tablets. they want to be able to surf the web and make a phone call, no matter where they are. dish plans to offer all the services from one company. we do a big -- good job of providing fixed video programming. but customers increasingly want mobile video, mobile voice, and mobile data. we need to be able to provide all the services to everyone of our customers, anywhere, at any time. our company is moving in that direction with innovations that allow our customers to use a wireless smartphone or tablet to you enjoy video content they have paid for. we recently purchased

blockbuster to enhance our offerings. we are a leading distributor of dvr technology, and we continue to innovate. our new prime time, any time technology takes this to a new level. customers have the choice to you prefer program and when they want while skipping what they do not want to see. this means that allowing our kids to watch tv does not mean they have no choice but to see commercials for junk food or all. dish did nothing more than improve on existing and legally accepted technologies to give consumers the ability to record their shows for playback a more convenient time where they can skip over commercials. these are some of the ways we responded to our customers' changing needs, we still need to go further. in the past, we have not shrunk from allowing -- changing to stay competitive. we went to launching our own

smart business to give consumers would want, including mobile, video, voice, and data. last year, we invested millions -- billions of dollars to acquire two bancorp satellite companies with the aim of transforming them into a next- generation broadband service. we went to provide consumers with a choice. if we're successful, we will create tens of thousands of new jobs in the united states. this brings me to my second point. foster change, do not ignore it or be afraid of it. we're prepared to leverage our experience and financial strength to bring communications and in a can afford, making the more mobile and dynamic than ever before. however, we cannot get started until sec releases updated rules about how our satellite licenses can be used for no problem. given overwhelming support and comments received today, we hope the sec will finalize a rose by the end of the summer. we went to build the most advanced wireless network against united states -- in the

united states to compete against incumbents, but we need to have a chance. just as rules must be modernized, the rules governing how broadcasters -- retransmission agreements are outdated and in need of change. 20 years ago, when congress first adopted the 1992 cable act, there was one cable operator in any given market ought negotiating with one broadcaster. today, there are multiple in each market, including small local and large regional cable providers. there are new providers like netflix. the broadcasters still has a government-sanctioned monopoly in their market, well-paid and tv markets face stiff competition. the road is almost always bad for consumers and the cream market. broadcasters play the tv providers against one another, cut off the most popular tv

programs if the demands are not met. consumers and a paying high rates. -- end up paying higher rates. the problem is only getting worse, with more broadcaster abuses. broadcasters going to the status quo instead of meeting consumer demand embracing new business models. retransmission consent is a prime example of an outdated government policy in need of an overhaul by congress or the fcc. it is incredible to see how much we have changed since 1992. there are few of us who used indiana back then. the idea of streaming movies to a smartphone was science fiction. just as they have of off to keep pace of what the consumer wants, the government should have regulations mirror today's competitive realities and advance in technologies. fenty, and a look forward to your questions. >> now, our final witness, who is the senior vice president

for external affairs at the motion picture association of america. thank you for being here today. >> thank you, members of the committee. i want to thank you for the opportunity to testify on behalf of the motion picture association and its member companies. allowed to acknowledge my colleagues on the fat -- panel. i'm honored to be with a distinguished group this morning. will you in a theater -- are in a theater, at home, or on the road, consumer electronics companies and concentrators are a working together to provide new innovative options to easily access high-quality content. we welcome this opportunity to testify and work with the subcommittee as you consider appropriate policies for the future of video. this is an important discussion, and we are pleased to be a part of it. we are driven by the desire to create and meet consumer demand for the products we produce. we're listening to our audiences. we are attuned to the desires.

every day, we are developing innovative ways to give viewers the experiences they want. audiences to they want to enjoy movies on multiple platforms, from the big screen televisions and concern -- tablets, even on their funds. we're partnering with companies around the globe, including youtube, facebook ,n, -- netflix, roku. all of these exciting innovations benefit the consumers, who receive high- quality experience is, and traders, could take the risks and invest in these experiences. for many, there is no substitute for the theater-going experience. the big screen is the foundation of the american viewing industry. this is equally a part of the present and future of video. in addition to utilizing cutting-edged and sophisticated visual and special effects, our

companies are embracing 3-d, imax, and a brilliant sound that has enhanced and transformed the movie experience. the theater will continue to play a significant role in how people around the globe are entertained. but our member companies are not as making movies available for the big screen. for decades, people have watched movies on television, but that is changing and improving to. today, programs are being delivered by over the air digital broadcast enter an astonishing range enabled by our distribution partners in the cable and satellite business. audiences are able to watch these programs at a time of the original aaron -- airing, or at the time of their choosing through video on demand options. in addition, with the advent of interactive television, roku boxes, the sony play station, and apple tv, just to name a few, consumers can watch hd movies stream across the

internet in their homes services or servicese, hulu, to many to list. all the major motion picture studios distribute full-link shows and movies directly to consumer mobile devices to operators such as at&t, sprint, and verizon. the ability to access high- quality content is thriving on line. competitors for consumer attention are providing new offerings ever week. in just a few short years, the quality of video delivery has improved tremendously. with it, literally hundreds of licensed on-line services have sprung up. among them is hbo go, which adds significantly to existing subscribers by providing online access to programming. that is not simple programming available on tv. that is basically all of the catalogue, in the past as well. netflix is not only delivering a

staggering number of movies, but is moving into the development of original content. youtube and facebook are entering into agreements to distribute movies as well. on-line services cater to every manner of consumer viewing model, including rental, down the to own, subscriptions, and ad-supported you in. -- viewing. they are supported by technology companies like apple's itunes, broadcast television networks, cable networks, pay television channels like hbo ep andix, -- epix, telecommunications providers, retailers like amazon, blockbuster, and wal- mart, and gaming systems. new venture is devoted entirely to delivering content why h suchulu as -- such as hulu as

well. today, consumers want the convenience to the content of a purchase in a number of devices without having to pay twice. we are delivering. we started to get along with dvd copies of funds a transferable downloadable copy of the film to use on their computers and portable devices. now there are a variety of ways to play everywhere. one exciting innovation comes from a consortium of more than 60 studios, retail stores, and technology firms that has treated ultraviolet, a cloud- based digital storage locker for consumer content. it works like this. when a consumer purchases ultraviolet media, such as ddt or internet down the, they receive the in doing right to access the content on any ultraviolet device register to their household, and to enjoy the content western to the devices at home or on the go.

presently, over five dozen titles are available through ultraviolet, and more than 3 million consumers have set up accounts this year. this spring, walmart will allow consumers to convert their existing dvd collections to ultraviolet collections. walmart estimates the average user brings seven disks to the store. each conversion takes about a minute. other systems are being developed, including disney's plan to provide consumers with easy access to disney content among several digital services. in closing, we are relentlessly innovate and to keep pace with the up -- often demands of our audience, and to give them more views on how you are content. we are committed to that. as this committee considers appropriate policies, we hope you will continue to recognize that, as promising as they are, the contents to reach their full potential. a video streaming site, a

broadcaster -- they are all terrific technologies, but without the content consumers want, they simply do not reach their full potential. make no mistake. will always have an incentive to seek out new ways for content to be distributed, but we must allow to be compensated for it. we also must be allowed to be part of the discussion for how it is distributed. we're pleased to be part of this dialogue. with four to working with you in the weeks and months ahead. again, i want to thank you for your time this morning. >> mr. o'leary, thank you for your testimony. thanks to all of our witnesses for enlightening us on your views on these important issues related to the world of video. i want to start with mr. johnson. i appreciated your comments on the situation you have faced. i want to get above your company for said, but raise the issues that come up in this new world we are in.

there are protections in the kinney kitchens at the fort multichannel video distributors. are you prepared -- in the communications act that forge multichannel distributors. are you willing to live under the must-carry rule, as well as the exclusivity rules and the closed captioning emergency information requirements? those are all attached the communications act. tell me what that means to you. >> we are currently already offering closed captioning through the service. as far as must-carry retransmission consent, when one not carry any type of local broadcasting. we have done a marketing agreement with a company which sells over the air digital antennas so that our subscribers who want to receive over the air programming can do so with

them. when one not be entering into any real transition consent issues. >> " if you are required to? >> -- what if you are required to? >> we would have to look at that. >> given the world your operating in now, do you want everything in the communications act -- would that be burdensome? >> i think the current situation where there is a competitive environment to innovate is the right approach. there are some parts of the requirement that i think will naturally come to the market, such as closed captioning and things that benefit consumers, but a lot of the regulations that have been written were written for a different environment than exists today. >> i agree in the sense that i think that this highlights some of the attic -- antiquated notions. i think it is something that, in connection with the

determinants, should be done in a broader scale, in a single regulatory filing. >> mr. johnson and others, is it not a little strange that a child could be watching the start channel --sprout channel, but the way the program got there could be subject to different rules whether it was provided by skype and joe, -- scott angel -- sky angel, netflix, cable, or dish? >> we are answering -- asking for a level playing field, but we have the same access that our competitors do. because of the definitions being questioned, we have not been able to access the programming. >> in general, i would say yes,

the rules should be the same. if you are going to be a provider. having said that, there are cases where things are a little bit different. you have to look at it on a case by case basis. cable is more of the local service. satellite is a national service. it remains to be seen about the ip networks of mr. johnson and others -- was the national or local tax -- will those be national or local? there will be differences because of that. >> mr. powell? >> i largely agreed. you are having the continued challenges of convergence, which technologies increasingly bring sameness to the ratings are provided and is targeted. that said, i would not make the hallmark of suggesting that

things are similarly situated just because they can produce the same content, the same show. there are different business models, different terms, different technologies underlying it. you can spend $186 billion over a decade to optimize high- quality content. that is very different from the same content being sold on itunes for $2.99 in a model largely designed to sell ipads. you have to be cognizant that these different business models are pursuing different central objectives. just because they have the same content does not make them identical. but as we look at a new statute, i do think that there should be more since then there is today. >> my time has expired. we're trying to get to the part of the issue here. everybody wants a different deal from the other guys deal. we are trying to figure out what

is the right regulatory regime to spur innovation, competition, and a marketplace that functions. your input is mostly of for that. i turned to my colleague from california, the woman who is proud to represent innovation and technology in this session. >> thank you. i think you hit the nail on the head. we all want to see an acceleration of innovation, that it not only be -- that we motivate things through clever it might be, a change of the law, rules at the sec, because this is one of the more exciting areas relative to our national economy that holds a much promise. there is an insatiable appetite on the part of consumers. i think that this morning's hearing is highly instructive,

but there are right below the surface all these different cases. i have four questions i want to ask, starting with you. we are very well aware of the consumer demand for innovative data in video applications like netflix, amazon video, and hulu, while at the same time wireless carriers are moving away from the unlimited data plans. there is a piece in the "new york times" yesterday talking about moving to meters. first of all, do you think that this curtails innovation? if so, how would you address it? >> i will start. first of all, there have been speed-based tears in internet

service for some time. tie --rs -- tiers in internet service for some time. the important thing is that, as long as there is competition among providers, the providers that give value to consumers will get business. if the tiers become inconvenient to the point we restrict choice, companies providing services will not succeed. the key thing is competition to ensure that the right outcome is reached. >> thank you. >> there is a lot of talk about -- >> you have 30 seconds. >> thousands of video channels. it is the golden age of video. i think that is true. the one thing we have to be mindful of is that internet video -- there is only one way to the internet video. that is over and internet pipe. there are very few enter --

carriers that provide internet video. in some areas, there is only one carrier. the ability to have competition in that marketplace is one thing you guys should be mindful of. in respect to our issues, one thing we have raised is the application of discriminatory data capps. c-- caps. >> when a discriminatory? >> when the same content comes from comcast -- one uses the data cap and one does not. if you will implement data caps, they should be assigned equally or not at all. >> let me give you an example. i agree with my colleagues to the left. a perfect example of discriminatory data caps is what comcast is doing with the xfinity.

