114th Congress outlook

Overview

Twenty years ago, two years after the first inauguration of President Clinton, Republicans took control of both houses of Congress for the first time since 1953. Despite significant disagreements between Clinton and the Republican-controlled Congress, that period of 1995 through 2000 was a relatively productive one for the U.S. Congress, producing welfare reform, several tax bills, a balanced budget agreement, significant telecommunications legislation, and many other laws. This year for the first time since 2001, we again have a Democrat in the White House and a Republicancontrolled Congress. After two of the least productive congresses in modern history, however, and in a political climate today that’s far more polarized than that of the Clinton era, expectations for the 114th Congress are not high. Our view is that current expectations of another donothing Congress are overly pessimistic. Although the odds of sweeping tax reform, or major healthcare changes being signed into law during the last two years of the Obama Administration are low, we do see opportunity for Congress and the White House to come together in crafting new laws related to less ambitious tax reforms, energy legislation, trade policy, telecommunication regulation, and transportation/ infrastructure measures, among other areas. Moreover, we expect the Republican Congress to make progress on more ambitious efforts (like tax reform) that, even if opposed by President Obama, will serve as a base for future action if a Republican is elected to the White House in 2016. The following presents background and our views regarding the outlook for action in the 114th Congress in major issue areas, including tax, energy, environmental, financial services, international trade, healthcare, transportation and infrastructure, food and agriculture, education, telecommunications, defense and homeland security, and privacy and cybersecurity.Hogan Lovells 114th Congress Outlook - January 2015 5 Table of Contents Tax Policy 07 Energy 11 Enviroment 15 Financial Services 19 International Trade 21 Healthcare 25 Transportation and Infrastructure 29 Food & Agriculture 33 Education 37 Telecommunications 41 Defense and Homeland Security 45 Privacy & Cybersercurity 47Hogan Lovells 114th Congress Outlook - January 2015 7 Tax Policy It is very likely that the year 2015 will see the enactment of some kind of federal tax legislation. Given the wide chasm between the goals (political and substantive) of congressional Republicans and Democrats, and President Obama, the path of least resistance would seem to be the enactment (at year-end) of yet another simple tax extenders bill, as we’ve seen every year or two over the last three decades. Our view, however, is that this year really will be different. We will likely see Congress pass, and the President sign into law, legislation making more substantive changes to the U.S. tax code rather than just simple extensions of expiration dates, requiring Congress to make hard decisions as to which tax extenders will be made permanent, and other significant tax policy matters. Getting to enactment of such tax legislation, however, will not be an easy or straight path. There will be a complex interplay between the drive for broad tax reform, led by new House Ways and Means Committee Chairman Paul Ryan and Senate Finance Committee Chairman Orrin Hatch, (and perhaps President Obama, arguably the most important factor) and the need to accomplish less-ambitious but still significant legislation relating to expiring tax provisions, inversions and business tax reform, and transportation trust fund revenue. There will also of course be strong disagreements between the White House and congressional Republicans, not only on basic issues like tax rates for high-income individuals, but also on important procedural issues like how to ‘score’ the federal budget consequences of tax legislation. The following presents some background on the factors influencing the tax legislative outlook and our views on how they will play out this year. 1) The Push for Some Kind of Tax Reform. Incoming Ways and Means Chairman Paul Ryan has said that he plans to move a tax reform bill, and that this bill will either be signed into law in 2015 or serve as the base bill for reform to be enacted in 2017 (under a new President.) Where previous Chairman Dave Camp had promoted a more doctrinaire ‘all or nothing’ approach, Chairman Ryan has made clear that he’s willing to accept in 2015 a half-a-loaf, or even a minor ‘down-payment’ on tax reform that he views as progress. On the Senate side, incoming Finance Committee Chairman Hatch is anxious to proceed on tax reform and already has issued a primer prepared by his staff on the broad conceptual issues to be addressed in assembling the architecture of a new “reformed” tax code. He also issued an invitation to Members on both sides of the aisle to work with him on the legislation. With now Ranking Committee Democrat Ron Wyden sharing a strong interest in tax reform, the Senate Finance Committee could be an early focus of tax reform activity. President Obama, in mid-December, indicated that he has directed the Treasury Department to prepare specific proposals related to corporate tax reform and plans to discuss these proposals with congressional leadership prior to his January 20 state of the union address. 2) Anti-Inversion Legislation. We expect at least one of the specific Obama tax legislative proposals to deal with shutting down the incentives for U.S. corporations to invert – i.e., convert a foreign subsidiary to become the parent of the U.S. entity to avoid hundreds of millions or more in U.S. tax liabilities. Anti-inversion legislation will increasingly become a driver for congress to pass tax legislation if major U.S. corporations continue to announce such deals in 2015. Although the Obama Administration in September, 2014, attempted to reduce the tax-motivated incentives associated with such deals through the issuance of Treasury guidance (effective on issuance) indicating 8 Hogan Lovells 114th Congress Outlook - January 2015 forthcoming regulations, it is widely acknowledged that legislative action is the only way to effectively eliminate such incentives. If and when Congress does pass anti-inversion legislation, it would almost certainly carry with it other tax legislative changes, and thus could serve as the driver for a ‘tax reform light’ bill. 3) Business Only Tax Reform. The biggest problem with Congress addressing only corporate tax reform is that most businesses are not corporations; they are pass-through entities where income is taxed to owners at individual rates. Chairman Ryan has expressed concern that it would be unfair to eliminate business tax incentives (which currently benefit all types of businesses, whether corporations or pass-throughs) for pass-through entities when there is not also a reduction in their corresponding individual tax rates. So the puzzle Ryan, Hatch and the White House (and Democrats like Senator Wyden of Oregon) must grapple with, if they focus on a business-only tax reform bill, is crafting a package that reduces business tax rates while eliminating tax incentives, without disproportionately (or unfairly) helping or hurting certain businesses depending on their legal structure. Our view is that it is very unlikely that Congress and the White House will be able to achieve in 2015 the sort of sweeping tax reform that Chairman Camp proposed. We do think it’s possible, however, that the two branches could agree on a lesser package including rate reductions for business entities, closing down benefits for perceived loopholes like corporate inversions, providing some relief for the tax on repatriation of offshore earnings and profits, and the elimination and/or modification of many (but not all) existing tax incentives for things like energy production, insurance and capital expenditures. 4) Budget Process and Timing for Tax Legislation. The re-acquisition of the majority in both Senate and House provides Republican leadership with a new (again) tax legislative weapon: the ability to use the budget reconciliation process under the Budget Act to prevent a filibuster in the Senate and accelerate consideration of a bill. This would enable a tax bill to pass the Senate relatively quickly and with only 51 votes. Using this process could serve as a defensive measure, not just from Senate Democrats looking to derail a bill, but also from Tea Party-allied Senate Republicans looking to do the same. Since President Obama could still veto a tax reconciliation bill, congressional tax bill supporters would still need the President’s support, or else that of twothirds of the House and Senate, to get the bill enacted into law. Here the recently enacted ‘Cromnibus’ appropriations bill provides a model of how congressional Republican leaders could work with the White House to pass legislation, notwithstanding opposition from congressional Democratic leaders as well as very conservative Republicans. Ways and Means Chairman Ryan has indicated that he’s willing to use the reconciliation process to move a tax bill if he’s unable to move a bill otherwise. In order to preserve this option in 2015, we think it’s likely that Ryan will move early in the year to include broad (general) tax reform instructions in the congressional budget resolution, which would preserve the option to move a tax reconciliation bill starting in the Spring. In addition, Republicans may try to use the extension of the federal debt ceiling (which will nominally expire on March 15, 2015, but with extraordinary measures won’t have to be extended until later in the Spring or Summer) as a bargaining chip to encourage the President to support a broader tax package. We also expect congressional Republicans to pass rules requiring the Congressional Budget Office to take into account ‘dynamic’ (macroeconomic) effects in determining Hogan Lovells 114th Congress Outlook - January 2015 9 revenue projections for major tax bills. (As this memo is going to press, the House of Representatives just passed this rules change.) This budget rules change will be opposed by Democrats and is likely to create tension between Republicans and the White House and congressional Democrats over proper budget scoring. 