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/ Thursday, January 15, 1998
[Federal Register: January 15, 1998 (Volume 63, Number 10)]
[Rules and Regulations]
[Page 2315-2350]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15ja98-6]
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 1, 21, 24, 26, 27, 90 and 95
[WT Docket No. 97-82, ET Docket No. 94-32; FCC 97-413]
Competitive Bidding Proceeding
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: In this Third Report and Order, the Commission adopts uniform
competitive bidding rules for all future auctions. The Commission
believes that these rule changes will simplify and streamline its
regulations in order to increase the overall efficiency of the
competitive bidding process. These rule changes are necessary to
further the Commission's goals of simplifying and streamlining its
regulations, and to develop uniform auction rules and procedures for
all future auctions. The intended effect of this action is to adopt
uniform final rules and procedures applicable to the Commission's
spectrum auction program.
EFFECTIVE DATE: March 16, 1998.
FOR FURTHER INFORMATION CONTACT: Josh Roland or Mark Bollinger,
Auctions and Industry Analysis Division, Wireless Telecommunications
Bureau, at (202) 418-0660.
SUPPLEMENTARY INFORMATION: This is a summary of the Third Report and
Order in WT Docket No. 97-82, ET Docket No. 94-32, adopted on December
18, 1997 and released on December 31, 1997. The complete Third Report
and Order is available for inspection and copying during normal
business hours in the FCC Reference Center, Room 239, 1919 M Street,
NW., Washington, DC 20554. The complete text may be purchased from the
Commission's copy contractor, International Transcription Service,
Inc., 1231 20th Street, N.W., Washington, D.C. 20036, (202) 857-3800.
The complete Third Report and Order also is available on the
Commission's Internet home page (http://www.fcc.gov).
SUMMARY OF ACTION:
I. Background
1. On December 18, 1997, the Federal Communications Commission
(Commission) adopted a Third Report and Order making substantive
amendments and modifications to its general competitive bidding rules
for all auctionable services. These changes to the Commission's general
competitive bidding rules are intended to streamline the Commission's
regulations and eliminate unnecessary rules wherever possible, increase
the efficiency of the competitive bidding process, and provide more
specific guidance to auction participants. The changes also advance the
Commission's auction program by reducing the burden on the Commission
and the public of conducting service-by-service auction rule makings.
In the Competitive Bidding Second Report and Order in PP Docket No. 93-
253, the Commission stated that we would ``issue further Reports and
Orders * * * to adopt auction rules for each auctionable service or
class of service,'' and we identified criteria that would govern our
choice of service-specific auction rules and procedures, which may be
found in subpart Q of part 1 of our rules. Implementation of Section
309(j) of the Communications Act--Competitive Bidding, PP Docket No.
93-253, Second Report and Order, 59 FR 22980 (May 4, 1994)
(``Competitive Bidding Second Report and Order''), on recon., Second
Memorandum Opinion and Order, 59 FR 44272 (August 26, 1994)
(``Competitive Bidding Second Memorandum Opinion and Order''). These
rule changes result from the Commission's proposals in Amendment of
Part 1 of the Commission's Rules--Competitive Bidding Proceeding,
Order, Memorandum Opinion and Order, and Notice of Proposed Rule
Making, WT Docket No. 97-82, 62 FR 13570 (March 21, 1997) (``Notice'').
2. The Commission also released a Second Further Notice of Proposed
Rule Making in this Docket, in which it sought comment on additional
changes to its general competitive bidding rules. The Second Further
Notice of Proposed Rule Making was published in the Federal Register on
January 7, 1998. See Amendment of Part 1 of the Commission's Rules--
Competitive Bidding Procedures, Allocation of Spectrum Below 5 GHz
Transferred from Federal Government Use, 4660-4685 MHz, Second Further
Notice of Proposed Rule Making, WT Docket No. 97-82, ET Docket No. 94-
32 (rel. January 7, 1998) (``Second Further Notice of Proposed Rule
Making'').
II. Applicability of General Competitive Bidding Rules
3. With some exceptions, the Commission adopts its proposal in the
Notice to apply the general competitive bidding rules adopted herein to
all future auctions, regardless of whether service-specific auction
rules have previously been adopted. The Part 1 rules will apply to all
auctionable services, unless the Commission determines that with regard
to particular matters the adoption of service-specific rules is
warranted. As the Commission indicated in the Notice, the Commission
has gained significant experience in the course of the 15 auctions
conducted to date. In particular, the Commission has found that much of
the auction process can be standardized and that adopting service-
specific rules for many aspects of the competitive bidding process is
both unnecessary and confusing. The Commission also finds that
conducting separate rule makings for each individual service often
slows the delivery of service to the public because it results in
regulatory delays before the licensing process begins. The majority of
commenters addressing this issue agree, emphasizing that the adoption
of uniform auction procedures will (1) shorten the rule making process
for future auctions by narrowing the issues on which the Commission
must seek comment in service-specific rule makings; (2) decrease
uncertainty for auction participants; (3) benefit small businesses
because uniform rules are more easily understood and complied with,
particularly by those with limited resources and those that participate
in different auctions; and (4) enable the Commission to develop a
consistent body of law and precedent governing the auction process.
4. The Balanced Budget Act of 1997, Pub. L. 105-33, 111 Stat. 251
(1997), to be codified in relevant part at 47 U.S.C. 309(j)(2)(E) and
309(j)(4)(F) (``Balanced Budget Act''), expands the Commission's
auction authority. Section 309(j)(2) formerly stated that mutually
exclusive applications for initial licenses or construction permits
were auctionable if the principal use of the spectrum was for
subscription-based services and competitive bidding would promote the
expressed objectives. As amended, Section 309(j)(2) provides that, in
cases of mutually exclusive applications, all spectrum is auctionable
except licenses or construction permits for (1) public safety services;
(2) digital television service given to existing broadcasters to
replace their analog license; and (3) non-commercial educational or
public broadcast stations. In addition, the Balanced Budget Act
authorizes the Commission to assign pending broadcast license
applications filed before July 1, 1997 by means of competitive bidding
pursuant to Section 309(j). Because these legislative changes
significantly increase the number of services that will be licensed by
competitive bidding, we believe that adopting uniform competitive
bidding
[[Page 2316]]
rules for all auctionable services is even more necessary.
5. With limited exceptions, the rules the Commission adopts today
will not apply to the initial auction of licenses in the paging, 220
MHz, and Local Multipoint Distribution (``LMDS'') services. The
Commission previously adopted service-specific auction rules for the
auction of these services, and believes that this decision is in the
best interest of prospective applicants for these auctions, who may
have relied upon the service-specific rules previously adopted by the
Commission in formulating business plans and making early efforts to
obtain financing. As discussed below, however, the Commission retains
the discretion to use the revised general competitive bidding
procedures adopted in this proceeding for any reauction of licenses in
these services. The Commission also notes that while service-specific
rules exist for the auction of the 220 MHz service, many of these rules
are similar, or refer to the Part 1 rules. To apply the existing rules
for the most part is also strongly supported by those commenters
addressing the issue. For example, AMTA states that the 220 MHz
industry has encountered extraordinary delays in achieving regulatory
certainty, and that amending or altering the auction rules for this
service would create further uncertainty. Consistent with the
Commission's discussion below, the Commission's decision regarding the
establishment of minimum opening bids will apply to the initial auction
of licenses in the paging and 220 MHz services. In addition, the
Commission notes that several petitions for reconsideration are pending
in these proceedings. In resolving these petitions, the Commission will
address installment payment financing for licenses in these services in
a manner consistent with our decision herein to temporarily suspend the
use of installment payments.
6. Many of the commenters who support the Commission's proposal to
adopt general competitive bidding procedures for all auctionable
services argue that the Commission should, in its discretion, adopt or
retain service-specific rules in particular instances. Airadigm argues
that the Commission should use existing service-specific rules where it
would be unfair to allow one group of licensees in the same service to
benefit or be disadvantaged by operating under a different set of rules
than its competitors in the same service (e.g., in the case of a
reauction of licenses following bidder default). Similarly, NextWave
contends that the adoption of service-specific rules may be appropriate
in some circumstances. In a related argument, some commenters believe
that, in certain instances, the rules adopted in this proceeding should
not be applied retroactively to supersede previously adopted service-
specific rules. For example, AirTouch and WWC suggest that when
service-specific rules have been adopted after industry participation
and based upon particular characteristics of a specific industry or
spectrum to be auctioned, those service-specific rules should govern.
7. With regard to the auction of licenses to provide paging
services, AirTouch opposes the Commission's proposal to apply general
auction rules to all future auctions, regardless of whether service
specific rules have been adopted. AirTouch argues in particular that
the Commission should not adopt a general stopping rule for the paging
auction which would be contrary to the comments received in that
proceeding and the stopping rule that the Commission ultimately
adopted. As discussed above, the Commission will use previously-
adopted, service-specific rules for the paging auction.
8. The rule changes the Commission adopts today streamline and
simplify its general competitive bidding procedures. The majority of
the rules the Commission adopts today address aspects of the
Commission's spectrum auction program that affect future auction
applicants only. These rules include application procedures (e.g.,
electronic filing, short-form application amendments, ownership
disclosure requirements), upfront and down payment issues, issues
relating to competitive bidding design, procedure and timing (e.g.,
alternate bidding methodologies, minimum opening bids, and bid
withdrawal), and rules prohibiting collusion during the auction.
However, some of the provisions the Commission adopts today address
aspects of its rules that govern current licensees as well.
Specifically, these minor rule changes affect certain license-related
payment terms (e.g., installment payments, grace periods, and unjust
enrichment).
9. Two commenters, AICC and AAA, argue that the general competitive
bidding procedures adopted in this proceeding would be wholly
inappropriate for auctions of shared frequencies governed by Part 90 of
the Commission's rules. In support of this position, these commenters
argue that: (1) None of the Commission's auctions have involved shared
frequencies; (2) any auction of Part 90 shared spectrum would involve
participants ranging in size from very large corporations to very small
businesses and individual users, which would require a significant
adjustment in the Commission's traditional auction rules; (3) industry
participation would be crucial in crafting appropriate auction and
service rules; and (4) in light of the public safety services provided
using Part 90 spectrum, auctioning such spectrum is not in the public
interest. AICC and AAA further suggest that those commenters who favor
the adoption of general competitive bidding procedures for all spectrum
might not have considered the possibility of auctions for shared
channels, since the Commission is not currently authorized to award
licenses for such spectrum by means of competitive bidding. The
Commission agrees that shared spectrum is, by definition, not
auctionable under Section 309(j) due to the lack of mutual exclusivity.
10. Similarly, Hughes suggests that in the event the Commission
decides to auction satellite services, it should conduct a service-
specific rule making specially tailored to the capital intensive nature
of the satellite industry, instead of employing the general competitive
bidding procedures adopted in this proceeding. Although the Commission
does not decide that issue now, as the Commission suggested in the
Notice, the Commission will continue to adopt service-specific auction
procedures where it finds that its general competitive bidding
procedures are inappropriate.
III. Rules Governing Designated Entities
11. Section 309(j)(4)(D) of the Communications Act of 1934 provides
that in prescribing rules for a competitive bidding system, the
Commission shall ``ensure that small businesses, rural telephone
companies, and businesses owned by members of minority groups and women
are given the opportunity to participate in the provision of spectrum-
based services.'' 47 U.S.C. 309(j)(4)(D). The statute further directs
the Commission to consider the use of tax certificates, bidding
preferences, alternative payment schedules and methods of calculations
and other procedures as means of accomplishing this statutory
objective. See 47 U.S.C. 309(j)(3)(B) and (j)(4)(D).
12. The Commission adopts the rules in this Third Report and Order
in order to facilitate broad-based participation in auctions. The
Commission believes that standardizing the rules regarding definitions
of eligible entities, unjust enrichment and bidding credits will assist
small, minority and women-owned businesses because the rules'
[[Page 2317]]
predictability will facilitate the business planning and capital
fundraising process. While the Commission suspends the use of
installment payments, the Commission seeks comment in the Second
Further Notice of Proposed Rule Making in this docket on whether
installment payments should be adopted in the future.