it is exempting its own app from the data cap, but netflix is not. caps are not inherently bad, but when they are abused -- they can be anti-competitive. there is the incentive and ability to discriminate against competitors in online video. if i can say one more thing, one thing that really calls us is that we have been asking the fcc for two years to look at data caps, evaluate them, see how they are raised and lowered so that people can get an idea of what caps are intended to do. >> thank you. mr. funk, it is my understanding that 20% of your customers have dropped their cable or satellite service. " factors to you think would cause more customers to consider

an alternative rather than a complement to a traditional cable or satellite service? >> we see a percentage of users who have cut the cord and dropped a cable or satellite package. it is the minority. a variety of reasons for this. some cases it is cost, some cases it is living situation or individual program and preferences. what is interesting is that there are now tauruses that allow consumers that opportunity, things like netflix and hulu -- they give people who want a different selection of video at a lower price the ability to do that. choice of offerings is the key to providing the right service for all consumers. i think we provide one method for doing that. you will see a lot more innovation in the coming months and years about how to do that better. we are optimistic that a court-

cutting will be to continue to the video consumption, just in different matters. >> i have four questions that i would like the answer to in writing. i would like to thank all the witnesses. you have made this an important and instructive hearing on the future of video. thank you. >> thank you. the chair recognizes chairman emeritus. >> thank you, mr. terry. allow to take a little victory lap this morning. -- i want to take a little victory lap this morning. the college presidents announced we will have a football playoff in college football. i take a little bit of credit, because back when i was chairman of this committee, we had some hearings on that and got the ball rolling. and they announced the playoffs. i want to commend them, but also take credit for this committee highlighting that issue several

years ago ago. i do not think the four-team playoff is the ultimate, but it is a step in the right direction. when they get to eight or 16, they will have it. my first question is to the audience. i want somebody in the audience to tell me the original analog television -- how many channels were on them? anybody that is my age ought to know? i see one hand. how many? somebody. not how many you got, but how many were on the dial. there were 13. two to 13, but there were no no. -- there was no number one. you could go up to 13. as mr. call pointed out, there are now 900 programs available.

we have gone from -- my first tv, we had one channel. on a good day. one channel. now we have literally thousands. i think it is time to review the telecommunications video market. i think mr. walden and ms.eshoo and mr. upton and mr. waxman should be commended for agreeing to do this hearing. there are principles we need to remember as we look at this. this is just my scratching. i do not claim this is the universe, but obviously in order to have a program you have to have a tree or. -- creator. in this country, we have never -- -- regulated the creator. did you have to the producer.

to my knowledge, we have never regulated the producers. there have been efforts at censorship, but in terms of creativity and production we basically let that be a free market operation. once you have a program, you have to have somebody to package it and market it. you have to have somebody to transmit it. then, obviously, you have to have somebody to buy it, to view it, to consume it. when you get into the packaging and transmission is where we have a role of government. it is a truism that form follows function. our original regulatory format was based on the fact that, whether it was radio or television, there was a potential for a natural monopoly. government either tries to prevent monopoly or regulate monopoly. a lot of the rules we were talking about here originated

when the radio market and the early tv market was getting started. as mr. powell pointed out, the advent of the cable industry brought video to more people, but it also brought additional regulation. i was the only member of the committee back in the 1980's who voted against the reregulation of cable. the only one on either side of the aisle when president bush, the first president bush, was president. i was at the white house when we deregulated cable, when we passed a telecommunications act in 1996. there were at least four, maybe five or six witnesses at this table whose industry or company did not exist. did not exist. i could not tell you today what roku is.

i listened to the president of them try to explain what it is. i think, mr. chairman, i know it is too late to do a major bill in this congress, but i hope that in the next congress will take this up and use the original principles to review .he market in general, i think we are better off having less regulation and more enterprise and more market competition. unless the role of government is to provide a level playing field and prevented monopoly, if possible. if we cannot prevent a monopoly, to try to prevent undue market share. to be fair to all. i think this is an excellent hearing. i look forward to big things happening on this committee in the next congress. the last thing i will say. if we are going to do big

things, it has to be done on a bipartisan basis. this is not a buy -- partisan issue. it will go nowhere if it becomes r versus d,. the good news is that, with the leadership on both sides, it is doable. >> the gentle lady from california. you are now recognized for your five minutes. >> thank you very much, mr. chairman. i would like to welcome all the witnesses before us. i would like to acknowledge the great work that thehearst-w -- hearst-owned station kcra is doing in my area. local news and weather is important to us. i would like to ask about the work you are doing in preserving the shared work for localism.

i descended retransmission payments are used to support local news and weather. how you respond to concerns that changes in the retransmission consent regime could undermine quality local programming? >> thank you. first of all, retransmission -- in my understanding, some goes to the networked -- the major network may take some of that. a large amount of retransmission does not go to local broadcasters anymore. that is the way it started. now the national network will take a large portion of that. second, it is a major -- the broadcast model has retransmission consent fees and advertising fees. they get revenue from two sources. the troubling thing is that, despite the fact that retransmission fees have gone

up 400% since i started in this business, the amount of localism has gone down from a local news perspective, in the sense that they have had to operate more efficiently. many broadcasters are sharing a local news networks. in many cities, you will see that a network news show will be on multiple networks. it will be sharing resources. the newspaper did this as well. >> would like to comment on that? >> a 21st-century media company today needs a dual revenue stream. for years, the television industry operated with an advertising-only model. the cable industry was tough to get us -- launched to get a signal into rural areas, but then built a significant business on the back of the most popular programming available to americans in every committee, --

community, local television. i would say we are using the retransmission consent fees to invest in local businesses and help support the investment we have made in digital technology, which was several billion dollars of last decade. i feel that seem most local stations, many local stations, go from producing 20 hours a week to 40 hours a week of programming exclusively in the local news genre. we have added multi-cast channels are signals now, which are trying to get clearance on satellite and cable. i would disagree that that money is not being used in a constructive way to advance the business interests of the local television. >> mr. barrett, how would you respond to concerns from parties that have been raised about the impact that broadcast titian coordination and consolidation is having on recant -- retransmission consent negotiations? >> speaking for our company, we negotiate only on behalf of

owned stations of the hearst corporation. other companies have pulled the retransmission consent negotiations and crated bundles. i believe that in most cases people have been smart enough to acknowledge that they had kept the break up. he wants to buy a station separately from kcra. will sellkqca -- sell kqca separately. >> your thoughts, quickly? >> these transmissions are a government-sponsored monopoly. nobody else can bring that signal in. it is an unfair fight. what is happening -- i will give you one example. in wyoming, where one individual bought the rights to negotiate for all three broadcast networks and cheyenne, wyoming -- there were either no

local networks or you had to pay israel. the signal had to come down, so consumers -- you had to pay his rate. the signal had to come down because of unfair bargaining. it is wanting to be an unregulated monopoly. it is another to negotiate on behalf of multiple stations in the same market. >> which he say this is not the same throughout the country? it appears that what mr. barrett says, in certain areas, sacramento may not be the same as what you are talking about in wyoming. >> i would agree. each broadcaster handles a differently. mr. barrett's company handles it on a very professional manner, with just their networks. other people utilize their market power, and that mr. can happen. >> i have run out of time. i would like to submit written questions. >> absolutely.

>> thank you. now i recognize myself for five minutes. i will spend most of my time with you, mr. powell. a month to give an anecdotal story first about when i walked into my 17-year-old's room. we got a tv for his room for christmas, thinking that when he graduates it will be a good thing for him to take to college. hopefully he is going to college. [laughter] but i walked into his room and he is on his iphone. i say hey, what is going on? he says hey, watching netflix on his iphone when there is a tv sitting there. that is the world we are living. that is the -- those people who will dominate the markets for years to come. i think of turning on the tv, they do not.

>> he has the xbox, so he can do it that way as well. but he chose to do it on his fund. mr. powell, it is interesting -- he mentioned the 57%. in 1992, congress was concerned about the cable monopoly that does not exist today. the folks that are sitting on this panel -- what does that really mean to the cable industry? how has it evolves to be competitive? with reference -- with reference to the 1992 act, not to be redundant on ms. matsui's questions of retransmission, what other underbrush is there from 1992 that was so focused on

the cable industry? what do we need to do to clear out the brush? what specific things should congress look at it one to review the 1992 act? >> the first thing i would say is that the competitive dynamics, you have to increase value for consumers. you can do that through innovation and evolution of your service. and the competition we face, most formidably from the satellite companies, increases the quality of content we provide and the amount of content we provide. it forced us to look at new businesses for revenue development. it continues to be competitive, which is part of the dynamic. that helps drive investment in broadband. when we brought that into the bottle of services we offer, as well as telephony -- if you look at the wonderful things the over-the-top folks are doing, you see customers knowing that they too are going to have to

add the do you to your son to allow him to watch what they are selling over ipads and other things as well. that dynamic is driving a lot of innovation. i would give you a more global answer about what to change. i think the the 1992 act had two foundational elements. one, we were a virtually -- vertically integrated, exclusive at monopoly, and other things focused on broadcasting for the protection of the social compact that america supposedly wanted to advance. the vertical integration role when industry only has 14% of its operators integrate with congress -- content. rules that are premised on the idea that you have to guard against our incentives associated with paying a distributor or or owner of contents. we have a dialogue. does the kinds of rules we

should have to talk about. to be fair and honest, you have to reevaluate elements of the social compact. is it still the case in policy that the cable industry should continue to forcefully subsidize broadcasting models to must- carry retransmission consent and other elements? i am not prepared to answer them. >> one last question. hopefully we can have time for the broadcaster rabat of. we are getting calls in our office about cable rates going up. this goes to the vertical integration model that was thought of as cable, but you are not the content provider today. could you explain in 26 seconds how that is impacting the business model, and what we should tell our constituents? >> two things. any industry, under economics stress, does not tend to give affordability -- that does not

offer affordability is acting at its peril. our industry is very focused. we're seeing companies experimenting with lower-priced packages. basic rate -- packages are being offered. it is difficult to compare prices over time, because there is a much more in the suite of bundled services. dvr, more channels. i would leave you with one statistic. on an hourly basis, cable is 21 cents per hour. that is cheaper than netflix and most others. >> is that viewing hours, or 24 hours a day? >> viewing hours. >> at this time, we recognize the gentle lady from the virgin islands. donna christensen. >> thank you. welcome to all the panelists. the to: this hearing. a couple of questions. i probably will not use all my time.

can you hear me? you advocate for eliminating the broadcast carrying role. you also note the importance of protecting public and non- commercial stations. what policies would protect its programming without a must-carry rule? >> we would be comfortable with preserving must-carry four public stations. but as far as commercial stations are concerned, our feeling is that, if local broadcasters are indeed providing good local programming, cable carriers will want to carry them because customers will demand them. i do not think they need the protection of must-carry. >> mr. barrett, one of the concerns is advertising revenues. how are broadcasters looking to respond to the pressures on advertising revenues with new technologies and services? >> one of our challenges has been the accuracy of measurement

from nielsen. in the time-shifted world of viewing, there is a challenge for nielsen to capture that viewing. from -- the's cents revenue stream is different. [inaudible] >> i am a tv broadcaster. i should know that. >> could he answer that again? we will stop the time. >> our challenge as broadcasters is to make sure that the nielsen captures the viewing that has occurred on time- shifted television experiences

like. dvr's and the the new revenue opportunities we have with retransmission consent and mobile television, the extent that those ad revenues will help replace and support some of the downward pressure on ad revenues against our core video product. >> thank you. thank you, mr. chairman. mr. powell, you and the palace pointed out ways that the competitive environment in technology has changed and will continue to change. you recommended reexamining a lot of the regulatory rules and program access obligations, as well as must-carry transition content and non-duplication rights. some would say that weakening those rules would give cable an unfair competitive advantage. given the wide choices that are available today, how would you respond? >> that is a great question.

i would characterize it that i do not think the -- cable is looking for wild deregulation. we are looking for a more rationalized regulatory model that properly reflects the reality of the market. we are seeing a lot of roles that we are currently living under. if you except the way they are promised, they would fall under a standard by today's measurement. i'm willing to entertain that somebody could conceive of a different basis or a different reason for some sort of regulatory role, but i think that the burden should be to prove that from a zero base. given the reality of today, not the legacy of yesterday, why you still need this role or a new proposal? we are a cooperative partner in making sure that public policy is right, but we do think it should be justified based on what we are seeing in the

market. given the wonderful things you have heard, on balance that of the lighter weight. >> thank you. i yield back the balance of my time. >> thank you. at this time, we recognize mr. stern's for five minutes. >> thank you, mr. chairman. mr. barrett, you'll be getting all the questions. i have a question confined to my congressional district of gainesville. it appears that there is a dispute between directv and an abc affiliate w,cjb, -- wcjb, over retransmission consent fees. you are probably not familiar with that. >> i am not. we own benefit in orlando. >> some have suggested that because gainesville -- they cannot even get abc now. there is a blackout.