5) Expired Tax Provisions (aka ‘Extenders’). Another driver for Congress to enact tax legislation in 2015 is the host of more than 50 ‘tax extender’ provisions – extended last month by Congress yet again – that have now already expired (again) as of December 31, 2014. These include popular business incentives like the research credit, small business expensing and bonus depreciation, the work opportunity tax credit, the renewable electricity production tax credit and the Subpart F exemption for active financing income, as well as individual incentives like the deduction for state sales tax payments. Republicans and Democrats alike have decried the congressional habit, now ingrained over 3 decades, of perpetually (every year or two) passing short-term extensions of these provisions. Leaders of both parties have expressed an interest in deciding once and for all which of these provisions should be made permanent, and which should be eliminated right away or phased-out. We believe that there is a good chance that Congress in 2015 will find a way to pass legislation that eliminates many extenders, while preserving at least a few (perhaps modified) for the longer term. 6) Highway Trust Fund Funding. Also looming on the horizon of the must-do congressional agenda for 2015 is the May 31, 2015 expiration date of funding for the federal Highway Trust Fund (HTF). The last funding ‘patch,’ passed just last fall, was one of 21 short-term HTF funding patches passed by Congress since 2005. None of these patches have addressed the long term funding imbalance between fuel taxes and HTF spending obligations, a structural deficit estimated at $15 Billion per year by the Congressional Budget Office, which is generally acknowledged to be caused by declining US gasoline and diesel fuel consumption. President Obama and congressional Democrats have pushed for congress to fix this structural imbalance by providing additional revenue to the HTF in a corporate tax reform bill. Chairman Ryan and House and Senate Republican leadership have all acknowledged the importance of addressing the under-funding of the HTF, and have all at least expressed willingness to consider the Obama proposal to tie this resolution to corporate tax reform. We believe that at the very least there will be serious consideration in both the House and Senate of this option.Hogan Lovells 114th Congress Outlook - January 2015 11 Energy The 114th Congress holds the prospect for significant legislative and administrative action impacting energy companies and their customers. Technological advances have seen US energy production skyrocket, both in the fields of traditional energy and newer renewable energy sources. The continued partisan divide between the Congress and the Obama Administration will necessitate that the President use regulatory avenues to advance his reduced carbon energy policies. Oil and Gas One of Congress’ first legislative initiatives will likely be to approve the Keystone XL Pipeline. In November, the Senate failed to advance legislation approving the pipeline by a single vote. With a Republican majority in both Houses, the pipeline will likely be approved by Congress, but could face a Presidential veto. It is unclear whether the House and Senate would be able to muster the 2/3 supermajority votes necessary to overcome a potential Presidential veto. On a longer-term basis, the House and Senate may consider legislation to speed regulatory approval for liquefied natural gas export facilities. There is currently a backlog of export license applications for non-Free Trade Agreement countries at the U.S. Department of Energy (DOE), though the Department has worked diligently to review export license applications more quickly in recent months. Such legislation is already being circulated for comment. Congress will almost certainly take up legislation regarding crude oil exports, which have largely been banned since the 1970s. Hearings on the subject were held in the House during the lame-duck session of the 113th Congress. Incoming Senate Energy Committee Chairman Murkowski has long been a proponent of “renovating the architecture of U.S. energy exports.” Export of refined products is allowable under current law. Proponents of crude oil exports point to studies that indicate crude oil exports will decrease U.S. gasoline prices while providing U.S. crude oil producers access to the global crude oil market for the vast supplies currently under production. The U.S. Department of Commerce has already approved some applications to export certain crude condensates, and could move to approve export of more crude products in the absence of congressional action. One major condensate producer has already announced its intention to export condensate without waiting for the approval of the Department of Commerce. Nuclear Power As Senate Minority Leader, Harry Reid’s (D-NV) ability to thwart efforts to open Yucca Mountain to receive nuclear waste will be severely diminished. Republicans in both the Senate and House may move to compel the Obama Administration to open the waste repository either through legislation or through the appropriations process. Additionally, both Congress and the Administration are expected to advance policies that will support the continued growth of the small modular nuclear reactor industry. Climate Change and Carbon Dioxide Emissions Reduction President Obama, with fewer allies in Congress and with Republicans in control of both the House and Senate, will need to continue to advance his reduced-carbon energy policy through regulatory action alone. His signature initiative, reducing carbon dioxide (CO2) emissions from new and existing power plants, is expected to be finalized by the U.S. Environmental Protection Agency 12 Hogan Lovells 114th Congress Outlook - January 2015 (EPA) in 2015. Meanwhile, the Republican Congress can be expected to advance policies to roll back these rules either through rescinding the EPA’s mandate legislatively, or by restricting the use of EPA’s appropriations to carry out its rule. Currently, the only cost-effective method of storing CO2 is through enhanced oil recovery (EOR), a process in which naturally-occurring or anthropogenic CO2 is pumped into depleted oil fields. This process produces additional oil while permanently storing CO2 underground. The EPA is currently considering rules to regulate EOR production, and Congress may weigh in as well. Also, on December 19, the White House Council on Environmental Quality published draft guidance on how and when federal agencies should consider the effects of greenhouse gas emissions and climate change in their evaluations of proposed federal actions under the National Environmental Policy Act (NEPA). This proposal is already quite controversial. There is a 60-day comment period already running. Undoubtedly, this proposal will end up being litigated in large part due to its extension of the FERC and DOE project permitting to upstream sources. LNG export permits and approval of new natural gas pipelines could be could be slowed or even denied. Energy efficiency For several years and on multiple occasions, Congress has come close to passage of the Shaheen Portman energy efficiency bill, without ultimate success. There is bipartisan support for this bill and its past failures have been more about unrelated issues than the bill itself. We believe there is a good chance that this bill will pass Congress in 2015, perhaps with some modifications. Hogan Lovells 114th Congress Outlook - January 2015 15 Environment Divided government will pit the Administration against Congress on environmental regulation throughout the 114th Congress. From issues ranging from carbon sequestration, to hydraulic fracturing, environmental review and permitting, requiring the use of social cost of carbon for project-specific analyses under NEPA and regulation of ozone, Republicans will conduct rigorous oversight of Obama Administration initiatives and will introduce legislation to reform or repeal environmental regulations while using the budget and appropriations processes to stymie EPA activities. The Administration will continue its efforts to improve the permitting of large infrastructure projects through executive action under Executive Order 13604 and the May 2014 Implementation Plan to Modernize Infrastructure Permitting. An interagency infrastructure permitting improvement team has been established within the Department of Transportation to support the implementation of reforms across agencies, as well as to look for new ways to modernize infrastructure permitting and reviews. For example, as part of this effort, the U.S. Coast Guard, the Army Corps of Engineers, and the Department of Transportation are collaborating to develop a new process that synchronizes their reviews for transportation projects. The Administration will also be working to develop metrics for environmental and community impacts of the federal permitting and review process. Federal agencies will also continue comprehensive reforms to facilitate advance planning for the mitigation of project impacts and landscape-or watershed-level approaches to mitigation, where appropriate. The Department of the Interior has already taken steps in this regard under Secretarial