13. The Commission also notes that pursuant to Section 309(j)'s
obligations to ensure opportunities for participation by small
enterprises, rural telephone companies, and minority- and women-owned
businesses, and Section 257 of the Telecommunications Act, requiring
that the Commission identify and eliminate market entry barriers for
small and entrepreneurial telecommunications businesses, the Commission
has commenced a series of studies, and has other studies in the
planning process, to examine barriers encountered by minorities and
women in the auctions process and the secondary market for licenses.
When those studies are completed, the Commission will examine whether
additional measures are warranted to promote the objectives of giving
small businesses, rural telephone companies, and women- and minority-
owned businesses the chance to provide spectrum-based services, as
required in Section 309(j).
14. Small Business Size Standards. The Commission adopts its
proposal to continue to define small businesses, as it has in the past,
based on the characteristics and capital requirements of the specific
service. The Commission believes that this approach has given it
flexibility that will continue to benefit small businesses in future
auctions. The Commission also notes that this approach is consistent
with the Small Business Administration's practice of approving small
business size standards on a service-by-service basis. Commenters
addressing this issue support this conclusion. For example, AMTA and
NextWave both believe that the determination of appropriate small
business size standards should be made on a case-by-case basis.
15. No commenters addressed the Commission's proposal in the Notice
to create size standards that require small businesses to have gross
revenues ``not to exceed,'' as opposed to ``less than'' a certain
amount. Nevertheless, the Commission believes that adoption of this
proposal is important to further its objective of establishing uniform
definitions relating to small business standards for future auctions.
From this point forward, the Commission's service-specific small
business definitions will be expressed in terms of average gross
revenues over the preceding three years ``not to exceed'' particular
amounts. The Commission also continues to believe that average gross
revenues provide an accurate, equitable, and easily ascertainable
measure of business size. As the Commission has discussed in the past,
a single gross revenues size standard is an established method for
determining size eligibility for various kinds of federal programs that
aid smaller businesses. NextWave, in its comments, agrees, stating that
gross revenues are a generally reliable measure of whether a company is
indeed small. In addition, while the Commission has used a total assets
test in determining eligibility for entrepreneur blocks, see, e.g., 47
CFR 709(a), the Commission has not used such a test for determining
small business eligibility. The Commission also notes that the Small
Business Act's statutory definition of small business does not use a
total assets test. See 15 U.S.C. 632(c). Thus, the Commission declines
to adopt any other measure of business size, such as a total assets
test, at this time.
16. Definition of Gross Revenues. All commenters addressing the
issue support the Commission's proposal in the Notice to adopt a
uniform definition of gross revenues for all auctionable services. The
Commission believes that a uniform definition of gross revenues, as the
essential element of our small business definitions, furthers the
Commission's goal of establishing uniform definitions and is
administratively efficient. Thus, the Commission adopts a uniform
definition of gross revenues in the Part 1 rules.
17. Various commenters addressed specific aspects of the
Commission's proposed definition of gross revenues. CII supports the
Commission's proposal that applicants be permitted to use either fiscal
year or calendar year figures for calculation purposes. No commenters
opposed this proposal. The Commission is persuaded that permitting use
of either of these figures will assist applicants in providing the most
current information available on their applications. The Commission
concludes that its general gross revenue definition should permit
applicants to support their gross revenue calculations using either
fiscal or calendar years.
18. Several commenters responded to the Commission's tentative
conclusion in the Notice to accept the use of unaudited financial
statements where audited financial statements are unavailable, if
prepared in accordance with Generally Accepted Accounting Principles,
for gross revenue calculations by auction applicants seeking to qualify
for small business status. A majority of these commenters supported the
Commission's tentative conclusion that where audited financial
statements are not available, they should not be required. In
particular, these commenters argue that any strict requirement that
financial statements be audited is unduly burdensome for most small
business applicants. In addition, AMTA contends that the certification
requirement already present on the short-form (FCC Form 175)
application is sufficient to ensure that small business applicants
submit only accurate information, both financial and otherwise, as part
of their applications. Only two commenters, ISTA and PageNet advocate
that applicants use audited financial statements in order to qualify
for small business status. After review of the comments on this issue,
the Commission concludes that such a requirement would be onerous to
small business. The Commission also agrees with AMTA's observation that
the certification requirement on the FCC Form 175 acts to ensure that
applicants submit accurate information. Furthermore, as discussed
below, the Commission also will retain the authority to audit
applicants individually if there is any question concerning small
business status. The Commission therefore declines to require all
applicants to use audited financial statements to support their gross
revenue calculations. Audited financial statements, however, are
necessary if they exist. The Commission also notes that, consistent
with the Small Business Act, 15 U.S.C. 632(c)(ii)(II), where an entity
has been in existence for less than three years, the entity's gross
revenues should be averaged for the relevant number of years the
entity, or its predecessor in interest (affiliate), has been in
existence.
19. Accordingly, as proposed in the Notice, and consistent with the
Commission's broadband PCS rules, the Commission will define gross
revenues for all auctionable services as:
all income received by an entity, whether earned or passive, before
any deductions are made for costs of doing business (e.g., cost of
goods sold), as evidenced by audited financial statements for the
three (3) most recent calendar years or, if audited financial
statements were not prepared on a calendar-year basis, for the most
recently completed fiscal years preceding the filing of the
applicant's short-form (FCC Form 175). If an entity was not in
existence for all or part of the relevant period, gross revenues
shall be evidenced by the audited financial statements of the
entity's predecessor-in-interest or, if there is no identifiable
predecessor-in-interest, unaudited financial statements certified by
the applicant as
[[Page 2318]]
accurate. When an applicant does not have audited financial
statements, its gross revenues must be certified by its chief
financial officer or its equivalent and must be prepared in
accordance with Generally Accepted Accounting Principles.
20. Definition of Affiliate. The Commission adopts its proposal to
adopt a uniform definition of the term ``affiliate'' for all future
auctions. As the Commission discussed in the Notice, the term affiliate
is defined by the Commission's Part 1 rules as an individual or entity
that directly or indirectly controls or has the power to control the
applicant; is directly or indirectly controlled by the applicant; is
directly or indirectly controlled by a third person(s) that also
controls or has the power to control the applicant; or has an
``identity of interest'' with the applicant. The Commission has found
that this definition, which also contains detailed discussion and
examples of relevant terms such as ``control'' and ``identity of
interest,'' has proven workable and is broad enough to address a wide
variety of business structures. In particular, this definition has
helped to ensure that businesses seeking small business status are
truly small. The Commission also believes that this definition, by
focusing on ``indicia of control,'' is consistent with our proposals
regarding attribution of gross revenues of investors and affiliates
discussed in the Second Further Notice of Proposed Rule Making in this
docket.
21. CIRI requests that the Commission include in its general
definition of the term ``affiliate'' an exemption for Indian tribes and
Alaska Regional or Village Corporations, as the Commission did for
broadband PCS, and more recently, for LMDS. The Commission agrees with
CIRI that entities owned and controlled by Indian tribes and Alaska
Regional or Village Corporations should be eligible to bid in future
auctions as small businesses, notwithstanding their affiliation with
other entities owned by tribes or Alaska Native Corporations whose
gross revenues cause the combined average gross revenues of the entity
and its affiliates to exceed the general limits for eligibility for
bidding as such a business. As the Commission stated in support of a
similar exemption from the affiliation rules in LMDS, this exception
will ensure that these entities will have a meaningful opportunity to
participate in spectrum-based services from which they would otherwise
be precluded. Furthermore, the Commission does not believe that this
exemption for the specified entities will entitle them to an unfair
advantage over entities that are otherwise eligible for small business
status.
22. The Commission also takes this opportunity to clarify its Part
1 definition of affiliate. The Commission's Part 1 rules provide that
parties to a joint venture are considered to be affiliated with each
other for purposes of determining the gross revenues of an applicant
seeking to qualify for status as a small business. See 47 CFR
1.2110(b)(4)(x). In the past, however, the term ``consortium'' has been
defined on a service-by-service basis as ``a conglomerate organization
formed as a joint venture between or among mutually independent
business firms, each of which individually satisfies the definition of
a very small business, small business or entrepreneur.'' See, e.g., 47
CFR 101.1112(f) (defining the term ``consortium'' for LMDS). This
results in each member of a consortium being defined as an affiliate of
each other member. The resulting attribution of gross revenues of each
member of the consortium is inconsistent with our intention to permit
small or very small businesses to form consortia as a means of
increasing the capital available to participate in the Commission's
auctions, while still being eligible for status as a small business.
23. The Commission therefore amends Sec. 1.2110(b)(4)(x) to provide
that a ``consortium'' as defined on a service-by-service basis for
purposes of determining status as a designated entity will not be
treated as a ``joint venture'' under our attribution standards. As a
result, when two or more entities form an association that meets the
service-specific definition of a ``consortium,'' the gross revenues of
each entity will not be attributed to each entity in determining
eligibility for designated entity status. The Commission believes that
this clarification to the general definition of the term ``affiliate''
will enhance the ability of small businesses to form associations that
will permit them to bid for licenses that would be too expensive for
them individually. Auction winners have successfully used consortium
structures to acquire licenses and ``spin-off'' licenses post-auction,
and the Commission wishes to continue to make this option available.
24. Definition of Rural Telephone Company. The National Telephone
Cooperative Association (``NTCA'') and the Rural Telecommunications
Group (``RTG''), commented in support of the Commission's proposal in
the Notice to adopt the definition of a rural telephone company
contained in the Telecommunications Act of 1996 as the single
definition of the term to be used in all auctionable services. No
commenters opposed this proposal. As the Commission noted in the
Notice, when the Commission amended the broadband PCS rule, the
Commission stated that using the definition contained in the 1996 Act
would likely expedite the delivery of advanced services to rural areas.
the Commission also noted that adopting the 1996 Act definition would
promote uniformity of regulations and is therefore consistent with the
mandate of that legislation to ease regulatory burdens and eliminate
unnecessary regulation. The Commission believes that the same reasons
for amending this definition in the broadband PCS rules justify
amending the definition in Part 1 for all services subject to
competitive bidding.
25. Thus, the Commission amends Sec. 1.2110(b)(3) to define the
term rural telephone company as a local exchange carrier operating
entity to the extent that such entity--(A) provides common carrier
service to any local exchange carrier study area that does not include
either (i) any incorporated place of 10,000 inhabitants or more, or any
part thereof, based on the most recently available population
statistics of the Bureau of the Census, or (ii) any territory,
incorporated or unincorporated, included in an urbanized area, as
defined by the Bureau of the Census as of August 10, 1993; (B) provides
telephone exchange service, including exchange access, to fewer than
50,000 access lines; (C) provides telephone exchange service to any
local exchange carrier study area with fewer than 100,000 access lines;
or (D) had less than 15 percent of its access lines in communities of
more than 50,000 on the date of enactment of the Telecommunications Act
of 1996.
26. Installment Payments. After careful review of the comments in
this docket, and the Commission's recent decisions in the broadband PCS
C block, LMDS and 800 MHz SMR services, the Commission has determined
that installment payments should not be used in the immediate future as
a means of financing small business participation in the Commission's
auction program. See also ``FCC Announces Spectrum Auction Schedule for
1998,'' Public Notice, DA 97-2497 (rel. November 25, 1997), announcing
the following upcoming auctions: LMDS, 220 MHz, broadband C block
Reauction, 39 GHz, Paging, 800 MHz SMR (Lower 80 and General Category
Channels), Location Monitoring Services (LMS), Public Coast Stations,
Pending Analog Broadcast Licenses for Commercial Radio and Television
Stations, and ``FCC Announces Auction Schedule for the General Wireless
Communications Service,'' Public
[[Page 2319]]
Notice, DA 97-2634 (rel. December 17, 1997). The Commission must
balance competing objectives in Section 309(j) that require, inter
alia, that it promote the development and rapid deployment of new
spectrum-based services and ensure that designated entities are given
the opportunity to participate in the provision of such services. The
Commission notes that its experience has demonstrated that installment
payments may not be necessary to ensure a meaningful opportunity for
small businesses to participate successfully in our auction program.