in your opinion, are these blackcaps becoming more opinion -- frequent? >> they are very infrequent. cox owns the station in orlando. of the past several years, there has been a new nbc officially licensed to gains though, to the marketplace. you may infer that we stood aside and did not challenge the nbc affiliate that went into that marketplace. >> what is your reply to that? are these blackouts becoming more the problem? >> they are becoming more frequent. >> we have a clear difference of opinion. >> perhaps we can get the committee -- >> they are becoming more frequent. we had six blackouts last year. we had nine last -- this year. >> let's take gainesville as an example. they cannot get abc, as they

call you up. what you say? >> you say that you are working with the broadcaster to negotiate fair rate for them. what happens, it is a bit of an unfair fight. the broadcaster -- the consumer has the choice to switch to another video provider, and their ratings only happen four times a year. they're on the measure four times a year by nielsen, which effect advertising rates. by law, cable companies cannot take down a network during a sweeps period. it is not fair, and it is becoming more prevalent. >> what you think the solution should be? is there a solution? >> i think there are some fairly easy solutions. as an example, if we are going to make a market determinate, i

am all for that. but that means, if you do not have been still abc station, you have to go to a standstill arbitration or have the right to enforce so that the customer does not do without the abc network while the dispute is going on. did you have the free-market system working with is a fair fight between the broadcaster. >> you have opened pandora's box. >> i gave you a chance to speak in him, so i do not know. i understand it broadcasters deploy services to allow viewers to watch live local mayors, a emergency alerts, and other programs on the go. what are the differences between bharrat and mobil and video over broadband currently available on cell phones? can mobil tv help alleviate pressure on wireless ands? >> the architecture of the

broadcast signal is the superior distribution cigna -- system. it does not run into broadband congestion. if i invite you to a yankee game in new york city and we wanted to go on line, you would have trouble in yankee stadium on any given weekend to connect with a broad band supplier that did not offer and did not have signal limitations. over the air broadcast signals could touch everybody in that city and simultaneously and would be no degradation. they are vastly superior distribution systems of the signal. >> my last question. i think we all understand the need for more spectrum. the fcc is moving forward with a rule on the spectrum. dish recently acquired the spectrum. what is the status of this item, and when will the fcc issue a final order, in your

opinion? >> went through the process last year and were denied that waiver by the sec. then we went into a roll-making process that is complete. comments are in from all the parties who might be effected -- effective in a positive or negative way. the roll-making -- rule making will be decided. we are hoping they can do that by the end of the summer. other than time, we realize that the fcc has a lot more on their plate. they have all the time -- fact guinea. hopefully will have something by the end of the summer. that would release 40 megahertz of spectrum. that would be big for the industry and jobs at a time when a lot of people are holding

their cash because of uncertainty. we're holding our cash because of f.c.c. uncertainty. we're hoping that businesses and government can work together to do the right thing for consumers and unleash productivity and investment in our states. >> thank you. the chair recognizes the gentle lady from colorado. >> thank you very much, mr. chairman. sitting here listening to this testimony, this reinforces my view that this retransmission consent issue is a very messy issue and there is not a one- size solution. most people would like to see a grievance -- grievance resolution that is fair to consumers. everyone can agree that congress should not two -- put too heavy of a figure on that scale. we should allow the market succumbed to a solution. i believe that we need access to free, diverse, local news and

programming. also information in any emergency. i was looking at some of my local news on these wild fires in colorado. there is a good example of how consumers in colorado springs need to be able to get access to local news. that is a balancing that we have to have. also, several members of the panel talked about mobile tv and how much promise that has. but the strong arguments supporting the value of broadcasting to consumers do not necessarily equate to a justification for pulling a signal from cable or satellite viewers if retransmission consent negotiations fail. i am thinking about this from a standpoint of my constituents, who work all day, barely have time to sit down in front of the television, wants to turn on the first game of the world series,

and held the rockies might be in it, though maybe not this year. but they cannot get the programming they want because we have retransmission consent talks. my first question is simple. if preferable, i would like to have a yes or no. that question is, do you think blackouts as a result of the failure of these agreements are fair to consumers now matter how rare or how often they might be? mr. powell, i will start with you. >> no. >> mr. barrett? >> no. >> know. >> no. >> i have a question for you about this issue. as you testified in your statement, as i think everybody knows, auto-hop technology lets

consumers skip over commercials or things they do not want to watch. as he said, that would be -- mean that when kids are watching tv they would not have to see junk food and alcohol commercials. i would submit that as the fall approaches many would skip over the shock and of tv commercials everybody will be treated to in the campaign this fall. i'm sorry? the volume, too. i think the volume is the issue. if people had auto-hop, it would let them decide what they want to see. talking about the legal issues and innovation in the free marketplace, does this simply improve on technology that is already available from the dvr,

to what is possible? >> yes. it was settled legally 28 years ago, but this does what every person in the page d -- pay-tv business does, allowing a customer to record a program with the push of a button. it allows customers to ship -- skip commercials. "auto-hop does is allow it to be more convenient. this morning, my alarm went off at 6:00, as does every morning. i do not have to set it every morning. auto-hop lets you make the choice to move to the commercial with the push of a button. it is, just as we have regulated the that we have to have a rating system for a tv

shows, we now have regulations to turn the volume down for commercials. it was amazing that we had to do that, that commercials could be that loud. we certainly do not need regulation that prevents a customer, as i understand, consumers do not have the right to skip a commercial -- we will fight the good fight for the consumer. >> from the standpoint of the broadcasters, i understand their business plan and the revenue concerns, but i think that we have to balance the consumer decision of what they want to see verses that business plan. we need to work something out. we can all agree on that. mr. barrett is eager to make a point. >> if this committee is interested in protecting localism. if you are interested in having your local station cover the wild fires in fort collins, the

autohpper and that technology will be damaging to the local business model, and you'll lose local station possibility to help. >> that is what i'm saying. for the local broadcasters, i am sympathetic to the business model, but we need to balance that with what the consumers want. it is notdis -- not dish that wants that choice, it is the consumer. thank you. >> the gentle lady from tennessee, ms. blackburn, is recognized for five minutes. >> i have a couple of questions that i want to get to today. i thank all of you for patients, your diligence, continuing to work on this issue. since you are the only female on the panel today, there is a lot i could say.

we need more women down there. let me go to something. you basically endorsed having usage based billing at one point by saying the isp should charge a flat rate and then charge a metered rates for usage that those over that limit. what i wanted to see is if you still agreed with that. if someone is a netflix subscriber and they are using a large portion of capacity, versus someone to check e-mail, should they be paying the same amount? >> we did not endorse the usage based billing. what we say is data caps are not bad. they can be abused. they can be used competitively to discourage people from is an

online video. -- using online video. one of the problems is, what is the rationale? the former chairman said, he said yesterday in response to questions about the investigation, we have to deal with congestion on our network. data caps are a very blunt instrument. congested only happens at one point in time. if i am back in of my data 3:00 in the morning, i'm not causing congestion. -- backing up my data at 3:00 in the morning, i am not causing congestion. it is important to know how they are set, how they are of value added. -- are evaluated. why did it take so long? we do not think usage-based

billing is bad. it is important to know how it is used. >> and wanted to talk about -- i want you to talk about mfn. in nashville, they understand the approach. with a lot of content produces, we have questions about the mfn and adm approach. if you want to respond and answer the second question that would be great. >> i would like to highlight something that she did say. it has been echoed by deleting

regulators. there is nothing wrong with usage based pricing, just like, if you run your air-conditioning all day long at the lowest temperature and your neighbor chooses to open the window, you are going to pay more money. inherently, usage based pricing is about price fairness. you are being allocated a portion of the cost. that is a well established econom principle. we do not think just because you can condemn it in words makes it so. the other thing i would say about it, caps are not the industry standard. in fact, as far as i know, there is not a cable company that employed c as aap -- employs a cap that penalizes a consumer. they are able to move to other

pricing bundles. this idea that we are all uniformly applying caps as a way of greeting scarcity is not factually accurate. there is a reason for usage- based pricing and threshold models. it is not about congestion management. it is about how do you fairly monetize a high fixed cost network? you have to put this thing in. you have to charge to users. we are not allowed to charge other corporations. we have to charge users alone. how to do that fairly is a question that cable companies are experimenting with. i am not that much of an expert. they have been around a long time. i would note that in the doj investigation that is under way, the doj looked at thesemfn's in the comcast-nbc merger and did not find anti-

trust violations. to be honest, they are contract specific. i am not privy to the contour is. they can serve as a beneficial purpose. i think they can be partial. that is what we rely on. >> my time has expired. i will yield back. >> the gentle lady yields back. the gentleman from pennsylvania is recognized for five minutes. >> thank you. i want to thank you for joining us today. i know my constituents and pittsburgh appreciate the hearst station. i want to elaborate on the comments about the hopper service. my understanding is there is a fair use exemption. can you explain to me if you believe the service is so different than regular dvr service?

>> i believe it goes beyond the various parameters. it is a copyright issue. it is a matter in the court. i will be interested to see how the court adjudicates that. it remains a threat to the local broadcasting system. one of the best qualities of the american society is that we have a local broadcasting system that is in place 210 markets. there is going to be a prioritization and a tradeoff. i am here on behalf of people who are committed to local communities. i think there has to be a high prioritization for preserving that localism that these stations provide. >> thank you. >> it is not a copyright issue. this is a perfect example of how copyright is misused to stop innovation. the sony purses universal case is clear. the public has a right to record

what they want to record off of tv. that was 1984. that was a long time ago. people have been skipping commercials for 50 years. this is about consumer choice. i remember, 10 years ago, the person from fox said it is ok for people to go to the bathroom to skip commercials. what the auto-hop service is doing is turning three steps into one. consumers should have the right to do that. >> thank you. in your testimony you spoke about your ultraviolet service. my understanding is it is a new way for consumers to be able to watch movies to the internet and other than having to purchase a dvd. -- through the internet rather than having to purchase a dvd. on the web site, you indicate that customers can stream

content to almost any device. that they can also download digital copies when they do not have good internet access. can they download it onto any device? >> my understanding is it has to be a device that is registered with the service. downloading is a component of it. they will have the ability to download it onto different devices. provided they are registered. >> i thought it was unclear on the website. based on the advertising, it seemed like a could download the content onto any device. i noticed some similar confusion from other uses who thought they were going to get a digital copy to watch anywhere. can you explain what some of the approved devices are? what would be improved device?

>> you could download it onto your laptop, a tablet, different things like that. i would have to get back to you with a specific list. a complete list of the types of devices. >> i am come curious -- i am curious about what these devices are. it might be easier for consumers, when you look at the website, for them to understand what they can and cannot use. just to follow up, does it give customers any guarantee they will always have access? i have my old dvd is. i can still go into the closet. i can pull out that dvd any time. is there a guarantee that people will always have access to it purchased? >> yes. it is my understanding it is a perpetual agreement.

they will have access to those. >> thank you. i will yield back. >> thank you. the chair will recognize himself for five minutes. we look at the video marketplace today. it is different from 1992 when congress passed the cable act. the laws still apply today. as if innovation has come to a halt. it is important to go back. we take for granted the technology. i can watch "swamp people" episodes. the laws were written when we had these devices for telephones. while i can do things today, the law was written when this device was your communication device. it is important to remember that technology has changed dramatically.

the law has not changed at all. we have a process where if you have a disagreement, you have to go to the fcc. maybe they roll your way, maybe they rule against it. -- you. traditional distributors -- since congress created the problem decade ago, it has a responsibility to fix them today. the current system forces people to turn to the sec for relief. -- fcc for relief. i question the wisdom of regulating new start-ups and innovative services as traditional providers. there are not recipes for encouraging the utmost innovation, investment, and competition. modernizing this decade old friend mark should focus on providing relief to all stakeholders.

sweeping with these actions will level the playing field for content creators and the distributors. negotiation for broadcast content will then look much like it does for cable programming, compensation is paid for the issuance of traditional licenses. we recognize the dramatic transformation that has occurred in the video marketplace by getting the government out of negotiations that to be left to the private sector. -- that should be left to the private sector. i know someone who has legislation to do just that. i want to ask some of our panelists questioned about this. first, if we can go across the board. yes or no. the believe the current video marketplace allows consumers sufficient choice over what, when, where, and how the what to do programming? >> i would say no.