Order, S. 3330, and a similar government-wide effort is underway as part of the implementation of Executive Order 13604 on Infrastructure Permitting. To increase the pool of available long-term capital for infrastructure, the Administration will also continue to advance the Build America Investment Initiative – a government-wide effort to engage with state and local governments and private sector investors to encourage collaboration, expand the market for public-private partnerships (PPPs), and put federal credit programs to greater use. Climate change With the Democratic President and Republican Congress at odds on energy and environmental policy, the Obama Administration will be effectively creating energy policy through environmental regulation, not the least of which will be continued actions to regulate greenhouse gas (GHG)emissions under the Clean Air Act. The White House is also proposing to require NEPA analyses of upstream emissions of GHG emissions (including methane) which could impact the permitting process and timing issuing LNG export facility permits by FERC and DOE. Additionally, the EPA is in the process of tightening regulations regarding methane emissions from the oil and natural gas industry, including natural gas pipeline systems; a multi-year, multi-faceted approach that will impact operators, drillers, pipeline companies, and service companies. Since the 114th Congress will not take up legislation to reduce carbon dioxide (CO2) emissions, the EPA will continue the Administration’s efforts to limit CO2 emissions through regulation of power plant emissions. Hydraulic fracturing Environmentalists across the country continue efforts to restrict hydraulic fracturing through legislation, administrative action, or direct voter referendums when possible. The Obama Administration is also likely to 16 Hogan Lovells 114th Congress Outlook - January 2015 press efforts to regulate fracking. At the same time, the Republican majority in Congress will continue to oppose what the majority views as an onerous extension of environmental regulation of hydraulic fracturing activities. The EPA is in the process of developing a proposed rule on drilling wastewater that will impact the oil and gas industry through amendments to the Agency’s Effluent Limitations Guidelines and Standards. The amendments are expected to address wastewater discharges from unconventional onshore wells, with a focus on hydraulic fracturing. In addition, the Department of the Interior continues to move forward to impose greater restrictions on hydraulic fracturing on public lands. The House in the 113th Congress voted to block the Department of the Interior from regulating hydraulic fracturing on public lands, and both the House and Senate could do so in the 114th Congress. Ozone Again relying on its authority under the Clean Air Act, the EPA in November 2014 issued a proposed rule to create stronger National Ambient Air Quality Standards (NAAQS) for ground-level ozone. Republicans in Congress immediately dubbed the proposal the “most expensive regulation” ever considered. Expect Congress to push back hard against the ozone rule through legislative and budgetary processes. The rule would impact any ozone-emitting sources, including vehicles, power plants, and paint or solvent manufacturers.Hogan Lovells 114th Congress Outlook - January 2015 19 Financial Services There are many policy areas that are ripe for attention next Congress with the new Republican Senate majority and the Republican House of Representatives. Now that both bodies are controlled by Republicans, the messaging and policy with respect to financial services should be more unified between the House and Senate, though they won’t be identical. Dodd-Frank reforms Both the House and Senate will work to pass several Dodd-Frank reform bills (rather than a wholesale repeal). These fixes will likely be on very technical areas, such as cross-border derivatives and the qualified mortgage points and fees provision. In the CR/omnibus that passed in December, the swaps push-out provision was included. And the end user exemption for margin with respect to derivatives trading was attached to TRIA. CFPB reform The Consumer Financial Protection Bureau (CFPB) was created as part of Dodd-Frank. It is involved in the regulation of both bank and non-bank financial institutions. It also deals with consumer complaints and works closely with state regulators in its enforcement activities. It has independence from Congress by virtue of its funding through the Federal Reserve. The House passed several CFPB reform bills last Congress. Chairman Richard Shelby (R-AL) of the Senate Banking Committee will work with Chairman Jeb Hensarling (R-TX) of the House Financial Services Committee, to pass a CFPB reform bill this Congress. Oversight and independence from Congress will be among those issues addressed. Depending on how the legislation is drafted, it could be a bipartisan effort. GSE reform GSE (Government Sponsored Enterprise) reform refers to the efforts by Congress and the Administration to reform the institutions chartered by the government to facilitate the flow of money into mortgage products. The most notable examples are Fannie Mae, Freddie Mac and Ginnie Mae. This legislation did not make it to the Senate floor or House floor last Congress, but did pass the respective Congressional Committees in each body. This is a top priority for Chairman Hensarling, and he hopes to work with a more willing Senate partner in Chairman Shelby on this issue. It’s going to be a heavier lift on the Senate side, but GSE reform will be a big issue in 2015, and there is White House interest in this effort. Oversight of Federal Reserve policy Both Committees will continue with extensive oversight of Federal Reserve policy. New public law on this issue is unlikely, but strong oversight will occur. Some potential policy ideas that will be considered include requiring the Federal Reserve to utilize cost benefit analysis and the disclosure of senior staff salaries. Too big to fail There will be significant attention in Congress to the “too big to fail” issue, and both Chairmen are not generally sympathetic to the largest financial institutions. It is a highly complicated issue, so we do not think legislation will be ripe right out of the gate in 2015. Ex-Im Bank The Bank’s charter expires at the end of June 2015. There is significant opposition to extension within the House Republican conference. There are currently not 218 votes for or against expiration, and it is likely that some sort of reform package will need to be negotiated if there is to be a long-term solution. Otherwise, either a short-term punt of the Ex-Im Bank’s charter or a short-term lapse in this authority is likely.Hogan Lovells 114th Congress Outlook - January 2015 21 International Trade One leading area for bipartisan progress in 2015 is international trade. The President and Republican Congressional leaders are both expected to seek Trade Promotion Authority (TPA) in early 2015, followed by an effort to secure Congressional approval of the Trans Pacific Partnership Agreement (TPP), if that agreement can be reached with foreign trading partners. These issues are enormously important for any company involved in international trade. The agreements involved will set the terms of trade in much for the world for decades to come, with large implications for companies seeking to do business in the Asia region. TPA, formerly known as “fast-track,” gives the President authority to submit trade agreements to the Congress for an up-or-down vote on approval within specific time limits, as long as the President consults closely with the Congress during the negotiations and achieves certain negotiating objectives. Originally enacted in the Trade Act of 1974, TPA strikes a balance between (1) asserting Congress’ ultimate authority to regulate trade under Article I, Section 8 of the U.S. Constitution, and (2) Presidential authority to negotiate trade agreements that promote U.S. exports and include necessary U.S. concessions that may generate political opposition. TPA ensures that the agreement will be voted on and treated as a package. While Congress has given TPA to the President for various trade negotiations, the last grant of such authority lapsed in June 2007 and has not been renewed. Passage of the TPA bill itself would not be subject to these expedited procedures, so it would need to survive the threat of filibusters, amendments, and other delaying tactics. This TPA authority is important, because it is viewed as necessary to secure passage of the TPP agreement, a trade liberalization negotiation currently being conducted between nine countries (including the United States) which together account for roughly 40% of the world’s trade. Other countries are unlikely to put their best and final offers on the table without stronger assurances (in the form of TPA) that Congress will not seek to amend the deal unilaterally when it considers the agreement. (In many parliamentary democracies, the Prime Minister has greater assurance he/she can secure a positive, unamended vote. TPA greatly reduces the risk for foreign countries that Congress or the administration will make additional demands after an agreement has been reached. Many TPP countries, particularly those with previous experience negotiating with the U.S., are worried USTR will come back with additional demands, putting them in a difficult position with their stakeholders.) There are good indications that trade has the potential for bipartisan cooperation. After the Republicans took control of the Senate on November 4, President Obama, House Speaker John Boehner (R-OH), and the incoming Senate Majority Leader, Senator Mitch McConnell (R-KY), all cited international trade as