For example, in the cellular auction of licenses for unserved areas,
which had no special bidding provisions, 36 percent of the licenses
went to small or very small businesses. The Commission also stated that
in assessing the public interest, we must try to ensure that all the
objectives of Section 309(j) are considered. The Commission has found,
for example, that obligating licensees to pay for their licenses as a
condition of receipt requires greater financial accountability from
applicants.
27. In addition, questions have been raised in bankruptcy
litigation about whether the Commission can quickly reclaim licenses
should a licensee declare bankruptcy (even though licenses are
expressly conditioned upon payment and cancel automatically in the
event of non-payment) resulting in significant delays in the provision
of service to the public. While the Commission is confident of
prevailing in any litigation, until controlling precedent is
established or legislation addressing the conflicting rights is
enacted, such delays may occur. In this regard, the Commission has
strongly urged Congress to adopt legislation that would clarify that
provisions of the Bankruptcy Code (1) are not applicable to any FCC
license for which a payment obligation is owed; (2) do not relieve any
licensee from payment obligations; and (3) do not affect the
Commission's authority to revoke, cancel, transfer or assign such
licenses. The Commission also notes that, in order to balance the
impact on small businesses of its decision to discontinue the use of
installment payments in the near future, the Commission is adopting
higher bidding credits than those proposed in the Notice.
28. Therefore, subject to the Commission's proposals in the Second
Further Notice of Proposed Rule Making, the Commission concludes that
until further notice, installment payments should not be offered in
auctions as a means of financing small businesses and other designated
entities seeking to secure spectrum licenses. Consistent with this
decision, the Commission hereby eliminates installment payments in the
auction of the lower 80 and General Category channels in the 800 MHz
SMR service. Although Merlin submits that the elimination of the
Commission's installment payment provisions in any service would be
contrary to the Commission's conclusions in previous rule makings, the
Commission believes that this decision is consistent with suggestions
of CIRI, as well as the Commission's general experience in examining
the success of the installment payment program to date. As the
Commission recently recognized in eliminating installment payments for
LMDS licensees, Congress did not require the use of installment
payments in all auctions, but rather recognized them as one means of
promoting the objectives of Section 309(j)(3) of the Communications
Act. The Commission continues to experiment with different means of
achieving its obligations under the statute, and has offered
installment payments to licensees in several auctioned wireless
services. Installment payments are not the only tool available to
assist small businesses. Indeed, the Commission have conducted auctions
without installment payments. Moreover, Section 3007 of the Balanced
Budget Act requires that the Commission conduct certain future auctions
in a manner that ensures that all proceeds from such bidding are
deposited in the U.S. Treasury not later than September 30, 2002.
Although the Commission seeks comment in the Second Further Notice of
Proposed Rule Making on offering installment payment plans in the
future, the Commission believes that Section 3007 may require that
these auctions be conducted without offering long-term installment
payments. See Balanced Budget Act of 1997. The Conference Report on the
Balanced Budget Act of 1997 indicates that the deadline set forth in
Section 3007 ``applies to all competitive bidding provisions in this
title of the conference agreement and any amendments to other law made
in this title.'' Conference Report on H.R. 2015, Balanced Budget Act of
1997, Congressional Record--House, Vol. 143, No. 109--Part II, at
H6176.
29. In this regard, the Commission agrees with commenters such as
CIRI, that contend that increased bidding credits will allow
responsible small bidders with appropriately tailored business plans to
secure adequate private financing to be successful in future auctions.
Further, as the Commission has already noted, Section 309(j) requires
the Commission to consider alternative methods to allow for
dissemination of licenses among designated entities, including small
businesses. The Commission believes that the rules it adopts below
regarding the use of bidding credits for small business applicants in
future auctions will both fulfill the mandate of Section 309(j) to
provide small businesses with the opportunity to participate in
auctions and ensure that new services are offered to the public without
delay.
30. Merlin contends that while significant bidding credits can be
useful in helping smaller entities win licenses when they bid against
larger companies, bidding credits alone do not help smaller entities
access the capital required to build a spectrum-based service. In
addition, Merlin states that eliminating the installment payment plan
would raise the cost of capital for small businesses which would be
forced to borrow additional funds from commercial lenders at higher
interest rates. Merlin also argues that because many small businesses
have relied on the current installment plan terms in formulating
business plans necessary to bid in upcoming auctions, any decision to
eliminate the installment payment program could effectively preclude
small business participation in future auctions altogether. The
Commission disagrees with Merlin's assertions. As the Commission has
discussed, the Commission believes that the increased bidding credits
it adopts below will help fulfill the mandate of Section 309(j)(4)(D)
of the Communications Act to provide small businesses with the
opportunity to participate in spectrum-based services. As noted above,
this approach was successful in enabling small businesses to
participate in the WCS auction, in which the Commisison was unable to
employ installment payments because of the statutory deadline for
depositing auction revenues in the U.S. Treasury. The Commission also
recently used this approach in establishing rules for the auction of
licenses for 800 MHz SMR and LMDS.
31. The Commission recognizes that it previously adopted rules for
both the 220 MHz and paging services that permit eligible small
businesses to pay for their licenses in installments. Several petitions
for reconsideration have been filed in these proceedings that remain
pending before the Commission. The Commission will resolve these
petitions separately in a manner consistent with our decision herein to
suspend the use of installment payment plans at least until our rights
[[Page 2320]]
to recover and reauction licenses in a timely fashion are established.
32. Bidding Credits. Although all commenters addressing the issue
are largely supportive of the use of bidding credits as a means of
ensuring the widest possible participation in future auctions, there is
disagreement among commenters as to whether a standard schedule of
bidding credits for small businesses is desirable. For example, CII
supports our proposal to standardize the sliding scale of bidding
credits that is available to an applicant. Specifically, CII believes
that granting businesses of different sizes different levels of bidding
credits in different services threatens to result in inconsistent
participation by small businesses in spectrum auctions. In contrast,
some commenters oppose any set schedule of bidding credits, and believe
that the Commission should specify appropriate bidding credits for each
auctionable service. Among these, PCIA and AMTA believe that the
Commission should continue to examine what constitutes an effective
bidding credit on a service-by-service basis because the financing
requirements of different spectrum-based services may necessitate use
of different size bidding credits to provide the proper assurances that
small businesses will be able to effectively compete. As the Commission
stated in the Notice, the Commission believes that an approach in which
the Commission provides certainty for future auctions about the size of
available bidding credits will benefit small businesses because
potential bidders will have more information well in advance of the
auction than previously about how such levels will be set. Once a small
business definition is adopted for a particular service, eligible
businesses will benefit they are able to refer to a schedule in our
Part 1 rules to determine the level of bidding credit available to
them. The Commission therefore adopts its proposal to create a standard
schedule of bidding credits.
33. In light of the Commission's decision to suspend installment
payment financing for the near future, the Commission has determined
that higher bidding credits than those proposed in the Notice would
better effectuate our statutory mandate. Airadigm supports larger
bidding credits than those proposed by the Commission. Similarly, CIRI
contends that unless the Commission is prepared to establish the
creditworthiness of installment payment applicants, the Commission
should offer substantial bidding credits to small businesses in lieu of
government financing. The Commission notes that some commenters argue
that, in relation to installment payment provisions, bidding credits
are less effective in allowing designated entities to participate in
the Commission's auction program. For example, Pocket states that
bidders often ``bid through'' bidding credits and that bidding credits
tend to result in higher bids and, in general, higher auction prices.
The Commission believes that without installment payments, bidding
credits, coupled with providing bidders sufficient time to raise
financing, will enable small businesses to successfully compete in
future auctions. Also, tiered bidding credits have proven to work well
and provide for more competition between small business participants of
different sizes. The use of tiered bidding credits was successful in
enabling small businesses to participate in the WCS auction, in which
the Commission was unable to employ installment payments because of the
statutory deadline for depositing auction revenues in the U.S.
Treasury. Finally, while the Commission recognizes Pocket's concerns
about the possibility that bidders ``bid through'' bidding credits, the
Commission does not believe that this problem is significant where not
all bidders are eligible for bidding credits, and the size of the
bidding credit varies among those who are eligible.
34. Consistent with this reasoning, the Commission adopts the
following schedule of bidding credits for use in future auctions in
which provisions for designated entities are offered:
------------------------------------------------------------------------
Bidding
Average annual gross revenues credits
(percent)
------------------------------------------------------------------------
Not to exceed $3 million..................................... 35
Not to exceed $15 million.................................... 25
Not to exceed $40 million.................................... 15
------------------------------------------------------------------------
The Commission recognizes that these credits are higher than some
previously adopted for specific services. Based on the Commission's
past auction experience and the suspension of installment payments,
however, the Commission believes that the approach taken here will
provide adequate opportunities for small businesses of varying sizes to
participate in spectrum auctions.
35. The Commission recognizes that Merlin recommends providing
higher bidding credits than those which the Commission adopts.
Specifically, Merlin suggests that (1) businesses with average gross
revenues for the preceding three years not exceeding $3 million be
eligible for bidding credits of 40 percent; (2) businesses with average
gross revenues for the preceding three years not exceeding $15 million
be eligible for bidding credits of 35 percent; and (3) businesses with
average gross revenues for the preceding three years not exceeding $40
million be eligible for bidding credits of 25 percent. As discussed
above, the Commission believes that higher bidding credits than those
proposed in the Notice are necessary now that our installment payment
program is suspended. The Commission believes that the schedule of
bidding credits it adopts is reasonable in light of our decision to
suspend installment payments for services auctioned in the immediate
future, and expect that it will prove sufficient to enable small
businesses to obtain spectrum licenses through our auction program.
Thus, the Commission declines to adopt Merlin's proposal. The
Commission also notes that it seeks comment in the Second Further
Notice of Proposed Rule Making on means other than bidding credits and
installment payments by which the Commission might facilitate the
participation of small businesses in our spectrum auction program.
36. Unjust Enrichment. The Commission adopts its proposal to
conform the Part 1 unjust enrichment rules to the broadband PCS rules.
The Commission believes that effective unjust enrichment rules are
necessary to ensure that meaningful small business participation in
spectrum-based services is not thwarted by transfers of licenses to
non-designated entities. As the Commission stated in the Notice, the
broadband PCS unjust enrichment rules are preferable to our current
general unjust enrichment rules because they provide greater
specificity about funds due at the time of transfer or assignment and
specifically address changes in ownership that would result in loss of
eligibility for installment payments, which the current general rules
do not address. The broadband PCS rules also address assignments and
transfers between entities qualifying for different tiers of
installment payments or bidding credits, thus supplying clearer
guidance for auctions in which tiered installment payment plans or
bidding credits are provided. Commenters addressing this issue largely
support this decision. For example, Pocket and Ericsson both argue that
modified unjust enrichment rules would still deter transfers designed
to subvert the Commission's rules, but would provide businesses with
more flexibility in situations of financial distress and permit the
transfer
[[Page 2321]]
of individual licenses that no longer comport with their business
plans.
37. Current as well as future licensees will be governed by the
rules the Commission adopts providing for unjust enrichment payments
upon assignment, transfer, partitioning and disaggregation. While the
Commission did not receive significant comment on this issue, the
Commission notes that in awarding licenses in the past, the Commission
has emphasized that the terms associated with the continued grant of a
license will be governed by current Commission rules and regulations.
