[Federal Register Volume 59, Number 165 (Friday, August 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21182]
[[Page Unknown]]
[Federal Register: August 26, 1994]
_______________________________________________________________________
Part VI
Federal Communications Commission
_______________________________________________________________________
47 CFR Part 1
Practice and Procedure: Competitive Bidding Procedures; Rule
-----------------------------------------------------------------------
47 CFR Part 1
[PP Docket No. 93-253; FCC 94-215]
Implementation of Section 309(j) of the Communications Act--
Competitive Bidding
AGENCY: Federal Communications Commission.
ACTION: Final Rule; Petition for Reconsideration.
-----------------------------------------------------------------------
SUMMARY: In this Second Memorandum Opinion and Order, the Commission
responds to petitions for reconsideration or clarification of the rules
and policies adopted in the Second Report and Order in this proceeding,
which sets forth general rules for the use of competitive bidding to
award licenses for use of the spectrum. The Commission makes minor
changes in the rules adopted in the Second Report and Order. This
action is taken to implement Section 309(j) of the Communications Act
of 1934, as amended. The rules will promote the development and rapid
deployment of new technologies, products, and services for the benefit
of the public, including those residing in rural areas. These rules
also will promote economic opportunity and competition, and disseminate
licenses among a wide variety of applicants, including small
businesses, rural telephone companies, and businesses owned by members
of minority groups and women. This action will result in recovery for
the public of a portion of the value of the public spectrum made
available for commercial use.
EFFECTIVE DATE: September 26, 1994.
FOR FURTHER INFORMATION CONTACT:
Jackie Chorney or Florence Setzer, Office of Plans and Policy, (202)
418-2030.
SUPPLEMENTARY INFORMATION: This Second Memorandum Opinion and Order in
PP Docket No. 93-253, adopted August 12, 1994, and released August 15,
1994, is available for inspection and copying during normal business
hours in the FCC Dockets Branch, room 230, 1919 M Street NW.,
Washington, DC. The complete text may be purchased from the
Commission's copy contractor, International Transcription Service,
Inc., 2100 M Street, NW., suite 140, Washington, DC 20037, telephone
(202) 857-3800.
Paperwork Reduction Act
In the Second Memorandum Opinion and Order in PP Docket No. 93-253,
the Commission adopted no new reporting or recordkeeping requirements.
In the Matter of Implementation of Section 309(j) of the
Communications Act--Competitive Bidding PP Docket No. 93-253.
Second Memorandum Opinion and Order
Adopted: August 12, 1994; Released: August 15, 1994; By the
Commission:
Table of Contents
Paragraph
I. Introduction.............................................. 1
II. Applicability of Competitive Bidding..................... 7
A. Cellular Unserved Areas................................. 7
B. Principal Use of PCS.................................... 11
III. Auction Design and Procedures........................... 12
A. Activity and Stopping Rules............................. 12
B. Suggested Opening Bid................................... 19
C. Commission Discretion During Auctions................... 21
D. Treatment of Upfront Payments........................... 27
E. Default Penalty......................................... 34
F. Disclosure of Bidding Information....................... 37
G. Standby Queue........................................... 43
H. Filing Fees............................................. 45
I. Waiver Requests in Short Form Applications.............. 47
J. Rules Prohibiting Collusion............................. 48
K. Information Disclosure by Applicants and Licensees...... 54
L. Application-Processing Rules............................ 58
M. Financial Qualifications................................ 61
IV. Designated Entities...................................... 64
A. Introduction............................................ 64
B. Rural Telephone Company Definition...................... 67
C. Rural Telephone Consortia............................... 81
D. Affiliation Rules....................................... 86
E. Rural Telephone Company Bidding Credits................. 105
F. Rural Telephone Company Eligibility for Installment
Payments.................................................. 116
G. Rural Telephone Company Partitioning.................... 123
H. Unjust Enrichment Provisions............................ 125
I. Upfront Payment......................................... 129
J. Installment Payments.................................... 132
K. Eligibility Issues...................................... 134
L. Small Business.......................................... 144
V. Final Regulatory Flexibility Analysis..................... 151
VI. Procedural Matters and Ordering Clauses.................. 155
I. Introduction
1. By this action, we respond to petitions for reconsideration or
clarification of the rules and policies adopted in the Second Report
and Order in this proceeding, which sets forth general rules for the
use of competitive bidding to award licenses.1 Twenty-one such
petitions were received, as well as eight oppositions and five replies.
---------------------------------------------------------------------------
\1\Second Report and Order, PP Docket No. 93-253, 9 FCC Rcd
2348, 59 FR 22980, May 4, 1994 (Second Report and Order).
---------------------------------------------------------------------------
2. On August 10, 1993, the Omnibus Budget Reconciliation Act of
1993 (the Budget Act) added Section 309(j) to the Communications Act of
1934, as amended, 47 U.S.C. Sec. 309(j).2 Section 309(j) gives the
Commission express authority to employ competitive bidding procedures
to choose among mutually exclusive applications for initial licenses.
The Commission adopted a Notice of Proposed Rulemaking in this
proceeding on September 23, 1993.3 The Second Report and Order
prescribing the required regulations was adopted on March 8, 1994. The
Commission has subsequently adopted specific rules for auction of
narrowband Personal Communications Service (PCS) licenses,4
Interactive Video and Data Service (IVDS) licenses,5 and broadband
PCS licenses.6
---------------------------------------------------------------------------
\2\See, Omnibus Budget Reconciliation Act of 1993, 47 U.S.C.
309(j)(3)(B).
\3\Notice of Proposed Rule Making in PP Docket No. 93-253, 8 FCC
Rcd 7635, 58 FR 53489 (Oct 15, 1993), (NPRM). In the First Report
and Order in PP Docket No. 93-253, FCC 94-32, released February 4,
1994, 59 FR 09100 (Feb 25, 1994), (First Report and Order), the
Commission prescribed transfer disclosure requirements with respect
to licenses awarded by random selection.
\4\Third Report and Order in PP Docket No. 93-253, 9 FCC Rcd
2941, 59 FR 26741, May 24, 1994 (Third Report and Order).
\5\Fourth Report and Order in PP Docket No. 93-253, 59 FR 24947,
May 13, 1994 (Fourth Report and Order).
\6\Fifth Report and Order in PP Docket No. 93-253, FCC 94-178,
59 FR 37566, July 29, 1994, adopted June 29, 1994, released July 15,
1994 (Fifth Report and Order).
---------------------------------------------------------------------------
3. The Second Report and Order established rules for determining
what types of services and licenses may be subject to auctions. The
Second Report and Order also set forth a range of auction designs and
procedures, from which the Commission stated it would choose in
establishing procedures for awarding licenses in specific services. The
Second Report and Order addressed a variety of procedural issues
regarding announcement of auctions, filing of applications, bidder and
licensee qualifications, payment requirements, and penalties for
default or disqualification, as well as safeguards to deter possible
abuses of the bidding and licensing process. In response to statutory
directive, the Second Report and Order also identified provisions
designed to ensure that small businesses, rural telephone companies,
and businesses owned by women or members of minority groups (designated
entities) are given the opportunity to participate in the provision of
spectrum-based services.
4. In many cases, the appropriate auction procedures and rules vary
from service to service. In the Second Report and Order we retained the
flexibility to choose, from within a defined range, the appropriate
procedures for particular services, depending on characteristics of the
service such as the likely value and interdependence of the licenses
being auctioned and the capital required to construct a system. We also
retained the flexibility to alter our procedures in response to our
experience with different auction techniques.
5. We dispose of all but two of the petitions for reconsideration
of the Second Report and Order in this Order. We defer consideration of
Brown and Schwaninger's petition concerning Finder's Preferences. We
plan to issue a Further Notice addressing the applicability of Finder's
Preferences to auctionable services in the near future, and we will
consider Brown and Schwaninger's petition in the context of that
Notice. We also defer to a future Order consideration of MCI's petition
concerning auctioning of BETRS licenses.
6. The issues raised in the petitions for reconsideration fall into
three categories: those dealing with the applicability of competitive
bidding to specific services and particular circumstances, those
dealing with auction design and procedures, and those dealing with the
definition of the groups eligible for special provisions (the
``designated entities'') and the nature of these provisions. We
consider issues raised by these petitions below.
II. Applicability of Competitive Bidding
A. Cellular Unserved Areas
7. Two cellular systems operate on separate frequency blocks in
each cellular market.7 The geographic areas not covered after five
years by the initial licensees are considered cellular ``unserved
areas'' that are licensed separately. In 1991, we adopted random
selection procedures to govern licensing of the cellular unserved
areas,8 and stated that we would revisit this decision to use
lotteries if Congress authorized Commission use of competitive bidding
procedures.9 As noted above, competitive bidding authority was in
fact enacted in 1993.10
---------------------------------------------------------------------------
\7\The Domestic Public Cellular Service is governed by Part 22
of the Commission's Rules, 47 CFR Part 22.
\8\See First Report and Order and Memorandum Opinion and Order
on Reconsideration, CC Docket No. 90-6, 6 FCC Rcd 6185, 56 FR 58503,
Nov 20, 1991.
\9\Id. at 6217.
\1\0See Budget Act, 107 Stat. 387-392.
---------------------------------------------------------------------------
8. After receiving comment and considering the extensive record,
the Commission indicated in the Second Report and Order that, unless
specifically excluded, mutually exclusive applications for licenses in
the Public Mobile Services, including the Cellular Service, will be
subject to competitive bidding if they were filed after July 26,
1993.\11\ We noted, however, that applications filed before July 26,
1993 present special issues due to the ``special rule'' of Section
6002(e) of the Budget Act.\12\ That rule does not require the
Commission to award licenses or permits by competitive bidding if the
license applications were filed before July 26, 1993, even if the
applications otherwise meet the criteria that would subject them to
selection by bidding.\13\ We therefore stated in the Second Report and
Order that we would determine in a separate order how to authorize
Public Mobile systems if applications were filed before July 26,
1993.\14\ Subsequently, after thorough consideration of the record, we
adopted a Memorandum Opinion and Order stating that in such situations
we will award licenses for the unserved areas by random selection.\15\
---------------------------------------------------------------------------
\11\See Second Report and Order at 61 & n.58.
\12\See id. at n.55, citing Budget Act, Sec. 6002(e).
\13\See Budget Act, Sec. 6002(e).
\14\See Second Report and Order at n.55.
\15\See Memorandum Opinion and Order, PP Docket No. 93-253, FCC
No. 94-123, 59 FR 37163, July 21, 1994, adopted May 27, 1994,
released July 14, 1994 (Memorandum Opinion and Order).
---------------------------------------------------------------------------
9. Petitions. We received three petitions for reconsideration of
the provisions of the Second Report and Order related to authorization
of the cellular unserved areas.\16\ John G. Andrikopoulos, et al.
(Andrikopoulos) states that where applications for cellular unserved
area licenses were accepted for filing before July 26, 1993, the
applications should not be subject to competitive bidding.
Andrikopoulos asserts that auctioning these licenses would be
unreasonable, retroactive application of the Budget Act.\17\ The
Houston, Dallas, Oxnard and Huntington Cellular Settlement Groups
(Cellular Settlement Groups; Groups) assert that the Commission should
accept full-market settlements between mutually exclusive applicants
for cellular unserved area licenses.\18\ These Groups state that
Congress intended the Commission to continue use of its existing policy
favoring full-market settlements, and express concern that the Second
Report and Order appears to profit full-market settlements where
licenses will be awarded through competitive bidding procedures.\19\
Finally, Thumb Cellular, a party to a full-market settlement agreement
filed for a Detroit unserved area, asks the Commission to process its
settlement agreement immediately.\20\
---------------------------------------------------------------------------
\16\See petitions of Thumb Cellular Limited Partnership (Thumb
Cellular), John Andrikopoulos, et al. (Andrikopoulos), and cellular
settlement groups in Houston, Dallas, Oxnard and Huntington
(Cellular Settlement Groups).
\17\See Andrikopoulos Petition at 4-5.
\18\See Cellular Settlement Groups Petition at 3-7.
\19\Id.
\20\Thumb Cellular Petition at 3-4.
---------------------------------------------------------------------------
10. Discussion. The issues raised by these petitioners are fully
addressed in the Memorandum Opinion and Order, which was released
shortly after these petitions were filed. We stated in that item that
we will grant licenses for cellular unserved areas by random selection
from the pool of applicants that filed lottery applications prior to
July 26, 1993, and we will permit full-market settlements among lottery
applicants to avoid mutual exclusivity.\21\ Applications for cellular
unserved areas accepted for filing prior to July 26, 1993 will not be
subject to competitive bidding. Accordingly, the issues raised by these
three petitioners are moot.
---------------------------------------------------------------------------
\21\See Memorandum Opinion and Order at 10-18.
---------------------------------------------------------------------------
B. Principal Use of PCS
11. Section 309(j)(1) of the Communications Act, as amended,
permits auctions only where mutually exclusive applications for initial
licenses or construction permits are accepted for filing by the
Commission and where the principal use of the spectrum will involve or
is reasonably likely to involve the receipt by the licensee of
compensation from subscribers in return for enabling those subscribers
to receive or transmit communications signals.\22\ In the Second Report
and Order we concluded that PCS service would meet the criteria for
auctionablility.\23\ Millin requests that we reverse that decision and
conduct further inquiry concerning the possibility of non-subscription
PCS.\24\ We consider and rejected Millin's arguments in the Fifth
Report and Order in this docket, stating that the overwhelming weight
of the comments in that proceeding, as well as our experience with the
PCS experiments that we have licensed, reflect that licensed PCS
spectrum is likely to be used principally for the provision of service
to subscribers for compensation.\25\ We continue to believe that the
record strongly supports the likelihood that PCS spectrum will be used
principally for the provision of service to subscribers for
compensation. Accordingly, we deny Millin's request.
---------------------------------------------------------------------------
\22\47 U.S.C. Sec. 309(j)(1).
\23\See Second Report and Order at 55-56.
\24\See petition of Millin Publications, Inc. (Millin).
\25\Fifth Report and Order at n.8.
---------------------------------------------------------------------------
III. Auction Design and Procedures
A. Activity and Stopping Rules
12. Activity rules and stopping rules are intended to govern the
speed and duration of bidding in an auction. An activity rule
encourages each bidder to participate actively through the course of an
auction. Activity rules are intended to ensure that simultaneous
auctions with simultaneous stopping rules will close within a
reasonable period of time and that bid prices will convey meaningful
information during the course of the auction. In the Second Report and
Order, the Commission adopted a three-stage Milgrom-Wilson activity
rule as the preferred activity rule when a simultaneous stopping rule
is employed.\26\ Under this rule the auction moves from stage I to
stage II when, in each of three consecutive rounds of bidding, the high
bid has increased on less than some specified percent of the spectrum
(measured in terms of MHz-pops) being auctioned.\27\ The auction will
move from stage II to stage III when in each of three consecutive
rounds the high bid has increased on less than some specified percent
of the spectrum (measured in terms of MHz-pops). The Commission,
however, retained the flexibility to decide whether to use an activity
rule, and if so what type of activity rule to use. We described
possible activity rules, and stated the range of alternatives from
which we would choose and the circumstances that might cause us to
choose particular rules. We stated that we would announce the activity
rule to be used by Public Notice before an auction.\28\ A stopping rule
specifies when an auction is over. In the Second Report and Order we
stated that, for simultaneous auctions, our preferred stopping rule was
that all markets would close simultaneously if a single round passed in
which no new acceptable bids are submitted for any license. We retained
the discretion, however, to announce at any point during a multiple
round auction would end after a specified number of rounds.\29\
---------------------------------------------------------------------------
\26\Second Report and Order at 144.
\27\The number of ``MHz-pops'' is calculated by multiplying the
population of the license service area by the amount of spectrum
authorized by the license.
\28\Id. at 133.
\29\Id. at 132.