one of the issues where bipartisan cooperation is feasible. As the new Majority Leader, McConnell will control the Senate calendar. This removes one important obstacle to a TPA vote, since Senate Majority Leader Harry Reid (D-NV) made it clear he would not allow a vote before the mid-term elections. In his post-election remarks, Obama also cited international trade as an area where bipartisan cooperation is possible. More fundamentally, trade is an area where bipartisan cooperation is almost certainly necessary. Many more liberal Democrats will oppose trade agreements, with a core of moderate and business-oriented Democrats supporting them. Republicans also cannot count on full support for trade agreements, with some more conservative Republicans opposing agreements they view as not serving America’s interests. Therefore, approval of almost all trade 22 Hogan Lovells 114th Congress Outlook - January 2015 agreements requires a bipartisan coalition of businessoriented Republicans and moderate Democrats. Congress will need to move fast on both TPA and TPP, however. It is generally thought that neither TPA or TPP consideration can slip too far into the election year of 2016, requiring that both occur at least largely in 2015. To make things more challenging, it is generally thought that passage of TPA must occur first, followed by approval of a TPP agreement. Approval of TPA therefore would need to start and be well along early in 2015 and completed sometime in the first half of 2015. Ideally, the TPP agreement would also be completed with our negotiating partners during early 2015. This would allow sufficient time for TPP consideration in 2015 or early 2016. Congressional negotiations over the TPA bill remain a work-in-progress. Republican and Democratic staffers continue to discuss potential changes to the BaucusCamp-Hatch draft TPA bill negotiated last year. Both committees of chief jurisdiction, the Senate Finance Committee and the House Ways & Means Committee, each have new chairman who may want to put their stamp on a renewed TPA effort. A bipartisan coalition of Republicans and Democrats will be required. While Republicans are likely to provide the majority of the votes, particularly in the House, at least some Democrats will be necessary in both chambers. As a result, both sides likely will have to make accommodations. However, both sides remain wary of each other’s potential demands. The Republicans are concerned that Democrats, such as Senate Finance Committee Ranking Democrat Ron Wyden (D-OR), will seek far-reaching changes to the Baucus-Camp draft that would generate opposition within the Republican Caucus. For their part, Democrats are worried that House and Senate Republicans will try to jam a partisan trade bill through the Committee and floor processes (as occurred with the House-passed version of the Trade Promotion Authority Act of 2002), or weaken the so-called “May 10” agreement between the Bush administration and Congressional Democrats on the treatment of labor and environmental obligations in U.S. Free Trade Acts. There is also the potential that related or extraneous legislation could be added to the TPA bill when is passes through Congress, since that bill is amendable. Therefore, companies should be vigilant about such riders, as they can significantly affect individual company interests. In general, this will be an important area of legislation in 2015, and one active companies would be wise to watch.Hogan Lovells 114th Congress Outlook - January 2015 25 Healthcare The 114th Congress will see new leadership on the Committees with jurisdiction over healthcare policy. While there will be several new leaders and opportunities to debate legislative initiatives, it is likely the only major healthcare-related legislation passed will once again be wrapped in a Sustainable Growth Rate physician payment formula extension early in the year. Orrin Hatch (R-UT) takes over as Chairman of the Senate Finance Committee and Senator Roberts (R-IA) will now serve as Chairman of the Healthcare Subcommittee. Senator Lamar Alexander (R-TN) will be Chairman of the Health, Education, Labor and Pensions (HELP) Committee. In the House, Representative Paul Ryan (R-WI) takes over as Chairman of the Ways While Representative Fred Upton (R-MI) will continue as Chairman of the House Energy and Commerce Committee, where Representative Pitts (R-PA) will serve as Chairman of the Health Subcommittee. Representative Frank Pallone (D-NJ) will be the new Ranking Member on the House Energy and Commerce Committee. The Labor and HHS Appropriations Subcommittees will also see new Chairmen in the House and Senate. Tom Culberson (R-TX) will take over the House Subcommittee and Jerry Moran (R-KS) will take over as Chairman of the spending subcommittee in the Senate. All of these Members have been active in health policy over the last four years, and we should expect an aggressive push to keep health care policy front and center. The healthcare policy agenda in 2015 will continue to focus on implementation of the Patient Protection and Affordable Care Act (ACA), as deadlines for major parts of the law and significant rulemaking continue to be developed. It is likely that the House will pass a full repeal of the law early in the Congressional session. This, of course, will be a symbolic effort. Like the other repeal votes taken in the last four years, it will not succeed in the Senate and will certainly face a veto from the White House. Once the symbolic repeal debate concludes, House and Senate Republicans are expected to move to considering changes to the law. These include many measures that have bipartisan support, such as the repeal of medical device tax and others, including changing the full-time employee definition for purpose of employer responsibility and health insurance coverage and revising the risk corridor program, which allows for additional federal payments to insurers who enroll a disproportionate number of sick patients. The medical device tax repeal effort is likely to be successful in 2015. The medical device industry has continued to lobby for repeal of the 2.3 percent excise tax on devices that took effect last year under the Affordable Care Act, but it comes with a sizable price tag. The Congressional Budget Office estimated in June 2012 that eliminating the tax would cost about US$29 billion over 10 years, although a 2014 Treasury Department inspector general report found collections were less than expected. Legislation to repeal the tax will likely serve as a bargaining chip in the broader SGR package. Some Democrats from states with a sizable industry presence oppose the tax and will support repeal, and more may join in if the right offset is found. Senate legislation to repeal the excise tax had 41 cosponsors last Congress, including six Democrats, only one of whom is not returning to the Senate in 2015. The bill is sponsored by Senator Orrin Hatch (R-UT), incoming Chairman of the Senate Finance Committee. Medicare physician payments will also be addressed early this year in order to deal with the last “doc fix” (Sustainable Growth Rate (SGR) physician payment formula extension) bill that extends through March 2015. 26 Hogan Lovells 114th Congress Outlook - January 2015 Other than the repeal of the medical device tax, the SGR fix is likely to be the one major piece of health policy legislation Congress that will get done in 2015. While many will call for a long-term fix to the issue, it is likely the SGR fix will once again be extended for one to two years given the difficulty paying for its significant price tag — estimated in February 2014 to be about US$138 billion over 11 years. The Committees with jurisdiction over heath policy will be debating reauthorizations and new initiatives introduced in 2014. The State Children’s Health Insurance Program (CHIP) is due for reauthorization in 2015 as well. The measure has seen bipartisan support in the past but is more complicated this time given the ACA, the role of exchanges, and expanded Medicaid to serve the CHIP population. Bills to reauthorize the program in 2014 were sponsored by retired members of Congress – Senator Rockefeller (D-WV) and Representative Waxman (D-CA). Representative Mike Burgess (R-TX) led the last effort to reauthorize in the House and will be a prominent figure in the debate this year along with Representative Pallone (D-NJ). Republicans and Democrats on the Energy and Commerce and Senate Finance panels wrote to governors in July 2014 requesting feedback on the CHIP programs. It is unlikely this bill will be reauthorized by the end of the 2015. The 21st Centers Cures Initiative introduced by Representative Dianne DeGette (D-CO) and Representative Fred Upton (R-MI) in early 2014 will likely be developed as legislation early in 2015. The legislation is expected to provide improvements to the regulatory process to support development and approval of new therapies. This comprehensive policy initiative will likely be a vehicle for addressing many issues circling access, FDA, telemedicine, and research. Health IT will continue to be an issue for debate in the 114th Congress. In 2014, Senators John Thune (R-SD), Lamar Alexander (R-TN), Pat Roberts (R-KS), Richard Burr (R-NC), Tom Coburn (R-OK), and Mike Enzi (R-WY) released a white paper, REBOOT: Re-examining the Strategies Needed to Successfully Adopt Health IT. The white paper outlined concerns with the Administration’s health IT policy, including the perceived lack of momentum toward interoperability, potential waste and abuse in the Meaningful Use Program, patient privacy concerns, and long-term sustainability of the health IT initiatives. All of these senators except Senator Coburn will be returning in 2015. Providers will continue to seek flexibility in