For example, in awarding licenses to C block licensees paying for their
licenses in installments, the Commission indicated in the associated
``Note'' and ``Security Agreement'' that the terms of the installment
plan would be governed by and construed in accordance with then-
applicable Commission orders and regulations, as amended. Therefore,
the Commission concludes that the unjust enrichment rules it adopts
apply to existing licensees, and supersede service-specific rules where
applicable. Specifically, these rules will supersede existing unjust
enrichment provisions in the narrowband and broadband PCS, WCS, 900
MHz, and IVDS services. See 47 CFR 24.309(f) (narrowband PCS), 24.711
(C block), 24.716(d) (F block), 27.209(d)(1), (2) (WCS), 90.812(b) (900
MHz), 95.816(e) (IVDS). As discussed above, the Commission suspends the
use of installment payments for the immediate future as a means of
financing small business participation in the Commission's auction
program. As a result, the Commission's decision with regard to unjust
enrichment payments as they relate to licensees paying for their
licenses in installment payments will apply only to existing licensees,
their transferees and assignees (until the Commission reinstates
installment payments).
Unjust Enrichment and Installment Payments
38. For existing licensees who make use of Commission installment
payment financing, the Commission amends Sec. 1.2111(c) to conform to
the Commission's broadband PCS rules. Specifically, if a licensee seeks
to assign or transfer control of its license to an entity not meeting
the eligibility standards for installment payments, the licensee must
make full payment of the remaining unpaid principal and any unpaid
interest accrued through the date of the assignment or transfer as a
condition of Commission approval. Similarly, if the licensee seeks to
make any change in ownership structure that would result in the
licensee losing eligibility for installment payments, the licensee must
first seek Commission approval and must make full payment of the
remaining unpaid principal and any unpaid interest accrued through the
date of such change as a condition of approval. If a licensee seeks to
make any change in ownership that would result in the licensee
qualifying for a less favorable installment plan, the licensee must
seek Commission approval and must adjust its payment plan to reflect
its new eligibility status.
Unjust Enrichment and Bidding Credits
39. For existing and future licensees who qualified or qualify in
the future for a bidding credit in paying for their winning bid, the
Commission also amends Sec. 1.2111(c) to provide for unjust enrichment
payments similar to those contained in the Commission's broadband PCS
rules. Specifically, during the term of the initial license grant, if a
licensee seeks to assign or transfer control of its license to an
entity not meeting the eligibility standards for bidding credits, or
seeks to make any other change in ownership that would result in the
licensee no longer qualifying for a bidding credit, the licensee must
seek Commission approval and must reimburse the government for the
amount of the bidding credit, plus interest based on the rate for U.S.
Treasury obligations applicable on the date the license is granted, as
a condition of the approval of such assignment, transfer or other
ownership change. Similarly, if the licensee seeks to assign or
transfer control of its license to an entity meeting the eligibility
standards for lower bidding credits, or seeks to make any other change
in ownership that would result in the licensee qualifying for a lower
bidding credit under this section, the licensee must seek Commission
approval and must pay to the United States Treasury the difference
between the amount of the bidding credit obtained by the licensee and
the bidding credit for which the assignee, transferee or licensee is
eligible as a condition of the approval of such assignment, transfer or
other ownership change. These provisions also will apply to licensees
who partition or disaggregate their licenses.
40. The Commission also adopts its proposal in the Notice to
provide for decreasing unjust enrichment payments for licensees that
utilized a bidding credit when paying for their licenses and that make
transfers and assignments occurring later in the license term. This
decision also is supported by the commenters. In amending the rule in
this manner, the Commission ensures that its general rule resembles
those rules the Commission has adopted in specific services (e.g., MDS,
narrowband PCS, and 900 MHz SMR ) that reduce the amount of unjust
enrichment payments due on transfer based upon the amount of time the
initial license has been held. Consistent with the rules that exist in
these services, the amount of this payment will be reduced over time as
follows: A transfer in the first two years of the license term will
result in a forfeiture of 100 percent of the value of the bidding
credit (or, in the case of very small businesses transferring to small
businesses, 100 percent of the difference between the bidding credit
received by the former and the bidding credit for which the latter is
eligible); in year three of the license term the payment will be 75
percent; in year four the payment will be 50 percent; and in year five
the payment will be 25 percent, after which there will be no payment.
These assessments will have to be paid to the U.S. Treasury as a
condition of approval of the assignment, transfer, or ownership change.
All current and future licensees, with the exception of entrepreneur
block licensees subject to restrictions on assignments and transfers of
licenses, will be governed by this modification to our general rules.
The Commission believes that our decision to maintain the original
transfer restrictions for such licensees is proper in light of the
special provisions which were made available for licensees in the
Commission's entrepreneur blocks.
Unjust Enrichment and Partitioning and Disaggregation
41. Also as proposed in the Notice, the Commission will adopt a
general rule modeled on the Commission's broadband PCS rules to
determine the amount of unjust enrichment payments assessed for all
current and future licensees. Thus, the Commission adopts a general
unjust enrichment rule that treats partitioning and disaggregation by
licensees in the same manner as the broadband PCS rule. Specifically,
if the licensee seeks to partition any portion of its geographic
service area, the amount of the unjust enrichment payment discussed
above will be calculated based upon the ratio of population in the
partitioned area to the overall population of the licensed area.
Similarly, if a licensee seeks to disaggregate spectrum, the amount of
the unjust enrichment payment will be determined based upon the ratio
of the amount of spectrum disaggregated to the amount of spectrum held
by the disaggregating licensee.
[[Page 2322]]
IV. Application Issues
42. Electronic Filing. The Commission believes that electronic
filing of all short-form and long-form applications for auctionable
services is in the best interest of auction participants, as well as
members of the public monitoring Commission auctions. Therefore, the
Commission amends Secs. 1.2105(a) and 1.2107(c) of its rules to require
electronic filing of all short-form and long-form applications,
beginning January 1, 1999, unless it is not operationally feasible.
Although in the Notice the Commission proposed to require electronic
filing commencing January 1, 1998, the Commission believes that this
additional phase-in period before the requirement becomes effective
will benefit potential bidders. The majority of the comments addressing
the issue support the decision to require electronic filing. For
example, PageNet contends that electronic filing promotes access to
applications by competing bidders, as well as the general public, by
making it possible to review and download applications without
traveling to FCC headquarters or contracting for photocopying of paper
applications. To facilitate public access, the Commission has developed
user-friendly electronic filing software and Internet World Wide Web
forms to give auction applicants the ability to conveniently file and
review applications. This software helps applicants ensure the accuracy
of their applications as they are filling them out, and enables them to
correct errors and omissions prior to submitting their applications. To
assist the public, the Commission provides technical support personnel
to answer questions and work with callers using the electronic auction
system. In addition, the Commission has demonstrated its auction
software at conferences organized by potential bidders and members of
the industry in order to familiarize interested parties with our recent
software enhancements.
43. AT&T is generally supportive of electronic filing, but proposes
that the Commission create a waiver process whereby an applicant that
has missed a filing deadline due to technical problems can obtain a
waiver quickly or be permitted to submit a paper original of the
application by hand or mail the same day. In addition, AT&T requests
that a Commission staff member be provided with the authority to grant
such a waiver in the event of electronic filing difficulties. The
Commission does not believe that a specific waiver provision is
necessary. The Commission's existing waiver provisions, which specify
the showing required for the grant of a waiver, provide adequate
assurance that requests for waiver relating to the electronic filing of
applications will receive proper consideration. In addition, the
Commission emphasizes that it has typically responded rapidly to time-
sensitive waiver requests filed by auction applicants, and intends to
continue to do so in the future.
44. Only one commenter, Airadigm, opposes an electronic filing
requirement. Airadigm states that the Commission experienced
difficulties in processing electronic filings during the IVDS auction
and argues that removing the option of manual filing could result in
similar problems in future auctions. The Commission believes that the
system enhancements discussed above, most of which were not in place
during the IVDS auction, adequately respond to Airadigm's concerns. The
Commission also notes that its experiences from recent auctions
demonstrate that the electronic bidding system is reliable. For
example, in the broadband PCS D, E, and F block auction, 94 percent of
the qualified bidders filed their short-form applications
electronically. In the recently completed 800 MHz SMR auction, 93
percent of the qualified bidders filed their short-form applications
electronically. The Commission did not experience problems with its
electronic filing procedures.
45. Finally, as the Commission stated in the Notice, the Commission
recognizes that there is a need for a period of time before a
comprehensive electronic filing requirement becomes effective in order
for bidders to prepare and be completely comfortable with this process.
The effective date of January 1, 1999, will provide potential bidders
with adequate time in which to adapt to electronic filing requirements.
Finally, although the Commission concludes that electronic filing is
the preferred filing method, the Commission nevertheless reserves the
right to provide for manual filing in the event of technical failure or
other difficulties.
46. Short-form Application Amendments. The majority of commenters
support the Commission's proposal in the Notice to create a uniform
definition of major and minor amendments to applicants' short-form (FCC
Form 175) applications for all future auctions. However, commenters'
opinions differ on what types of amendments the Commission should
categorize as major or minor. For example, AT&T and ISTA argue that
major amendments should include all changes in ownership that
constitute a change in control, as well as all changes in size that
would affect an applicant's eligibility for designated entity
provisions. In contrast, Metrocall contends that all changes in
ownership incidental to mergers and acquisitions, non-substantial pro
forma changes, and involuntary changes in ownership should be
categorized as minor. Metrocall also states that an applicant should
not be permitted to upgrade its designated entity status after the
short form filing deadline (i.e., go from a ``small'' to ``very small''
business), but should be permitted to lose its designated entity status
as a result of a minor change in control (i.e., exceed the threshold
for eligibility as a small business).
47. After careful consideration of the comments addressing the
issue, the Commission concludes that a definition of major and minor
amendments similar to that provided in the Commission's PCS rules, 47
CFR 24.822, is appropriate. After the short-form filing deadline,
applicants will be permitted to make minor amendments to their short-
form applications both prior to and during the auction. However,
applicants will not be permitted to make major amendments or
modifications to their applications after the short-form filing
deadline. Major amendments will include, but will not be limited to,
changes in license areas designated on the short-form application,
changes in ownership of the applicant which would constitute a change
in control, and the addition of other applicants to any bidding
consortia. Consistent with the weight of the comments addressing the
issue, major amendments will also include any change in an applicant's
size which would affect an applicant's eligibility for designated
entity provisions. For example, if Company A, an applicant that
qualified for special provisions as a small business, merges with
Company B during the course of an auction, and if, as a result of this
merger, the merged company would not qualify as a small business, the
amendment reflecting the change in ownership of Company A would be
considered a major amendment. Otherwise, the new entity could receive
small business bidding credits and installment payments when it does
not qualify for them. As is the case in the Commission's PCS rules,
however, applicants will be permitted to amend their short-form
applications to reflect the formation of bidding consortia or changes
in ownership that do not result in a change in control of the
applicant, provided that the parties forming consortia or entering into
ownership agreements have not applied for licenses
[[Page 2323]]
in any of the same geographic license areas. In contrast, minor
amendments will include, but will not be limited to, the correction of
typographical errors and other minor defects, and any amendment not
identified as major.
48. As noted above, the Commission has generally refused to grant
requests to add or delete markets on an applicant's short-form
application in order to prevent collusive conduct or gaming that would
reduce the competitiveness of the auction. While the Commission
recognizes that there may be some circumstances in which the
competitiveness of the auction might be enhanced by allowing applicants
to add markets to their short-form applications, the Commission
concludes that the risks of encouraging or facilitating conduct that
negatively affects the competitiveness of the auction and the post-
auction market structure outweigh the benefits of categorizing such
amendments as minor. Several commenters support this conclusion that
the addition or deletion of markets on the short-form application
should always be deemed a ``major'' amendment. Specifically, PageNet
states that because the only new information that an applicant could be
deemed to possess at this stage would be licenses on which other
applicants intend to bid, amendment of the short-form application in
this regard could only lead to auction abuses. Those commenters
supporting defining the addition or deletion of markets after the
short-form filing deadline as a minor amendment argue that such an
amendment should only be permitted prior to the upfront payment
deadline or the release of the Public Notice announcing qualified
bidders. After this point, the overall competitiveness of the auction
may be threatened.