---------------------------------------------------------------------------
13. Petitions. Southwestern Bell Corporation (SBC), the GTE Service
Corporation (GTE), and the Association of Independent Designated
Entities (AIDE) argue that the three-stage Milgrom-Wilson activity rule
is unnecessarily complex and should be simplified or eliminated.\30\
SBC points out that the three-stage Milgrom-Wilson activity rule would
require the Commission to track a large number of upfront payments and
eligibility levels, and notes that the software the Commission intends
to develop to track activity levels may not be developed in time. SBC
states that allowing five automatic waivers, as the Commission proposes
to do, does not reduce the uncertainty and expense which the activity
rule imposes and may make bidding strategy more complex.\31\ GTE states
that the upfront payment formula, when combined with the activity rule,
unnecessarily restricts bidder flexibility.\32\ GTE states that the
activity rules limit the ability of bidders to revise their plans in
the course of the auction, particularly if information revealed during
the latter stages of the auction causes a bidder to become interested
in additional properties. The activity rules, according to GTE,
discourage qualified entities from participating as fully as they might
otherwise do, so that some licenses may not be awarded to the entity
placing the highest value on them.\33\
---------------------------------------------------------------------------
\30\SBC Petition at 1-6; GTE Petition at 6-11; AIDE Petition at
12-13.
\31\SBC Petition at 3-6.
\32\GTE Petition at 7.
\33\Id. at 9-10.
---------------------------------------------------------------------------
SBC urges the Commission to alter the stopping rule to allow the
agency to issue a notice that bidding will close after a given number
of rounds.\34\ GTE and SBC ask the Commission to adopt a simpler
activity rule, such as a requirement that bidders be active on a single
license in each round.\35\ AIDE urges that the activity rules be
withdrawn, at least in the case of designated entities.\36\ Pacbell
counters that the three-stage Milgrom-Wilson activity rule avoids
delay, provides meaningful information, and allows bidders the
flexibility to react to that information, and that software is
available to help ensure that the Milgrom-Wilson rule will not be hard
to implement.\37\
---------------------------------------------------------------------------
\34\SBC Petition at 5.
\35\GTE Petition at 10-11; SBC Petition at 5.
\36\AIDE Petition at 12-13.
\37\Bell Opposition at ii.
---------------------------------------------------------------------------
14. Discussion. As we noted in the Second Report and Order, the
decision to use activity rules and the choice among activity rules
involve tradeoffs among the speed of the auction, bidder flexibility,
and simplicity.\38\ The petitioners raise no issues relating to
activity rules that we did not consider carefully in the Second Report
and Order.\39\ We see nothing in the petitions for reconsideration to
cause us to change our opinion concerning the choices we made among
these goals.
---------------------------------------------------------------------------
\38\Second Report and Order at 134.
\39\For instance, GTE notes that a bidder may be interested in
some properties only if it can also acquire other key properties.
GTE states that ``under the modified Milgrom-Wilson rule, the bidder
could be forced to choose between dropping out of the auction
prematurely or staying active in markets that may prove to be less
valuable if the bidder loses out in the other key markets.'' GTE
Petition at 9-10. The Second Report and Order considers the same
situation of interdependency and concludes that a bidder would have
more flexibility with the three-stage Milgrom-Wilson rule than with
another possible activity rule, that of starting the bidding with
the third stage of the Milgrom-Wilson rule. See Second Report and
Order at 142.
---------------------------------------------------------------------------
15. We do not believe that the Milgrom-Wilson activity rules will
excessively restrict bidders' flexibility to bid for desired
combinations of licenses or cause licenses to be awarded to bidders who
value them less than other bidders. The rules were expressly designed
to counteract the incentive to delay serious bidding that occurs in
simultaneous auctions, without unduly limiting bidders' flexibility to
pursue backup strategies and to use new information.\40\ The
restrictions placed on bidders at the beginning of the three-stage
auction procedure are modest. In the first stage, to retain full
eligibility a bidder need only bid on, or have the highest bid from the
previous round on, licenses representing at least one-third of the MHz-
pops he or she ultimately hopes to win. In the second stage, the bidder
must bid on, or hold the high bid on, two-thirds of the MHz-pops he or
she hopes to win. Only in the third stage are bidders required to bid
on the full amount of MHz-pops they hope to acquire.\41\ Bidders may
shift bids among any combination of licenses from round to round.\42\
Paul Milgrom points out that at the shift from stage I to stage II
there will be no more than three bidders on an average license, and at
the shift to stage III there will be at most 1\1/2\ bidders on an
average license.\43\ Because the progression to higher stages imparts
such information, it gives the bidders important signals concerning the
state of bidding. By stage III, bidding should be rapidly drawing to a
close, and any major shifts in strategy should already have been
implemented. Bidders who believe that they may want to expand their
purchases if prices are unexpectedly low can guarantee their ability to
do so by making a sufficiently high upfront payment.
---------------------------------------------------------------------------
\40\Id.
\41\Id. at 137.
\42\Id. at 136.
\43\Ex parte submission of Paul Milgrom, June 21, 1994 at 2.
---------------------------------------------------------------------------
16. In the Second Report and Order, we also stated our intention to
reduce the complexity faced by bidders by developing bidding software
and making it available to all bidders in auctions in which a Milgrom-
Wilson activity rule is used.\44\ SBC expresses concern that the
software may not be available in time. Software was in fact developed
in time for the July nationwide narrowband auction, and performed
successfully in that auction. In light of that success, we have no
doubt that appropriate software will also be available for the
remaining narrowband and broadband auctions.
---------------------------------------------------------------------------
\44\Second Report and Order at 143.
---------------------------------------------------------------------------
17. Finally, we remind petitioners that, in the Second Report and
Order, we adopted the three-stage Milgrom-Wilson activity rules only as
a preferred option.\45\ We deferred to later, service-specific Orders
the choice of actual rules to be used in auctions for individual
services, depending, as discussed in the Second Report and Order, on
the characteristics of the services and our experience with the conduct
of auctions. In addition, we retained the flexibility to decide on an
auction-by-auction basis, and to announce by Public Notice before the
auction, whether to use an activity rule, and if so what type of
rule.\46\ Thus, if experience shows that the Milgrom-Wilson rules are
unduly difficult to administer, we may shift to other activity rules,
including the one recommended by petitioners requiring only that
bidders be active on a single license in each round. We also expressly
retained the discretion, requested by SBC, to announce at any point
during a multiple round auction that the auction will end after some
specified number of additional rounds.\47\
---------------------------------------------------------------------------
\45\Second Report and Order at 144.
\46\Id. at 133.
\47\Id. at 132.
---------------------------------------------------------------------------
18. In the Second Report and Order the Commission also retained the
ability to speed up an auction by announcing at any time during an
auction that the next stage of the auction will begin in the next
bidding round.\48\ In this Order the Commission wishes to make explicit
that this discretion could be exercised by employing an alternative
rule for moving from one stage of the auction to the next. The
Commission will announce by Public Notice prior to an auction its
intent to use an alternative rule. One possible alternative rule would
be that the auction will move to the next stage if in each of some
fixed number of rounds, bidding activity is below some level measured
as the ratio of new bids (measured in terms of MHz-pops) to available
licenses (measured in terms of MHz-pops). The ratio of new bids to
licenses may be a better measure of bidding activity than the
percentage of total licenses on which the high bid has increased
(measured in terms of MHz-pops) because it accounts for the possibility
that bidding may be concentrated on a few licenses. In contrast, the
latter measure indicates the same level of bidding activity regardless
of how many bids are made on a given set of licenses.
---------------------------------------------------------------------------
\48\Id. at n.110.
---------------------------------------------------------------------------
B. Suggested Opening Bid
19. In the Second Report and Order, we stated that in multiple
round auctions the Commission will generally specify minimum bid
increments to speed the progress of the auction.\49\ The bid increment
is the amount or percentage by which the bid must be raised above the
previous round's high bid in order to be accepted as a valid bid in the
current round. We retained the discretion to use a ``suggested''
minimum bid increment rather than a required bid increment.\50\
---------------------------------------------------------------------------
\49\Second Report and Order at 124.
\50\Under a suggested minimum bid increment rule, the auction
would close if no bids or only one bid was submitted that was above
the minimum bid increment. Id. at n. 102.
---------------------------------------------------------------------------
20. In the recent nationwide narrowband auctions, it became
apparent that the Commission may need further tools to avoid
unnecessarily long auctions. In order to expedite the auction process
further, we also reserve the discretion to establish a suggested
opening bid on each license in addition to the minimum bid
increment.\51\ Where we adopt a suggested opening bid, initial bids
will have to be above the minimum bid increment but may be below the
suggested opening bid. Generally, we will establish suggested opening
bids in the range of $.02-$.20 per pop per MHz for each license. This
suggested opening bid will provide bidders with an incentive to start
bidding at a substantial portion of the license value, thus ensuring a
rapid conclusion of the auction.
---------------------------------------------------------------------------
\51\See ex parte submission of Paul Milgrom, May 19, 1994.
---------------------------------------------------------------------------
C. Commission Discretion During Auctions
21. In the Second Report and Order, and discussed supra, we chose
our primary auction methodology, but noted that no one auction design
is optimal for all auctionable services. We stated that we would adopt
auction rules for specific services in subsequent Report and Orders,
based on criteria established in the Second Report and Order. We
further stated that when we announced individual auctions for specific
services, we would specify more detailed procedures for those auctions
in a Public Notice, but that those procedures also would be governed by
criteria set forth in the Second Report and Order.\52\ Our rules also
afforded flexibility with respect to some auction procedures, such as
those governing the duration of bidding rounds, minimum bid amounts,
and stopping rules, and we stated that we might make decisions
regarding such matters during the course of an auction.\53\
---------------------------------------------------------------------------
\52\Id. at 68.
\53\Id. at 123, 126, 132.
---------------------------------------------------------------------------
22. Petition. The National Association of Business and Educational
Radio, Inc. (``NABER'') asserts that the auction rules do not comply
with the public interest and the Administrative Procedure Act\54\
because they allow the Commission to circumvent the normal notice and
comment procedure, and that the rules prevent providers of service from
devising a business plan and auction strategy in advance.\55\ NABER
states that the Commission should eliminate its discretion to change
the auction rules or procedures during a particular auction, that
bidders need to know the rules which will apply for a particular
service auction, and that interested parties should have the
opportunity to provide meaningful comment before the final auction
rules for particular services and frequencies are set.\56\ NABER
asserts that should the Commission change bidding methods in mid-stream
without prior public comment, the Commission would violate the notice
and comment rulemaking requirements of the Administrative Procedure
Act, by its failure to keep a record and analyze and consider all
relevant matter regarding those new rules.\57\
---------------------------------------------------------------------------
\54\See Administrative Procedure Act, 5 U.S.C. Secs. 551 et seq.
\55\NABER Petition at 2.
\56\Id. at 8.
\57\Id. at 9; see 5 U.S.C. Sec. 553.
---------------------------------------------------------------------------
23. Discussion. We believe that the process we have used to adopt
auction designs and implementation procedures and the rules themselves
fully comply with the Administrative Procedure Act. In the NPRM in this
docket, we provided notice of the auction designs we were considering
and requested comment on issues of auction design and procedure. We
received voluminous public comment on these issues. In the Second
Report and Order, we carefully considered all comments and suggestions
concerning a wide variety of proposed auction designs, including the
comments and proposals of numerous experts in auction theory. We have
established a broad framework for the conduct of license auctions,
specifying a menu of auction designs and procedures from which we will
choose for individual auctions. We have identified our preferred
options, and have discussed the circumstances in which we believe the
various options will be most appropriate in order to serve our
statutory goals, and which are therefore most likely to be chosen.
After the Second Report and Order was issued, we made, in addition,
more specific choices of auction designs for particular services in
Orders dealing with those services.\58\ We have also established
application, payment, and penalty procedures for individual
services.\59\ The procedures, we believe, afforded members of the
public all of the procedural rights to which they are entitled under
the Administrative Procedure Act.
---------------------------------------------------------------------------
\58\See Third Report and Order at 16-40, Fourth Report and
Order at 11-18, and Fifth Report and Order at 27-57.
\59\See Third Report and Order at 41-60, Fourth Report and
Order at 19-29, and Fifth Report and Order at 58-92.
---------------------------------------------------------------------------
24. Our rules, however, must also be flexible enough so that we can
adjust our procedures to fit the circumstances of individual auctions.
We will not know until we have gained some experience with simultaneous
multiple round auctions exactly what values of such parameters as
bidding increments and triggers for movement to the next auction phase
work best under what circumstances. Consequently, we believe that it is
important for those running the auctions to be able to use information
generated in the early auctions and in the early rounds of individual
auctions. Further, it may be important to be able to respond to the
behavior of bidders in the course of particular auctions. We may find
it desirable to allow more time for consultation between bidding rounds
in complex auctions, for instance, or, in light of the statutory
requirement to issue licenses expeditiously, to increase the bidding
increment to hasten the conclusion of an auction if the auction is
proceeding slowly. Clearly, notice and comment procedures would be
unworkable in such cases. The flexibility that our rules permit us is
analogous to the ad hoc decisional authority that may be exercised
within other types licensing proceedings, and our discretion here is
similarly constrained by the general framework and standards embodied
in our rules. The latitude remaining to the Commission to alter auction
procedures is, however, necessary to ensure that we can make
improvements as we become aware of the need for them, and that we can
manage auctions efficiently. The Commission will exercise its
discretion in a manner consistent with our clearly articulated goals
and the general procedures we have established.
25. We have also taken care to safeguard bidders' interests. During
the course of an auction only minor adjustments in procedures are
permitted that will necessitate no major changes of strategy on their
part. Further, we have stated clearly which procedures are, and which
are not, subject to change during the course of an auction, so that
bidders will know what kinds of changes to expect and to prepare for.
We have stated that when we announce auctions for particular services
by public notice, we will also announce the procedures to be used in
those auctions.\60\ We believe that this approach will provide
prospective bidders with ample information to plan rational bidding
strategies.
---------------------------------------------------------------------------
\60\Second Report and Order at 68.
---------------------------------------------------------------------------
26. Finally, although the Commission has never before used auctions
as a licensing method, we note that our auction procedures afford as
much, or more, detailed guidance to bidders than is usually provided in
advance of an auction. For example, in conventional oral auctions the
auctioneer customarily has the discretion to alter bid increments and
other procedures at will in any manner and at any time during an
auction. As in other types of auctions, we believe that it will be
critically important to the success of our auctions to leave the
Commission some discretion to fine-tune auction procedures between
auctions and, in some cases, on an ad hoc basis, during the course of
an auction. Accordingly, we affirm our original decisions to adopt
rules that afford the Commission some flexibility to modify its
procedures during the course of an auction, within the scope of the
options we have delineated and under the circumstances described above.
D. Treatment of Upfront Payments
27. In the Second Report and Order we required bidders to tender a
substantial payment in advance of the auction in order to deter
frivolous or insincere bidding.\61\ Upfront payments were also intended
to provide a source of funds for collection of penalties for bid
withdrawal.\62\ The amount of the upfront payment was related to the
level of eligibility the bidder wished to establish, measured in terms
of the population and amount of spectrum encompassed by the licenses on
which the bidder was permitted to bid. In some cases the upfront
payment could amount to millions of dollars.\63\ We required that
upfront payments be submitted prior to bidding, and we did not permit
use of letters of credit or Treasury bills for upfront deposits due to
administrative difficulties in accepting payment in such forms, at
least until the Commission has more experience in conducting
auctions.\64\ We stated that upfront payments made by a winning bidder
would be applied to satisfy its down payment obligations, and that
losing bidders' upfront payments would be returned if they wished to
withdraw from further bidding.\65\
---------------------------------------------------------------------------
\61\Second Report and Order at 171.
\62\Id. at 176.
\63\Id. at 172, 173.
\64\Id. at 182, 184, 185.
\65\Id. at 187, n.140.
---------------------------------------------------------------------------
28. Petitions. GTE asserts that the Commission should adopt an
interest-bearing evergreen deposit procedure for upfront deposits.\66\
GTE states that, since the Commission is not currently authorized to
establish interest-bearing accounts, substantial sums of money could be
tied up in upfront deposits without any accrual of interest for
substantial periods of time. GTE asserts that maximum bidder
flexibility can be achieved by allowing bidders to add or withdraw
deposit funds during the course of the auction. GTE states that the
Commission needs to ensure that it has the requisite authority to
permit the accumulation and payment of interest.
---------------------------------------------------------------------------
\66\GTE Petition at 11-13.