implementing “meaningful use” deadlines providing incentives associated with the use of certified electronic health records. January 1, 2015 marks the beginning of the reporting period where providers are required to report a full year of Electronic Health Records (EHR) use. Bipartisan legislation was introduced late in 2014 to shorten the 2015 reporting period, allowing providers more flexibility and avoiding payment reductions for non-compliance. The Democrat cosponsor of that legislation, Representative Jim Materson (D-UT), has retired. The push to extend October 1, 2015 implementation of the ICD-10 standard for medical diagnosis and billing codes will also continue. The Office of the National Coordinator for Health Information Technology at HHS is currently looking for new leadership, as Dr. Karen DeSalvo has been tasked as the Assistant Secretary for Health to work on Ebola and other public health issues. HHS Secretary Sylvia Burwell will continue as Secretary and will lead HHS in the implementation of a number of ACA provisions that have been delayed since passage of the bill. These include the employer mandate, large employer reporting requirements, and minimum essential coverage reporting by insurers. Republicans may renew their efforts to repeal the Independent Payment Advisory Board (IPAB), one of the most criticized provisions of the ACA. The IPAB is tasked with making annual cost-cutting recommendations if Medicare spending exceeds a target growth rate. President Obama has not appointed any of its members, and, with a Republican-led Senate, appointments may be more difficult to make in 2015. Repeal may require an offset, since the Congressional Budget Office estimated in 2012 that repeal would cost billions dollars over a decade. Hogan Lovells 114th Congress Outlook - January 2015 29 Transportation and Infrastructure Congress begins 2015 with a number of high-profile transportation challenges, including vehicle safety legislation, an extension (and likely revision) of the Highway Trust Fund and a reauthorization of the Federal Aviation Administration. Vehicle Safety 2014 brought many high-profile vehicle recalls, leading Congress to take a serious look at the process through which vehicles and recalls are regulated. Some policymakers are concerned that our current vehicle safety laws and regulations are outdated and unable to keep pace with advancing technology. Others express concern that the National Highway Traffic Safety Administration (NHTSA) has systemic flaws, which must be corrected if it is to effectively regulate the automobile industry. Congress has begun the process of crafting legislation aimed primarily at enhancing NHTSA’s enforcement authority, imposing stricter penalties on vehicle and equipment manufacturers for noncompliance and increasing oversight of the system as a whole. Congress also remains interested in the advent of connected and automated vehicle technologies, including in particular privacy and cybersecurity concerns as the technology develops and deploys. Enforcement issues are likely to take a primary seat in the upcoming legislative session, and improving NHTSA’s ability to keep pace with advancing technology will be an ongoing legislative dialogue. Highway Trust Fund Reauthorization Rapidly approaching is the May 31, 2015 expiration date of funding for the federal Highway Trust Fund (HTF), which is critical for transportation infrastructure funding. The current funding ‘patch,’ enacted just last fall, was one of 21 short-term HTF funding patches passed by Congress since 2005. None of these patches have addressed the long-term funding imbalance between fuel taxes and HTF spending obligations, a structural deficit estimated at US$15 Billion per year by the Congressional Budget Office, which is generally acknowledged to be caused by declining US gasoline and diesel fuel consumption. Chairman Ryan and House and Senate Republican leadership have acknowledged the importance of addressing the under-funding of the HTF. We believe there will be serious consideration in both the House and Senate to tying a long-term HTF fix to tax reform legislation. Aviation The FAA is currently operating under an authorization, which was enacted in February 2012, that expires in September 2015. It was enacted after years of struggle and multiple (20+) short-term extensions. The previous authorization expired at the end of FY 2007. Attempts to enact a successor law failed in the 110th and 111th Congresses. Although the House and Senate enacted separate versions of a multiyear reauthorization, the bills were dramatically different in scope and approach, preventing a possible conference. A compromise was finally reached in early 2012 for a short-term extension. A number of issues stood in the way of compromise following the expiration of the 2007 bill, including, among others, a significant labor dispute between FedEx and UPS/Teamsters, reforms to the Essential Air Service program, funding mechanisms for the Airport and Airways Trust Fun, an increase in the jet fuel tax and Airport Improvement Program funding. Ultimately, Congress enacted a compromise bill that basically extended existing authorities through FY 2015. It maintained the fuel tax as the funding mechanism and did very little to adjust the tax levels. Included in this package was funding for NextGen, along with a list of NextGen priority directives to be considered by the FAA. The package also provided some direction to the FAA on UAS integration. The controversial issues were removed from the package, however, many will likely return as Congress debates the next FAA Reauthorization.30 Hogan Lovells 114th Congress Outlook - January 2015 ● Funding Mechanisms – Congress is expected to take a fresh look at the funding mechanisms for the Airport and Airways Trust Fund. President Obama has proposed an additional US$100 per-flight tax on aircraft operators for any flight that operates in controlled airspace (the airlines and GA generally oppose this). The fuel tax continues to be the likely funding vehicle, however, Chairman Shuster has indicated a willingness to look at other funding mechanisms, including public-private partnerships and additional user-fees. ● NextGen – Congress has invested heavily in NextGen, and it remains a top priority of both Congress and the FAA. Congress, however, is growing frustrated with the slow pace with which NextGen technologies are being implemented. Funding for NextGen will likely remain a top priority in the next reauthorization debate, however, we should expect Congress to add additional directives and milestones to ensure the program moves forward at an appropriate pace. ● UAS Integration – The FAA is responsible for developing plans and policies for the safe and efficient integration of unmanned aircraft systems (UAS). This includes coordinating efforts with national security and privacy policies so that the integration of UAS into the NAS is done in a manner that supports and maintains the government’s ability to secure the airspace and addresses privacy concerns. In the 2012 authorization, Congress directed the FAA to establish a plan to begin working toward the safe integration. Congress has become increasingly frustrated, however, with the slow pace with which the FAA seems to be proceeding, including missing a number of targets to introduce proposed rules for small-UAS integration. The FAA has fallen behind this issue as UAS are already being used – operating under questionable authority. As such, Congress has indicated that UAS integration will be an important issue in the next authorization. ● Safety – Safety issues are always prominent in any FAA reauthorization. Although a number of major safety issues were addressed in the last authorization, including pilot fatigue, we will likely see additional issues raised. As runway incursions remain the number one air transportation safety issue, Congress will likely be looking for solutions. Hogan Lovells 114th Congress Outlook - January 2015 33 Food and Agriculture Representative Mike Conaway (R-TX) will be taking over as Chairman of the House Agriculture Committee in January with Representative Peterson (D-MN) remaining as Ranking Member. There will be several changes to subcommittee leadership including the new Nutrition Subcommittee chaired by Representative Jackie Walorski (R-IN). In the Senate, Senator Pat Roberts (R-KS) will be taking over as Chairman of the Agriculture Committee. Senator Stabenow (D-MI) will remain as Ranking Member. Newly elected Republicans joining the Committee include Senators David Perdue (R-GA), Thom Tillis (R-NC), and Ben Sasse (R-NE). Several high-profile issues will continue to be debated in 2015. GMOs will be at the top of the list. To date, more than 70 bills have been introduced in over 30 states to require GMO Labeling or prohibiting genetically engineered food. The food industry is concerned that multiple state laws will result in a “patchwork” of different and potentially conflicting regulations. Representative Mike Pompeo (KS-R) will actively pursue passage of his Safe and Affordable Food Labeling Act in 2015. The bill would create a federal voluntary labeling system for foods that are not genetically modified and prohibit states from requiring GMO labeling. Food and biotech industries support Pompeo’s legislation while consumer advocates argue it is blocking states from responding to the citizen’s concerns of what is in their food. It is likely several bills will be introduced on this topic with little luck of becoming law in 2015. Congress will also be working to reauthorize the Healthy, Hunger-Free Kids Act, which authorized federal child nutrition programs and the WIC. Congress is expected to debate reauthorization legislation for several programs set to expire by September 30, 