>> justice no. >> no. >> yes. >> i agree. >> three, yes. >> yes. >> not yet. >> yes. >> we have a split amongst the panelists. i appreciate the work the nbc affiliate in new orleans does. do you have the legal rights to license all broadcast transmitted over your signals to netflix? is it something you have the legal right to do? >> we have limited rights from our networks with how we may transmit the signal to other

distributors. >> limited rights. your company as opposed to paying for access to content. >> we are not opposed. >> mr. johnson? >> do you mean local programming for cable channels? >> any content. >> we have been paying for it. >> all we do is pay for content. [laughter] >> this is something that already occurs. i want to ask, you own a stake in andy -- history, lifetime. those negotiations, when you are negotiating with different distributors, is that a free market? are there any compulsory copyright laws or retransmission consent agreements?

>> we negotiate on behalf of hearst television for the retransmission consent rights. we are not involved in any lengthy negotiations with hearst owned cable assets. >> i want to ask you about some comments he made. he made specific reference to the legislation -- you made specific reference to the legislation. you said cable and satellite providers, they would turn back the clock to the time when they confiscated and resold broadcast signals to their subscribers without maintaining a set. -- without getting consent. by law does not do that. we would revert to traditional copyright laws. under the legislation i filed, a company would have to pay for the content that he would provide. you say that providers could

confiscate the content. i wonder if you read the bill, have you looked at this statement? >> i have read the bill. if you say this is in this characterization, i will read it again. >> how would you -- you have read the bill, does this allow for people to confiscate content and give it away? >> of course not. the thing that keeps getting lost is that they get their transmission from the public. you get it for free from the public. in exchange, they are supposed to make that signal available. the notion that they are entitled to money for the signal, that has only been the case the last 20 years. from the advent of television broadcasting until 1992, other people were confiscating their

signals. it is supposed to be free. i do not know how you confiscate something that is free. >> if someone were to retransmit it they would have to pay. >> that makes more sense. it eliminates the middle men to request i would ask if you could go back and look. >> -- the middleman. >> i would ask if he could go back and look. >> i will go back and look. the public model has been in place since the 1920's. it acknowledges that spectrum is a limited resource. it belongs to the public. those most capable of serving the public interest should be in charge. local broadcasters have served the public interest very well. >> i was asking about the bill that was filed and the copyright

law that would be in effect. that no one would return to signal without giving compensation. -- retransmit your signal without giving compensation. the gentleman from michigan is recognized. >> i thank you. i commend you for holding this hearing. i welcome our witnesses. i have a lot of questions to ask. i hope you'll help me by a answering yes or no. i will make a statement. i will ask if there is anyone who disagrees. consumers want innovative, it informative, and entertaining new content absent of content and delivery methods will not matter. is there anyone that disagrees? content creators should be compensated fairly for their content with itself should be protected. is there anyone that disagrees?

speaking of content. there is some consternation. the latest inventions affect on content distribution. i would like to explore this more carefully. network currently being sued for copyright infringement in federal court over its new service? >> yes. we filed a declaratory ruling. let me finish, please. i want to make the record clear. we filed a declaratory ruling perry >> may i have order please. >> is it true it only automatically records and provides commercial skipping for

programs on the local affiliate stations in the market? >> nook, it does not. >> is this because the channels are in the most popular channels on your system? >> it has to do with a variety of factors. it is not a yes or no answer. >> i have an election coming up. like every politician everywhere. we all use political ads on local stations to reach our constituents. it potentially limits the ability of every member of the subcommittee and every of our challengers to reach constituents with ads to help

them to make up their minds on election day. do you understand and appreciate the concern that the politicians up here and other politicians would feel? >> i understand the concern. i am not a politician. i certainly understand consumers. >> given all of this. i hope you understand my skepticism when it comes to the latest offering and its affect on the future of video. i would like to learn the rest of my time to learn about how the cable industry is adapting to new federal communications regulations to provide subscribers with new types of content and ways to do this. is it true that the cable

industry supported the commission's open internet order? >> ultimately, yes. >> if you please. help me remember, was use-based billing considered and allowed by the open internet order? >> yes. >> were managed services also considered and allowed as part of the order? >> yes. >> i want to thank you for the way you are proceeding. our cable companies delivering products and services as well as practicing business models that comply with the open internet order? >> yes. >> in other words, cable is complying with the order. >> yes, we are. >> one last question. i want to commend you again.

i think it is very important that cable subscribers be able to access local content by smaller broadcasters. this is the question. what steps will ncta's member companies take to ensure subscribers can still access local broadcast signals affected by the few ability -- viewability orders? >> we agree it is important they continue to receive the signals. 80% have already gone digital. as to the remaining 20%, we have committed to low-cost boxes, similar to the boxes used in the hdtv switch. we have provided notice and a transmission. to allow that to happen

smoothly. >> thank you. thank you for your assistance and your candor. i yield back the balance of my time. >> the gentleman from illinois is recognized for five minutes. >> thank you. i want to think the witnesses for their appearance before the subcommittee. i have a question regarding the definition that i would submit for the record. or i will ask if we get another round of questions. if there is time remaining, i would like to hear some of the panelists use regarding the consumer -- panelists' views regarding privacy of ma tters. privacy needs to be addressed. there are emerging models not represented here today.

video offerings tied to social media platforms. first, i would like to ask questions that pertain to the importance of more diverse ownership of broadcasting wireless, cable, and information services licenses. while i agree with you that we should limit the ownership and control of wireless services, i like to look more into something that is written into your testimony. it says that, "the broadcast model permits a diversity of ownership and control that does not exist in wireless services." you know, for example,

minorities make up more than one-third of the u.s. population. yet, only an estimated 3% of television stations and 7.5% of commercial registration. -- commercial radio stations. i suspect that in cable ownership the numbers are much lower. there is sufficient diversity of ownership and offerings of diverse media content, should we be concerned that those levels could decrease even further following voluntary relocation? >> i think they suggest there is a limitation of the number of minorities that are involved in ownership. i think my comments and remarks

were meant to suggest there are 700 or so tv stations across the country. there is an opportunity for diverse ownership. there may be in a world where the national licensees is the reality we live with. i think the country is at risk in terms of less diversity. i would note that minority groups are very dependent on broadcast perception. 28 percent of asian households, 23% of latino households are receiving broadcast reception. >> thank you very much. i would like to enter into the record a copy of a letter that was just filed with the fcc a couple days ago. asking the fcc to study the state of black radio ownership and programming diversity and

adopt rules that adjust these disparities. even though we are taking up a video, these concerns are about ownership. in video, it is even more acute and troubling to >> no objection. >> this is a question i have about certificates. in the past, the association you are representing has endorsed the passage of legislation to establish a new communications certificate program. is that still their position? >> yes, it is. we would continue to support such an initiative. >> the association that you are representing, the ncta,

previously endorsed passage of legislation for a new certificate program. is that still the position? >> yes, in 2003 when senator mccain introduced tax certificates, i was an enormous proponent and remains a. >> thank you very much. i would like to enter into the record the fcc's report recommended congress reinstates a tax certificate policy. i will point out a statement of the former commissioner accompanying the order as being the source for the minority ownership percentage i cited earlier. with that, i yield back the balance of my time. >> the gentleman yield. there is no objection to the unanimous consent motion.

the gentleman from massachusetts. >> thank you. could you tell me what to believe the effect would be of the proposed deal between horizon and spectrum? -- verizon and spectrum? >> the deal will have several negative affects, both for competition and consumers. one is, because there are these side agreements. there is the sale and there are side agreements. two of the side agreements, they are agreements between the cable companies and verizon to lay down arms and no longer compete. verizon and at&t will get wireless. cable will get the wire industry. there is something called the joint operating entity, the joe.

it is an agreement between the five cable companies and verizon to develop patents and technologies that would help stream video from wireless to weather system -- wire systems. that can be anti-competitive and used against a company. if he wanted to use that, he would be charged higher license fees. he might be told, you are not part of the club. you cannot have this. >> are you afraid of that? that you might not be part of the club? that there is going to be a cozy cooperation that exists? >> unfortunately, we have not seen the and redacted comment. i cannot say what they say. we have a concern that the two vicious competitors might get together to not compete with

each other and exclude other people from competing with them. >> that has always been the beauty of the 1992 and 1996 act. -- acts. it created the conditions for darwinian paranoia and is in competition. -- inducing competition. it ultimately results in innovation. you always have to be wary, especially when people start talking about rewriting the 1992 and 1996 telecommunications act. that there are too many players. some of the smaller players do not need protection. let me go to you. you just heard the two comments. how would you comment?

>> i would be limited. as the head of the association, i am not a party to the transaction. i would say that all deserve of vigilance. that is what we have an antitrust process. we should rely on the confidence and the able skills of both the federal communications commission and the and the trust division to scrutinize transactions for those purposes -- and the antitrust division to scrutinize transactions for those purposes. it is not clear that there would not be continued competition among these companies. that is why we have an antitrust process. i have a lot of faith in it. >> let me ask you, july 1 is the deadline for the completion of the rulemaking and the

provisions that i built into a 2010 law for video accessibility. can you give us an update as to where you are in terms of complying with that? >> speaking on behalf of per se television, -- of hearst television, we are well in hand. our implementation will be fully complete. on behalf of the nba, the same can be said. >> mr. o'leary perry >? >> i would say the same thing. we are working towards compliance. i am pleased with the way the process has gone perry . >> it is important. that the death and the blind have access. that they are able to fully participate. it is very, very important we

get the full cooperation. we thank you for your positive comments about the process. i think then you, mr. chairman. i yield back. >> -- i thank you, mr. chairman. i yield back. >> i believe that is the last member. i want to thank all of the participants. as you heard, they may have other questions this may submit for the record -- they may submit for the record. your presence helps us and our work. these are consequential issues we are discussing. your input is really helpful. i thank you for but dissipating. with that, the hearing is adjourned. -- for participating. with that, the hearing is adjourned. [captioning performed by national captioning institute] and i [captions copyright national cable satellite corp. 2012]

what's coming up next, a discussion at the brookings institution about the defense budget. senator john mccain talks about violence in syria. later, the supreme court oral argument on the constitutionality of the health- care law. tomorrow morning, we will be joined by republican, and member of the oversight and government reform committee, to talk about the congressional agenda. we will look ahead to tomorrow's supreme court decision.

we will also talk about the upcoming decision with vermont democratic representative peter welch, also a member of the oversight and government reform committee. live on c-span every day at 7:00 a.m. eastern. >> this is the conversation we need to have that nobody is willing to have. what role will the government play in how things are financed? >> in"reckless endangertment," these of crime -- subprime lending collapse is detailed. >> if you want to subsidize housing, we want to talk about it, the populace agrees it is something we should subsidize, put it on the balance sheet. make it clear. make it evident. make everyone aware about how much it is costing. when you deliver it through

these third party enterprises, fannie mae and freddie mac, when you deliver the subsidies through a public company, executives who can expect a lot of the subsidy for themselves, -- extract a lot of the subsidy for themselves, that is not a good way of subsidizing. we saw the end of that movie in 2008. >> more, sunday at 8:00. >> automatic budget cuts currently in place would eliminate $500 billion from the national defense budget over the next 10 years. these cuts, called sequestration, are the results of an earlier congressional agreement. yesterday, a panel of defense analysts talked about the effect of sequestration on the pentagon's budget. this is an hour and 15 minutes.