---------------------------------------------------------------------------
29. AIDE states that when a winning bidder's upfront payments, less
bid withdrawal penalties, exceed the required deposit, the excess
upfront payment should remain available for crediting to another
auction or for refund to the winning bidder.\67\ AIDE points out that,
in the case of designated entities, the required deposit is only 10
percent. AIDE notes that the Commission has stated that it will apply
this policy for losing bidders, and as a matter of equal protection the
Commission should apply the same policy to winning bidders with excess
upfront payments.\68\
---------------------------------------------------------------------------
\67\AIDE Petition at 15.
\68\Id. at 16.
---------------------------------------------------------------------------
30. AIDE requests clarification of footnote 133 in the Second
Report and Order.\69\ Footnote 133 reads:
---------------------------------------------------------------------------
\69\Id. at 13.
---------------------------------------------------------------------------
For example, an entity that is interested in bidding on several 30
MHz PCS licenses with a goal of providing service to a population of at
most 50 million should make an upfront payment of $30 million ($.02 x
30 MHz x 50,000,000). That bidder will not be permitted to bid (at any
time) in the auction, or be permitted to win, 30 MHz licenses covering
more than 50 million pops.
31. Discussion. Allowing bidders to add funds to upfront deposits
in order to increase their eligibility level, or to withdraw funds from
upfront deposits, as GTE recommends, would add greatly to the
complexity of the Commission's administrative task. The Commission
would have to keep track of changes in eligibility due to changes in
upfront payments, as well as to changes in bidders' activity levels,
and would have to ascertain that fund transfers had taken place before
permitting bidders to bid at the levels to which the additional
payments entitled them. Because of the short intervals between rounds,
delays in the transfer of funds would likely create problems for both
bidders and the Commission. For these reasons, we believe it is prudent
to require bidders to submit upfront payments that represent the
maximum level of bidding that they anticipate before the beginning of
the auction. Bidders can always ensure that they will be able to expand
their bidding above their originally anticipated level by submitting a
sufficiently large upfront payment and maintaining a high activity
level.
32. We agree with AIDE that winners' upfront deposits, in excess of
their required down payment deposits and any penalties they may owe,
should be refunded expeditiously. We intend to refund excess upfront
deposits of all bidders as soon as possible. We will not apply excess
upfront deposit balances to subsequent auctions, however, due to the
additional administrative difficulty of tracking the funds.
33. With respect to AIDE's request for clarification, we clarify
that footnote 133 means that in any round of the auction, a bidder who
has made an upfront payment of $30 million may bid on, or hold the high
bid from the previous round on, 30 MHz licenses in markets with a
combined population totaling not more than 50 million. The specific
licenses on which the bidder submits bids may vary from round to round,
but the total MHz-pop ceiling cannot be exceeded in any single round.
E. Default Penalty
34. In the Second Report and Order the Commission imposed a default
penalty for withdrawing a bid after a simultaneous multiple round
auction has closed.\70\ This default penalty was set at 3 percent of
the amount of the winning bid the next time the license is offered by
the Commission, or 3 percent of the amount of the defaulting bidder's
bid, whichever is less. The default penalty would be imposed in
addition to the bid withdrawal penalty, which was set at the difference
between the amount bid and the amount of the subsequent winning bid. We
stated that the default penalty was intended to provide an incentive
for bidders who wished to withdraw their bids to do so before the close
of the auction. We stated that such a penalty was appropriate because a
withdrawal that occurs after an auction closes is likely to be more
harmful than one that occurs before closing. We stated that if a
withdrawal occurs after the auction closes, other bidders will have
little opportunity to revise their strategies, and the likelihood will
be lower that the licenses will be awarded to those who value them
most. We also stated that default imposes on the government the extra
costs of re-auctioning the license.
---------------------------------------------------------------------------
\70\ Second Report and Order at 154.
---------------------------------------------------------------------------
35. Petition. AIDE asserts that the default penalty will produce a
windfall to the Treasury if the winning bid exceeds the defaulting bid
by more than 3 percent.\71\ AIDE states that the defaulting bidder
should pay no penalty if the second bid exceeds the defaulting bid by 3
percent or more, and that if the second bid exceeds the defaulting bid
by less than 3 percent, the defaulting bidder's penalty should be the
difference between the second winning bid and 103 percent of the
defaulting bid.
---------------------------------------------------------------------------
\71\AIDE Petition at 14.
---------------------------------------------------------------------------
36. Discussion. We believe that it is appropriate to charge the
full 3 percent default penalty in addition to the bid withdrawal
penalty whether or not the winning bid in the second auction exceeds
the defaulting bid. As we stated in the Second Report and Order, the
function of the default penalty is to encourage bidders who plan to
withdraw their bids to do so before the close of the auction.\72\ The
additional costs to the Commission and to other bidders of auctioning
the license a second time, and the increased likelihood that the
license will not be won by the bidder who values it most, are incurred
as a consequence of default regardless of the level of the bids. Even
if the winning bid is higher than the defaulting bid, we have no reason
to believe that it is higher than the winning bid would have been had
the defaulting bidder withdrawn before the close of the auction, nor
have we reason to believe that a high winning bid compensates for the
undesirable effects of default. Consequently, we retain the default
penalty as set forth in the Second Report and Order.
---------------------------------------------------------------------------
\72\Second Report and Order at 154.
---------------------------------------------------------------------------
F. Disclosure of Bidding Information
37. In the Second Report and Order the Commission recognized the
informational benefits to be gained from releasing bidder identities
during an auction, but concluded that such information should not be
released because ``the risk of collusion and strategic manipulation
outweighs the benefits of the additional information.'' Instead the
Commission adopted an intermediate approach pursuant to which the
bidder identification numbers and bid amounts for each bidder will be
released at the end of each round of bidding. This approach provides
bidders with useful information without incurring excessive risks of
collusion and strategic manipulation.\73\
---------------------------------------------------------------------------
\73\Id at 158.
---------------------------------------------------------------------------
38. Petitions. GTE and Southwestern Bell request that the
identities of bidders be released during the course of the auction. GTE
requests that the identity of the bidder associated with each bidder
identification number be disclosed during the bidding process.\74\ SBC
states that the Commission should announce both the identity of the
highest bidder and the bid amount for each round of the auction.\75\
GTE argues that a bidder must construct a strategy based on its own
valuation of the spectrum as well as estimates of its competitors'
valuations and past bids, and that a fundamental component of this
exercise is knowledge of who the competitors are. GTE notes that the
Commission's sole justification for not furnishing information about
the identity of bidders is a concern for collusion, and states that the
Second Report and Order includes other mechanisms for minimizing
collusion. GTE states that increases in available information raise the
level of competition and the efficiency of license assignments, and
that access to bidder identification information may increase revenue
from the auction process while ensuring award to the bidder who most
highly values the license.\76\ SBC argues that the decision to keep
winning bidder identities secret creates an opportunity for collusive
behavior because cartels could coordinate activities and punish
violators without detection. SBC notes that if the identity of all
bidders is known, the Commission and bidders need not be concerned with
protecting bidders' identity. SBC states that knowing who the
successful bidders are affects other bidders' ability to assess the
accuracy of their valuation of the spectrum and allows them to
ascertain that an aggregation of licenses is underway which might pose
a competitive threat. MCI states that because of the potential for
bidder collusion and strategic manipulation, bidder identities should
not be revealed.\77\
---------------------------------------------------------------------------
\74\GTE Petition at 4-6.
\75\SBC Petition at 8-10.
\76\GTE Petition at 5-6.
\77\MCI Comments at 3.
---------------------------------------------------------------------------
39. Discussion. Arguments in favor of disclosing bidder identities
primarily turn on the value of the information in improving the quality
of bids. Some auction experts argue that bidders' estimates of license
values can be improved by comparing them to the valuations of their
competitors.\78\ Bidders' valuations of licenses may also be highly
dependent on knowing the identity of neighboring carriers, especially
regional leaders and competitors, and on knowing the manner in which
complementary licenses are likely to be used and the compatibility of
standards both inside and outside their desired service areas.
Maximizing information available to bidders may increase bids by
decreasing bidders' incentives to reduce their bids to avoid the
``winner's curse,'' the tendency for the bidder who most overestimates
the value of the item for sale to win an auction. Revealing bidder
identities may facilitate awarding licenses to those who value them
most highly by providing more information to bidders. More accurate
valuation of licenses by bidders can thus improve the efficiency of
license assignments. In addition, publicly disclosing the identity of
other bidders may encourage vigorous bidding for licenses. Releasing
bidder identities may increase interest in and media coverage of the
auctions.
---------------------------------------------------------------------------
\78\See e.g. comments of PacBell on NPRM, Attachment by Paul R.
Milgrom and Robert B. Wilson at 21.
---------------------------------------------------------------------------
40. Our experience with the first narrowband PCS auction showed
that preventing bidder identities from being revealed can be extremely
difficult. In addition, if some but not all bidders know other bidders'
identities, those bidders have an advantage in the quality of
information available to them and in the potential ability to thwart
others' bidding strategies. Concealing bidder identities may give an
advantage to larger bidders that have the resources to devote to
discovering other bidders' identities.
41. As we noted in the Second Report and Order, however, releasing
the identities of high bidders may foster strategic manipulation, such
as bidding up the prices of licenses needed by rivals, and may
facilitate collusion.\79\ Some auction experts argue that anonymity
makes it harder to target a firm for strategic hold-up because the
bidding and aggregation strategies of specific competitors cannot be
easily detected.\80\ Concealing bidder identities makes initiating
collusive arrangements during the course of an auction more difficult
because bidders will not easily be able to identify the parties against
whom they are bidding, unless those parties voluntarily reveal their
identities. On the other hand, concealing bidders' identities may not
be critical to preventing collusion during an auction; existing
antitrust laws and the FCC's collusion rules should be adequate to
prevent collusive conduct. In any event, under an anonymous bidding
scenario, if bidders want to collude they can simply disclose their
bidder identification numbers to one another before the auction.
---------------------------------------------------------------------------
\79\Second Report and Order at 158.
\80\Comments of NYNEX on NPRM, attachment by Robert G. Harris
and Michael L. Katz, ``A Public Interest Assessment of Spectrum
Auctions for Wireless Telecommunications Services'' at 9.
---------------------------------------------------------------------------
42. Because of the advantages of providing more information to
bidders and the difficulties involved in ensuring that bidder
identities remain confidential, we will generally release the
identities of bidders before each auction. However, we recognize that
experts disagree on the potential for knowledge of bidders' identities
to facilitate collusion and other strategic behavior. Consequently we
wish to have the flexibility to conceal bidder identities if further
experience shows that it would be feasible and desirable to do so. We
may also wish to test the effects of releasing identities of bidders.
Consequently we are reserving the option to withhold bidder identities
on an auction-by-auction basis. If we decide to withhold bidder
identities for a particular auction, we will announce that decision by
a service-specific auction Order. We will announce by Public Notice
prior to each auction whether the identities of bidders will be made
public in that auction.
G. Standby Queue
43. Petition. GTE states that for 10 MHz blocks in broadband PCS
the Commission should adopt the ``standby queue'' bidding mechanism
considered in experiments sponsored by the National Telecommunications
and Information Administration and conducted at the California
Institute of Technology.\81\ The standby queue allows parties seeking
individual licenses to coordinate their bids in order to beat a bid for
a combination of licenses. GTE asserts that the standby queue would
allow bidders seeking to combine smaller blocks into a larger set of
frequencies, or to combine blocks on a geographic basis, to obtain
information about the status of bidding that would permit them to bid
rationally and efficiently.
---------------------------------------------------------------------------
\81\GTE Petition at 13-14.
---------------------------------------------------------------------------
44. Discussion. The standby queue is a mechanism to be used in
conjunction with combinatorial auctions. In the Fifth Report and Order
we concluded that the disadvantages of combinatorial bidding were
likely to outweigh the advantages for auctions of broadband PCS
licenses, and we adopted simultaneous multiple round bidding as our
auction methodology for broadband PCS licenses. Nevertheless, we left
open the option to use combinatorial auctions if simultaneous multiple
round auctions do not result in efficient aggregation of licenses, and
if there are significant advances in the development of combinatorial
auctions.\82\ Although we have no current plans to use combinatorial
auctions, if in the future we do adopt such an auction methodology we
will consider the use of a standby queue mechanism.
---------------------------------------------------------------------------
\82\Fifth Report and Order at 35.
---------------------------------------------------------------------------
H. Filing Fees
45. Petition. William E. Zimsky (Zimsky) states that the rule
imposing filing fees for the filing of short-form applications for
auctions should be deleted.\83\ Zimsky asserts that because there is no
provision in 47 U.S.C. Sec. 158(g) for imposing the filing fee for the
new short-form application, the Commission lacks the statutory
authority to impose such a fee. Zimsky also asserts that, even if the
Commission has such statutory power, to impose a filing fee on all
bidders is unreasonable because the filing fee was designed to recoup
the costs of fully processing the application. Since only auction
winners will submit long-form applications and have their applications
scrutinized, the losing bidders do not receive this service.
Consequently, the Commission's proposed scheme is unconstitutional, he
argues, because a user fee which is not reasonably related to, or a
fair approximation of, the cost incurred by the government in providing
the service for which the fee is assessed, effects a taking of
applicants' property without just compensation, in violation of their
fifth amendment rights. Zimsky cites Webb's Fabulous Pharmacies, Inc.
v. Beckwith, 449 U.S. 155, 163 (1980); United States v. Sperry Corp.,
493 U.S. 52, 60 (1989) in support of his argument.
---------------------------------------------------------------------------
\83\See William E. Zimsky Petition.
---------------------------------------------------------------------------
46. Discussion. The Commission has requested express statutory
authority to impose section 8 application fees for short-form
applications. In the absence of such express authority, we do not
currently impose fees for short-form applications. However, long-form
applications in most services are subject to fees under section 8.
Consequently we find Zimsky's petition to be moot, and we dismiss it.
I. Waiver Requests in Short-Form Applications
47. Cable & Wireless, Inc. (CWI) asks that the Commission
reconsider its rules that appear to mandate dismissal of the short-form
application (Form 175) that do not certify compliance with the foreign
ownership provision of Section 310 of the Communications Act,
notwithstanding the filing of a request for waiver or other relief.\84\
CWI asserts that the Commission should permit participation at auction
where the applicant certifies to the pendency of such a waiver request.
In considering the acceptance for filing of short-form applications,
the Commission will accept certifications that state that a request for
waiver or declaratory ruling concerning the requirements of section 310
is pending.\85\
---------------------------------------------------------------------------
\84\See petition of CWI.
\85\On January 5, 1994, CWI also filed a petition seeking a
declaratory ruling that the public interest warrants grant of common
carrier radio license applications to U.K. citizens and/or
corporations that possess ownership interests in excess of the
foreign ownership benchmarks in Section 310(b)(4) of the
Communications Act. We expect to address the merits of this petition
in a separate Declaratory Ruling.
---------------------------------------------------------------------------
J. Rules Prohibiting Collusion
48. In order to prevent collusion in bidding, the Commission in the
Second Report and Order stated, * * * bidders will be required to
identify on their short-form applications any parties with whom they
have entered into any consortium arrangements, joint ventures,
partnerships or other agreements or understandings which relate in any
way to the competitive bidding process. Bidders will also be required
to certify on their short-form applications that they have not entered
into any explicit or implicit agreements, arrangements or
understandings of any kind with any parties, other than those
identified, regarding the amount of their bid, bidding strategies or
the particular properties on which they will or will not bid * * *.
After such applications are filed and prior to the time that the
winning bidder has made its required down payment, all bidders will be
prohibited from cooperating, collaborating, discussing or disclosing in
any manner the substance of their bids or bidding strategies with other
bidders, unless such bidders are members of a bidding consortium or
other joint bidding arrangement identified on the bidder's short form
application.\86\
---------------------------------------------------------------------------
\86\Second Report and Order 225.