2015, including: The Afterschool Snack and Meal Program, WIC, WIC Farmers Market Nutrition Program, and The Fresh Fruit and Vegetable Program. Though the School Breakfast Program, National School Lunch Program, Child and Adult Care Food Program, Summer Food Service Program, and Special Milk Programs are authorized permanently, they are subject to congressional funding and Congress may still opt to revise the laws governing these programs through the reauthorization process. School lunch standards and childhood obesity will be part of this debate. Republican lawmakers will continue to push back against First Lady Michelle Obama’s “Let’s Move” initiative and the recent new school lunch standards created by USDA. Members argue that the standards are a federal intrusion into state and local jurisdiction, while many food companies claim that they are too stringent and are appealing to Congress to change the updated nutrition standards or slow their implementation. Republicans were successful at getting state exemption language from the new grain and sodium standards in school lunches into the recently passed omnibus spending bill. The 114th Congress will continue to work to find a solution to the Country of Origin Labeling (COOL) requirements it passed in the 2002 Farm Bill. The COOL legislation limited U.S. origin labels to meat from animals born, raised, and slaughtered exclusively in the United States and required origin labeling for products of foreign origin. The regulations prompted a WTO challenge won by Canada and Mexico. In May of 2013, USDA responded by revising the regulations with even stricter requirements, once again initiating another widely anticipated challenge by Canada and Mexico, which it has again won. The U.S. is expected to appeal the decision in January of 2015, while Canada and Mexico continue to threaten to impose retaliatory tariffs. Due to the economic impact of these potential tariffs, as well as other concerns, Agriculture Committee leadership has encouraged the Administration to reach a settlement instead of continuing to argue the dispute before the WTO. Lawmakers, including incoming House Agriculture Committee Chairman Mike Conaway (R-TX), 34 Hogan Lovells 114th Congress Outlook - January 2015 suggest changing COOL and finding another legislative solution to provide consumers with what they need to make choices in buying their meat products. Members included a provision in the recently passed omnibus requiring the Department to report to Congress by May 2015 on how it might fix the COOL regulations while satisfying WTO rules. Secretary Vilsack has suggested that one possible solution to solving the problem would be voluntary labels, but also said he was reluctant to take anything to Capitol Hill given the lack of a consensus on the issue. Immigration reform will continue to be a subject of great concern to the agriculture industry, which has been seeking immigration reform to resolve longstanding labor issues with migrant workers. While Democrats and Republicans vowed to work together in the 113th Congress to pass the first comprehensive overhaul since 1986, no agreement could be met. There is a significant number of members on both sides of the aisle that agree on some of the broader issues such as including stronger boarder and security provisions and better visa systems for low-and high-skilled jobs. The Senate passed a bill in the Spring of 2013, but bipartisan efforts fell apart, leaving Republican negotiators walking away from the table. The latest Executive actions by President Barack Obama in November 2014 will produce many new legislative responses by Republicans in the 114th Congress, including the possibility of restricting funding for the Department of Homeland Security to implement the President’s executive actions. Hogan Lovells 114th Congress Outlook - January 2015 37 Education The 114th Congress will face several key policy issues affecting education. Congress may consider many of these issues as part of efforts to reauthorize the Elementary and Secondary Education Act (ESEA)1  and the Higher Education Act (HEA)2 . However, education issues also may emerge as part of other legislative efforts such as comprehensive immigration reform, overhaul of the federal tax code, and the annual appropriations process. Some of the education issues that the new Congress may address include: Elementary and Secondary Education The new Republican leadership of the Senate and House education committees, Senator Lamar Alexander (R-TN), Chairman of the Senate Health, Education, Labor and Pensions Committee, and Representative John Kline (R-MN), Chairman of the House Education and the Workforce Committee, announced that they will seek significant changes to the ESEA in the 114th Congress. The proposed changes include revisions to requirements for annual standardized testing for certain grades and consequences or sanctions for schools and school districts that do not make “Adequate Yearly Progress” based on annual testing and mandates for qualifications of teachers. The Republican leadership has indicated that it plans to move quickly with the reauthorization of ESEA, with the goal of having a bill to President Obama by this summer. 1. The ESEA expired as of September 30, 2007, and was automatically extended through September 30, 2008. Congress has extended (or continued) the funding of various programs through annual appropriations legislation. 2. The HEA expired as of September 30, 2014, and has been automatically extended through September 30, 2015. Higher Education College Accountability and Affordability. President Obama and members of Congress have voiced concerns about student outcomes and college affordability. Before his retirement Senator Harkin (D-IA) introduced a bill to reauthorize the HEA, reflecting those concerns. In light of the new Republican majority in the Senate, his bill will not likely progress, but may provide a framework for positions of the Democratic minority. Postsecondary education regulatory issues likely to surface in the new Congress include: ● Accreditation. Institutional accreditation currently is a requirement for colleges and universities to participate in federal student financial aid programs. The Administration and members of Congress have suggested modifications to the accreditation system, with the objectives of both providing quality assurance and encouraging innovation. Such proposals include decoupling accreditation from federal student financial aid eligibility, requiring greater transparency by accreditors concerning institutions’ accreditation status, introducing “tiers” of accredited institutions with less oversight for those with records of compliance, providing for accreditation of course providers other than postsecondary education institutions, and evaluating student competencies rather than completion of specified numbers of credits. ● Program integrity. In 2010 the U.S. Department of Education (ED) issued controversial rules intended to ensure the integrity of federal student financial aid programs. Since federal courts invalidated some of the rules, the Administration has issued or is considering modified versions. Some of the rules have a more severe impact on for-profit institutions, and Democratic members of Congress have proposed greater inter-agency coordination in oversight of such institutions. The Republican Congress is likely to be more supportive of such institutions and legislation that would apply more uniform rules to nonprofit, public, and for-profit institutions.38 Hogan Lovells 114th Congress Outlook - January 2015 – Gainful employment. One set of rules requires postsecondary education institutions to show that certain programs meet specified metrics that purport to show that the programs “prepare students for gainful employment in a recognized occupation.” Such programs include virtually all programs at for-profit institutions and non-degree programs at public and nonprofit institutions. Congress may act to block the new regulations or forbid ED to use appropriated funds to enforce them. – State authorization for distance education. Another set of rules requires institutions to be legally authorized to provide a program of postsecondary education. ED not only requires state authorization for on-ground locations, but has endeavored to promulgate regulations that would apply the requirement to online programs. States are developing reciprocity arrangements for purposes of approval of distance education programs. Congress may encourage such arrangements, or it may act to block any regulation that ED promulgates on state authorization of distance education or forbid ED to use appropriated funds to enforce such regulation. ● College ratings. ED has released a proposed framework for rating colleges and universities based on metrics such as percentage of low-income students, students’ family income, proportion of first-generation college students, average net price, completion rates, transfer rates, graduates’ short-term employment rates, graduates’ long-term median earnings, graduates’ attendance at graduate schools, and student loan repayment. Senator Alexander, Representative Kline, and other members of Congress have threatened to block this initiative as well. Campus Safety. In response to concerns about campus safety, the 114th Congress may consider a variety of proposals to address the issue, including: providing federal funding to assist colleges and universities in developing and implementing emergency management plans; increasing access to mental health services for students; providing federal funding for initiatives to reduce bullying and harassment on campus; providing federal funding to increase campus security; expanding requirements imposed on universities and colleges with respect