49. AT&T proposes that the deletion of markets to avoid specifying
markets that overlap with another auction applicant (and thus
preventing discussion on potentially non-auction-related matters such
as interconnection, resale, and equipment orders that do not affect
bids or bidding strategies) be deemed a minor amendment. The Commission
notes that in previous auctions some applicants have inadvertently
placed themselves at risk of violating the Commission's anti-collusion
rule by choosing to specify ``all markets'' on their short-form
applications when they intended to bid only on a particular license or
group of licenses. As a general matter, the anti-collusion rule does
not prohibit non-auction-related business negotiations between auction
applicants that have applied for the same geographic service areas.
AT&T argues that the aspect of the rule prohibiting the addition or
deletion of markets often has had the unfortunate result of
discouraging non-auction, business-related discussions between auction
applicants who are not actually bidding for licenses in the same
geographic license areas. Because of the potential anti-competitive
results of allowing bidders to delete markets after the short-form
filing deadline, however, the Commission believes that this type of
error can be more effectively addressed by other means, including
increased awareness on the part of prospective auction applicants of
the consequences of choosing ``all markets,'' as well as software
enhancements that make specifying particular markets on the FCC Form
175 less burdensome.
50. The Commission also emphasizes that, pursuant to Sec. 1.65 of
the Commission's rules, each auction applicant is required to assure
the continuing accuracy and completeness of information furnished in a
pending application. See 47 CFR 1.65. Each applicant is therefore under
a continuing obligation to update its short-form and long-form
applications as appropriate to reflect any changes that would make a
pending application inaccurate or incomplete, or that are necessary to
determine that an applicant is in compliance with our rules. As in all
prior auctions, an application that is amended by a major amendment
will be considered newly filed, and therefore will not be accepted
after the short-form filing deadline. The Commission further notes that
it has waived its ex parte rules as they apply to the submission of
amended short-form applications to maximize applicants' opportunities
to seek the advice of Commission staff when making amendments at any
time after the short-form filing deadline.
51. Finally, the Commission notes that in the context of cellular
unserved area licensing, WWC contends that the rules adopted in this
proceeding addressing major and minor amendments to short-form
applications should not apply to cellular unserved area applications
filed in 1994 as these applications were to be governed by a ``letter-
perfect'' standard and applicants were given no opportunity to cure
minor defects. While the Commission has considered WWC's argument, the
Commission believes that it is inapplicable. WWC addresses the initial
application procedures for cellular unserved area licenses, while the
Part 1 rules, in contrast, address application procedures for
participation in an auction once a finding of mutual exclusivity has
been made.
52. Ownership Disclosure Requirements. As the Commission indicated
in the Notice, the Commission continues to believe that detailed
ownership information is necessary to ensure that applicants claiming
small business status qualify for such status, and to ensure compliance
by all applicants with spectrum caps and other ownership limits.
Disclosure of ownership information also aids bidders by providing them
with information about their auction competitors and alerting them to
entities subject to our anti-collusion rules. Therefore, the Commission
adopts standard ownership disclosure requirements for all auctionable
services that will avoid the variations found in the Commission's
current service-specific ownership disclosure requirements.
53. This decision is widely supported by the majority of comments
in this proceeding. Most commenters addressing the issue of ownership
disclosure support requiring some level of ownership information at the
short-form application stage. For example, PCIA believes that full
disclosure of bidder ownership information is necessary if competing
bidders are to accurately assess the legitimacy of their auction
opponents and their respective bids. PCIA contends that there can be no
valid reason for legitimate bidders to hide their ownership. Such
information, according to PCIA, is crucial for purposes of the
Commission's anti-collusion rules, spectrum caps, and other ownership
limits. Similarly, PageNet contends that full ownership disclosure is
important to aid bidders in compiling information about their auction
competitors and, most importantly, to alert them to any conduct that
might be a violation of the Commission's anti-collusion rules. In the
satellite context, Hughes argues that the submission of detailed
ownership information is essential because of the extreme costs
associated with the build-out of a satellite system. In contrast, only
CII argues that the Commission's objectives with regard to the rules
governing designated entity status, spectrum caps, and other ownership
limitations would be fully satisfied by deferring the filing of
comprehensive ownership information until the long-form application
stage.
54. For all future auctions, therefore, the Commission will model
our reporting requirements on the general application requirements
contained in our broadband PCS rules. Under this standard, all auction
applicants will be required to disclose the real party or parties in
interest by including as an exhibit to their short-form applications
[[Page 2324]]
detailed ownership information. Although the Commission's current Part
1 rules require auction applicants to list all owners of a five percent
or greater interest in the applicant, the Commission agrees with
commenters such as CII that argue that applicants should not be
required to list all holders of this small an interest in the
applicant, unless they are in a position of control by virtue of other
factors (i.e., voting agreements, management structure), or hold a
significant passive ownership interest (i.e., 20 percent). Thus, the
Commission amends its rules to require that applicants list controlling
interests as well as all parties holding a 10 percent or greater
interest in the applicant and any affiliates of these interest holders.
See 47 CFR 1.2110(b)(4). A 10 percent or greater interest reporting
requirement is consistent with the revised definition of the term
``applicant'' we adopt for purposes of the anti-collusion rule. The
Commission notes that PageNet contends that the Commission should
require disclosure of entities and individuals that own more than five
percent of the applicant or who have provided more than five percent of
the applicant's equity. However, as suggested above, the Commission
believes that the detailed reporting requirement we create today, in
combination with our comprehensive affiliation rules, permits us to
determine the ``real party or parties in interest'' when parties apply
to participate in an auction.
55. Specifically, all auction applicants will be required to
disclose: (1) A list of any FCC-regulated business, 10 percent or more
of whose stock, warrants, options or debt securities are owned by the
applicant; (2) a list of any party holding a 10 percent or greater
interest in the applicant, including the specific amount of the
interest; (3) a list of any party holding a 10 percent or greater
interest in any entity holding or applying for any FCC-regulated
business in which a 10 percent or greater interest is held by another
party which holds a 10 percent or greater interest in the applicant
(e.g., if company A owns 10% of company B (the applicant) and 10% of
company C, a company holding or applying for an FCC-regulated business,
the companies A and C must be listed in company B's application); (4)
the name, address and citizenship of any party holding 10 percent or
more of each class of stock, warrants, options or debt securities,
together with the amount and percentage held; (5) the name, address and
citizenship of all controlling interests of the applicants, as this
term is defined in Sec. 1.2110 of our rules; (6) if the applicant is a
general partnership, the name, address and citizenship of each partner,
and the share or interest participation in the partnership; (7) if the
applicant is a limited partnership, the name, address and citizenship
of each general partner and each limited partner whose interest in the
applicant is equal to or greater than 10 percent (as calculated
according to the percentage of equity paid in and the percentage of
distribution of profits and losses); (8) if the applicant is a limited
liability corporation, the name, address and citizenship of each of its
members; and (9) a list of all parties holding indirect ownership
interests in the applicant, as determined by successive multiplication
of the ownership percentages for each link in the vertical ownership
chain, that equal 10 percent or more of the applicant, except that if
the ownership percentage for an interest in any link in the chain
exceeds 50 percent or represents actual control, it shall be treated
and reported as if it were a 100 percent interest. See, e.g., 47 CFR
20.6(d)(8).
56. In addition, consistent with the reporting requirements set
forth in the 900 MHz SMR rules, the Commission will require that
applicants claiming small business status disclose on their short-form
applications the names of each controlling interest and affiliate, as
these terms are defined in this proceeding, and to provide gross
revenues calculations for each. On their long-form applications, such
applicants will be required to disclose any additional gross revenues
calculations, any agreements that support small business status, and
any investor protection agreements. The Commission believes that these
reporting requirements will help to assure that only qualifying
applicants obtain the benefits of our small business provisions,
without being unduly burdensome.
57. Finally, in a related proposal, PageNet states that Commission
should expressly prohibit ``blind bidding'' (i.e., bidding in which
auction participants do not know the identities or ownership
information of the other bidders in the auction) in any pending and
future auction because it (1) is unfair to auction participants; (2)
encourages auction abuses; and (3) encourages speculation. PageNet
contends that these factors can have a significant impact upon the
competitiveness of the auction and the post-auction marketplace. In
situations in which an incumbent has already met the Commission's
build-out requirements and must still bid in an auction in which blind
bidding is used, PageNet contends that a competitor is often able to
bid up the price of a license that it never intends to win in order to
force the incumbent to buy the license at a higher price. PageNet
further contends that this higher price is then reflected in higher
rates for services, which in turn affect the incumbent's ability to
compete. As discussed above, the Commission agrees that it is important
that auction applicants disclose certain ownership information prior to
the start of an auction. At the same time, however, the Commission
believes that in certain circumstances, the competitiveness of an
auction may be increased if less bidder information is made available.
In the Competitive Bidding Second Memorandum Opinion and Order, the
Commission retained the flexibility to conceal bidder identities if
further experience showed that it would be desirable to do so. More
recently, in the auction rules for geographic area paging licenses, the
Commission concluded that the advantages of limiting information
disclosed to bidders outweigh the disadvantages of this approach, and
reserved the discretion to announce by Public Notice prior to the
auction the precise information to be revealed to bidders during that
auction. The Commission believes that the uniform rules adopted today
provide the Commission with the necessary flexibility to tailor the
amount of bidder information made available to applicants to ensure the
competitiveness of each auction. The Commission therefore declines to
adopt a provision prohibiting non-disclosure of bidder identities in
all future auctions.
58. Ownership Disclosure Filings. The Commission believes that
permitting applicants to file ownership information when they apply for
their first auction, which would then be stored in a central database
and updated each time the information changes during or after the first
auction and when applicants participate in a subsequent auction, will
streamline our application processes and minimize the burden on auction
applicants. This concept is supported by the record. For example, CII
and Airadigm argue that this approach will benefit auction applicants
by reducing the time spent preparing auction applications, and will
benefit the Commission by eliminating the need to review and analyze
duplicative filings. The Commission believes that by requiring
ownership disclosure filings, we ensure that we receive all the
information necessary to evaluate an applicant's qualifications. As the
[[Page 2325]]
Commission indicated in the Notice, however, these requirements could
result in duplicative filings. For example, where licenses for a
service are offered in a series of blocks, as in the case of broadband
PCS, an entity may wish to participate in several auctions, and would
be required to disclose the same information a number of times. Under
the system the Commission envisions, when applying to participate in
subsequent auctions, applicants will be permitted to update the
database or certify that there have been no changes in ownership and
that the information contained in the database remains correct. The
Commission will look to implement this process in the near future as
part of our Universal Licensing System.
59. Audits. The only commenters to address this proposal, PageNet
and Airadigm, support this proposal. Airadigm requests that applicants
and licensees subject to audit be afforded sufficient time to provide
information to the Commission and that the Commission issue written
findings following its examination. The Commission therefore adopts its
proposal, and will modify our rules governing status as a designated
entity to expressly provide that applicants and licensees claiming
eligibility for special provisions shall be subject to audits by the
Commission. Such audits will be governed by the standards set forth in
Sections 403 and 308(b) of the Communications Act. 47 U.S.C. 403,
308(b). The Commission believes that these provisions, as well as the
general provisions of the Administrative Procedure Act, will adequately
address Airadigm's concerns, and the Commission therefore declines at
this time to adopt specific rules to govern audits of applicants and
licensees conducted in the future.