---------------------------------------------------------------------------
49. Petition. BET Holidays, Inc. (BET) states that the above
requirements prevent bidders from entering into any new agreements,
joint ventures or similar arrangements with other entities after filing
a short-form application.\87\ BET claims that as a consequence bidders
may be locked into bidding arrangements significantly before the
commencement of the auctions, and will be unable to modify their
bidding strategies, consult with experts or others, or enter into
alliances with new parties any time after the filing of the short-form
application. BET states that the collusion rule is an unrealistic
constraint on lawful business behavior. For example, according to BET,
if a company does not identify affiliates or others with whom it must
consult, the company would be forbidden from soliciting research,
sharing resources, or discussing its bids until after the winning
bidder tenders its down payment.\88\ BET requests that the Commission
rely on antitrust law as a safeguard against collusion.
---------------------------------------------------------------------------
\87\BET Petition at 10.
\88\Id. at 11.
---------------------------------------------------------------------------
50. Discussion. While we intend to rely primarily on the antitrust
laws to prevent bidding collusion, we believe that the anticollusion
rules in the Second Report and Order will provide an important tool
that will enable the Commission to detect, prevent, and punish
collusion. To prevent and detect collusion, we believe that it is
important to have clearly stated rules concerning the entities with
whom communication about bidding strategies is permissible. The
requirement that an entity identify at the time of the short-form
application those affiliates, or others with whom it has agreements
concerning bidding, and the prohibition of communication concerning
bidding with entities identified by other bidders, serve this purpose
and are not particularly burdensome. Similarly, prohibiting additional
agreements and alliances concerning bidding between applicants bidding
for the same licenses, after applications have been filed and the
identities of all applicants are known, seems a prudent deterrent to
collusion that should have only a minimal and temporary effect on
bidders' flexibility. We wish to make explicit our intention that the
prohibition extend to post-application settlement agreements and
discussions concerning settlement agreements.
51. We do believe, however, that our prohibition on communication
among bidders and formation of agreements among bidders after
applications have been filed may have been excessively broad in that it
includes communications and agreements with bidders who are not bidding
against each other, and so may prevent useful agreements that have no
effect on the competitiveness of bidding. Consequently, we are
modifying our collusion rules, which currently prohibit bidders from
communicating with another after short-form applications have been
filed regarding the substance of their bids or bidding strategies and
which also prohibit bidders from entering into consortium arrangements
or joint bidding agreements of any kind after the deadline for short-
form applications has passed. In order to permit certain bidders to
respond to higher than expected license prices by combining their
resources during an auction, we will now permit bidders who have not
filed Form 175 applications for any of the same licenses to engage in
discussions and enter into bidding consortia or joint bidding
arrangements during the course of an auction. We conclude that where
bidders have not applied for any of the same licenses there is little
risk of anticompetitive conduct and therefore we believe that it is
appropriate to relax our collusion rules to permit bidders in this
context to have great flexibility to increase their competitiveness in
the auction by combining their resources, provided that no change of
control of any applicant takes place.
52. In addition, we now believe that entering into consortium
arrangements or adding equity partners during an auction may have a
useful effect in enabling bidders to acquire the capital necessary to
bid successfully for licenses. We have concluded that formation of
consortia or changes in ownership after the filing of short-form
applications will not necessarily have anticompetitive effects,
provided they do not involve parties that might have bid against each
other and do not result in a change in control of the applicant.
Consequently, we wish to modify our rules regarding amendments to
short-form applications. As a result of our experience in the
nationwide narrowband PCS auction, we believe that it is necessary to
allow applicants to amend their FCC Form 175 applications to make
ownership changes after the filing deadline has passed, provided such
changes do not result in a change in control of the applicant.
Permitting such amendments will provide bidders with flexibility to
seek additional capital after applications have been filed, whole
ensuring that the real party in interest does not change. Accordingly,
we will modify Section 1.2105(c) to permit applicants to amend their
FCC Form 175 applications to reflect ownership changes that do not
result in a change in control of the applicant, provided the parties
have not filed Form 175 applications for any of the same licenses. Such
changes shall not be regarded as major amendments to an application,
provided they do not result in a transfer of control of the license or
the applicant and do not change control of the company.
53. Situations may arise in which an applicant has some common
ownership interest with another bidder. We wish to clarify that, unless
that other entity is expressly identified as an entity with whom the
applicant has an agreement concerning bidding, we will prohibit
communication concerning bidding with that bidder, as described in the
Second Report and Order, even if the other bidder is identified on the
applicant's short form application as having some common ownership
interest with the applicant. We will retain the anticollusion rule as
set forth in the Second Report and Order, with these clarifications.
K. Information Disclosure by Applicants and Licensees
54. Petitions. Two petitions deal with the amount of information
auction participants are required to disclose. GTE requests that the
Commission require applicants to provide full ownership disclosure in
their short form applications.\89\ GTE asserts that by enabling the
Commission and competing applicants to assess the legitimacy of auction
applicants, full disclosure facilitates the award of licenses to
qualified and eligible service providers. According to GTE, full
disclosure also promotes open and informed bidding decision.
---------------------------------------------------------------------------
\89\GTE Petition at 2-4.
---------------------------------------------------------------------------
55. SBC asks that the Commission minimize requirements for
disclosure of information upon transfer of licenses.\90\ SBC states
that the point of transfer disclosures is to ``prevent unjust
enrichment as a result of the methods employed to issue licenses and
permits.''\91\ SBC assserts that rules designed to prevent unjust
enrichment should be solely applicable, if at all, to designated
entities that receive special accommodations, since the risk of unjust
enrichment is high only in auctions where such special accommodations
are provided. SBC asserts that the formation of reasonable and
efficient alliances would be discouraged by the mandate to expose the
details of the alliance to competitors. SBC particularly objects to the
requirement that any management agreements or consulting contracts be
filed. SBC seeks clarification that the disclosure requirements will
apply only to the licensees which either have not begun to offer
service or have only offered service for some minimal period of time.
---------------------------------------------------------------------------
\90\SBC Petition at 6-8.
\91\Id. at 6 (citing 47 U.S.C. Sec. 309(j)(4)(E)).
---------------------------------------------------------------------------
56. Discussion. With respect to ownership disclosure in short-form
applications, in the Second Report and Order we decided to require
applicants to furnish only minimal information in short-form
applications and bidder certifications prior to auctions in order to
reduce administrative burdens and minimize the potential for delay.\92\
Further ownership disclosure requirements, however, were adopted on a
service specific basis in later Reports and Orders.\93\ We believe that
GTE's concerns are fully met by these requirements.
---------------------------------------------------------------------------
\92\Second Report and Order at 165.
\93\See Third Report and Order, Appendix at 13; Fifth Report and
Order at 62.
---------------------------------------------------------------------------
57. As for transfer disclosure requirements, Congress in the Budget
Act required us to develop and test alternative auction designs.\94\ We
noted in the Second Report and Order that in addition to allowing
detection of unjust enrichment, transfer disclosure requirements would
provide data necessary for evaluation on our auction designs.\95\ We
noted that the reporting requirements would allow us to monitor our
compliance with the Congressional directive in Section 309(j)(3)(B) to
ensure that ``new and innovative technologies are readily accessible to
the American people by avoiding excessive concentration of licenses and
by disseminating licenses among a wide variety of applicants.
***.''\96\ The information will be useful in meeting our statutory
obligation to report to Congress on the outcome of the auctions.\97\
The information we acquire from transfer disclosures, including
purchase price and other aspects of the sale contracts and management
agreements, will enable us to determine the ultimate distribution of
licenses and the value of the spectrum for particular uses, and will
permit comparisons between licenses awarded with and without designated
entity provisions. Such analyses require collection of data from all
licensees, not just from designated entities or those who have not
begun to offer service or have only offered service for a short period
of time. As we stated in the Second Report and Order, we do not expect
the transfer disclosure requirements to be burdensome to licensees
because the documents to be submitted will have been prepared for other
purposes in any event. Moreover, parties may request confidential
treatment of competitively sensitive information pursuant to
Secs. 0.457 and 0.459 of our Rules.\98\ Consequently we will retain
transfer disclosure requirements for all transfers of licenses obtained
by competitive bidding.
---------------------------------------------------------------------------
\94\47 U.S.C. 309(j)(3).
\95\Second Report and Order at 214.
\96\Id. at 215.
\97\See Budget Act, 47 U.S.C. Sec. 309(j)(2).
\98\Second Report and Order at 215, citing 47 CFR 0.457, 0.459.
---------------------------------------------------------------------------
L. Application-Processing Rules
58. In the NPRM in this proceeding the Commission stated:
In order to avoid needless duplication, we propose that the
following general filing and processing rules apply to all PCS:
Sections 22.3-22.45 and 22.917(f), and 22.918-22.945, 47 CFR 22.3-
22.45, 22.917(f), and 22.918-22.945. For those PCS applicants who file
on Form 574, we believe that Secs. 90.113-90.159 of our rules, 47 CFR
90.113-90.159, could be used to process those applications with
appropriate modifications.\99\
---------------------------------------------------------------------------
\99\NPRM at 128.
---------------------------------------------------------------------------
59. Petition. AIDE asserts that the Commission acted improperly in
proposing substantive PCS application-processing rules in the NPRM
because, it argues, such rules are outside the scope of this
rulemaking, which is limited to implementation of the competitive
bidding requirements of Sec. 390(j) of the Communications Act.\100\
AIDE argues that the Commission's proposal of application-processing
rules is legally insufficient to constitute a valid notice of proposed
rules, and that some of the rules cited have no immediate applicability
to PCS service. AIDE asserts that in the Second Report and Order the
Commission failed to respond to the merits of the arguments concerning
filing and processing rules in AIDE's comments on the NPRM. AIDE
concludes that the Commission needs to issue a supplemental Notice of
Proposed Rulemaking to adopt license-processing rules for PCS.
---------------------------------------------------------------------------
\100\AIDE Petition at 20-21.
---------------------------------------------------------------------------
60. Discussion. The competitive bidding process is a means of
assigning licenses, and rules and procedures for processing of license
application are an integral and necessary part of that process. The
Commission adopted few filing or processing rules in the Second Report
and Order. Those rules that the Commission did adopt pertaining to the
filing and processing of applications and certifications were clearly
proposed in the NPRM.\101\ The rules to which AIDE refers were adopted
not in the Second Report and Order but in subsequent Orders
establishing auction rules for specific services.\102\ We address
AIDE's petition relating to those rules either in the Orders in which
they were adopted or in reconsiderations of those Orders.\103\
---------------------------------------------------------------------------
\101\See Second Report and Order at 164-168, NPRM at 96-101.
\102\See Third Report and Order at 41, n. 18; Fifth Report and
Order at 83.
\103\See Fifth Report and Order at 83.
---------------------------------------------------------------------------
M. Financial Qualifications
61. In the Second Report and Order, the Commission stated that
applicants filing short form applications would be required to certify
that they are financially qualified pursuant to Section 308(b) of the
Communications Act. The applicants would also be required to certify
that they satisfy any financial qualification requirements for the
service in question.\104\
---------------------------------------------------------------------------
\104\Second Report and Order at 166.
---------------------------------------------------------------------------
62. Petition. AIDE states that applying competitive bidding and
payment requirements in addition to existing financial qualification
requirements disadvantages designated entities, who have historically
been constrained by difficulties in capital formation and financing.
AIDE recommends that short-form applications not require and
certification of financial qualification. If an application become
mutually exclusive, according to AIDE, the applicant's payment of its
winning bid would demonstrate that it was financially qualified. If the
application did not become mutually exclusive, then the applicant
should have a short period in which to file any required demonstration
of financial qualifications by amendment.\105\
---------------------------------------------------------------------------
\105\AIDE Petition at 19-20.
---------------------------------------------------------------------------
63. Discussion. We believe that, in order to prevent the delay in
bringing service to the public that might be occasioned by bankruptcies
or by prolonged financial negotiations, it is important to require
licensee to have the financial ability to construct and operate a
system in addition to being able to purchase the license. Consequently
we will continue to require applicants to certify on their short-form
applications that they meet any existing financial qualification
requirements of the services in which licenses are auctioned. We will
not, however, impose additional showings of financial qualification as
part of the auction process.
IV. Designated Entities
A. Introduction
64. Several provisions of the Budget Act address participation by
small businesses, rural telephone companies, and businesses owned by
women and minorities (referred to collectively as ``designated
entities'') in the competitive bidding process and in the provision of
spectrum-based services. Specifically, Section 309(j)(4)(D) of the Act,
provides that, in prescribing competitive bidding regulations, the
Commission shall, inter alia, 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, and, for such purposes, consider the use of
tax certificates, bidding preferences, and other procedures * * *\106\
---------------------------------------------------------------------------
\106\47 U.S.C. Sec. 309(j)(4)(D).
---------------------------------------------------------------------------
In addition, section 309(j)(3)(B), provides that in establishing
eligibility criteria and bidding methodologies the Commission shall
seek to promote the objectives of ``economic opportunity and
competition and ensur[e] that new and innovative technologies are
readily accessible to the American people by avoiding excessive
concentration of licenses and by disseminating licenses among a wide
variety of applicants, including small businesses, rural telephone
companies, and businesses owned by members of minority groups and
women.'' To promote these objectives, section 309(j)(4)(A) expressly
states that the Commission is required ``to consider * * * alternative
payment schedules and methods of calculation, including lump sums or
guaranteed installment payments, with or without royalty payments, or
other schedules or methods.''\107\
---------------------------------------------------------------------------
\107\See also 47 U.S.C. Sec. 309(j)(4)(C)(ii), requiring the
Commission, when prescribing area designations and bandwidth
assignments, to promote ``economic opportunity for a wide variety of
applicants, including small businesses, rural telephone companies,
and businesses owned by members of minority groups and women'';
section 309(j)(3)(A), establishing the objective to promote ``the
development and rapid deployment of new technologies, products, and
services for the benefit of the public, including those residing in
rural areas, without administrative or judicial delays''; section
309(j)(12)(D)(iv), requiring that the Commission's 1997 report to
Congress evaluate, inter alia, whether and to what extent ``small
businesses, rural telephone companies, and businesses owned by
members of minority groups and women wee able to participate
successfully in the competitive bidding process.''
---------------------------------------------------------------------------
65. In the Second Report and Order we adopted a broad menu of
provisions that the Commission might employ to implement these
statutory provisions. We adopted general provisions and eligibility
rules designed to ensure that small businesses, rural telephone
companies, and businesses owned by members of minority groups and/or
women were afforded the opportunity to participate in both the
competitive bidding process and in the provision of spectrum-based
services. Specifically, we provide that small businesses (including
those owned by women and/or minorities and rural telephone companies)
that are winning bidders for certain blocks of spectrum could pay in
installments over the term of their licenses. We also indicated that
rural telephone companies may be eligible for bidding credits for
licenses obtained in their service areas if they make an additional
infrastructure build-our commitment beyond any existing performance
requirements. We indicated that bidding credits may be available to
designated entities on certain frequency blocks. In addition, we
retained the option of establishing set-aside spectrum in certain
services, in which eligibility to bid may be limited to some or all
designated entities. Finally, we stated that we would consider the use
of tax certificates as a means of creating incentives both for
designated entities to attract capital from non-controlling investors
and to encourage licensees to assign licenses to designated entities in
post-auction transactions.
66. In the Second Report and Order we recognized that the
provisions applicable to particular designated entities would vary
depending on the nature of each individual service. For example, we
retained the discretion to modify our general designated entity
provisions for capital intensive services such as broadband PCS. In
this regard, we stated that we would evaluate on a service-specific
basis the capital requirements and other characteristics of the service
to determine the appropriate provisions. We continue to believe that it
is essential for the Commission to retain flexibility to select, and if
necessary to modify, the general designated entity provisions and
eligibility requirements on a service-specific basis depending on the
capital requirements and construction costs of the particular service.
B. Rural Telephone Company Definition
67. Background. In the Second Report and Order, we adopted a
definition of ``rural telephone company'' that includes independently
owned and operated local exchange carriers that (1) do not serve
communities with more than 10,000 inhabitants in the licensed area, and
(2) do not have more than 50,000 access lines, including all
affiliates.\108\ We stated our belief that a limitation on the size of
eligible rural telephone companies was appropriate because Congress did
not intend for us to provide special treatment to large LECs that
happen to serve small rural communities.\109\
---------------------------------------------------------------------------
\108\47 CFR 1.2110(b)(3).
\109\See Second Report and Order at 282.