to sexual assault on campus; and clarifying the circumstances under which an institution may disclose a student’s mental health records without consent. Federal Student Financial Aid. The 114th Congress may examine whether to reform the current federal student aid system. This review could include such issues as loan terms and conditions, eligibility for Federal Pell Grants, program administration and accountability, and program costs. Federal student loans constitute the largest source of federal student financial aid made available through programs authorized under the HEA. Millions of students and their families rely on federal student loans to help finance their college expenses. Student loan debt totals over US$714 billion, and the number of federal student loan borrowers continues to grow. Representative Kline has proposed to consolidate all existing federal student loans into one loan and all existing federal grants into one grant. Senator Alexander and Senator Michael Bennett (D-CO) have proposed combining two federal grant programs into one program and reducing the six different federal loan programs into three: one for undergraduates, one for graduates, and one for parents. Congressional Members have also proposed eliminating the complicated student aid application, increasing financial aid counseling, permitting more liberal discharge of federal and private education loans in bankruptcy, and other proposals.Hogan Lovells 114th Congress Outlook - January 2015 39 The Federal Pell Grant program provides grants to low-income students and has grown significantly in recent years. The recently passed FY2015 omnibus appropriations bill increased the upper limits for Pell Grants by US$100 to US$5,830. However, the bill also cuts funding for future Pell Grants by US$303 million. The new Congress may examine the issue of long-term funding of Pell Grants, including changes to student eligibility or other aspects of the current funding structure. Congress may also consider whether beneficiaries of comprehensive immigration reform should be granted eligibility to participate in higher education federal student aid programs. Higher Education Tax Benefits. The 114th Congress may examine higher education tax benefits as part of an effort to reform the tax code. As part of this examination Congress may look at the relationship between such tax benefits and student aid, the cost of such tax benefits to the federal government, the actual beneficiaries of such tax benefits, and overlap among various higher education tax benefits. Higher education tax benefits include incentives for current year expenses, preferential tax treatment of student loans, and incentives for saving for college. The Joint Committee on Taxation (JCT) estimates the cost to the federal government of such tax benefits to be US$187.8 billion between 2013 and 2017. In 2014 Congressman Dave Camp, the Chairman of the House Ways and Means Committee, released a tax reform plan that contains a number of proposal to reform such tax benefits. The plan would consolidate three separate higher education tax benefits into a single tax credit that targets low-and middle-income families with students enrolled at least half-time in undergraduate degree or certificate programs. The Camp plan would also eliminate a number of education-related exclusions and deductions, the largest of which are the deduction for interest on education loans and the exclusion of employer-provided education assistance from income. Congress will likely consider Camp’s proposals as part of any effort to reform the tax code. Research Funding. Congressional efforts to reduce federal spending will continue to threaten reductions in federal spending on research. However, legislation recently passed by Congress has some encouraging news. The FY 2015 defense authorization bill, recently passed by Congress, erased proposed cuts to basic research conducted by universities for the Department of Defense (DOD). Although DOD’s overall basic research accounts would still shrink by about 3%, or US$60 million, to US$2.1 billion in 2015, that cut is smaller than the 7% cut proposed by the White House. Also, funding for DOD programs that support basic research at universities received a 6% increase. DOD distributes to university researchers about one-half of its US$1 billion in annual basic research funds. Also, in the recently approved FY2015 omnibus appropriations bill, the National Science Foundation (NSF), which is a large source of funding for university research, received an increase of 2.4% to US$7.344 billion, US$89 million above the President’s request. This funding will allow NSF to fund fully its part of the BRAIN Initiative. Unfortunately, most other federal research agencies received flat or reduced funding in the FY 2015 appropriations process.Hogan Lovells 114th Congress Outlook - January 2015 41 Telecommunications The incoming 114th Congress will seek far-reaching changes to the laws governing wireless devices and Internet services in the United States. While the incoming House and Senate leaders have a long list of proposed reforms that they hope adopt as part of a wholesale rewrite of the 1934 Communications Act, the Republican-controlled committees will focus on two priorities first: (1) increasing commercial access to government-controlled wireless spectrum; and (2) changing the rules under which the nation’s top telecom regulator, the Federal Communications Commission (FCC), conducts its business. With everything from phones to cars to refrigerators consuming wireless spectrum, Republican leaders would like to make more of this limited resource available for commercial use. One major source has caught Congress’ eye: repurposing underused government spectrum for use by the private sector. If adopted, Republicansponsored legislation would encourage Federal spectrum users to use spectrum more efficiently and surrender what they do not strictly need by awarding agencies a share of the proceeds of any future spectrum auctions. The newly ascendant Republican leadership also wants to change the way the FCC operates. House Republicans have said that “genuine, long-term reform” of the FCC must come from Congress. Under proposed legislation, the FCC would have to establish clear deadlines for action, satisfy minimum periods for public comment, and publish proposed rules prior to adopting them. The proposed legislation would also create an exception to transparency rules to allow FCC Commissioners to discuss issues with one another off of the public record. Spectrum reform and procedural changes represent only a small portion of the comprehensive telecom agenda that Republicans would like to see enacted in the 114th Congress. But with other telecom priorities such as opposition to net neutrality and cutbacks to funding for expanded access to broadband sure to encounter friction from Congressional Democrats and President Obama, these top Republican goals also have the best chance of any proposals for becoming law. While spectrum policy and procedural reform may be Republicans’ best hopes for achieving lasting change in telecommunications policy, other legislative proposals have dominated the headlines, particularly the ongoing debate over net neutrality. House and Senate leadership have stated their support for legislative action to either prevent the FCC from reclassifying broadband internet service as a common carrier under Title II of the Communications Act, or to shift net neutrality regulatory authority from the FCC to antitrust enforcers. Either move would likely have to come early in 2015, before the FCC issues net neutrality rules, on which a vote is expected at the FCC’s February 26 Open Meeting. Even if a measure passes the House, however, Republicans will likely have to contend with a Democratic filibuster in the Senate or a veto by President Obama, who has come out in support of Title II reclassification. The FCC’s role in competition and consumer protection policy is likewise under close scrutiny as the Commission reviews the Comcast/Time Warner Cable and AT&T/ DirecTV mergers and seeks to address a variety of consumer issues such as communications privacy. For example, Republican leadership has questioned whether the Act’s siloed regulatory approach, which assumes a natural monopoly in each communications technology, makes sense in an era of intermodal competition. There is also skepticism over the need for strong competition regulation in light of intermodal competition between different types of networks, and concern over the potential of the FCC to regulate edge providers who offer network-agnostic services. In addition, the Communications Act is said to be ill-suited to addressing privacy and other consumer issues in today’s online and social media-centric world. A new focus on regulatory flexibility and changes to accommodate market realities and technological advancements have led to scrutiny of how the FCC promotes competition and consumer protection. Some have suggested that the FCC transition to an 42 Hogan Lovells 114th Congress Outlook - January 2015 enforcement agency, operating on a case-by-case basis like the FTC, rather than rulemaking. The possibility of requiring periodic Congressional reauthorization for the Commission’s regulatory authority has likewise been floated as one response to a rapidly-changing telecommunications industry. Republican policymakers have also highlighted the rapid evolution of telecommunications technology since the 1996 Act, as IP traffic and VoIP services displace traditional voice interconnection. With existing regulations written to accommodate the needs of an earlier technological era, Republicans have called into question whether regulation of interconnection by the FCC is needed at all, given that wireless