>> let me convene us back into order. i direct the 21st century defense initiative. i am excited to welcome you all back. >> 0 rather than focusing on compromise and entitlement reform, the discourse out there seems to be a cross between two strategies. one is a deliberate strategy to maximize the level of panic over what it might mean for the u.s. military national security. i cannot resist but throwing across the idea that have been more than what the 50,000

marines, they would not be able to carry out -- have been more than a quarter to thousand marines, but they would not be able to carry out -- 150,000 marines. the navy would be the same size as 1915. i would prefer to have one submarine today than two from back then. we have a second strategy. to deliberately not plan or prepare for the nightmare contingency we are laying out there. if this was "spinal tap" the volume would be set to 11 while pentagon planners were told to wear ear muffs. it may make for good politics, it is a poor way to approach national security discussions.

today, this panel is very much intended to get our way past that. to bring to gather a group of some of the top experts and dig deep into what the implications of the sequestration might mean for the industry and for national security as well as talk about alternative solutions. to treat it seriously rather than turning the volume up to 11. the panel features doctor rebecca grant. she earned her ph.d. in international relations. she worked for the rand corp. she is presently the director of the institute for airpower studies, which is an air force association nonprofit dedicated to studying all forms of air power. she is president of iris independent research. then we will hear -- she

received a master's from georgetown university. she served as a fellow in the secretary of defense. she served as a research fellow for national security. as well as a staff member of the 2010 defense review. she is currently a fellow at the center for security at the american enterprise institute. finally, we are welcoming back tom davis. if former brookings fellow. he is a graduate of the u.s. military academy. he was a program analyst for the army. he also commanded an act leroy -- and artillery battalion. he was an assistant professor at west point. currently, he is vice president at general dynamics. in insists corporations

global opportunities. a set of great expert. first, we will hear from rebecca, the mackenzie, then tom. >> it is great to be here today. we are going to have a lot to talk about with the sequestration possibilities. i want to be two things which probably all the. one is -- i want to review two things which you probably all know. we have been spending at historical highs. you have probably all seen the chart that looks at the top line. what strikes me is that our spending has been higher than it was during the korean war. if you are like me you say, how did we get into this situation? sequestration itself is a frightening thing. you talked about "spinal tap," i was trying to think of a movie that would give us a sense of

what this is like. the only one that came to mind is "rebel without a cause." in the final moment, the limousine driver catches his sleeve on the carpet -- the losing driver catches his sleeve on the car. the hard thing about sequestration is we have come off a period of three rounds of budget-driven cut. we may all agree that cuts are in order. the problem is we do not see these tied to a national strategy. two strategic decisions. sequestration is tough. as a first panel mentioned, sequestration means a cut, probably 10%, to each account.

if it is spending $51 million, take out 10%. it is such a difficult way. i want to talk about two ways we might see this unfold. i will tell you why we need to avoid sequestration and get to the place we need to go, which is a strategy-driven heart set of toys. -- hard set of choices. when we think about the worst case, what comes to mind is a place in afghanistan that is not able to get its share drop of water, ammunition. there are other parts of the

are likelyget hyathat to suffer. you all know what the counts are about. they are put together for fy 2013. they comprise $70 billion. even if we have a stay of execution, one possibility is for congress to go back and say, we are not going to make you cut 10%. we'll give you a bogey of $50 billion. we will let you find a way to go at it. when you have $70 billion in r&d, maybe that is a tempting target. let's talk about the basic part of that. these are the little billions of

dollars. they comprise some of the most essential money for renovation. they include basic research and applied research that attempts to make new technologies and convert them into something with a useful military application. these can be quite important. if we see them go away, we pay the price as a lost technology opportunity. there is another problem. that is in the remaining $50 billion in the account. this is money that goes into what the military likes to call, demonstration and development. 64, 65, 66, 7. what are in those programs? the army has work. the navy has big accounts in jtrs.

the air force has $25 billion . they cover classified categories. also things like high energy laser and a gps control. there is another $17 billion in the r&d budget. it includes things we like, things like cider, homeland security, crossover initiatives, ballistic missile defense initiatives. in short, these are not the kind of things we can afford to blindly slash. programmable sequestration, or through attempting to direct a big $50 billion bogey. here is the reason we should not do it. take something like the f-35 program. that still has some are in the money. it is largely a production

program. what we learned about other programs, to use another air force one, long-range strikes, is pretty compelling about the cost. a study that was completed in 2011 found that insufficient r&d was a major cost driver and four major programs, f-35, the ddg 1000 destroyer, and the army apache helicopter. take money out of r&d in the will bank on more cost to the program -- and you will bent on more cost to the program. we can talk more about zero and m -- o am m. -- o and m. there is also a desire to bring the ships back to port and do things like that. is the defenseee

budget needs to come down. slashing through these accounts is not the way to do it. time to get to a study did discussion and make the hard choices. -- a strategy discussion and make the hard choices. >> thank you for having me on the panel. i am going to take a different angle. rebecca is a good friend. we agree on a lot of things. i would catch it, not everyone agrees it has to come down. of the budget cuts have not been allocated towards debt reduction. that is the big elephant and the role. -- in the room. that is not the case. the budget sitting on the hill proposes an increase for every other federal agencies.

dod is the only federal agency taking any spending cuts that were supposedly applied to debt reduction. the debt is not coming down. i was just at a meeting with a senior air force official. the discussion was about the active component cuts and a high the reserve component cuts. it is a great example of what a nice edge the u.s. military it is operating under. most budget go to people. the delta of 1500 people in the air force, could they have done that any other way? it is driven by structure reduction. you are familiar with the debate and the family feuds.

it cannot be done any of the way. to think there is this money that could be stored aside from sequestration, i want to talk about solutions. one of the favorite solutions baffles the mind. we are already talking about the 487 and how difficult that has been. sequestration is going to get brought down. it is not going away. that should be the discussion. ultimately, in the end, even if congress backs in, the pentagon will get flexibility. it will never come down to the program product activity level because of the damage. i have been thinking about, what are the solutions? let's get aside from how awful

it is. there is consensus it is ridiculous. it is a silly bill that passed. it is an awful sophie's choice that was put into place. the solution, while i was at the bloomberg news conference, i heard a lot of members talking about sequestration, senator mccain, senator levin, norm dick, congressman welch. i thought i might hear something new. i did not hear much new. the couple of things. washington loves to dust off the old plan that died before there was the new plan and recycle old ideas. you know where everyone is going to go. all of the things are going to turn back. it the right solution. we are not going to resurrect

big ideas. steve made a good point about the grand bargain. i have met with senator warner;s staff. a lot of members want the grand bargain. it is not all gloom and doom houghm. , what of the old plans? -- what are the old plans? tax increases are not going to pay down sequestration. there is no dollar for dollar offset. since then with obamacare. -- same thing with obamacare. the president's commission, that is the favored position there was a lot of work and thought. what it gives us is the exact recipe that was outlined.

there is more defense budget reductions beyond the $487 billion. if you break down the defense side, it is always great to look at these. it is important. that is key. if we are going to dust off any plan, it should look at government spending. if i am breaking down the the baselinesiece, have changed. all the numbers are different. you get the idea. focus on modernization. pick your program. it is probably in there for a reduction or cancellation. there were some ground-breaking changes on the bipartisan level to talk about defense. it is something i know a lot of

our colleagues are thinking about. about the way you pay the uniforms, not today's force. changes to, should dod operate commissaries? should we let the private sector do that? interesting ideas. up for debate. it does not mean we are going to enact the whole thing. it is an interesting idea. the proposal, slightly different defense numbers. it came in at the same amount. it would freeze defense budget for five years and then only grow at the rate of inflation. it seems reasonable. still a big bogey. you are looking at double in the -- at doubling the 487. senator mccain reference to another plan.

they are going to dust it off. the other one is the super committee. yes, it failed. there was a lot of work done. there were a lot of negotiations. a lot of the members have come to an agreement in theory. they have just not taken the vote. that is why we are waiting on the lame-duck. it is about taking the vote. there is a large center already there. senator mccain referenced the proposal put forward as part of the super committee for tax reforms of various sorts. it means a lot of different things to a lot of different people. as senator mccain said, tax increases are in the eye of the beholder. eliminating ethanol subsidies, which congress is doing, some consider that tax reform, it generates additional revenue.

things like that, those are the things that were on the table. i think the super committee, deliberations and packages they have put together, it is also a place to look. the super committee was looking at more defense budget cuts. it was not, we will take the 487 and go home. they're looking at 200 billion to $250 billion. there was an emphasis on trying to protect the short-term acquisition cycle, not breaking programs. not to break r&d. it breaks programs in the future. not to increase the unemployment benefit as a direct result of the next quarter based on laos. -- lay-offs. if you have a net increase in unemployment benefit, have you saved a dollar? there was a lot of work in the ssince the committee. this is where congress is going

to start from. >> tom? >> thank you. i was a battalion commander in does it storm. -- in desert storm. our colonel was marty dempsey. we had him out to dinner. he said, it is a great thrill to be here with all his old familiar faces. i know why you are old, i am trying to figure out why you are familiar. i feel in his shoes. am at a point, i am actinbattg cleanup. i had a whole bunch of very pithy comments. i think i'm going to restricted to a couple. i saw a comment in the economist magazine not too long ago. the editorial page had a comment

that said it would be an extraordinary event if america sacrificed its position as the royal -- as the world military power as a result of an accident. it would be an accident. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

. .

affordable care act addresses a fundamental and enduring problem in our health care system and our economy. insurance has become the predominant means of paying for health care in this country. insurance has become the predominant means of paying for health care in this country. for most americans, for more than 80% of americans, the insurance system does provide effective access. excuse me. but for more than 40 million

americans who do not have access to health insurance either through their employer or through government programs such as medicare or medicaid, the system does not work. those individuals must resort to the individual market, and that market does not provide affordable health insurance. it does not do so because, because the multibillion dollar subsidies that are available for the, the employer market are not available in the individual market. it does not do so because erisa and hipaa regulations that preclude, that preclude discrimination against people based on their medical history do not apply in the individual market. that is an economic problem. and it begets another economic problem. >>why aren't those problems that the federal government can address directly? >> they can address it directly, justice scalia, and they are addressing it directly through

this, through this act by regulating the means by which health care, by which health care is purchased. that is the way this act works. under the commerce clause, what, what congress has done is to enact reforms of the insurance market, directed at the individual insurance market, that preclude, that preclude discrimination based on pre-existing conditions, that require guaranteed issue and community rating, and it uses -- and the minimum coverage provision is necessary to carry into execution those insurance reforms. >> can you create commerce in order to regulate it? >> that's not what's going on here, justice kennedy, and we are not seeking to defend the law on that basis. in this case, the -- what is being regulated is the method of financing health, the purchase of health care.

that itself is economic activity with substantial effects on interstate commerce. and >> any self purchasing? anything i -- you know if i'm in any market at all, my failure to purchase something in that market subjects me to regulation. >> no. that's not our position at all, justice scalia. in the health care market, the health care market is characterized by the fact that aside from the few groups that congress chose to exempt from the minimum coverage requirement -- those who for religious reasons don't participate, those who are incarcerated, indian tribes -- virtually everybody else is either in that market or will be in that market, and the distinguishing feature of that is that they cannot, people cannot generally control when they enter that market or what they need when they enter that market. >> well, the same, it seems to me, would be true say for the market in emergency services -- police, fire, ambulance, roadside assistance, whatever.

goingn't know when you're to need it, you're not sure that you will. but the same is true for health care. you don't know if you're going to need a heart transplant or if you ever will. so there is a market there. to -- in some extent, we all participate in it. so can the government require you to buy a cell phone because that would facilitate responding when you need emergency services? you can just dial 911 no matter where you are? >> no, mr. chief justice. think that's different. it's -- we -- i don't think we think of that as a market. this is a market. this is market regulation. and in addition, you have a situation in this market not only where people enter involuntarily as to when they enter and won't be able to control what they need when they enter but when they >> it seems to me that's the same as in my hypothetical. you don't know when you're going to need police assistance.

you can't predict the extent to emergency response that you'll need. but when you do, and the government provides it. i thought that was an important part of your argument, that when you need health care, the government will make sure you get it. well, when you need police assistance or fire assistance or ambulance assistance, the government is going to make sure to the best extent it can that you get it -- get it. >> i think the fundamental difference, mr. chief justice, is that that's not an issue of market regulation. this is an issue of market regulation, and that's how congress, that's how congress looked at this problem. there is a market. insurance is provided through the market system -- >> do you think there is a, a market for burial services? >> for burial services? >> yes. >> yes, justice alito, i think there is. >> all right, suppose that you and i walked around downtown washington at lunch hour and we found a couple of healthy young people and we stopped them and we said, "you know what you're doing? you are financing your burial services right now because eventually you're going to die, and somebody is going to have to pay for it, and if you don't have burial insurance and you haven't saved money for it,

you're going to shift the cost to somebody else." isn't that a very artificial way of talking about what somebody is doing? >> no, that >> and if that's true, why isn't it equally artificial to say that somebody who is doing absolutely nothing about health care is financing health care services? >> it's, i think it's completely different. the -- and the reason is that the, the burial example is not -- the difference is here we are regulating the method by which you are paying for something else -- health care -- and the insurance requirement -- i think the key thing here is my friends on the other side acknowledge that it is within the authority of congress under article i under the commerce power to impose guaranteed-issue and community rating forms, to end -- to impose a minimum coverage provision. their argument is just that it has to occur at the point of sale, and >> i don't see the difference. you can get burial insurance. you can get health insurance. most people are going to need health care. almost everybody.