---------------------------------------------------------------------------
68. Petitions. Several parties filed petitions for reconsideration
of the Second Report and Order requesting that we modify our standard
definition for rural telephone companies. Petitioners' proposals
include requests that the Commission amend its definition of ``rural
telephone company'' (1) to expressly include municipal- and government-
owned telephone companies within the ``rural telephone company''
definition in accordance with the earlier Senate version of the Budget
Act,\110\ (2) to define ``rural telephone company'' as a local exchange
carrier with annual revenues of less than $100 million or serving no
more than 100,000 access lines;\111\ and (3) to include within the
definition of ``independently owned and operated'' LECs that either
operate 50,000 access lines or less serve communities of 10,000 or
fewer inhabitants.\112\
---------------------------------------------------------------------------
\104\See Anchorage Telephone Utility (ATU) Petition.
\111\See Petitions of The National Telephone Cooperative
Association (NTCA), South Dakota Network, Inc. (SDN) and U.S.
Intelco Networks, Inc. (USIN).
\112\See Petitions of the Rural Cellular Association (RCA) and
SDN.
---------------------------------------------------------------------------
69. In addition, Blooston, Mordkofsky, Jackson & Dickens (Blooston)
and South Dakota Networks, Inc. (SDN) request that the Commission
eliminate the term ``independently owned and operated'' from the
definition of ``rural telephone company.'' According to Blooston, this
restriction is unnecessary to prevent the largest telephone companies
from taking advantage of provisions provided for rural telephone
companies, since this same purpose is already served by the 50,000
access line limit, Blooston argues the Commission should amend its
eligibility rules to indicate that they include the access lines of
affiliates. Similarly, SDN indicates that the Commission should include
``and affiliates'' after ``50,000 or fewer access lines'' in the
current definition. SDN maintains that the current language penalizes
holding companies structured to permit telephone companies to offer
paging and other nonregulated services.
70. The National Telephone Cooperative Association (NTCA) requests
that the Commission amend the definition of rural telephone company to
include any local exchange carrier with annual revenues of less than
$100 million or serving no more than 100,000 access lines. NTCA also
indicates that the term ``independently owned'' should not exclude
small rural telephone companies that are affiliated with each other and
that rural telephone company consortia should be permitted. USIN
similarly advocates a ``rural telephone company'' definition based
annual revenues of less than $100,000,000 or less than 100,000 access
lines. According to USIN a revenue-based test is more accurate than net
worth/net profit test.
71. The Rural Cellular Association (RCA), South Dakota Network,
Inc. (SDN) and NTCA ask that the Commission amend the definition of
rural telephone companies to include any independently owned and
operated local exchange carriers (``LECs'') that either operate 50,000
access lines or less or serve communities of 10,000 or fewer
inhabitants. According to NTCA and RCA, the existing definition
needlessly excludes many small independent telephone companies that
serve rural areas. SDN alternatively requests that we revise the
definition to include carriers with 100,000 or fewer access lines or up
to $100 million in annual revenues.
72. Finally, Anchorage Telephone Utility (ATU) requests that the
Commission modify the definition of rural telephone companies to
include government-owned telephone companies. According to ATU, such a
modification is necessary to achieve congressional intent. ATU notes
that the Senate bill included municipally-owned telephone companies in
its definition of rural telephone companies. ATU's argues that the
Senate Bill mandates special consideration for rural telephone
companies and directed the FCC to grant ``rural program licenses'' to
``qualified'' common carriers and explicitly said that the category of
``qualified'' carriers included all state-owned and municipally-owned
telephone companies.\113\ As evidence Congress' intent to include these
provisions in the enacted version of Budget Act, ATU asserts that the
Conference Report declares that the Senate's ``findings'' are
incorporated by reference.
---------------------------------------------------------------------------
\113\See ATU Petition at 2-3.
---------------------------------------------------------------------------
73. Oppositions and Replies. In its Comment on Petitions for
Reconsideration, BET supports retention of the Commission's existing
generic rural telephone company definition.\114\ BET maintains that
adoption of RCA's proposal to define rural telephone companies as LECs
that have 50,000 access or fewer or serve communities with no more than
10,000 inhabitants will allow large LECs that ``happen to serve rural
areas'' to qualify for designated entity provisions. In response to
BET's Comments, RCA asserts that the ``independently owned and
operated'' requirement for rural telephone company eligibility will
prevent large LECs from qualifying for rural telephone company
provisions. RCA also restates its request for an amendment to the
general rural telephone company definition to include LECs that serve
100,000 access lines or fewer.\115\
---------------------------------------------------------------------------
\114\BET Comments at 2.
\115\RCA Reply at 2.
---------------------------------------------------------------------------
74. In light of the Commission's decision in Fifth Report and Order
in this proceeding, which adopted an alternative rural telephone
company definition, NTCA argues that the Commission should abandon its
generic rural telephone company definition and instead establish rural
telephone company eligibility criteria on a service-specific basis.
Alternatively NTCA proposes that we define rural telephone companies to
include LECs that have annual revenues not in excess of $125 million or
that serve no more than 100,000 access lines.\116\ Tri-County Telephone
Company, Inc. (Tri-County) supports SDN's proposed rural telephone
company definition (50,000 access lines or serves no community with
more than 10,000 inhabitants or alternatively 100,000 access lines or
less).\117\
---------------------------------------------------------------------------
\116\NTCA Reply Comments at 4.
\117\Tri-County Reply at 3.
---------------------------------------------------------------------------
75. Discussion. We are persuaded by petitioner's arguments that the
current generic ``rural telephone company'' definition is overly
restrictive and effectively excludes many independently owned telephone
companies that serve rural areas.\118\ In the Fifth Report and Order we
departed from our generic definition of rural telephone companies in
the context of broadband PCS by adopting a definition that includes any
local exchange carrier having 100,000 or fewer access lines, including
all affiliates.\119\ In adopting this definition of a ``rural telephone
company,'' we sought to achieve the congressional goal of promoting the
rapid deployment of service in rural areas by targeting only those
telephone companies whose service territories are predominantly rural
in nature, and who are thus likely to use their wireline telephone
networks to build infrastructures to serve rural America.\120\ For
purposes of our rules governing broadband PCS licenses, we indicated
our belief that this goal could best be achieved if we defined ``rural
telephone companies'' as those local exchange carriers having 100,000
or fewer access lines, including all affiliates. We concluded that this
definition included virtually all telephone companies whose service
areas are predominantly rural.
---------------------------------------------------------------------------
\118\See RCA Petition at 4-5; USIN Petition at 10; NTCA Petition
at 2.
\119\See Fifth Report and Order at 198.
\120\We also note that the unique technological requirements and
the capital intensive nature of broadband PCS dictated that we adopt
this definition of ``rural telephone company.''
---------------------------------------------------------------------------
76. For the foregoing reasons, we also believe that using the
100,000 access line definition as our standard rural telephone company
definition will better serve our goals of encouraging the provision of
service to rural areas than the definition previously adopted in the
Second Report and Order. Accordingly, we will amend our standard
definition of ``rural telephone company'' to include all local exchange
carriers with 100,000 access lines or fewer, including affiliates. In
general, we believe that this definition will more precisely capture
those carriers that are truly rural in nature, while excluding the
largest telephone carriers that do not face similar capital formation
problems. We believe that this definition will also better achieve
Congress' goal for fostering the development and rapid deployment of
new technologies and services to rural areas by making special measures
available to legitimate rural telephone companies that require such
provisions in order to meaningfully participate in the provision of
service to rural areas without giving such benefits to large companies
that do not require such assistance. Rural telephone companies that
satisfy this definition thus will be eligible for rural telephone
company provisions in each service where such provisions are
established.\121\
---------------------------------------------------------------------------
\121\Such companies also will be eligible for special treatment
under our cellular attribution rules for broadband PCS. See 47 CFR
24.204(d)(2)(ii).
---------------------------------------------------------------------------
77. As indicated above, Blooston, SDN and NTCA request that we
eliminate the phrase ``independently owned and operated'' from the
definition of ``rural telephone company.'' These petitioners assert
that the ``independently owned and operated'' restriction in the rural
telephone company definition was intended to prevent large telephone
companies from taking advantage of rural telephone company benefits,
but that this purpose is served by the access line limit. In this
regard, SDN argues that such language unduly penalizes holding
companies of nonregulated services and entities created by groups of
telephone companies to provide equal access, SS7, and other services.
78. We agree. The new 100,000 access line rural telephone company
definition adopted above includes the access lines of affiliates. Under
the affiliation rules established in the context of broadband PCS, and
adopted below as our generic affiliation rules, the access lines of
holding companies, parent companies or affiliates of rural telephone
companies that are not independently owned will be attributed for
purposes of determining eligibility. This definition will capture most
of the independently owned rural telephone companies, while excluding
carriers affiliated with the largest LECs. In addition, we are
concerned that the requirement that a rural telephone company must be
independently owned would unnecessarily exclude rural telephone
companies that are part of a holding company structure. Therefore we
will delete the ``independently owned and operated'' requirement from
our standard rural telephone company definition.
79. With respect to ATU's request that we amend our definition of
rural telephone company to include municipal and government owned
telephone companies that are owned by governmental authorities, we do
not believe that such a change is warranted. ATU contends that Congress
meant to mandate special consideration not only for telephone carriers
serving rural areas but also for all municipally-owned telephone
companies, even those with wholly or predominantly urban service
areas.\122\ This argument is based on ATU's interpretation of the
Senate bill which preceded the enacted Budget Act. ATU argues that the
Senate bill containing the prototype of a mandate for special
consideration for rural telephone companies directed the FCC to grant
``rural program licenses'' to ``qualified'' common carriers and
explicitly said that the category of ``qualified'' carriers included
all state-owned and municipally-owned telephone companies. ATU further
states that the report of the conference committee that drafted the
Budget Act declares that the Senate's ``findings'' are incorporated by
reference.\123\ ATU also asserts that without the aid of special
assistance it and most other state-owned and municipal telephone
companies will not be able to purchase spectrum licenses at auction
because it is politically infeasible for them to generate and retain
enough surplus revenue to fund such investments, due to popular
aversion to increases in taxes or telephone rates.\124\
---------------------------------------------------------------------------
\122\ATU Petition at 2-3.
\123\Id.
\124\Id. at 4-5.
---------------------------------------------------------------------------
80. As we indicated in the Fifth Report and Order, we are not
persuaded by ATU's arguments.\125\ We can find no specific evidence
that Congress intended the term ``rural telephone companies'' to
include all state or municipally-owned telephone companies. In fact,
the preceding bill contained an explicit mandate for preferential
treatment of government-owned telephone companies that was deleted from
the enacted bill. To the contrary, the fact that an antecedent bill
contained an explicit mandate for preferential treatment of government-
owned telephone companies that was deleted from the enacted bill could
just as easily be interpreted as an indication that Congress rejected
such a rule. We also disagree that state and municipal governments are
without the means to participate successfully in auctions. As we noted
in Fifth Report and Order such governments have substantial
capabilities to raise funds through private financing, bond offerings
and taxation.\126\
---------------------------------------------------------------------------
\125\See Fifth Report and Order at 203.
\126\See Fifth Report and Order at 200. In any event, most
state and municipally owned telephone systems (although not ATU)
will be captured by our new 100,000 access line rural telephone
company definition.
---------------------------------------------------------------------------
C. Rural Telephone Company Consortia
81. Petitions. Telephone and Data Systems, Inc. (TDS) requests that
the Commission relax the eligibility requirements for rural telephone
company bidding consortia by (1) eliminating the 50,000 access line
limit for rural telephone company consortium applicants; (2) allowing
companies with more than 50,000 access lines, directly or through
affiliates, to participate in rural telephone company consortia by
demonstrating that more than 50 percent of their access lines company-
wide (including affiliates) and over 50 percent of those in the
proposed service area serve only communities with 10,000 or fewer
inhabitants and (3) providing that all rural telephone companies in
consortia with 50,000 access lines or less have the right to hold up to
60 percent of the equity in the consortium. SDN and NTCA also argue
that the Commission should allow rural telephone companies to form
consortia, since combining telephone companies would not alter their
rural nature, so long as the rural telephone company retains at least
50.1 percent equity and control.
82. USIN similarly requests that small businesses, including rural
telephone companies, be allowed to qualify for special provisions if
they pool their resources into consortia, provided such consortia are
controlled by designated entities. According to USIN, if such consortia
are not permitted, rural telephone companies and other small businesses
may be foreclosed from participation in the auction process and in the
provision of auctionable services. USIN also indicates that
efficiencies and economies of scale are created by aggregation and thus
special measures should be provided to these entities who may be able
to provide service most efficiently.
83. Discussion. We deny the requests of TDS, SDN,\127\ and NTCA
that we modify the standard definition of rural telephone company to
eliminate or relax the access line limit for rural telephone company
consortia. In the Second Report and Order as a general matter, we
declined to provide exceptions to our designated entity eligibility
criteria for applicants that are consortia of various individual
entities, which in combination fail to qualify as designated
entities.\128\ We found that such combinations, if they deviate from
our standard definitions of designated entities, should not be eligible
for provisions expressly designed for designated entities. This
conclusion was based on our desire to provide economic opportunity to
those entities designated in the statute and to ensure such entities
the opportunity to provide spectrum-based services. We concluded that
establishing exceptions to our definitions for consortia (even those
wholly comprised of otherwise qualified designated entities) would
undermine this objective by diluting the economic opportunity for
individual qualified designated entities. We also found that allowing
applicants to be formed from a combination of eligible and ineligible
entities would invite attempts to abuse the designated entity
provisions by those not entitled to them.
---------------------------------------------------------------------------
\127\SDN argues that the Commission should allow rural telephone
companies to form consortia among themselves, since combining
telephone companies does not alter their rural nature. SDN also
argues that consortia with investors should be permitted so long as
the rural telephone company retains at least 50.1 percent equity and
control. SDN Petition at 20-23.
\128\See Second Report and Order at 286.
---------------------------------------------------------------------------
84. However, in the Second Report and Order we noted that we may
determine on a service-specific basis to allow a designated entity
consortium to receive other benefits based on equity and operational
participation in the consortium by one or more designated entities. We
retained the flexibility to enable designated entity consortia to
qualify for special provisions particularly where the capital costs of
a particular service are high and the formation of consortia is thus
essential to foster investment in designated entity ventures and to
enable such entities to compete in the provision of such service. In
this regard, in the Fifth Report and Order we allowed consortia
comprised of small businesses to qualify for all of the measures
applicable to individual small businesses provided each member of the
consortium individually satisfies the definition of a small business.
We found that given the ``exceptionally large capital requirements''
associated with broadband PCS, allowing small businesses to pool their
resources in this manner was necessary to help them overcome capital
formation problems and thereby ensure their opportunity to participate
in auctions and to become strong broadband PCS competitors.
85. As a general matter, we will continue to determine whether to
permit designated entities to receive benefits based on their
participation in consortia on a service-specific basis, depending on
the capital requirements and other characteristics of the particular
service. We modify the Second Report and Order, however, to provide
that consortia may be permitted to qualify for any designated entity
provisions (where each member individually meets the eligibility
requirements) on a service-specific basis, where the capital
requirements of the service are high. Where, as in broadband PCS, we
will find that the capital requirements necessitate allowing designated
entities to pool their resources to help them overcome capital
formation problems and thereby ensure their opportunity to participate
in auctions and in the provision of service, we may adopt rules
allowing such consortia to qualify for designated entity provisions.
D. Affiliation Rules
86. Petitions. Blooston and NTCA request that the Commission
clarify the meaning of ``affiliate'' for purposes of access line
aggregation. According to Blooston, passive investments by a rural
telephone holding company in other telephone companies should not
preclude eligibility for rural telephone company status, so long as
there is no common control between the rural telephone company and the
other carrier. Blooston reasons that the common control definition is
used in the auction rules for small businesses' affiliates, has been
used by the Commission when defining connecting carriers, and is
generally used by the financial community and the Securities and
Exchange Commission. Finally, Blooston requests that the Commission
amend its designated entity provisions to allow rural telephone
companies to combine into consortia and partner with investors without
losing designated entity status so long as the majority equity control
resides with members who are rural telephone companies. NTCA similarly
requests that the term ``affiliates'' be clarified to indicate what
organizational structures are permitted.