V. Payment Issues
60. Determination of Upfront Payment Amount. In the Competitive
Bidding Second Report and Order, the Commission indicated that the
upfront payment should be set using a formula based upon the amount of
spectrum and population (or ``pops'') covered by the license or
licenses for which parties intend to bid. The Commission reasoned that
this method of determining the required upfront payment would enable
prospective bidders to tailor their upfront payment to their bidding
strategies. At the same time, however, the Commission noted that
determining an appropriate upfront payment involved balancing the goal
of encouraging bidders to submit serious, qualified bids with the
desire to simplify the bidding process and minimize implementation
costs imposed on bidders. The Commission concluded that the best
approach would be to maintain the flexibility to determine the amount
of the upfront payment on an auction-by-auction basis, because this
balancing may yield different results depending upon the particular
licenses being auctioned.
61. Many commenters make specific proposals regarding the proper
size and terms for assessing upfront payments in future auctions. For
example, PageNet and CII suggest that the Commission adopt a standard
upfront payment rule requiring separate upfront payments for each
license identified in an applicant's short-form application. CII
contends that this would reduce the number of ``phantom'' mutual
exclusivities (i.e., theoretical frequency conflicts caused by the fact
that the current auction rules create no financial disincentive to list
licenses in an application on which the applicant has no bona fide
intention to bid). In contrast, Airadigm and NPCS argue that the
Commission should not require a separate upfront payment for each
license on which an entity elects to bid, as this would limit bidders'
flexibility to change strategy and force them to reveal their bidding
strategy prior to the start of the auction. In an alternate proposal,
AirTouch and CII suggest that the Commission require applicants to
increase their upfront payments as an auction progresses to equal a
percentage of their total bids. AirTouch argues that this requirement
would reduce the risk of defaults and discourage parties from
submitting ``jump bids'' where they have no intention of actually
winning a particular license. Similarly, to reduce the risk of default,
CII recommends that when an applicant's upfront payment drops below a
specific percentage of its high bid amount, the Commission allow the
applicant to increase its deposit to a certain percentage of its high
bid total within ten business days. In contrast to these two proposals,
Airadigm opposes increasing the upfront payment requirement once a
bidder's bid amount exceeds a certain multiple of the original upfront
payment amount because this would create a significant barrier to small
businesses.
62. The Commission agrees with Airadigm and NPCS that it is
unnecessary to adopt additional rules governing the amount of the
upfront payment and the terms under which it is assessed. The
Commission believes its reasoning in the Competitive Bidding Second
Report and Order remains valid, and that the required upfront payment
should be tailored to the particular auction design and to the
characteristics of the licenses being auctioned. This determination can
be made in a variety of ways and using a variety of techniques to
estimate the value of the spectrum being auctioned; however, as a
general rule we have required an upfront payment equal to $0.02 per pop
per megahertz. As discussed infra, under the current competitive
bidding rules the Commission maintains the discretion to alter the
amount of the required upfront payment or to modify the terms under
which the upfront payment is assessed. The Commission believes that
retaining this discretion provides the Commission with the greatest
level of flexibility to determine the appropriate upfront payment
amount on an auction-by-auction basis.
63. Refund of Upfront Payments. After considering the issue in
light of Congress's 1996 amendment to Section 309(j)(8)(C) and the
comments received in this proceeding, the Commission will continue our
current practice of returning the upfront payments of bidders who have
completely withdrawn from an auction prior to the conclusion of
competitive bidding. As the Commission suggested in the Notice, it is
unclear whether Congress intended, in amending Section 309(j)(8)(C), to
require the Commission to change its practice of refunding upfront
payments to bidders who withdraw during the course of an auction. The
Commission continues to believe, however, that the prompt return of
upfront payments is in the public interest, because it prevents
unnecessary encumbrances on the funds of auction bidders, many of whom
may be small businesses, after they have withdrawn from the auction. In
addition, we believe that this practice minimizes the financial burdens
of participating in an auction, because auction participants earn no
interest on upfront payment funds on deposit with the Commission.
Moreover, all commenters addressing the issue support our proposal to
continue this practice. AirTouch proposes that the Commission retain an
administrative fee based upon the number of rounds an applicant has
remained in the auction when it refunds upfront payments to bidders who
have withdrawn. Airadigm and AT&T state that not returning upfront
payments in a prompt manner in circumstances where a bidder has
withdrawn is akin to a ``fee'' that Congress did not intend to
authorize, and that may work to discourage participation in the
Commission's auction program. The Commission agrees with Airadigm and
AT&T, and conclude that such a fee is
[[Page 2326]]
inappropriate, and therefore, rejects AirTouch's proposal.
64. Down Payment and Full Payment for Licenses
Level of Down Payments
65. The Commission created the down payment requirement in the
Competitive Bidding Second Report and Order, in which the Commission
concluded that at the conclusion of the auction, a bidder must tender a
significant and non-refundable down payment to the Commission over and
above its upfront payment in order to provide further assurance that
the winning bidder will be able to pay the full amount of its winning
bid. The Commission believes that a substantial down payment is
required to ensure that licensees have the financial capability to
attract the capital necessary to deploy and operate their systems, and
to protect against default. Because it is due soon after the close of
the auction, the down payment is a valuable indicator of a license
applicant's financial viability. In addition, the Commission believes
that it is important it learns early on in the licensing process when
an applicant might be unable to finance its winning bid or bids.
66. Several commenters oppose any increase in the down payment
beyond 20 percent of the high bid amount. Airadigm opposes granting the
Bureau the discretion to establish a down payment amount because it
believes that the Bureau could unfairly disadvantage small businesses
by requiring disproportionately large down payments for auctions of
particularly capital-intensive services. In addition, Airadigm states
that granting the Bureau this discretion could complicate applicants'
financing arrangements because down payment amounts could vary with
each auction. After consideration of these comments, the Commission
concludes that a standard down payment amount of 20 percent is
appropriate. Finally, if unusual circumstances present themselves in
the context of a particular service, the Commission reserves the right
to adopt a different amount by rule in that service.
Untimely Second Down Payments and Full Payments
67. The Commission will amend sections 1.2109(a) and 1.2110(e) of
its rules to permit auction winners to make their second down payments
or final payments within ten business days after the applicable
deadline, provided that they also pay an appropriate late fee, without
being considered in default. As the Commission recognizes in the
Notice, in past auctions there have been cases where a winning bidder
missed the applicable second down payment deadline but subsequently
made its down payment and filed a request seeking a waiver of the
deadline. In some of these cases, the Bureau granted the waivers,
subject to payment of a five percent late fee. In granting the waivers,
the Bureau recognized the licensee's good faith and ability to pay as
evidenced by its timely remittance of all earlier payments and prompt
action to cure the delinquency.
68. The Commission recognizes that applicants may encounter
unexpected or unforeseeable difficulties when trying to arrange
financing and make substantial payments under strict deadlines. In
circumstances that may warrant favorable consideration of a waiver
request or an extension of the payment date, the Commission must also
evaluate the fairness to other licensees who made their payments in a
timely fashion. Two commenters, Mountain Solutions, Ltd. (``Mountain
Solutions'') and AirTouch, the only commenters to address this issue in
detail, support our proposal to permit late payment subject to a
standard late fee for any licensee not able to make a timely payment.
The Commission agrees, and amends Sec. 1.2109(a) to permit winning
bidders who are required to make final payment on their licenses within
a certain period of time as announced by public notice, to submit their
payment 10 business days after the payment deadline, provided that they
also pay a late fee equal to five percent of the amount due. Although
the Commission suspends the use of installment payments for the
immediate future, in the event the Commission once again offers
installment payments, the Commission will also amend Sec. 1.2110(e) to
permit auction winners paying for the licenses in installments to
submit their second down payment 10 business days after the payment
deadline, provided they also pay a late fee equal to five percent of
the amount due.
69. As discussed above, the Commission's rules provide that winning
bidders have ten business days to make timely payment following
notification that their licenses are ready to be granted. The
Commission believes that in establishing this additional ten business
day period, during which winning bidders will not be considered in
default, the Commission will provide an adequate amount of time to
permit winning bidders to adjust for any last-minute problems. The
Commission declines to provide for a lengthier late payment period
because we believe that extensive relief from initial payment
obligations could threaten the integrity, fairness, and efficiency of
the auction process. As observed in the Notice, a late fee of five
percent is consistent with general commercial practice and provides
some recompense to the federal government for the delay and
administrative or other costs incurred. In addition, we believe that a
five percent fee is large enough to deter winning bidders from making
late payments and yet small enough so as not to be punitive. Therefore,
applicants who do not submit the required final payment and five
percent late fee within the 10-day late payment period will be declared
in default, and will be subject to the default payment specified in
Sec. 1.2104(g) of our rules. 47 CFR 1.2104(g).
70. Finally, the Commission emphasizes that its decision to permit
late payments is limited to payments owed by winning bidders who have
submitted timely initial down payments. The Commission continues to
believe that the strict enforcement of payment deadlines enhances the
integrity of the auction and licensing process by ensuring that
applicants have the necessary financial qualifications. In this
connection, the Commission believes that the bona fide ability to pay
demonstrated by a timely initial down payment is essential to a fair
and efficient auction process. Thus, the Commission has not proposed to
modify its approach of requiring timely submission of initial down
payments that immediately follow the close of an auction. The
Commission did not propose to adopt a late payment period for down
payments that are due soon after the close of the auction as the
Commission believes it is reasonable to expect that winning bidders
timely remit their down payments, given that it is their first
opportunity to demonstrate to the Commission their ability to make
payments toward their licenses. Further, if a winning bidder defaults
on its down payment on a license, the Commission can take action under
Sec. 1.2109(b) relatively soon after the auction has closed, by, for
example, re-auctioning the license or offering it to the other highest
bidders (in descending order) at their final bids. Similarly, the
Commission will not allow for any late submission of upfront payments,
as to do so would slow down the licensing process by delaying the start
of an auction.
Full Payment and Petitions To Deny
71. The Commission will suspend the use of installment payments as
a means
[[Page 2327]]
of financing small business participation in our auction program for
the immediate future. As a result, all auction winners, including small
businesses, will be required to submit the full payment owed on their
winning bids shortly after a license is ready to be granted. The
Commission will recognize that in the past the filing of petitions to
deny against a winning bidder's application(s) has often had the effect
of significantly delaying the grant of the applicant's license(s), and
as a result, the deadline for that applicant to submit the balance of
its winning bid. However, in the Balanced Budget Act Congress granted
the Commission the authority to shorten the petition to deny period,
and as a result, to grant licenses much more rapidly. Balanced Budget
Act, Sec. 3008. As an initial matter, consistent with this legislation,
the Commission amends Secs. 1.2108(b) and (c) of its rules to provide
that the Commission shall not grant a license earlier than seven days
following issuance of a public notice by the Commission that long-form
applications have been accepted for filing. 47 CFR 1.2108(b), (c). Also
consistent with the Balanced Budget Act, the Commission amends this
section to provide that in all cases the period for filing petitions to
deny shall be no shorter than five days. In this regard, the Commission
seeks comment in the Second Further Notice of Proposed Rule Making on
whether there are instances in which the Commission should provide for
a longer period for the filing of petitions to deny or for the grant of
initial licenses in auctionable services.
72. In light of this change in our rules, the Commission believes
that the concerns discussed in the Notice regarding delays in the
granting of licenses and, as a result, in the deadline for full payment
are substantially reduced. While applications that are the subject of
petitions to deny ordinarily take longer to resolve than uncontested
applications, the Commission believes these changes in procedure will
reduce the risk of frivolous petitions being filed solely for purposes
of delay, and will enhance our ability to resolve petitions
expeditiously. Finally, the Commission believes that concerns regarding
delayed payment are outweighed by the risk and uncertainty that would
be imposed on an applicant if it were required to make its full auction
payment while a petition against its application was still pending and
could potentially result in denial of the application. As a result, the
Commission declines to amend its rules to require all winning bidders
to make their full payments at the same time, regardless of whether
petitions to deny their applications have been filed.
73. Default Payments. The Commission adopts its proposal to delete
the words ``simultaneous multiple-round'' from Sec. 1.2104(g), and will
apply the default/withdrawal payment procedure to all auction designs.