and internet providers have engaged in voluntary interconnection agreements without a regulatory mandate. While certain areas, such as rural call completion, have been singled out for special treatment in draft policy proposals, a greater reliance on private agreements between networks and an enhanced role for states in oversight of interconnection is likely to be emphasized as Congress reexamines the nature and scope of the FCC’s authority to regulate interconnection. Just as the end of monopoly wireline systems’ dominance has called into question the need for competition and interconnection regulation, so too has intermodal competition and technological convergence on IP called into question the rationale behind the Universal Service Fund (USF). Particularly in an era of constrained budgets, the USF and related spending programs within the National Telecommunications and Information Administration and the Rural Utility Service are likely to face pressure to reduce costs . Republicans have also indicated an interest in applying policy tools, such as state block grants or consumer vouchers, which they have advocated for in other policy areas. Reforming the USF to align it more closely to market mechanisms is thus likely to be high on the Republican agenda. Finally, as more and more players enter into the market for video content and distribution, Republicans have sought to revisit long-standing elements of the regulatory regime governing this industry. Regulations such as media ownership restrictions in broadcast and local franchising rules in cable have been criticized as outdated and unnecessary, particularly as consumers shift to on-demand services, and business models rely increasingly on subscription fees instead of advertising. Many of these existing rules have been mentioned as potential candidates for revision in light of increased competition and consumer choice in the video marketplace. Long-standing rules such as must-carry requirements, local market rules, and technology-specific regulation of competing services (e.g., satellite and cable) are all potentially up for revision as the new Republican Congress evaluates how to bring the Communications Act into alignment with market forces. In sum, Republicans in the 114th Congress can be expected to favor market competition over government regulation across the entirety of the communications sector, and to revise the Communications Act with this overarching policy goal in mind.Hogan Lovells 114th Congress Outlook - January 2015 45 Defense and Homeland Security Defense, national security, and homeland security policy activity and funding levels can be expected to grow in the 114th Congress as “defense hawk” legislators in both Houses of Congress move to eliminate the congressionally mandated budget “sequester” for defense and national security programs and Congress and the Administration move to combat ISIL, cyber attacks, and global threats such as Ebola. Sequester The Budget Control Act, passed by Congress in 2011, instituted across-the-board spending cuts in every federal agency, including the Department of Defense (DOD), Department of Veterans Affairs (VA), and Department of Homeland Security (DHS). The budget cuts have been particularly difficult for the DOD to absorb, and were therefore eliminated by Congress in the federal government’s FY 2014 and FY 2015 budgets. But unless Congress and the Administration can agree to eliminate or reform the sequester mechanism, DOD will face deep spending cuts in 2016. The President’s FY 2016 budget top lines, released with his FY 2015 budget, assumes repeal of the sequester. Republicans in both the House and Senate are also eager to eliminate sequester cuts for defense and national security programs for FY 2016 and beyond, and we expect the Administration and Congress to find a way to eliminate sequester cuts for at least DOD, VA, and DHS. Cybersecurity With attacks on computer systems and cyber networks now commonplace, policymakers within the federal government are increasingly advocating strong measures to protect both public and private computer systems from cyber attacks. With Congress previously divided over how to address the issue, the President has moved forward with an Executive Order in addition to a framework for future regulation and/or legislation on the issue. The 114th Congress will take up legislation to strengthen cybersecurity regulations to protect customer data and vital networks, and to build capabilities at the federal level to identify and respond to cyber attacks in real time. In the absence of legislation, the Administration may consider additional executive action, and individual agencies will continue to move forward with instituting stronger regulations to protect customers and critical systems. National Defense Authorization Act In an era of unprecedented political gridlock, two bills nonetheless get passed every year: an appropriations measure to fund the government, and the National Defense Authorization Act (NDAA). While dedicated funding sources are depleted, tax extenders expire, and various federal agency problems remain unresolved, Congress passes legislation authorizing hundreds of billions of dollars in defense spending year after year. The FY 2016, NDAA will fund congressional priorities including major weapons systems, overseas military activities, and domestic military base operations. However, incoming House Armed Services Committee Chairman Mac Thornberry (R-TX) may also include provisions reforming the military’s acquisition policies, and incoming Senate Armed Services Committee Chairman John McCain (R-AZ) may include provisions to correct what he sees as President Obama’s missteps related to America’s military action abroad.Hogan Lovells 114th Congress Outlook - January 2015 47 Privacy and Cybersecurity Congress has been on the verge of enacting new constraints on the collection, use, and sharing of personally identifiable information for the last several years, and there is no reason to think that the 114th Congress will be any different. The pressure for congressional action continues to mount as states and federal regulators move forward with new privacy rules, proposals, and enforcement actions. Last year alone saw activity by the states on privacy rules related to unmanned aircraft systems and students’ records. The federal government also undertook the development of standards for facial recognition technology and explored regulations related to big data. Privacy issues impact almost every industry sector and, as data analytics and personalization continue to drive innovation in the marketplace, lawmakers’ interest in privacy standards will only grow. One of the leading privacy issues in Congress is cybersecurity. With near weekly headlines of major cyber attacks on U.S. businesses and organizations, Congress is attempting to improve threat information sharing between the government and private sector to prevent further attacks. Congress also has shown an interest in pre-empting different state data security and breach notification laws and replacing this complex, state-based regulatory system with one comprehensive federal scheme. We expect legislation related to cybersecurity and data security to take center stage in the 114th Congress along with oversight of entities that have suffered a data breach. Additionally, we expect Congress and the Administration to continue offering proposals related to evolving privacy issues such as online behavioral advertising, geo-location tracking, and Big Data.48 Hogan Lovells 114th Congress Outlook - January 2015 Key contacts Financial Services Financial Services/Education Financial Services Healthcare/Food & Agriculture Energy/Environmental Michael House Partner, Washington, D.C. T +1 202 637 5636 [email protected] Kyle Simpson Senior Advisor, Washington, D.C. T +1 202 637 3652 [email protected] Aaron Cutler Partner, Washington, D.C. T +1 202 637 5648 [email protected] Michael Gilliland Partner, Washington, D.C. T +1 202 637 5619 [email protected] Kate McAuliffe Counsel, Washington, D.C. T +1 202 637 6438 [email protected] International Trade Robert Kyle Partner, Washington, D.C. T +1 202 637 5494 [email protected] Tax John Stanton Partner, Washington, D.C. T +1 202 637 5704 [email protected] Tax/Energy James Wickett Partner, Washington, D.C. T +1 202 637 6422 [email protected] Tax Robert Glennon Partner, Washington, D.C. T +1 202 637 5458 [email protected] Lovells 114th Congress Outlook - January 2015 49 Homeland Security and Defense Privacy and Cybersecurity Transportation/Telecommunication Telecommunications Transportation Jack Jacobson Legislative Analyst, Washington, D.C. T +1 202 637 6820 [email protected] Jared Bomberg Associate, Washington, D.C. T +1 202 637 2872 [email protected] Lance Bultena Partner, Washington, D.C. T +1 202 637 5587 [email protected] Michael Bell Counsel, Washington, D.C. T +1 202 637 5441 [email protected] Michele Farquhar Partner, Washington, D.C. T +1 202 637 5663 [email protected] Telecommunications Trey Hanbury Partner, Washington, D.C. T +1 202 637 5534 [email protected] Lovells has offices in: Alicante Amsterdam Baltimore Beijing Brussels Budapest* Caracas Colorado Springs Denver Dubai Dusseldorf Frankfurt Hamburg Hanoi Ho Chi Minh City Hong Kong Houston Jakarta* Jeddah* Johannesburg London Los Angeles Luxembourg Madrid Mexico City Miami Milan Monterrey Moscow Munich New York Northern Virginia Paris Philadelphia Rio de Janeiro Riyadh* Rome San Francisco São Paulo Shanghai Silicon Valley Singapore Tokyo Ulaanbaatar Warsaw Washington, DC Zagreb* www.hoganlovells.com “Hogan Lovells” or the “firm” is an international legal practice that includes Hogan Lovells US LLP and Hogan Lovells International LLP. 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