87. Discussion. In response to the requests of the NTCA and
Blooston that we clarify the meaning of the term affiliate to indicate
the types of organizational structures that will be included, we amend
the Second Report and Order to establish as our standard affiliation
rules the same affiliation rules adopted by the Commission in the Fifth
Report and Order.\129\ Blooston specifically requests that we clarify
the meaning of ``affiliate'' so that passive investments by a rural
telephone company in other rural telephone companies do not preclude
designated entity status if there is no common control. As described
more fully below, under our affiliation rules a passive interest in
another telephone company, which does not constitute control of that
company would not be considered an affiliation for purposes of access
line aggregation.
---------------------------------------------------------------------------
\129\See Fifth Report and Order at 201-217.
---------------------------------------------------------------------------
88. In the Second Report and Order, we referenced the SBA's
affiliation rules for purposes of defining generally whether an entity
qualifies as a small business and gave examples of how the affiliation
rules would be applied. In the Fifth Report and Order we expanded on
the SBA's affiliation rules in establishing detailed affiliation
standards for broadband PCS to be used in the context of determining
designated entity eligibility where our criteria are based on the size
of the entity seeking special treatment and require applicants to
include ``affiliates'' when calculating their eligibility. These
affiliation requirements are intended to prevent entities that do not
meet these size standards for receiving benefits targeted to smaller
entities.\130\ We believe that these rules are appropriate for
determining affiliations generally, and therefore we will incorporate
these standards into our generic auction rules for purposes of
determining all size-based eligibility requirements. We summarize these
standards below.
---------------------------------------------------------------------------
\130\See, e.g., Second Report and Order at 272.
---------------------------------------------------------------------------
89. Where we adopt sized-based eligibility rules and provide that
such eligibility determinations shall include the applicant and all its
``affiliates,'' the following rules shall govern determinations
regarding affiliation. Apart from determining affiliation between the
applicant itself and outside entities, the need to determine
affiliation arises where an investor has an attributable interest in a
designated entity.\131\ In this context it is necessary for the
Commission to examine whether such investor has a relationship with
other persons or outside entities that rise to the level of an
affiliation with the applicant, and if so, whether the affiliate's
assets, revenues, net worth, number of access lines, or other
applicable financial thresholds, when aggregated with the applicant's,
exceed the Commission's size eligibility thresholds.
---------------------------------------------------------------------------
\131\In the context of broadband PCS, we stated that, generally,
investors owning more than 25 percent of the applicant's passive
equity would be considered to have ``attributable'' interests. See
Fifth Report and Order at 158. With regard to IVDS, we used the SBA
standard to determine attributable interests, i.e., control.
---------------------------------------------------------------------------
90. General Principles of Affiliation. An affiliation under the SBA
rules would arise, first, from ``control'' of an entity or the ``power
to control it.'' Thus, under the SBA rules, entities are affiliates of
each other when either directly or indirectly (i) one concern controls
or has the power to control the other, or (ii) a third party or parties
controls or has the power to control both.\132\ In determining control,
the SBA's rules provide generally that every business concern is
considered to have one or more parties who directly or indirectly
control or have the power to control it. The rules, in addition,
provide specific examples of where control resides under various
scenarios, such as through stock ownership or occupancy of director,
officer or management positions. The rules also articulate general
principles of control, and note, for example, that control may be
affirmative or negative and that it is immaterial whether control is
exercised so long as the power to control exists.\133\ Second, an
affiliation, under SBA rules, may also arise out of an ``identity of
interest'' between or among parties.\134\ We adopted these same general
provisions as our affiliation rules for broadband PCS and will also
incorporate them into our general affiliation rules.
---------------------------------------------------------------------------
\132\13 CFR Sec. 121.401(a)(2) (i), (ii).
\133\Id. Sec. 121.401(c)(1).
\134\Id. Sec. 121.401(a)(2)(iii), (d).
---------------------------------------------------------------------------
91. In adopting these affiliation rules, we emphasize that these
rules will not be applied in a manner that defeats the objectives of
our service specific attribution rules. For example, in the context of
broadband PCS, our attribution rules expressly permit applicants to
disregard the gross revenues, total assets and net worth of certain
passive investors, provided that an eligible control group has de facto
and de jure control of the applicant.\135\ Our attribution rules are
designed to preserve control of the applicant by eligible entities, yet
allow investment in the applicant by entities that do not meet the size
restrictions in our rules. Therefore, so long as the requirements of
our attribution rules are met, the affiliation rules will not be used
to defeat the underlying policy objectives of allowing such passive
investors. More specifically, if a control group has de facto and de
jure control of the applicant, we shall not construe the affiliation
rules in a manner that causes the interests of passive investors to be
attributed to the applicant.
---------------------------------------------------------------------------
\135\See Fifth Report and Order at 205.
---------------------------------------------------------------------------
92. Applying these SBA affiliation rules, an affiliation would
arise, for example, where an entity with an attributable interest in an
applicant is under the control of another entity. An affiliation would
also arise where an entity with an attributable interest in an
applicant controls, or has the power to control, another entity. For
example, if an attributable investor in an applicant is also a
shareholder in a large Corporation X, when should Corporation X be
deemed an affiliate of the applicant as a result of the shareholder's
ownership interest in both entities? Under the SBA rules and the rules
we adopt here, Corporation X would be deemed an affiliate of the
applicant if the shareholder controlled or had the power to control
Corporation X, in which case, Corporation X's gross revenues must be
included in determining the applicant's gross revenues.\136\
---------------------------------------------------------------------------
\136\See Fifth Report and Order at 206.
---------------------------------------------------------------------------
93. For purposes of determining control, ownership interests will
be calculated on a fully-diluted basis. Thus, for example, stock
options, convertible debentures, and agreements to merge (including
agreements in principle) will generally be considered to have a present
effect on the power to control or own an interest in either an outside
entity or the PCS applicant or licensee. We will treat such options,
debentures, and agreements generally as though the rights held
thereunder had been exercised.\137\ However, an affiliate cannot use
such options and debentures to appear to terminate its control over or
relationship with another concern before it actually does so.\138\
---------------------------------------------------------------------------
\137\See 13 CFR 121.401(f). SBA's rules provide the following
examples to guide the application of this provision: Example 1. If
company ``A'' holds an option to purchase a controlling interest in
company ``B,'' the situation is treated as though company ``A'' had
exercised its rights and had become owner of a controlling interest
in company ``B.'' The [annual revenues] of both concerns must be
taken into account in determining size. Example 2. If company ``A''
has entered into an agreement to merge with company ``B'' in the
future, the situation is treated as though the merger has taken
place. [A and B are affiliates of each other].
\138\Id. SBA's rules provide this example: If large company
``A'' holds 70 percent (70 of 100 outstanding shares) of the voting
stock of company ``B'' and gives a third party an option to purchase
66 of the 70 shares owned by A, company ``B'' will be deemed to be
an affiliate of company ``A'' until the third party actually
exercises its option to purchase such shares. In order to prevent
large company ``A'' from circumventing the intent of the regulation
which [gives] present effect to stock options, the option is not
considered to have present effect in this case.
---------------------------------------------------------------------------
94. Voting and Other Trusts. In a similar vein, we also borrow from
the SBA's rules and our own rules in other services to find affiliation
under certain voting trusts in order to prevent a circumvention of
eligibility rules. The SBA's rules provide that a voting trust, or
similar agreement, cannot be used to separate voting power from
beneficial ownership of voting stock for the purpose of shifting
control of or the power to control an outside concern, if the primary
purpose of the trust is to meet size eligibility rules.\139\ Similarly,
under the Commission's broadcast multiple ownership rules, stock
interests held in trust may be attributed to any person who holds or
shares the power to vote such stock, has the sole power to sell such
stock, has the right to revoke the trust at will or to replace the
trustee at will.\140\ Also, under the broadcast rules, if a trustee has
a familial, personal or extra-trust business relationship to the
grantor or the beneficiary of a trust, the stock interests held in
trust will be considered assets of the grantor or beneficiary, as
appropriate.\141\ Because we believe the broadcast rules provide more
definitive guidance in this particular area, we shall use them as a
model for the general affiliation rules adopted here. Thus, for
example, if an investor with an attributable interest in an applicant
holds a beneficial interest in stock of another firm that amounts to a
controlling interest in that other firm, depending on the identity of
the trustee, the other firm may be considered an affiliate and its
assets and gross revenues may be attributed to the applicant.
---------------------------------------------------------------------------
\139\13 CFR 121.401(g).
\140\See 47 CFR 73.3555 note 2(e).
\141\Id.
---------------------------------------------------------------------------
95. Officers, Directors and Key Employees. Under the SBA's
affiliation rules, which we adopt as our generic approach, affiliations
also generally arise where persons serve as the officers, directors or
key employees of another concern and they represent a majority or
controlling element of that other concern's board of directors and/or
management of the outside entity.\142\ Thus, if a person with an
attributable interest in an applicant, through his or her other key
employment positions or positions on the board of another firm,
controls that other firm, then the other firm will be considered an
affiliate of the applicant. Such affiliations may or may not result in
the applicant's exceeding our size limitations. As this rule reflects,
for purposes of attributing the financial position of an outside entity
in this context, officers and directors of an outside concern are not
foreclosed entirely from holding attributable or non-attributable
interests in an applicant. Whether or not such persons control the
outside entity, we also do not want to prohibit these persons, who may
be experienced in the telecommunications, finance, or communications
and equipment industries, from assisting start-up companies by serving
as officers or directors of the applicant. Thus, if such persons
serving as officers or directors of the applicant do not control the
applicant or otherwise have an attributable interest in the applicant,
their outside affiliations (even if controlling) will not be considered
at all for purposes of determining the applicant's eligibility under
our rules.\143\
---------------------------------------------------------------------------
\142\See 13 CFR 121.401(h). A key employee is an employee who,
because of his/her position in the concern, has a critical influence
in or substantive control over the operations or management of the
concern. 13 CFR 121.405.
\143\SBA's size standard affiliation rules also provide that
affiliations can arise in a variety of other scenarios, such as
where one concern is dependent upon another for contracts and
business, where firms share joint facilities, or have joint venture
or franchise license agreements. To the extent we believe these
rules may have general applicability we shall codify them in our
affiliate rules. We caution parties that issues relating to de facto
control of the applicant (or parties with attributable interests in
the applicant) could also arise under arrangements not expressly
codified in the rules.
---------------------------------------------------------------------------
96. Affiliation Through Identity of Interest: Family and Spousal
Relationships. Consistent with the SBA's rules, an affiliation may
arise not only through control, but out of an ``identity of interest''
between or among parties.\144\ For example, affiliation can arise
between or among members of the same family or persons with common
investments in more than one concern. In determining who controls or
has the power to control an entity , persons with an identity of
interest may be treated as though they were one person.\145\ For
example, if two shareholders in Corporation X are both attributable
shareholders in an applicant, to the extent that together they have the
power to control Corporation X, Corporation X may be deemed an
affiliate of the applicant.
---------------------------------------------------------------------------
\144\See 13 CFR 121.401(a)(2)(iii).
\145\Id. Sec. 121.401(d).
---------------------------------------------------------------------------
97. Similarly, as under the SBA rules, we will consider spousal and
other family relationships in determining whether an affiliation
exists. Under the SBA rules for determining small business status, for
example, members of the same family may be treated as though they were
one person because they have an ``identity of interest.''\146\
Likewise, in order to determine whether individuals are economically
disadvantaged, the SBA rules governing eligibility for participation in
the government's ``section 8(a)'' program for socially and economically
disadvantaged small businesses have special provisions for attributing
spousal interests. The latter rules provide generally that half of the
joint-owned interests of an applicant and his or her spouse must be
attributed to the applicant for purposes of determining the applicant's
net worth.\147\
---------------------------------------------------------------------------
\146\13 CFR 121.401(d).
\147\See 13 CFR 124.106(a)(2)(i)(A)(1).
---------------------------------------------------------------------------
98. In the context of auction size-based eligibility standards at
issue here, we begin by clarifying that our reason for considering
spousal and kinship relationships is not to determine whether the
spouse or other kin of a women-owned applicant actually is controlling
the applicant, thereby violating our eligibility rules for woman-owned
businesses. Our rules do not embody any presumptions concerning spousal
control in that context. Rather, our objective here is to ensure both
that entities are actually in need of the assistance provided by our
rules and that entities otherwise ineligible under applicable size
criteria do not circumvent the rules by funding family members that
purport to be eligible applicants.
99. In formulating these rules, we need to consider also that, as a
practical matter, it will not be possible for us prior to the auctions
to resolve all questions that pertain to the individual circumstances
of particular applicants. Furthermore, if we determine subsequent to an
auction that a winning bidder in fact was ineligible to bid or to
benefit from special provisions, such as bidding credits, because of
spousal or kinship relationships, not only will authorization of
service be delayed but, as discussed above, disqualified applicants may
be subject to substantial penalties. In these circumstances, we think
that the public interest requires that we endeavor, insofar as
possible, to establish bright-line tests for determining when the
financial interests of spouses and other kin should be attributed to
the applicant.
100. We have decided that, for purposes of determining whether the
financial limitations in our eligibility rules have been met, interests
of an applicant's spouse to the applicant. This will resolve any
concern that an applicant might transfer his or her assets to a spouse
in order to satisfy the financial restrictions that apply to eligible
entities. For example, an applicant could not transfer stock or other
assets to his or her spouse and thereby dispose of interests that, I
held by the applicant, would render the applicant ineligible. Just as
importantly, this approach will resolve any concern that an applicant
might participate in bidding by using the personal assets of an
ineligible spouse, which would defeat entirely the objective of
providing special financial measures for designated entities.
101. In adopting this rule, we fully recognize that instances could
arise in which, if all factors were considered, attributing a spouse's
financial interests to the applicant could lead to harsh results. As a
general matter, however, we think it provides a workable bright-line
standard that resolves fully our policy concerns and avoids undesirable
ambiguity concerning the nature of our requirements. As in the SBA
rules, however, one exception is clearly warranted; this affiliation
standard would not apply if the applicant and his or her spouse are
subject to a legal separation recognized by a court of competent
jurisdiction. In calculating their personal net worth, for example,
investors in the applicant who are legally separated must, of course,
still include their share of interests in community property held with
a spouse.
102. As indicated above, circumstances could also arise in which
other kinship relationships are used as a means to evade our
eligibility requirements. Because we believe kinship relationships in
many cases do not present the same potential for abuse that exists with
spousal relationships, particularly in terms of the ``identity of
interests'' that are likely to exist between the persons involved, we
shall adopt a more relaxed standard for determining when kinship
interests must be attributed to applicants. In this area, we shall
follow the same standard that is applied by the SBA when interpreting
its ``identity of interest'' rule described above. Specifically, an
identity of interests between family members and applicants will be
presumed to exist, but the presumption can be rebutted by showing that
the family members are estranged, or that their family ties are remote,
or that the family members are not closely related in business
matters.\148\ For purposes of determining who is a family member under
this rule, we shall use a definition that is identical to the
definition of ``immediate family member'' in the SBA's rules, 13 CFR
124.100.
---------------------------------------------------------------------------
\148\See generally Texas-Capital Contractors, Inc. v. Abdnor,
933 F.2d 261 (5th Cir. 1990).
---------------------------------------------------------------------------
103. In appropriate cases, an applicant should be able to rebut the
presumption regarding kinship affiliations with relative ease, simply
by demonstrating that the applicant has no close relationship in
business matters with the relevant family members. Of course, should
such business relationships arise with a winning applicant after the
auction, we might need to consider whether the applicant intended to
circumvent the requirements of our eligibility rules.
104. The affiliation requirement is intended to prevent entities
that, for all practical purposes, do not meet the size standard
required for eligibility from receiving benefits targeted to smaller
entities.\149\ We believe that the affiliation rules described above
will accomplish this objective.
---------------------------------------------------------------------------
\149\See, e.g., Second Report and Order at 272.