Several commenters support this decision, maintaining that rigorous
enforcement of the Commission's payment deadlines is critical to
preserving the integrity of the auction and licensing process by
ensuring that applicants possess the necessary financial
qualifications. These commenters also suggest that default payments are
an effective and necessary method of discouraging defaults and
encouraging private market solutions to licensee financing
difficulties. The Commission believes that this modification to our
general rules governing bidder default will help to maintain the
integrity of the auction process by discouraging defaults on the part
of bidders, encouraging bidders to make secondary or back-up financial
arrangements, and ensuring that default payments are made in a timely
manner. The Commission also believes this modification will help to
discourage insincere bidding and ensure that licenses end up in the
hands of those parties that value them the most and have the financial
qualifications necessary to construct operational systems and provide
service. See 47 U.S.C. 309(j)(5).
74. Our rules provide that where a winning bidder defaults on a
license, the bidder becomes subject to a default payment equal to the
difference between the amount bid and the winning bid the next time the
license is offered by the Commission, plus a payment equal to three
percent of the subsequent winning bid or the amount bid, whichever is
lower. See 47 CFR 1.2104(g)(2). In the Competitive Bidding Fifth Report
and Order, the Commission stated that where the default payment cannot
be determined, the Commission may assess an initial default payment
``of up to 20 percent'' of the defaulting bidder's winning bid. We
adopt our proposal in the Notice to employ this practice for all
auctionable services. No commenter addressed this issue. Although the
Commission provided that this deposit amount will be up to 20 percent
of the defaulted bid amount, we note that if a license is reauctioned
for an amount greater than the defaulted bid for the license, the
default payment due will be only three percent of the defaulted bid. 47
CFR 24.704(a)(2). See also 47 CFR 1.2104(g). Thus, in the future we
will assess an initial default deposit of between three percent (3%)
and twenty percent (20%) of the defaulted bid amount where a winning
bidder or licensee defaults and the defaulted license has yet to be
reauctioned. Once the license has been reauctioned by the Commission
and the total default payment can be determined, the Commission will
either assess the balance of the appropriate default payment, or refund
any amounts due, as necessary.
75. Installment Payments
Late Payments
76. In order to add certainty to the installment payment process,
the Commission adopts its proposals from the Notice to modify its grace
period provisions. As discussed above, the Commission declines to use
installment payments for the immediate future as a means of financing
small business participation in our auction program. As a result, the
Commission's decision with regard to late payment fees for installment
payments effectively will apply only to existing licensees who are
currently paying for their licenses in installments. From this point
forward, instead of considering individual grace period requests, the
following system will apply: A licensee who does not make payment on an
installment obligation will automatically have an additional 90 days in
which to submit its required payment without being considered
delinquent, but will be assessed a five percent late payment fee as
discussed above. If the licensee fails to make the required payment at
the close of this first 90-day non-delinquency period, the licensee
will automatically be provided a subsequent 90-day grace period, this
time subject to a second, additional late fee equal to ten percent of
the initial required payment.
77. As proposed in the Notice, under this system, licensees will
not be required to submit a filing to take advantage of these
provisions. During this 90-to-180-day period, the Commission or its
designated collection agent will continue to pursue collection of past-
due installments and fees. Also during this time, the licensee will
have the opportunity to raise necessary capital, continue service and
construction efforts, or seek a buyer for its license(s) that will
resume payments. These late payment provisions will apply independently
to all installment payments. Therefore, the late payment provisions and
accompanying late fees will not affect the payment schedule for future
payments. Thus, even if a licensee elects to take advantage of the late
payment provisions, the licensee
[[Page 2328]]
will still be responsible for remitting all future installment payments
in a timely manner, unless the licensee elects to take advantage of the
late payment provisions for any future installment payment. The
following example illustrates how this system will operate:
ABC Corp. has a $100,000 installment interest payment due on
March 1. If ABC Corp. is able to make its payment on March 1, then
it must remit $100,000 to the Commission. If ABC Corp. makes its
payment anytime from March 2 until May 30 (the end of the non-
delinquency period), then ABC Corp. must remit $105,000 to the
Commission to be considered current on its March 1 installment
payment. If ABC Corp. does not make its March 1 payment by May 30,
then it must remit $115,000 on or before August 28. If ABC Corp.
does not remit the required $115,000 by August 29 (the end of the
90-day grace period), then it will be considered in default and its
license will automatically cancel on August 30 without further
action by the Commission. See 47 CFR 1.2110(e)(4)(iii).
ABC Company's June 1 installment payment of $100,000 remains due on
June 1 regardless of the payment status of the March 1 payment. The
late payment terms apply to June installment payment independently of
the March payment. Thus, if ABC Company does not make its March 1
payment until June 1, the total amount due to the Commission on June 1
is $215,000 which consists of the March payment, the March 5% non-
delinquency late fee, the March 10% grace period late fee and the June
payment. Assuming the licensee remits the March 1 payment and
accompanying March late fees of $115,000 to the Commission by August
29, then the total amount due to the Commission on September 1 will be
$215,000 which consists of the June installment payment of $100,000,
the June 5% non-delinquency late fee, the June 10% grace period late
fee and September installment payment of $100,000.
ABC Company may elect to make late payments and pay the
accompanying late fees on the March and June payments. However, ABC
Company must remit $115,00 representing the required March payment and
accompanying March late fees by August 29 (the end of March's 90-day
grace period) or it will be considered in default and its license will
automatically cancel on August 30 without further action by the
Commission. Furthermore, ABC Company must remit and additional $115,000
representing the required June payment and accompanying June late fees
by November 29 (the end of June's 90-day grace period) or it will be
considered in default and its license will automatically cancel on
November 30 without further action by the Commission.
As proposed in the Notice, the late fees the Commission adopts will
accrue on the next business day following the payment due date and will
be payable with the next quarterly installment payment obligation. The
Commission emphasizes that at the close of non-delinquency or grace
period, a licensee must submit the required late fee(s), all interest
accrued during the non-delinquency period, and the appropriate
scheduled payment with the first payment made following the conclusion
of the non-delinquency period or grace period. Payments made at the
close of any grace period will first be applied to satisfy any lender
advances as required under each licensee's ``Note and Security
Agreement.'' Afterwards, payments will be applied in the following
order: late charges, interest charges, principal payments. As part of
the Commission's spectrum management responsibilities, the Commission
wishes to ensure that spectrum is put to use as soon as possible. The
Commission also believes that licensees should be working to obtain the
funds necessary to meet their payment obligations before they are due
and, accordingly, that the non-delinquency and grace periods the
Commission adopts should be used only in extraordinary circumstances.
Thus, as the Commission emphasized in the Notice, a licensee who fails
to make payment within 180 days sufficient to pay the late fees,
interest, and principal, will be deemed to have failed to make full
payment on its obligation and will be subject to license cancellation
pursuant to Sec. 1.2104(g)(2) of the Commission's rules.
78. Several commenters support the Commission's efforts to provide
licensees with predetermined non-delinquency periods without requiring
the submission of a formal grace period request. In addition, many of
the commenters addressing this issue, including AMTA, Hughes, AirTouch,
Mountain Solutions and CII support the imposition of a late payment fee
similar to that imposed in the broadband F block auction, in order to
create a significant incentive for timely payment of installment
obligations. CII believes that modifying our current grace period
procedures will provide licensees with knowledge in advance of the
extent of any relief that will be forthcoming from the Commission to a
licensee who misses an installment payment. AirTouch believes that any
licensee who fails to make payment within 180 days should face the
automatic cancellation of its license. AirTouch contends that once a
certain number of installment payments have been submitted late, the
Commission should declare the licensee in default and subject to the
default payments proposed in the Notice. In contrast, only CIRI opposes
this liberalization of the current grace period rules, requesting
instead that grace period relief be made available only when a licensee
can demonstrate that such relief is warranted and the public debt will
ultimately be satisfied. Although Hughes recommends the imposition of a
``significant'' late fee to the extent that an applicant misses a
payment deadline, Hughes believes that a five to ten percent late fee
is large enough to discourage late payments and to ensure that the
government is compensated for its administrative expenses in recouping
the payment. As an alternative to our proposal in the Notice, GWI
proposes that any such late payment fee should be pro-rated over the
90-day payment period instead of accruing all at once regardless of
when the late payment is made, in order to provide an economic
incentive for licensees who are overdue in their payment obligations to
retire the payment quickly instead of waiting until the end of the
payment period. In addition, GWI suggests that such a pro-rated payment
is fairer to licensees who inadvertently miss a required payment
through administrative error or other unavoidable, unforeseen
circumstances.
79. As an alternative to the Commission's proposals in the Notice,
Airadigm contends that following the first 90-day non-delinquency
period, licensees should be given a second 90-day period with a five
percent late fee, followed by a third 90-day grace period with a 10
percent late fee. ISTA believes that a rule whereby any license is
cancelled at the close of the second 90-day grace period is draconian,
and that such a ``hard-and-fast'' automatic cancellation rule would
doom many small businesses. GWI opposes the imposition of an additional
10 percent late payment fee where licensees require an additional 90-
day late payment period. The Commission declines to adopt these
alternate proposals. As the Commission indicated in the Notice, the
grant of a grace period is an extraordinary remedy and we wish to
encourage licensees to seek private market solutions to their capital
problems before the payment due date. In this regard, the Commission
notes that it has an obligation under the Debt Collection Improvement
Act to enforce payment obligations owed to the federal
[[Page 2329]]
government. See Debt Collection Improvement Act, Pub. L. 104-134,
Sec. 3100(j)(i), 110 Stat. 1321 (1996), codified at 31 U.S.C. 3711(a)
(``DCIA'').
80. The Commission believes that the automatic grace period
provisions we adopt today provide licensees with adequate financial
incentives to make installment payments on time, while at the same time
creating increased certainty that will help licensees pursue private
market solutions to their financing difficulties. These provisions also
will discourage licensees from attempting to maximize their cash flow
at the government's expense by submitting a required installment
payment after it is due. Several commenters agree with this assessment.
At the same time, these provisions will eliminate uncertainty for many
licensees who are seeking to restructure other debt contingent upon the
results of the Commission's installment payment provisions. In
addition, this system will ease the burden on the Commission of
considering individual grace period requests where Commission or its
designee may not have the necessary resources to evaluate a licensee's
financial condition, business plans, and capital structure proposals.
The Commission recognizes that some commenters oppose the imposition of
a late fee on overdue installment payment, and in particular on the 90-
day non-delinquency period. However, this approach is consistent with
the standard commercial practice of establishing late payment fees and
developing financial incentives for licensees to resolve capital issues
before payment due dates. This approach also is consistent with the
provisions of the DCIA, which requires that the Commission notify the
Secretary of the Treasury and commence debt collection procedures where
a party is more than 180 days past due on any outstanding debt owed to
a federal agency. See 31 CFR 3711(g)(1).
81. The Commission recognizes that a number of commenters oppose
the application of these provisions to current licensees. In
particular, GWI and IVDS Enterprises argue that to the extent the
Commission adopts a late payment fee, it should limit the imposition of
such a fee to licenses issued in future auctions. However, the
Commission's recent experience with the installment payment program has
shown the importance of ensuring that all licensees, including current
licensees, have adequate financial incentives to make installment
payments on time. The Commission notes that in awarding licenses in the
past to entities choosing to pay in installments, the Commission has
emphasized that the terms of the installment payment program will be
governed by current Commission rules and regulations, as amended. For
example, in awarding licenses to C block licensees paying for their
licenses in installments, the Commission indicated in the associated
``Note and Security Agreement'' that the terms of the installment plan
would be governed by and construed in accordance with then-applicable
Commission orders and regulations, as amended. The Commission also
believes that these licensees should obtain the benefit of increased
certainty that provisions for automatic grace periods provide. This
decision is supported by Mountain Solutions, who requests that current
licensees obtain the benefits of any loosening of the late payment fee
and grace period rules.