everybody is going to be buried or cremated at some point. what's the difference? >> well, one big difference, one big difference, justice alito, is the -- you don't have the cost shifting to other market participants. here >> sure you do, because if you don't have money then the state is going to pay for it. or some >> that's different. >> or a family member is going to pay. >> that's a difference and it's a significant difference. in this situation one of the economic effects congress is addressing is that the -- there -- the many billions of dollars of uncompensated costs are transferred directly to other market participants. it's transferred directly to other market participants because health care providers charge higher rates in order to cover the cost of uncompensated care, and insurance companies reflect those higher rates in higher premiums, which congress found translates to a thousand dollars per family in additional health insurance costs. >> but isn't that a very small part of what the mandate is doing? you can correct me if these figures are wrong, but it appears to me that the cbo has estimated that the average premium for a single insurance policy in the non-group market would be roughly $5,800 in --

in 2016. respondents -- the economists have supported -- the respondents estimate that a young, healthy individual targeted by the mandate on average consumes about $854 in health services each year. so the mandate is forcing these people to provide a huge subsidy to the insurance companies for other purposes that the act wishes to serve, but isn't -- if those figures are right, isn't it the case that what this mandate is really doing is not requiring the people who are subject to it to pay for the services that they are going to consume? it is requiring them to subsidize services that will be received by somebody else. >> no, i think that -- i do think that's what the respondents argue. it's just not right. i think it -- it really gets to a fundamental problem with their argument. >> if you're going to have insurance, that's how insurance

works. >> a, it is how insurance works, but, b, the problem that they -- that they are identifying is not that problem. the -- the guaranteed issue and community rating reforms do not have the effect of forcing insurance companies to take on lots of additional people who they then can't afford to cover because they're -- they tend to be the sick, and that is -- in fact, the exact opposite is what happens here. the -- when -- when you enact guaranteed issue and community rating reforms and you do so in the absence of a minimum coverage provision, it's not that insurance companies take on more and more people and then need a subsidy to cover it, it's that fewer and fewer people end up with insurance because their rates are not regulated. insurance companies, when -- when they have to offer guaranteed issue and community rating, they are entitled to make a profit. they charge rates sufficient to cover only the sick population because health >> could you help -- help me with this. assume for the moment -- you may disagree. assume for the moment that this

is unprecedented, this is a step beyond what our cases have allowed, the affirmative duty to act to go into commerce. if that is so, do you not have a heavy burden of justification? i understand that we must presume laws are constitutional, but, even so, when you are changing the relation of the individual to the government in this, what we can stipulate is, i think, a unique way, do you not have a heavy burden of justification to show authorization under the constitution? >> so two things about that, justice kennedy. first, we think this is regulation of people's participation in the health care market, and all -- all this minimum coverage provision does is say that, instead of requiring insurance at the point of sale, that congress has the authority under the commerce power and the necessary proper power to ensure that people have insurance in advance of the

point of sale because of the unique nature of this market, because this is a market in which -- in which you -- although most of the population is in the market most of the time -- 83% visit a physician every year, 96% over a five- year period -- so virtually everybody in society is in this market, and you've got to pay for the health care you get, the predominant way in which it's -- in which it's paid for is insurance, and -- and the respondents agree that congress could require that you have insurance in order to get health care or forbid health care from being provided >> why do you -- why do you define the market that broadly? health care. it may well be that everybody needs health care sooner or later, but not everybody needs a heart transplant, not everybody needs a liver transplant. why >> that's correct, justice scalia, but you never know

whether you're going to be that person. >> could you define the market -- everybody has to buy food sooner or later, so you define the market as food, therefore, everybody is in the market, therefore, you can make people buy broccoli. >> no, that's quite different. that's quite different. the food market, while it shares that trait that everybody's in it, it is not a market in which your participation is often unpredictable and often involuntary. it is not a market in which you often don't know before you go in what you need, and it is not a market in which, if you go in and -- and seek to obtain a product or service, you will get it even if you can't pay for it. it doesn't >> is that a principal basis for distinguishing this from other situations? i mean, you know, you can also say, well, the person subject to this has blue eyes. that would indeed distinguish it from other situations. is it a principle basis? i mean, it's -- it's a basis that explains why the government is doing this, but is it -- is it a basis which shows that this is not going beyond what -- what the -- the system

of emerated powers allows the government to do. >> yes, for two reasons. first, this -- the test, as this court has articulated it, is -- is congress regulating economic activity with a substantial effect on interstate commerce? the way in which this statute satisfies the test is on the basis of the factors that i have identified. if >> mr. verrilli, i thought that your main point is that, unlike food or any other market, when you made the choice not to buy insurance, even though you have every intent in the world to self-insure, to save for it, when disaster strikes, you may not have the money. and the tangible result of it is -- we were told there was one brief that maryland hospital

care bills 7% more because of these uncompensated costs, that families pay a thousand dollars more than they would if there were no uncompensated costs. i thought what was unique about this is it's not my choice whether i want to buy a product to keep me healthy, but the cost that i am forcing on other people if i don't buy the product sooner rather than later. >> that is -- and that is definitely a difference that distinguishes this market and justifies this as a regulation. >> all right. so if that is your difference -- if that is your difference, i'm somewhat uncertain about your answers to -- for example, justice kennedy asked, can you, under the commerce clause, congress create commerce where previously none existed. well, yeah, i thought the answer to that was, since mcculloch versus maryland, when the court said congress could create the bank of the united states which did not previously

exist, which job was to create commerce that did not previously exist, since that time the answer has been, yes. i would have thought that your answer -- can the government, in fact, require you to buy cell phones or buy burials that, if we propose comparable situations, if we have, for example, a uniform united states system of paying for every burial such as medicare burial, medicaid burial, chip burial, erisa burial and emergency burial beside the side of the road, and congress wanted to rationalize that system, wouldn't the answer be, yes, of course, they could. >> so >> and the same with the computers or the same with the -- the cell phones, if you're driving by the side of the highway and there is a federal

emergency service just as you say you have to buy certain mufflers for your car that don't hurt the environment, you could -- i mean, see, doesn't it depend on the situation? >> it does, justice breyer, and if congress were to enact laws like that, we >> we would be -- or >> my responsibility -- and i would defend them on a rationale like that, but i do think that we are advancing a narrower rationale. >> well, then your question is whether or not there are any limits on the commerce clause. can you identify for us some limits on the commerce clause? >> yes. the -- the rationale purely under the commerce clause that we're advocating here would not justify forced purchases of commodities for the purpose of stimulating demand. we -- the -- it would not justify purchases of insurance for the purposes -- in situations in which insurance doesn't serve as the method of payment for service >> but why not? if congress -- if congress says

that the interstate commerce is affected, isn't, according to your view, that the end of the analysis. >> no. the, the -- we think that in a -- when -- the difference between those situations and this situation is that in those situations, your honor, congress would be moving to create commerce. here congress is regulating existing commerce, economic activity that is already going on, people's participation in the health care market, and is regulating to deal with existing effects of existing commerce. >> that -- that it seems to me, it's a -- it's a passage in your reply brief that i didn't quite grasp. it's the same point. you say health insurance is not purchased for its own sake, like a car or broccoli, it is a means of financing health care consumption and covering universal risks. well, a car or broccoli aren't purchased for their own sake, either. they are purchased for the sake

of transportation or in broccoli, covering the need for food. i -- i don't understand that distinction. >> the difference, mr. chief justice, is that health insurance is the means of payment for health care and broccoli is >> well, now that's a significant -- i'm sorry. >> and -- and broccoli is not the means of payment for anything else. and an automobile is not >> it's the means of satisfying a basic human need, just as your insurance is a means of satisfying -- >> but i do think that's the difference between existing commerce activity in the market already occurring -- the people in the health care market purchasing, obtaining health care services -- and the creation of commerce. and the principle that we are advocating here under the commerce clause does not take the step of justifying the creation of commerce. it's a regulation of the existing commerce. >> general verrilli, can we -- can we go back to, justice breyer asked a question, and it kind of interrupted your answer to my question. and tell me if i'm wrong about this, but i thought a major, major point of your argument was that the people who don't

participate in this market are making it much more expensive for the people who do, that is, they -they will get, a good number of them will get services that they can't afford at the point where they need them, and the result is that everybody else's premiums get raised. youru're not -- it's not -- your free choice just to do something for yourself. what you do is going to affect others, affect them in -- in a major way. >> that -- that absolutely is a justification for congress's action here. that is existing economic activity that congress is regulating by means of this rule. >> general verrilli, you -you could say that about buying a car. if -- if people don't buy cars, the price that those who do buy cars pay will have to be higher. so you could say in order to bring the price down, you are

hurting these other people by not buying a car. >> that is not what we are saying, justice scalia. >> that's not -- that's not what you're saying. >> that's not -- not >> i thought it was. i thought you were saying other people are going to have to pay more for insurance because you're not buying it. >> no. it's because you're going -- in the health care market, you're going into the market without the ability to pay for what you get, getting the health care service anyway as a result of the social norms that allow -- that -- to which we've obligated ourselves so that people get health care. >> well, don't obligate yourself to that. why -- you know? >> well, i can't imagine that that -- that the commerce clause would --would forbid congress from taking into account this deeply embedded social norm. >> you -- you could do it. but -- but does that expand your ability to, to issue mandates to -- to the people? >> i -- i -- this is not a purchase mandate. this is a -- this is a law that regulates the method of paying for a service that the class of people to whom it applies are either consuming >> general >> -- or -- or inevitably will consume. >> general, i see or have seen three strands of arguments in

your briefs, and one of them is echoed today. the first strand that i have seen is that congress can pass any necessary laws to effect those powers within its rights, i.e., because it made a decision that to effect, to effect mandatory issuance of insurance, that it could also obligate the mandatory purchase of it. the second strand i see is self-insurance affects the market, and so the government can regulate those who self- insure. and the third argument -- and i see all of them as different -- is that what the government is doing, and i think it's the argument you're making today -- that what the -- what the government is saying is if you pay for -- if you use health services, you have to pay with

insurance. because only insurance will guarantee that whatever need for health care that you have will be covered. because virtually no one, perhaps with the exception of 1% of the population, can afford the massive cost if the unexpected happens. this third argument seems to be saying what we are regulating is health care, and when you go for health services, you have to pay for insurance, and since insurance won't issue at the moment that you consume the product, we can reasonably, necessarily tell you to buy it ahead of time, because you can't buy it at the moment that

you need it. is that -- which of these three is your argument? are all of them your argument? i'm just not sure what the >> so, let me try to state it this way. the congress enacted reforms of the insurance market, the guaranteed-issue and community- rating reforms. it did so to deal with a very serious problem that results in 40 million people not being able to get insurance and therefore not access to the health care environment. everybody agrees in this case that those are within congress's article i powers. the minimum coverage provision is necessary to carry those provisions into -- into execution, because without them, without those provisions, without minimum coverage, guaranteed issue and community rating will, as the experience in the states showed, make matters worse, not better. there will be fewer people covered, it will cost more. now the -- so >> so on that ground, you're answering affirmatively to my colleagues that have asked you the question, can the

government force you into commerce. >> so -- no. >> and there is no limit to that power. >> no. no. because that's -- that's the first part of our argument. the second part of our argument is that the means here that the congress has chosen, the minimum coverage provision, is a means that regulates the -that regulates economic activity, namely your transaction in the health care market, with substantial effects on interstate commerce, and it is the conjunction of those two that we think provides the particularly secure foundation for this statute under the commerce power. >> general, you've talked on -a couple of times about other alternatives that congress might have had, other alternatives that the respondents suggest to deal with this problem, in particular, the alternative of mandating insurance at the point at which somebody goes to a hospital or an emergency room and asks for care. did congress consider those alternatives? why did it reject them?