---------------------------------------------------------------------------
E. Rural Telephone Company Bidding Credits.
105. Petitions. NCTA, USIN and SDN argue that the FCC should retain
the rural telephone company bidding credit provision adopted in the
Second Report and Order but delete the accelerated build-out
requirement as a condition for receipt of bidding credits. USIN asserts
that bidding credits will not help attract capital when tied to such an
expanded build-out requirement. According to USIN, making bidding
credits contingent on an accelerated build-out effectively nullifies
the provision because the commitment of additional capital for network
build-out will reduce the amount available to finance the license price
by enough to offset any benefit conferred by the availability of the
credit.\150\ SDN agrees that additional build-out should not be
required as a prerequisite for rural telephone company bidding credits,
but states that a rural telephone company should receive additional
bidding credits if it substantially covers its certified rural service
area during its license term.\151\ NTCA argues that the accelerated
build-out requirement for bidding credits should be eliminated since
this requirement is unrelated to the statutory purpose of promoting
investment in and rapid deployment of new technologies and services in
rural areas.\152\
---------------------------------------------------------------------------
\150\USIN Petition at 12.
\151\SDN Petition at 14.
\152\See 47 U.S.C. 309(j)(3)(A).
---------------------------------------------------------------------------
106. SDN also contends that the risk of forfeiting the bidding
credit (plus interest) for failure to meet the expanded build-out
commitment will have a chilling effect because of the difficulty of
anticipating potential problems that may be encountered in attempting
to extend service rapidly to remote areas. Further, SDN maintains that
an accelerated build-out requirement could engender a perverse
incentive for a rural telephone company that would otherwise
concentrate primarily on providing PCS service in the rural portions of
a BTA or MTA (which, according to SDN might be a commercially-
attractive strategy because of in densely-populated areas.\153\
---------------------------------------------------------------------------
\153\SDN Petition at 14-15.
---------------------------------------------------------------------------
107. Finally, SDN and USIN contend that it is inequitable to
provide rural telephone companies with a less favorable bidding credit
provision than other designated entities. In this regard, USIN argues
that the Second Report and Order fails to explain why rural telephone
company bidding credits should contain more restrictive terms than
other designated entity bidding credits. On the contrary, SDN contends
that rural telephone companies should receive a greater bidding credit
than other entities, because they face higher service and construction
costs. Accordingly, SDN maintains that if accelerated build-out is to
be included in the rural telephone company provision, an incentive
should be provided in the form of bonus credit over and above the
standard bidding credit available to other designated entities.
108. Discussion. In the Second Report and Order we adopted a system
of bidding credits for rural telephone companies designed to further
promote the investment in and rapid deployment of new technologies and
services in rural areas.\154\ We generally concluded that any special
measures adopted for rural telephone companies, including bidding
credits, should be limited to bidding for licenses, in their rural
service areas. We found that this limitation satisfied Congress'
objectives without unduly favoring rural telephone companies in markets
where there was no compelling reason to do so. Specifically, we
concluded that Congress was primarily concerned with assuring rural
consumers the benefits of new technologies and providing opportunities
for participation by rural telephone companies in the provision of
wireless services that supplement or replace their landline
facilities.\155\ Accordingly, we provided that rural telephone
companies would be eligible for bidding credits for specified licenses
only in their service areas.
---------------------------------------------------------------------------
\154\See 47 U.S.C. 309(j)(3)(A).
\155\Second Report and Order at 243.
---------------------------------------------------------------------------
109. However, unlike bidding credits available to women and
minority-owned firms, we linked the amount of the bidding credit for
rural telephone companies to their commitment to achieve certain
expanded infrastructure build-out requirements in their rural service
areas. We provided that the amount of the bidding credit would be
proportionately linked to the amount by which the rural telephone
company agreed to expand its build-out commitment. In this regard, we
indicated that failure to meet the expanded build-out commitment would
result in liability for a penalty in the amount of the bidding credit,
plus interest at the rate applicable to installment payments. We
further provided that grant of the licenses to rural telephone
companies utilizing bidding credits would be conditioned upon payment
of this penalty, if and when it becomes applicable. We concluded that
this added construction requirement would fulfill the congressional
objective of developing and rapidly deploying new services to those
residing in rural areas.
110. On reconsideration of this issue, we no longer believe the
provision in the Second Report and Order, which links the availability
of bidding credits for rural telephone companies to their agreement to
satisfy an expanded construction requirement, is necessary or
appropriate to promote the statutory objectives. We agree with
petitioners' assertions that the expanded build-out requirement may
have adverse consequences contrary to the purpose of bidding credit
provision. We are also concerned that the expanded construction
requirement may be unduly burdensome both to rural telephone company
licensees and the Commission. In this regard, we are concerned that the
accelerated build-out requirement may not be economically feasible in
some rural areas and thus may result in frequent forfeitures of the
bidding credit amount by rural telephone companies. As discussed more
fully below, we now believe that Congress' objectives of promoting
investment in and rapid deployment of new technologies and services to
rural areas will best be achieved through the use of other provisions
such as installment payments, bidding credits (without an expanded
build out requirement), and service area partitioning. Thus, we amend
our rules to retain flexibility to adopt any of these or other
provisions for rural telephone companies on a service-specific basis
after considering the characteristics and capital requirements of the
particular service.
F. Rural Telephone Company Eligibility for Installment Payments
111. Petitions. SDN, USIN, and NCTA all request that installment
payments be extended to rural telephone companies regardless of their
status as small businesses. AIDE and Cook Inlet argue that all
designated entities should be permitted to pay for their licenses in
installment payments irrespective of their size. These parties all
object to the decision to limit eligibility for installment payments to
small businesses as defined in Sec. 1.2110(b)(1), (i.e., companies with
net worth including that of affiliates of $6 million or less and no
more than $2 million of annual after-federal-tax profit for the last
two years). USIN argues that there is no statutory support in the
provisions cited by the Commission as authority for adopting different
provisions for one designated entity group as opposed to another.
112. Citing the legislative history to the Budget Act and H.R.
Report No. 103-111 in particular, USIN also maintains that the
statutory purpose of requiring special provisions for designated
entities was to promote entry by firms with difficulty in obtaining
access to capital. Petitioners maintain that the $6 million net worth/
$2 million net revenue standard for installment payment eligibility is
too strict and will prevent rural telephone companies from qualifying
for the installment payment option although they face significant
difficulty in obtaining access to capital. USIN asserts that as a
practical matter rural telephone companies may have high levels of non-
amortized assets and yet have less capital available for investment
than many businesses that meet the small business definition. SDN
maintains that rural telephone companies should be eligible for
installment payments regardless of whether they qualify as small
businesses because they will generally incur higher build out costs
with lower revenue streams than other designated entities. According to
USIN, a rural telephone company bidding for a license in a capital-
intensive service should be eligible for installment payments if its
annual revenue are under $100 million. USIN asserts that without
installment payments such telephone companies will be unable to bid for
broad-coverage licenses as traditional rural telephone company lenders
have indicated unwillingness to finance auction bids.
113. AIDE objects to the determination in the Second Report and
Order that limits the installment payment option to small businesses
bidding on licenses for ``those smaller spectrum blocks that are most
likely to match the business objectives of bona fide small
businesses.''\156\ According to AIDE, such the installment payment
option should be available to all designated entities bidding on all
licenses. AIDE maintains that Congress did not intend to give the FCC
discretion to offer special provisions to some designated entities in
some auctions but not in others. AIDE argues, moreover, that these
limitations on the availability of installment payments are not
justified by the Commission's desire to prevent abuse of its designated
entity provisions since there are other safeguards designed
specifically for that purpose, such as the rules for disclosure of real
parties in interest, the definitional requirements including the assets
of affiliates and the financial qualification rules.
---------------------------------------------------------------------------
\156\See Second Report and Order at 237.
---------------------------------------------------------------------------
114. Discussion. For the reasons set forth below, we deny
petitioners' requests to expand the installment payment option to other
designated entities irrespective of their economic status. However, we
will retain the flexibility to expand or modify the installment payment
option on a service-specific basis for other appropriately-sized
entities where the spectrum costs and capital infrastructure
requirements necessitate their application to other entities. For
example, in the Fifth Report and Order we recognized that the
substantial expected capital required to acquire and construct
broadband PCS licenses warranted expansion of the installment payment
option to most entities acquiring licenses in the entrepreneurs'
blocks.\157\ Under the broadband PCS rules, installment payments are
available to smaller entities that do not technically qualify as small
businesses and an enhanced installment payment option is available to
eligible small businesses and businesses owned by women and/or
minorities.
---------------------------------------------------------------------------
\157\See Fifth Report and Order at 136-140.
---------------------------------------------------------------------------
115. In the Second Report and Order, we concluded that for some
auctions, small businesses would be eligible for installment payments.
We noted that by allowing payment in installments, the government would
be extending credit to an eligible winning bidder, thus reducing the
amount of private financing needed in advance of the auction by a
prospective licensee. We noted that this will assist small entities who
are likely to have difficulty obtaining adequate private financing. As
a result, we concluded that installment payments would be an effective
way to promote efficiently the participation of small businesses in the
provision of spectrum-based telecommunications service and an effective
tool for efficiently distributing licenses and services among
geographic areas.\158\ Thus, we limited application of installment
payments to small entities, including such entities that are owned by
minorities and/or women. We found that this approach best served the
intent of Congress in enacting section 309(j)(4)(A), to avoid a
competitive bidding program that has the effect of favoring incumbents,
with established revenue streams, over new companies or start-ups.\159\
---------------------------------------------------------------------------
\158\See Second Report and Order at 233-240.
\159\See H.R. Rep. No. 103-111 at 255.
---------------------------------------------------------------------------
116. Consistent with Congress's concern that auctions not operate
to exclude small businesses, the provisions relating to installment
payments for minorities and/or women also were intended to assist only
minorities and women who are small businesses. The House Report states
that these related provisions were drafted to ``ensure that all small
businesses will be covered by the Commission's regulations, including
those owned by members of minority groups and women.''\160\ (emphasis
added). It also states that the provisions in section 309(j)(4)(A)
relating to installment payments were intended to promote economic
opportunity by ensuring that competitive bidding does not inadvertently
favor incumbents with ``deep pockets'' ``over new companies or start-
ups.''\161\ Because the Congressional objective here was to assist
``new companies or start-ups,'' we therefore concluded that the
Commission should use installment payments only for smaller sized
entities. As indicated by the legislative history, large entities with
established revenue streams were not intended to be beneficiaries of
this particular means of financial assistance. We concluded that the
statutory language, when read in conjunction with the legislative
history, does not indicate that Congress's purpose was to accord
special financial assistance measures under section 309(j)(4)(A) to
entities other than those with small economic status.\162\ In this
regard, we reject petitioner's proposals to allow installment payments
for rural telephone companies or other designated entities irrespective
of their size. We will continue to determine on a service-specific
basis the appropriate economic eligibility criteria for installment
payments. And we may, as we did in the context of broadband PCS,
establish different installment payment options for entities who face
different economic barriers.
---------------------------------------------------------------------------
\160\Id.
\161\Id.
\162\Under authority of Section 309(j)(4))(D), we have, however,
afforded other types of financial assistance measures, such as
bidding credits, to other designated entities. See e.g., Third
Report and Order, in PP Docket No. 92-253, 59 FR 26741, May 24,
1994, at 72-81 (which provides bidding credits to businesses owned
by minorities and/or women).
---------------------------------------------------------------------------
117. In addition, and consistent with our decision to limit
installment payments to small entities, we decline to make installment
payments available for all licenses in all auctions. Rather, in order
to match the provisions with eligible recipients, we will continue to
make installment payments available only for certain licenses that do
not involve the largest spectrum blocks and service areas. In this
regard, in the context of narrowband PCS, we adopted installment
payments only for the regional, MTA and BTA licenses. Similarly, for
broadband PCS, we limited eligibility for installment payments to the
BTA licenses contained in the entrepreneurs' blocks. We continue to
believe that where large, valuable blocks of spectrum are being
auctioned we should not give ineligible entities the incentive to
create small business ``fronts,'' thereby enabling large businesses to
become eligible for low-cost government financing. Nor do we desire to
delay service to the public by encouraging under-capitalized firms to
receive licenses for facilities which they may lack the resources
adequately to finance.\163\ Accordingly, we will continue to allow
installment payments only for licenses in those smaller spectrum blocks
and service areas that are most likely to match the business objectives
of bona fide small entities in the context of a particular service. The
particular spectrum block sizes that will be eligible for installment
payments will be decided in the context of each particular service
taking into account the cost of acquiring the spectrum and constructing
the system.
---------------------------------------------------------------------------
\163\See 47 U.S.C. Sec. 309(j)(3)(A).
---------------------------------------------------------------------------
G. Rural Telephone Company Partitioning
118. Petitions. SDN requests that rural telephone companies be
allowed to partition their rural service areas either pursuant to an
agreement with the BTA or MTA licensee, or by licensing a separate PCS
service area using a system similar to the cellular unserved area
application process.\164\
---------------------------------------------------------------------------
\164\See SDN Petition at 7.
---------------------------------------------------------------------------
119. Several commenters responding to the NPRM in this proceeding
suggested that the Commission allow partitioning of PCS licenses so as
to permit rural telephone companies to hold licenses to provide service
only in their service areas.\165\ In the Second Report and Order we
recognized that partitioning may be an effective means to achieve
Congress's goal of ensuring that advanced services are provided in
rural areas.\166\ In the context of broadband PCS, we adopted a system
of geographic partitioning, for rural telephone companies which allows
rural telephone companies to acquire partitioned broadband PCS licenses
in one of two ways: (1) they may form bidding consortia to participate
in auctions, and then partition the licenses won among consortia
participants, or (2) they may acquire partitioned broadband PCS
licenses from other licensees through private negotiation and agreement
either before or after the auction (provided the partitioned area is
reasonably related to the size of the rural telephone company's rural
service area).\167\ We require that partitioned areas conform to
established geopolitical boundaries and that each area include the
wireline service area of the rural telephone company applicant. We
believe that this system of partitioning of rural service areas will
provide a significant opportunity for many of these designated entities
who desire to offer PCS to their customers as a complement to their
local telephone services. Therefore, we will retain the flexibility in
the generic auction rules to adopt a system of partitioning on a
service-specific basis where the capital requirements and construction
costs are such that a system is necessary to assist rural telephone
companies who cannot afford or do not desire to bid for or construct
systems for an entire service area.\168\
---------------------------------------------------------------------------
\165\See, e.g., comments of GVNW at 2-4, and NTCA at 13.
\166\See Second Report and Order at 243 n. 186.
\167\See Fifth Report and Order at 152.
\168\In a Further Notice of Proposed Rulemaking in this docket,
the Commission will also explore the merits of allowing businesses
owned by minorities and/or women to acquire partitioned PCS
licenses, as well as partitioned licenses in other services.
---------------------------------------------------------------------------
H. Unjust Enrichment Provisions
120. Petitions. AIDE requests that when the Commission recaptures
the benefits accruing to a designated entity pursuant to the unjust
enrichment provisions, the unjust enrichment penalty should credit the
licensee's pre-sale investments in the license and should be based on
the portion of the licensee's taxable gain on the sale allocated to the
license, with appropriate adjustments. BET similarly requests that the
Commission revise the unjust enrichment provisions to credit the
designated entity for its pre-transfer expenditures on the license
including construction costs.
121. Discussion. We deny the requests of AIDE and BET. In the
Second Report and Order the Commission crafted unjust enrichment
provisions designed to prevent designated entities from profiting by
the rapid sale of licenses acquired through the benefit of provisions
and policies meant to encourage their participation in the provision of
spectrum-based services. These rules were intended to deter designated
entities from prematurely transferring licenses obtained through the
benefit of provisions designed to create opportunities for such
designated entities in the provision of spectrum-based services. We
sought through our unjust enrichment provisions to discourage
designated entities who do not intend to provide service to the public
from abusing our provisions by obtaining a license at a lower cost than
other licensees and then selling the license after a short time to a
non-designated entity at a profit. In addition, the unjust enrichment
rules were intended to recapture for the government a portion of the
value of the bidding credit or other special provision if such a
designated entity prematurely transfers its licenses to an ineligible
entity, thereby frustrating the government's efforts to encourage the
inclusion of designated entities in the provision of new spectrum-based
services.