82. As provided in the Second Report and Order and Further Notice
of Proposed Rule Making in this docket, installment payments for C and
F block licensees will resume effective March 31, 1998. See Amendment
of the Commission's Rules Regarding Installment Payment Financing for
Personal Communications Services (PCS) Licensees, Second Report and
Order and Further Notice of Proposed Rule Making, WT Docket No. 97-82
62 FR 55348 (October 24, 1997) (``Second Report and Order and Further
Notice of Proposed Rule Making''). Under the Commission's decision to
reinstate installment payments for these licensees, the Commission
provided them with one automatic 60-day non-delinquency period
following the March 31, 1998, deadline, during which time they will not
be considered delinquent in their payment obligations. As the
Commission indicated in the Second Report and Order and Further Notice
of Proposed Rule Making, the Commission will not entertain any requests
for extension of the March 31, 1998 deadline beyond an automatic 60-day
non-delinquency period, so that for C and F block licensees all
required payments must be submitted no later than May 30, 1998. Only
those licensees making a timely payment of all amounts due, as set
forth in the Second Report and Order will be permitted to take
advantage of the late payment provisions the Commission adopts today.
See 47 CFR 1.2110.
83. In commenting on these modifications to the grace period
provisions, CIRI also proposes that the Commission make public the
terms of any workouts or debt relief provided to licensees. CIRI notes
that parties may request confidential treatment of sensitive financial
information pursuant to Sec. 0.459 of the Commission's rules, and that
such confidential treatment should be sufficient to safeguard the
privacy interests of licensees, while still making the terms of any
workout available for public scrutiny. As an initial matter, because
the Commission adopts its proposals providing for automatic grace
periods, the Commission does not envision licensees filing grace period
requests under normal circumstances from this point forward. As a
result, the Commission believes that CIRI's concerns about the
Commission making public a licensee's request for grace period relief
are moot. Moreover, because from this point forward a licensee's taking
advantage of our late payment provisions will be an administrative
matter processed by the Commission's loan servicer, and not a formal
waiver request, aside from instances where a licensee is declared in
default, there will be no public notice of a licensee's payment status.
The license is cancelled automatically under such circumstances. In
contrast, for licensees who have previously filed grace period requests
consistent with the Commission's current rules and procedures, the
Commission will continue its current practice of making the request
public when a decision is released granting or denying the request,
except to the extent that any request by the licensee for confidential
treatment is granted pursuant to Sec. 0.459 of the Commission's rules.
See 47 CFR 0.459. The Commission further clarifies that such licensees
are not deemed to be in default on these licenses until such time as
the Bureau issues a decision on these grace period requests. Licensees
whose requests for a grace period are denied will have ten (10)
business days to make the required payment or be considered in default.
Defaults on Installment Payments
84. The Commission will not adopt its tentative conclusion to apply
the default provisions of Sec. 1.2104(g) to licensees who default on an
installment payment. Most commenters addressing the issue oppose this
proposal. For example, Pocket submits that default payments assessed
later in the license term become highly arbitrary and unduly
burdensome. Pocket also contends that such payments are greater than
those traditionally required for secured creditors and create
substantial disincentives for investors and creditors who might
otherwise be interested in providing financing for licensees. Pocket
also notes that any default payment assessed disadvantages a licensee's
other creditors, which also makes it more difficult for licensees to
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raise capital. Finally, Pocket states that default payments assessed
later in the license term have no deterrent effect as there is no basis
to believe that licensees that have paid substantial sums to the
Treasury will willingly default. In contrast, AirTouch supports our
tentative conclusion that licensees that ultimately fail to fulfill
their installment payment obligations despite the availability of a 90-
day non-delinquency period and a subsequent, automatic 90-day grace
period, should be declared in default, and in turn be made subject to
the default payments proposed in the Notice.
85. The Commission has considered the comments of those who oppose
the proposed assessment, and find that an additional payment
requirement for licensees defaulting on installments is not necessary
to achieve our stated objectives. The Commission's current rules and
installment payment terms are adequate to discourage defaults and
encourage licensees to find private market solutions when they face
financial difficulties. The Commission also believes that the rules it
adopts providing for a 90-day non-delinquency period followed by a
subsequent, automatic 90-day grace period, subject to appropriate late
fees of five percent for the 90-day non-delinquency period and 10% for
automatic 90-day grace period, payable at the conclusion of these
periods serve these goals without substantially risking delays or
disruption in service to the public. In particular, the Commission
believes that this certainty regarding the Commission's treatment of
licensees needing extra time to make their installment payments will
increase the likelihood that licensees and potential investors will
find solutions to capital problems before a default occurs. The risk of
losing its license should provide a licensee a strong incentive to
avoid default. If, however, a default does occur, the conditions on the
face of each license and the terms of the notes and security agreements
executed by licensees provide the Commission appropriate remedies that
will ensure that defaulted licenses are returned to the Commission for
reauction and that all outstanding debts, as well as the Commission's
costs, are recoverable.
Cross Default in the Context of Installment Payments
86. After consideration of the comments in this proceeding, The
Commission concludes that it will not pursue a policy of cross default
(either within or across services) where licensees default on an
installment payment. Because the Commission will eliminate the use of
installment payments as a means of financing small business
participation in its auction program for the foreseeable future, the
Commission notes that in practice this decision will apply only to
existing licensees who are currently paying for their licenses in
installments.
87. The Commission's decision not to pursue cross default remedies
against current licensees who default on an installment payment is
supported by the majority of commenters. For example, Airadigm contends
that it is unfair to jeopardize an entire business because of a default
on one license. Similarly, ISTA argues for separate treatment of
separate services, regardless of ownership, lest a failure in one
business cause failure in unrelated businesses. IVDS Enterprises
proposes that licensees be able to discontinue installment payments on
a particular license and allow that license to be cancelled or revoked.
IVDS Enterprises believes that such a decision should not affect the
licensee's other licenses, whether in the same or other services, where
the licensee has made timely installment payments. Alternatively,
Pocket believes that the Commission should reserve the authority to
impose cross defaults on a case-by-case basis only for licensees that
have demonstrated bad faith.
88. The Commission recognizes that some commenters strongly
advocate a policy of cross defaults in this context. These commenters
suggest that such a policy (1) prevents speculation during the auction
and cherry-picking (e.g., selectively defaulting on some licenses while
keeping others) after the auction concludes, (2) encourages auction
participants to find private market solutions to financial shortfalls,
and (3) is consistent with commercial lending policies. The Commission
believes, however, that the default provisions contained in
Sec. 1.2104(g)(2) serve as an adequate incentive to discourage
speculation and encourage licensees to pursue non-default solutions to
financial difficulties. The Commission also emphasizes that our
decision on this matter only addresses default in the context of
installment payments, and does not affect our policy with regard to
defaults on down payments. In addition, by making licensees who default
on an installment payment subject to the default payment set forth in
Sec. 1.2104(g)(2), the Commission created an additional deterrent to
licensees considering default as a solution to financing shortfalls.
The Commission believes that this policy will promote the goals of
section 309(j) by not punishing otherwise successful licensees for
failures in one market, and will strike an appropriate balance between
our conflicting roles as both ``lender'' and ``regulator.''
Accordingly, upon default on an installment payment, a license will
automatically cancel without further action by the Commission, the
licensee will become subject to the default payment set forth in
Sec. 1.2104(g) of our rules, and the Commission will initiate debt
collection procedures against the licensee and accountable affiliates.
47 CFR 1.2104(g), 1.2110(e)(4)(iii). See also 31 U.S.C. Chapter 37; 4
CFR Parts 101-105; 47 CFR Part 1, Subpart O.
VI. Competitive Bidding Design, Procedure, and Timing Issues
89. Balanced Budget Act of 1997 Notice and Comment Procedures. The
Commission believes that in the past our service-specific rule making
process has served the purpose of adequately ensuring that interested
parties have sufficient time to familiarize themselves with the rules
and procedures to be employed in an auction prior to the application
deadlines and start date of that auction. The Commission nevertheless
believes that this legislation requires that the Commission provide an
additional opportunity for input from potential bidders prior to the
issuance of detailed auction-specific information by the Bureau. To
date, the Bureau has served as the primary point of contact with
potential bidders and other parties interested in issues relating to
each upcoming auction, and this has worked well. In light of the
typically time-sensitive nature of most issues arising in the weeks
prior to the start of an auction, the Bureau has been equipped to make
determinations and respond rapidly to potential bidders' concerns.
Consistent with the provisions of the Balanced Budget Act, and to
ensure that potential bidders have adequate time to familiarize
themselves with the specific provisions that will govern the day-to-day
conduct of an auction, the Commission directs the Bureau, under its
existing delegated authority, see 47 CFR 0.131(c), 0.331, 0.332, to
seek comment on a variety of auction-specific issues prior to the start
of each auction.
90. The Commission directs the Bureau to seek comment on specific
mechanisms relating to day-to-day auction conduct including, for
example, the structure of bidding rounds and stages, establishment of
minimum opening bids or reserve prices, minimum acceptable bids,
initial maximum eligibility for each bidder, activity requirements for
each stage of the auction, activity rule waivers, criteria for
determining reductions in
[[Page 2331]]
eligibility, information regarding bid withdrawal and bid removal,
stopping rules, and information relating to auction delay, suspension,
or cancellation. The Commission directs the Bureau to afford interested
parties a reasonable time, in light of the start date of each auction
and relevant pre-auction filing deadlines, to comment on auction-
specific issues. In this regard, the Commission notes that it has been
the Bureau's practice to release the public notice providing details
concerning each upcoming auction sufficiently in advance of the short-
form filing deadline (e.g., 30 days prior to the deadline) to provide
interested parties with an opportunity to develop business plans,
assess market conditions and evaluate the availability of equipment.
Also consistent with previous practice, the Commission recognizes that
the Bureau needs the flexibility to announce, at any time in the weeks
leading up to the start date of each auction, any minor, non-
substantive amendments or clarifications to the specific mechanisms set
forth in auction-related public notices or the Bidder Information
Package. The Commission believes that this process is consistent with
the requirements of section 3002(a)(1)(B)(iv) of the Balanced Budget
Act, and will afford potential bidders adequate notice, as well as an
opportunity to comment on the Bureau's intentions regarding issues
relating to the day-to-day conduct of each auction.
91. ``Real time'' Bidding. The Commission will adopt its proposal
in the Notice to allow for ``real time'' bidding as an alternate design
methodology in our rules. After careful consideration of the comments
received in this proceeding, as well as its experience in conducting 15
auctions to date, the Commission concludes that ``real time'' bidding
will allow auctions to proceed more rapidly because it will allow
bidders immediate feedback on new high bids. The Commission also notes
that in an effort to simplify the auction process and prevent
``gaming'' of bids, the Commission has recently modified its electronic
bidding process by implementing ``click-box bidding.'' This feature,
which replaces the field where bidders previously typed their dollar
bid amount with a ``click on check box to bid'' field (where the only
bid amount allowed is at the minimum acceptable bid) no longer allows
bidders to type a bid amount on the Bid Submission screen. As such,
``click-box bidding'' can work well in a ``real-time'' bidding context
because bidders can more rapidly respond to the bids of other bidders,
permitting an auction to progress more rapidly and efficiently. The
Commission has successfully employed click box bidding in the recently
completed 800 MHz SMR auction, and plans to employ it in the
forthcoming LMDS auction.
92. The Commission delegates to the Bureau the authority to
determine whether the public interest will be served by ``real time''
bidding in a particular auction. Most commenters oppose the use of
``real time'' bidding, arguing it may be difficult for bidders to react
quickly enough to ensure that in each bidding round they make new high
bids on the necessary percentage of their bidding eligibility to meet
their activity requirement. These commenters also believe that the
somewhat accelerated pace of ``real time'' bidding may leave less time
to craft informed bidding strategies during the auction.
93. As mentioned above, the ``click-box bidding'' format should
significantly improve a bidder's ability to react quickly. Further,
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