how should we think about the question of alternative ways of dealing with these problems? >> i do think, justice kagan, that the point of difference between my friends on the other side and the united states is about one of timing. they have agreed that congress has article i authority to impose an insurance requirement or other -or other penalty at the point of sale, and they have agreed that congress has the authority to do that to achieve the same objectives that the minimum coverage provision of the affordable care act is designed to achieve. this is a situation if which we are talking about means. congress gets a substantial deference in the choice of means, and if one thinks about the difference between the means they say congress should have chosen and the means congress did choose, i think you can see why it was eminently more sensible for congress to choose the means that it chose. >> i'm not sure which way it cuts. if the congress has alternate means, let's assume it can use the tax power to raise revenue

and to just have a national health service, single payer. how does that factor into our analysis? in the one sense, it can be argued that this is what the government is doing, it ought to be honest about the power that it's using and use the correct power. on the other hand, it means that since the court can do it anyway -- congress can do it anyway, we give a certain amount of latitude. i'm not sure which the way the argument goes. >> let me try to answer that question, justice kennedy, and get back to the question you asked me earlier. the, the -- i do think one striking feature of the argument here that this is a novel exercise of power is that what congress chose to do was to rely on market mechanisms and efficiency and a method that has more choice than would the traditional medicare/medicaid type model, and so it seems a little ironic to suggest that that counts against it. but beyond that, in the sense that it's novel, this provision is novel in the same way, or unprecedented in the same way, that the sherman act was unprecedented when the court upheld it in the northern

securities case, or the packers and stockyards act was unprecedented when the court upheld it, or the national labor relations act was unprecedented when the court upheld it in jones and laughlin, or the -- the dairy price supports in wrightwood dairy and rock royal >> oh, no, it's not. they all involved commerce. there was no doubt that was what regulated was commerce. and here you're regulating somebody who isn't covered. by the way, i don't agree with you that the relevant market here is health care. you're not regulating health care. you're regulating insurance. it's the insurance market that you're addressing and you're saying that some people who are not in it must be in it and that's -- that's difference from regulating in any manner commerce that already exists out there. >> well, to the extent that we are looking at the comprehensive scheme, justice scalia, it is regulating commerce that already exists out there. and the means in which that regulation is made effective here, the minimum coverage provision, is a regulation of

the way in which people participate, the method of their payment in the health care market. that is what it is. and i do think, justice kennedy, getting back to the question you asked before, what -- what matters here is whether congress is choosing a tool that's reasonably adapted to the problem that congress is confronting. and that may mean that the tool is different from a tool that congress has chosen to use in the past. that's not something that counts against the provision in a commerce clause analysis. >> wait. that's -- that's -it's both "necessary and proper." what you just said addresses what's necessary. yes, has to be reasonably adapted. necessary does not mean essential, just reasonably adapted. but in addition to being necessary, it has to be proper. and we've held in two cases that something that was reasonably adapted was not proper because it violated the sovereignty of the states, which was implicit in the constitutional structure. the argument here is that this

also is -- may be necessary, but it's not proper because it violates an equally evident principle in the constitution, which is that the federal government is not supposed to be a government that has all powers, that it's supposed to be a government of limited powers. and that's what all this questioning has been about. what -- what is left? if the government can do this, what, what else can it not do? >> this does not violate the norm of proper as this court articulated it in printz or in new york because it does not interfere with the states as sovereigns. this is a regulation that -- this is a regulation >> no, that wasn't my point. that is not the only constitutional principle that exists. >> but it >> an equally evident constitutional principle is the principle that the federal government is a government of enumerated powers and that the vast majority of powers remain in the states and do not belong

to the federal government. do you acknowledge that that's a principle? >> of course we do, your honor. >> okay. that's what we are talking about here. >> and the way in which this court in its cases has policed the boundary that -- of what's in the national sphere and what's in the local sphere is to ask whether congress is regulating economic activity with a substantial effect on interstate commerce. and here i think it's really impossible, in view of our history, to say that congress is invading the state sphere. this is a -- this is a market in which 50% of the people in this country get their health care through their employer. there is a massive federal tax subsidy of $250 billion a year that makes that much more affordable. erisa and hipaa regulate that to ensure that the kinds of bans on pre-existing condition discrimination and pricing practices that occur in the individual market don't occur. >> i don't understand your >> this is in >> whatever the states have

chosen not to do, the federal government can do? >> no, not at all. >> i mean, the tenth amendment says the powers not given to the federal government are reserved, not just to the states, but to the states and the people. and the argument here is that the people were left to decide whether they want to buy insurance or not. >> but this -- but, your honor, this is -- what the court has said, and i think it would be a very substantial departure from what the court has said, is that when congress is regulating economic activity with a substantial effect on interstate commerce that will be upheld. and that is what is going on here, and to embark on -- i would submit with all due respect, to embark on the kind of analysis that my friends on the other side suggest the court ought to embark on is to import lochner-style substantive due process >> the key in lochner is that we were talking about regulation of the states, right, and the states are not limited to enumerated powers. the federal government is. and it seems to me it's an entirely different question when you ask yourself whether or

not there are going to be limits in the federal power, as opposed to limits on the states, which was the issue in lochner. >> i agree, except, mr. chief justice, that what the court has said as i read the court's cases is that the way in which you ensure that the federal government stays in its sphere and the sphere reserved for the states is protected is by policing the boundary -- is the national government regulating economic activity with a substantial effect on interstate commerce? >> but the reason, the reason this is concerning, is because it requires the individual to do an affirmative act. in the law of torts our tradition, our law, has been that you don't have the duty to rescue someone if that person is in danger. the blind man is walking in front of a car and you do not have a duty to stop him absent some relation between you. and there is some severe moral criticisms of that rule, but that's generally the rule.

and here the government is saying that the federal government has a duty to tell the individual citizen that it must act, and that is different from what we have in previous cases and that changes the relationship of the federal government to the individual in the very fundamental way. justice't think so, kennedy, because it is predicated on the participation of these individuals in the market for health care services. now, it happens to be that this is a market in which, aside from the groups that the statute excludes, virtually everybody participates. but it is a regulation of their participation in that market. >> well, but it's critical how you define the market. if i understand the law, the policies that you're requiring people to purchase involve -- must contain provision for maternity and newborn care, pediatric services, and substance use treatment. it seems to me that you cannot say that everybody is going to need substance use treatment, substance use treatment or

pediatric services, and yet that is part of what you require them to purchase. >> well, it's part of what the statute requires the insurers to offer. and i think the reason is because it's trying to define minimum essential coverage because the problem >> but your theory is that there is a market in which everyone participates because everybody might need a certain range of health care services, and yet you're requiring people who are not -- never going to need pediatric or maternity services to participate in that market. >> the -- with respect to what insurance has to cover, your honor, i think congress is entitled the latitude of making the judgments of what the appropriate scope of coverage is. and the problem here in this market is that for -- you may think you're perfectly healthy and you may think that you're not -- that you're being forced to subsidize somebody else, but this is not a market in which you can say that there is a immutable class of healthy people who are being forced to subsidize the unhealthy.

this is a market in which you may be healthy one day and you may be a very unhealthy participant in that market the next day and that is a fundamental difference, and you're not going to know in which >> i think you're posing the question i was posing, which is that doesn't apply to a lot of what you're requiring people to purchase -- pediatric services, maternity services. you cannot say that everybody is going to participate in the substance use market and yet you require people to purchase insurance coverage for that. >> congress has got --congress is enacting economic regulation here. it has latitude to define essential, the attributes of essential coverage. that doesn't -- that doesn't seem to me to implicate the question of whether congress is engaging in economic regulation and solving an economic problem here, and that is what congress is doing. >> are you denying this? if you took the group of people who are subject to the mandate and you calculated the amount of health care services this

whole group would consume and figured out the cost of an insurance policy to cover the services that group would consume, the cost of that policy would be much, much less than the kind of policy that these people are now going to be required to purchase under the affordable care act? >> well, while they are young and healthy that would be true. but they are not going to be young and healthy forever. they are going to be on the other side of that actuarial equation at some point. and of course you don't know which among that group is the person who's going to be hit by the bus or get the definitive diagnosis. and that >> the point is -- no, you take into account that some people in that group are going to be hit by a bus, some people in that group are going to unexpectedly contract or be diagnosed with a disease that -- that is very expensive to treat. but if you take their costs and you calculate that, that's a lot less than the amount that they are going to be required to pay. so that you can't just justify

this on the basis of their trying to shift their costs off to other people, can you? >> well, the -- the people in that class get benefits, too, justice alito. they get the guaranteed-issue benefit that they would not otherwise have, which is an enormously valuable benefit. and in terms of the -- the subsidy rationale, i -- i don't think -- i think it's -- it would be unusual to say that it's an illegitimate exercise of the commerce power for some people to subsidize others. telephone rates in this country for a century were set via the exercise of the commerce power in a way in which some people paid rates that were much higher than their costs in order to subsidize >> only if you make phone calls. >> well, right. but -- but everybody -- to live in the modern world, everybody needs a telephone. and the -- the same thing with respect to the -- you know, the dairy price supports that -- that the court upheld in wrightwood dairy and rock royal. you can look at those as disadvantageous contracts, as forced transfers, that -- you

know, i suppose it's theoretically true that you could raise your kids without milk, but the reality is you've got to go to the store and buy milk. and the commerce power -as a result of the exercise of the commerce power, you're subsidizing somebody else >> and this is especially true, isn't it, general >> -- because that's the judgment congress has made. >> -- verrilli, because in this context, the subsidizers eventually become the subsidized? >> well, that was the point i was trying to make, justice kagan, that you're young and healthy one day, but you don't stay that way. and the -- the system works over time. and so i just don't think it's a fair characterization of it. and it does get back to, i think -- a problem i think is important to understand >> we're not stupid. they're going to buy insurance later. they're young and -- and need the money now. >> but that's >> when -- when they think they have a substantial risk of incurring high medical bills, they'll buy insurance, like the rest of us. but >> that's -- that's >> -- i don't know why you think that they're never going to buy it. >> that's the problem, justice scalia. that's -- and that's exactly the experience that the states had that made the imposition of guaranteed-issue and community rating not only be ineffectual but be highly counterproductive.

rates, for example, in new jersey doubled or tripled, went from 180,000 people covered in this market down to 80,000 people covered in this market. in kentucky, virtually every insurer left the market. and the reason for that is because when people have that guarantee of -- that they can get insurance, they're going to make that calculation that they won't get it until they're sick and they need it, and so the pool of people in the insurance market gets smaller and smaller. the rates you have to charge to cover them get higher and higher. it helps fewer and fewer -- insurance covers fewer and fewer people until the system ends. this is not a situation in which you're conscripting -- you're forcing insurance companies to cover very large numbers of unhealthy people >> you could solve that problem by simply not requiring the insurance company to sell it to somebody who has a -- a condition that is going to require medical treatment, or at least not -not require them to sell it to him at -- at a rate that he sells it to healthy people. but you don't want to do that. >> but that seems to me to say, justice scalia, that congress

-- that's the problem here. and that seems to be >> that seems to me a self- created problem. >> congress cannot solve the problem through standard economic regulation, and that -- and -- and i do not think that can be the premise of our understanding of the commerce clause >> whatever >> -- this is an economic problem >> -- whatever problems congress's economic regulation produces, whatever they are, i think congress can do something to counteract them. here, requiring somebody to enter -- to enter the insurance market. >> this is not a -- it's not a problem of congress's creation. the problem is that you have 40 million people who cannot get affordable insurance through the means that the rest of us get affordable insurance. congress, after a long study and careful deliberation, and viewing the experiences of the states and the way they tried to handle this problem, adopted a package of reforms. guaranteed-issue and community rating, and -- and subsidies and the minimum coverage provision are a package of reforms that solve that problem.

i don't -- i think it's highly artificial to view this as a problem of congress's own creation. >> is your argument limited to insurance or means of paying for health care? >> yes. it's limited to insurance. >> well, now why is that? congress could -- once you -- once you establish that you have a market for health care, i would suppose congress's power under the commerce clause meant they had a broad scope in terms of how they regulate that market. and it would be -- it would be going back to lochner if we were put in the position of saying no, you can use your commerce power to regulate insurance, but you can't use your commerce power to regulate this market in other ways. i think that would be a very significant intrusion by the court into congress's power. so i don't see how we can accept your -it's good for you in this case to say oh, it's just insurance. but once we say that there is a market and congress can require people to participate in it, as

some would say -- or as you would say, that people are already participating in it -- it seems to me that we can't say there are limitations on what congress can do under its commerce power, just like in any other area, all -- given significant deference that we accord to congress in this area, all bets are off, and you could regulate that market in any rational way. >> but this is insurance as a method of payment for health care services >> exactly. >> and that -- and that is >> and you're worried -- that's the area that congress has chosen to regulate. there's this health care market. everybody's in it. so we can regulate it, and we're going to look at a particular serious problem, which is how people pay for it. but next year, they can decide everybody's in this market, we're going to look at a different problem now, and this is how we're going to regulate it. and we can compel people to do things -- purchase insurance, in this case. something else in the next case, because you've -- we've accepted the argument that this is a market in which everybody participates. >> mr. chief justice, let me

answer that, and then if i may, i'd like to move to the tax power argument. >> can -- can i tell you what the something else is so -- while you're answering it? the something else is everybody has to exercise, because there's no doubt that lack of exercise cause -- causes illness, and that causes health care costs to go up. so the federal government says everybody has to -- to join a -- an exercise club. that's -- that's the something else. >> no. the -- the position we're taking here would not justify that rule, justice scalia, because health club membership is not a means of payment for -- for consumption of anything in -- in a market. >> right. right. that's -- that's exactly right, but it doesn't seem responsive to my concern that there's no reason -- once we say this is within congress's commerce power, there's no reason other than our own arbitrary judgment to say all they can regulate is the method of payment. they can regulate other things that affect this now-conceded interstate market in health care in which everybody participates.

>> but i think it's common ground between us and the respondents that this is an interstate market in which everybody participates. and they agree that -- that congress could impose the insurance requirement at the point of sale. and this is just a question of timing, and whether congress's - whether the necessary and proper authority gives congress, because of the particular features of this market, the ability to impose the -- the insurance, the need for insurance, the maintenance of insurance before you show up to get health care rather than at the moment you get up to show >> right. no, i think >> -- show up to get health care. and that >> -- unless i'm missing something, i think you're just repeating the idea that this is the regulation of the method of payment. and i understand that argument. and it may be -- it may be a good one. but what i'm concerned about is, once we accept the principle that everybody is in this market, i don't see why congress's power is limited to regulating the method of payment and doesn't include as it does in any other area. what other area have we said congress can regulate this

market but only with respect to prices, but only with respect to means of travel? no. once you're -- once you're in the interstate commerce and can regulate it, pretty much all bets are off. >> but we agree congress can regulate this market. erisa regulates this market. hipaa regulates this market. the -- the market is regulated at the federal level in very significant ways already. so i don't think that's the question, mr. chief justice. the question is, is there a limit to the authority that we're advocating here under the commerce power, and the answer is yes, because we are not advocating for a power that would allow congress to compel purchases >> could you just -- before you move on, could you express your limiting principle as succinctly as you possibly can? congress can force people to purchase a product where the failure to purchase the product has a substantial effect on interstate commerce -- if what? if this is part of a larger regulatory scheme? was that it? was there anything more? >> we got two and they are -- they are different. let me state them. first with respect to the

comprehensive scheme. when congress is regulating -- is enacting a comprehensive scheme that it has the authority to enact that the necessary and proper clause gives it the authority to include regulation, including a regulation of this kind, if it is necessary to counteract risks attributable to the scheme itself that people engage in economic activity that would undercut the scheme. it's like -- it's very much like wickard in that respect, very much like raich in that respect. with respect to the -- with respect to the -- considering the commerce clause alone and not embedded in the comprehensive scheme, our position is that congress can

regulate the method of payment by imposing an insurance requirement in advance of the time in which the -- the service is consumed when the class to which that requirement applies either is or virtually is most certain to be in that market when the timing of one's entry into that market and what you will need when you enter that market is uncertain and when -- when you will get the care in that market, whether you can afford to pay for it or not and shift costs to other market participants. so those -- those are our views as to -those are the principles we are advocating for and it's, in fact, the conjunction of the two of them here that makes this, we think, a strong case under the commerce clause. >> general, could you turn to the tax clause? >> yes. >> i have to look for a case that involves the issue of whether something denominated by congress as a penalty was nevertheless treated as a tax, except in those situations where the code itself or the statute itself said treat the

penalty as a tax. do you know of any case where we've done that? >> well, i think i would point the court to the license tax case, where it was -was denominated a fee and nontax, and the court upheld it as an exercise of the taxing power, in a situation in which the structure of the law was very much the structure of this law, in that there was a separate stand-alone provision that set the predicate and then a separate provision in closing >> but fees, you know, license fees, fees for a hunting license, everybody knows those are taxes. i mean, i don't think there is as much of a difference between a fee and a tax as there is between a penalty and a tax. >> and that, and -- and i think in terms of the tax part, i think it's useful to separate this into two questions. one is a question of characterization. can this be characterized as a tax, and second, is it a constitutional exercise of the power? with respect to the question of characterization, the -- this is -- in the internal revenue code, it is administered by the irs, it is paid on your form 1040 on april 15th, i think >> but yesterday you told me -- you listed a number of penalties that are enforced

through the tax code that are not taxes and they are not penalties related to taxes. >> they may still be exercise of the tax -- exercises of the taxing power, justice ginsburg, as -- as this is, and i think there isn't a case in which the court has, to my mind, suggested anything that bears this many indicia of a tax can't be considered as an exercise of the taxing power. in fact, it seems to me the license tax cases point you in the opposite direction. and beyond that your -the -- it seems to me the right way to think about this question is whether it is capable of being understood as an exercise of the tax. >> the president said it wasn't a tax, didn't he? >> well, justice scalia, what the -- two things about that, first, as it seems to me, what matters is what power congress was exercising. and they were -- and i think it's clear that -- that the -- the -- they were exercising the tax power as well as >> you're making two arguments. number one, it's a tax, and number two, even if it isn't a

tax, it's within the taxing power. i'm just addressing the first. >> if the president said >> is it a tax or not a tax? the president didn't think it was. >> the president said it wasn't a tax increase because it ought to be understood as an incentive to get people to have insurance. i don't think it's fair to infer from that anything about whether that is an exercise of the tax power or not. >> a tax is to raise revenue, tax is a revenue-raising device, and the purpose of this exaction is to get people into the health care risk -- risk pool before they need medical care, and so it will be successful. if it doesn't raise any revenue, if it gets people to buy the insurance, that's -- that's what this penalty is -- this penalty is designed to affect conduct. the conduct is buy health protection, buy health insurance before you have a need for medical care.

that's what the penalty is designed to do, not to raise revenue. >> that -- that is true, justice ginsburg. this is also true of the marijuana tax that was withheld in sanchez. that's commonly true of penalties under the code. they do -- if they raise revenue, they are exercises of the taxing power, but their purpose is not to raise revenue. their purpose is to discourage behavior. i mean, the -- the mortgage deduction works that way. when the mortgage deduction is -- it's clearly an exercise of the taxing power. when it's successful it raises less revenue for the federal government. it's still an exercise of the taxing power. so, i don't >> i suppose, though, general, one question is whether the determined efforts of congress not to refer to this as a tax make a difference. weean, you're suggesting should just look to the practical operation. we shouldn't look at labels. and that seems right, except that here we have a case in which congress determinedly said this is not a tax, and the question is why should that be irrelevant?

>> i don't think that that's a fair characterization of the actions of congress here, justice kagan. on the -- december 23rd, a point of constitutional order was called to, in fact, with respect to this law. the floor sponsor, senator baucus, defended it as an exercise of the taxing power. in his response to the point of order, the senate voted 60 to39 on that proposition. the legislative history is replete with members of congress explaining that this law is constitutional as an exercise of the taxing power. it was attacked as a tax by its opponents. so i don't think this is a situation where you can say that congress was avoiding any mention of the tax power. it would be one thing if congress explicitly disavowed an exercise of the tax power. but given that it hasn't done so, it seems to me that it's -- not only is it fair to read this as an exercise of the tax power, but this court has got an obligation to construe it as an exercise of the tax power, if

it can be upheld on that basis. >> why didn't congress call it a tax, then? >> well >> you're telling me they thought of it as a tax, they defended it on the tax power. why didn't they say it was a tax? >> they might have thought, your honor, that calling it a penalty as they did would make it more effective in accomplishing its objective. but it is -- in the internal revenue code it is collected by the irs on april 15th. i don't think this is a situation in which you can say >> well, that's the reason. they thought it might be more effective if they called it a penalty. >> well, i -- you know, i don't -- there is nothing that i know of that -- that illuminates that, but certainly >> general, the problem goes back to the limiting principle. is this simply anything that raises revenue that congress can do? >> no. there are certain limiting principles under the >> so there has to be a limiting principle >> -- taxing power, and they -- and i think, of course, the constitution imposes some, got to be uniform, can't be taxed on exports, if it's a direct tax, it's got to be apportioned. beyond that, the limiting principle, as the court has identified from drexel furniture to kurth ranch, is

that it can't be punishment, punitive in the guise of a tax. and there are three factors of court has identified to look at that. the first is the sanction and how disproportionate it is to the conduct, the second is whether there is scienter, and the third is whether there is an -- an -- an administrative apparatus out there to enforce the tax. now in -- in bailey v. drexel furniture, for example, the tax was 10% of the company's profits, even if they had only one child laborer for one day. there was a scienter requirement, and it was enforced by the department of labor. it wasn't just collected by the internal revenue service. here you don't have any of those things. this -- the -- the penalty is calculated to be no more than, at most, the equivalent of what one would have paid for insurance if you forgone. there is no scienter requirement, there is no enforcement apparatus out there. so, certain >> can the -- can the mandate be viewed as tax if it does impose a requirement on people who are

not subject to the penalty or the tax? >> i think it could, for the reasons i -- i discussed yesterday. i don't think it can or should be read that way. but if there is any doubt about that, your honor, if there is -- if -- if it is the view of the court that it can't be, then i think the -- the right way to handle this case is by analogy to new york v. united states, in which the -- the court read the shall provision, shall handle the level of radioactive waste as setting the predicate, and then the other provisions were merely incentives to get the predicate met, and >> you're saying that all the discussion we had earlier about how this is one big uniform scheme and the commerce clause blah, blah, blah, it really doesn't matter. this is a tax and the federal government could simply have said, without all of the rest of this legislation, could simply have said everybody who doesn't buy health insurance at a certain age will be taxed so

much money, right? >> it -- it used its powers together to solve the problem of the market not >> yes, but you didn't need that. >> you didn't need that. if it's a tax, it's only -- raising money is enough. >> it's justifiable under its tax power. we will take a pause. >> why don't we get started again. >> the mandate represents an effort to compel individuals to

enter commerce in order to better regulate commerce. the commerce clause gives them the power to regulate existing commerce. it does not give them the far greater power to compel people to enter commerce and create commerce in the first place. congress, when it passed in this statute made soundings about why it thought it could regulate the congress and unjustified the mandate as a regulation of the economic decision to form or the purchase of health insurance. that is a theory without and emitting principle. >> you have conceded that congress could say if you are going to consume health services you have to pay by way of insurance? >> that's right, justice sotomayor. we say, consistent with 220 years of this court's jurisprudence, that if you regulate the point of sale, you regulate commerce, that's within congress' commerce power. >> all right. so what do you do with the

impossibility of buying insurance at the point of consumption. virtually, you force insurance companies to sell it to you? >> well, justice, i think there is two points to make on that. >> well, justice, i think there is two points to make on that. one is, a lot of the discussion this morning so far has proceeded on the assumption that the only thing that is at issue here is emergency room visits, and the only thing that's being imposed is catastrophic care coverage, but, as the chief justice indicated earlier, a lot of the insurance that's being covered is for ordinary preventive care, ordinary office visits, and those are the kinds of things that one can predict. so there is a big part of the market that's regulated here that wouldn't pose the problem that you're suggesting, but, even as to emergency room visits, it certainly would be possible to regulate at that point. you could simply say, through some sort of mandate on the insurance companies, you have to provide people that come in -- this will be a high-risk pool, and maybe you will have to share it amongst yourself or

something, but people simply have to sign up at that point, and that would be regulating at the point of sale. >> well, mr. clement, now it seems as though you're just talking about a matter of timing, that congress can regulate the transaction, and the question is when does it make best sense to regulate that transaction? and congress surely has within its authority to decide, rather than at the point of sale, given an insurance-based mechanism, it makes sense to regulate it earlier. it's just a matter of timing. >> well, justice kagan, we don't think it's a matter of timing alone, and we think it has very substantive effects. because if congress tried to regulate at the point of sale, the one group that it wouldn't capture at all are the people who don't want to purchase health insurance and also have no plans of using health care services in the near term. and congress very much wanted to capture those people. i mean, those people are essentially the golden geese that pay for the entire lowering of the premium. >> was the government's argument this -- and maybe i won't state it accurately -- it is true that the noninsured young adult is, in fact, an actuarial reality insofar as our

allocation of health services, insofar as the way health insurance companies figure risks? that person who is sitting at home in his or her living room doing nothing is an actuarial reality that can and must be measured for health service purposes, is that their argument? >> well, i don't know, justice kennedy, but, if it is, i think there is at least two problems with it. one is, as justice alito's question suggested earlier, i mean, somebody who is not in the insurance market is sort of irrelevant as an actuarial risk. i mean, we could look at the people not in the insurance market, and what we'd find is that they're relatively young, relatively healthy, and they would have a certain pool of actuarial risks that would actually lead to lower premiums. the people that would be captured by guaranteed rating and community issue -- guaranteed issue and community rating would presumably have a higher risk profile, and there would be higher premiums.