122. We recognize that over time, a designated licensee may have
made substantial investments in a license prior to transfer. In order
to reward efficiency and encourage such investments in infrastructure
development, we provided that we will generally reduce the amount of
the recapture penalty as time passes or construction benchmarks are
met.\169\ We further provided that our recapture provisions would not
apply to the transfer or assignment of a license that has been held for
more than five years.\170\ In addition, where a recapture penalty is
assessed, we stated that the penalty will not prevent the transferring
designated entity from recovering the depreciated value of its capital
investment. Moreover, we indicated that in appropriate circumstances,
we might waive recapture ``if the licensee has incurred substantial
start-up costs or made significant capital investments with the
intention of starting service, but due to circumstances beyond its
control, was unable to provide service.''\171\
---------------------------------------------------------------------------
\169\See Second Report and Order at 262.
\170\Id.
\171\Id. at n.205.
---------------------------------------------------------------------------
123. We believe that these measures adequately account for a
designated entity's pre-transfer investments in a license, including
construction expenses. Therefore, we decline to adopt AIDE's proposal
that we credit the licensee's pre-sale investments in the license and
base the recapture amount on the portion of the licensee's taxable gain
on the sale allocated to the license, because such provisions would
require the government to undertake lengthy and complex accounting and
allocation proceedings to determine the amount of the penalty.
Similarly, we deny BET's request that we credit designated entities for
their pre-transfer expenditures on a license because we believe that
our recapture provisions adequately account for these expenditures by
reducing the amount of the penalty over time. Moreover, the unjust
enrichment provisions were designed to act as a penalty to deter
premature license transfers by designated entities. Therefore we
decline to modify the recapture provisions adopted in the Second Report
and Order. We note, however, that because license terms and
construction requirements vary by service, and because we may adopt
different designated entity provisions for different services, we will
set forth the specific recapture provisions in the service-specific
competitive bidding rules of each auctionable service. Moreover, we
modify our general recapture provisions to provide flexibility on a
service-specific basis to extend the duration of the recapture
provisions beyond five years.
I. Upfront Payment Amount
124. Petitions. AIDE requests that the Commission reduce the amount
of the upfront payment for designated entities. AIDE asserts that a
reduced upfront payment would help ensure that capital constrained
designated entities have the opportunity to participate in the
competitive bidding process. According to AIDE, a reduced upfront
payment is necessary to create opportunities for designated entities to
participate in competitive bidding and will allow such entities to
preserve their limited resources for post-auction infrastructure
development.
125. Discussion. The Commission adopted an upfront payment
requirement in order to ensure that only serious, qualified bidders
participate in our auctions. We reasoned that an upfront payment
requirement would ensure the validity of the information generated
during auctions and increase the likelihood that licenses will be
awarded to the qualified bidders who value them the most, thus
promoting the rapid deployment of new technology. Upfront payments will
also provide the Commission with a source of available funds in the
event a bid withdrawal penalty must be assessed. By requiring a
substantial upfront payment amount, the Commission seeks to deter
speculative and frivolous bidding by all bidders, including designated
entities. Moreover, the standard upfront payment formula ($.02 per MHz
per pop for the maximum MHz-pops a bidder intends to bid on in any
single round of bidding), is based on the amount of spectrum and
population coverage on which a bidder seeks to bid and therefore is
directly linked to the expected value of the license and anticipated
construction costs a licensee will incur.
126. Nevertheless, in the Second Report and Order we retained the
flexibility to cap, reduce or modify the upfront payment amount for
designated entities.\172\ We indicated that such decisions would be
made in the service-specific competitive bidding rules for individual
services. In the Fifth Report and Order, recognizing that the standard
upfront payment formula may create a barrier for smaller entities
wishing to participate in auctions, we reduced by 25 percent the
upfront payment amount required for designated entities bidding in the
entrepreneur's blocks.\173\ Given the varied spectrum costs of
different services, we will continue to consider such reduced upfront
payments for designated entities on a service-specific basis.
Generally, we will only reduce the upfront payment amounts for
designated entities in capital intensive services, such as broadband
PCS, where the spectrum bandwidth will result in upfront payment
amounts that may be prohibitive for some smaller entities.
---------------------------------------------------------------------------
\172\See Second Report and Order at 178 n.37.
\173\See Fifth Report and Order at 156.
---------------------------------------------------------------------------
J. Installment Payments
127. In the Second Report and Order, we stated that, for some
auctions, winning bidders that are small businesses would be eligible
to use installment payments in paying for licenses.\174\ We provided
that for these winning bidders, a down payment of 10 percent would be
due within five business days of the close of the auction, and that an
additional 10 percent would be due within five days of grant of the
license.\175\ We stated that we would impose interest on installment
payments at a rate equal to the rate for U.S. Treasury obligations of
maturity equal to the license term. We stated that the schedule of
installment payments would begin with interest-only payments for the
first two years, and that thereafter principal and interest would be
amortized over the remaining term of the license.\176\
---------------------------------------------------------------------------
\174\Id. at 233.
\175\Id. at 238.
\176\Id. at 239.
---------------------------------------------------------------------------
128. Upon reconsideration, we have decided that we may need to
tailor installment payment provisions more precisely to needs of
various groups of designated entities and the characteristics of
particular services. In the Fifth Report and Order we provided
installment payments for minorities and women in some blocks, and
provided different installment provisions for small businesses of
different sizes.\177\ We will continue to establish different
installment payment provisions on a service-specific basis. We may
offer installment payments to minorities and women, in some
circumstances, and may offer installment payments having differing
terms to different classes of designated entities. We may vary the
interest rate and the payment schedule for installment payments,
including the amount and timing of the down payment and the schedule
for amortization of principal and interest. Installment payment
provisions for each service will be specified in Orders establishing
auction rules for that service. We believe that this additional
flexibility will allow us to take account of differences in capital
requirements across services and license blocks, and to provide access
to capital in ways that will give various groups of designated entities
a realistic chance to participate in offering service.
---------------------------------------------------------------------------
\177\Fifth Report and Order at 137-139.
---------------------------------------------------------------------------
K. Eligibility Issues
129. Petitions. Black Entertainment Television Holdings, Inc. (BET)
requests that the FCC reconsider the public company restriction on the
availability of provisions for minority and women-owned companies in
broadband PCS. BET argues that given the costs of acquiring spectrum
and the construction expense, such a limitation would defeat realistic
opportunities for a wide range of minority-owned firms. BET also
requests that we clarify that provisions for minority and women-owned
firms are separate and distinct from provisions for small businesses.
Finally, BET argues that rights, privileges, options or other forms of
ownership that do not affect the ability of a designated entity to
control a company, or diminish a designated entity financial stake in a
venture, should not be considered in the definitional analysis for
purposes of determining eligibility.
130. Discussion. In the Second Report and Order, we stated that
publicly traded minority and women-owned companies would not be
eligible for provisions applicable to these designated entities. In the
Fifth Report and Order, however, we deviated from this restriction to
allow publicly traded minority and women-owned companies to qualify to
bid in the entrepreneurs' block, and under certain circumstances to
qualify for bidding credits.\178\ We will continue to consider
exceptions to our restriction on publicly traded company eligibility
for minority and women-owned businesses on a service-specific basis, in
each case considering the capital requirements and the expected build-
out cost of the service. We agree with BET that in services with high
entry costs, precluding publicly traded companies from receiving
measures intended for minority and women-owned businesses may undermine
our objective of ensuring the opportunity for these designated entities
to participate in the provision of spectrum-based services.
---------------------------------------------------------------------------
\178\See Fifth Report and Order at 163-164.
---------------------------------------------------------------------------
131. As requested by BET, we clarify that the provisions for
businesses owned by women and minorities are separate and distinct from
the provisions for small businesses. Thus, women and minority-owned
businesses may qualify for measures adopted for these entities
irrespective of their size, and small businesses may qualify for small
business provisions regardless of their ownership by minorities and
women. And small businesses that are owned by members of minorities
and/or women may qualify for provisions applicable to both groups.
132. Finally, in the general auction rules, we indicated that in
determining designated entity eligibility we would consider all rights,
warrants and options on a fully diluted basis, i.e., they will be
treated as if already exercised.\179\ We intend to maintain the
existing rule of calculating these ownership interests on a fully
diluted basis, since we expect that such ownership interests will
almost always have the potential either to impact the ability of a
designated entity to control a company or to diminish a designated
entity's financial stake in the venture. However, in the rare
circumstance where such ownership interests have no effect on a
designated entity's ability to control a firm or to diminish the
designated entity's financial stake, we will consider requests for
waivers.\180\ We note, however, that we expect such instances to be
rare, and petitioners will be required to make an affirmative showing
sufficient to overcome the presumption that such ownership interests
should be calculated as if exercised for purposes of determining
eligibility issues.
---------------------------------------------------------------------------
\179\47 CFR 1.2110(b)(2).
\180\See 47 CFR 1.2110.
---------------------------------------------------------------------------
133. Petitions. AIDE and Cook Inlet propose stricter eligibility
and anti-sham measures to avoid designated entity shams. Specifically,
Cook Inlet proposes requiring that a designated entity maintain clear
structural control of an entity in order to be eligible for designated
entity provisions. In this regard, Cook Inlet argues that in limited
partnerships, the general partner should be required to be a designated
entity and restrictions should be imposed on the ability of other
general partners to exercise management control. Cook Inlet also
proposes that the Commission require designated entities to document
their eligibility by attaching documentation to their long form
application.
134. We agree with AIDE that in some instances stricter eligibility
requirements are appropriate to ensure that only legitimate designated
entities are the beneficiaries of the special provisions established
under our rules. In particular, we clarify that, when an applicant or a
licensee is a partnership, because each general partner generally has
the ability to act on behalf of the partnership, all general partners
in the license applicant must be designated entities in order to
qualify for designated entity status. We believe that this
clarification is consistent with the Commission's long-standing
practice of attributing control in the context of partnerships to the
general partners. This clarification will ensure that designated
entities in partnerships retain de facto as well as de jure control.
135. In addition, we agree with AIDE that documentation of
designated entity status should be submitted along with the applicants'
long-form applications in order to enable the Commission to verify
designated entity eligibility. Accordingly, we will require designated
entities to substantiate their eligibility by describing on their long-
form application how they satisfy the requirements for eligibility. We
will also require designated entity applicants to list on their long-
form application all agreements that effect designated entity status,
such as all partnership agreements, shareholder agreements, management
agreements and other agreements, including oral agreements, which
establish that the designated entity will have both de facto and de
jure control of the entity. In addition, we will require that such
information be maintained at the licensee's facilities, or by its
designated agent, for the term of the license, and that the information
be made available to Commission staff upon request in order to enable
the Commission to audit designated entity eligibility on an ongoing
basis.
136. In addition, if an applicant for designated entity status
proves unqualified, and the Commission determines that the application
for designated entity status involved willful misrepresentation or
other serious misconduct, the Commission will impose severe penalties.
These may include monetary forfeitures, revocation of licenses, and
prohibition of participation in future auctions.
137. With respect to AIDE's proposal that clear structural control
should be required to establish designated entity eligibility, we
believe that as a general rule, our strict requirement that women and
minority principals control the applicant and maintain a 50.1 percent
voting interest (in a corporate applicant) and a 50.1 percent equity
stake in the entity is sufficient to prevent ``fronts'' and to ensure
that our provisions are only made available to legitimate qualified
designated entities. However, we reserve the flexibility on a service-
specific basis, taking into account the nature of the specific
provisions applicable in that service, to adopt additional or different
requirements for designated entity eligibility.\181\
---------------------------------------------------------------------------
\181\For example, in the Fifth Report and Order we allowed
minority or women-owned broadband PCS applicants to sell up to 75
percent of the company's equity to passive investors so long as the
control groups retained control and 25 percent of the equity and
each other investor owned less than 25 percent of the passive
equity. We also established control group tests for small businesses
and entities that wished to bid in certain blocks.
---------------------------------------------------------------------------
138. While we conclude that our requirement that control and
substantial equity rest with minorities and/or women will generally be
adequate to ensure that parties do not attempt to evade the statutory
requirement to provide economic opportunities and ensure participation
by businesses owned by these groups, we also reaffirm our commitment to
investigate all allegations of fronts, shams or other methods used to
try to evade our eligibility rules. In this regard, we remind parties
that we will conduct random pre and post-auction audits to ensure that
applicants receiving designated entity benefits are bona fide
designated entities.
L. Small Businesses
139. Petitions. NTCA and USIN request that we amend the small
business definition so that it can be flexibly modified in the context
of a particular service. NTCA and USIN advocate that such flexibility
is appropriate because the existing $6 million net worth/$2 million net
income test is too low to reflect the capital-intensive nature of the
broadband PCS business. NTCA asserts that most telephone companies are
unable to meet this test even though they have few subscribers and few
employees. USIN states that the current definition discriminates
against small rural telephone companies, and that the proper measure
for small businesses in capital-intensive service is those with annual
revenues of less than $100 million.
140. Discussion. We agree with NTCA. In the Second Report and Order
we relied on the Small Business Administration's (SBA) standard
definition. The SBA definition permits an applicant to qualify for
financial assistance based on a net worth not in excess of $6 million
with average net income after Federal income taxes for the two
preceding years not in excess of $2 million.\182\ The record in this
proceeding reflected broad disagreement about the appropriate
definition of small businesses. Many commenters, including the Chief
Counsel for Advocacy of the SBA, argued that the SBA net worth/revenue
definition was too restrictive and would exclude businesses of
sufficient size to survive, much less succeed, in the competitive
wireless communications marketplace. The SBA's Chief Counsel for
Advocacy and Suite 12 Group advocated adoption of a revenue test,
arguing that a net worth test could be misleading as some very large
companies have low net worth. The SBA's Chief Counsel recommended that
the revenue standard be raised to include firms that (together with
affiliates) have less than $40 million in revenue. The SBA Chief
Counsel suggested that the Commission consider a higher revenue ceiling
or adopt different size standards for different telecommunications
markets.\183\
---------------------------------------------------------------------------
\182\13 CFR 121.802.
\183\Some parties recommend using the SBA's 1500 employee
standard. See, e.g., comments of SBA Associate Administrator for
Procurement Assistance at 2, CFW Communications at 2, and Iowa
Network at 17. A number of other commenters argue, however, that
adoption of this alternative SBA definition would open up a huge
loophole in the designated entity eligibility criteria.
Specifically, they contend that telecommunications is a capital,
rather than labor, intensive industry, and that an entity with 1,500
employees is likely to be extremely well capitalized and have no
need for the special treatment outlined by Congress in the Budget
Act. See, e.g., comments of LuxCel Group, Inc. at 4, Suite 12 Group
at 10-11.
---------------------------------------------------------------------------
141. Other parties indicated that the definition used by the
Commission might impede the ability of small businesses to raise
capital in anticipation of auctions. They noted that many small firms
are soliciting investors to enable these firms to compete better in
auctions, and argued that their designated entity status should not be
jeopardized as a result. Thus, these commenters suggested, if the FCC
adopts the SBA's net worth standard, the net worth valuation should
relate back to the date of the PCS Final Report and Order (September
23, 1993).
142. In contrast, several commenters argue that the small business
definition must be made more restrictive in order to prevent large
firms from spinning off companies to compete as designated entities. In
this regard, some parties recommend limiting provisions to those small
businesses that were in existence for the previous two years.
143. In the Second Report and Order, we adopted the existing SBA
net worth/net income size standard as the generic threshold for small
businesses to qualify as designated entities because at that time we
were unable to conclude that the other proposals suggested by
commenters were superior to this established standard. However we
acknowledged that for certain telecommunications industry sectors this
standard may not be high enough to encompass those entities that
require the benefits, but also have the financial wherewithal to
construct and operate the systems. Accordingly, we indicated that this
``threshold could be adjusted upward on a service-by-service basis to
accommodate such situations.'' We also noted that we may modify the
small business definition if the SBA changed its definition or the
Commission determined that an alternative definition was more
appropriate for capital intensive services.
144. In this regard, in the Fifth Report and Order we revised the
definition of a small business set forth in the Second Report and Order
to include entities with up to $40 million in gross revenues, and we
provided that these small businesses would permit to pool their
resources and form consortia to bid in the entrepreneurs' blocks or to
receive other small business benefits. We also adopted rules that allow
small businesses and businesses owned by women and/or minorities to
raise capital by selling passive ownership interests in their
companies. Thus, for example, under certain conditions, businesses
owned by women and minorities have the option of taking on one large
passive partner (holding up to 49.9 percent of the enterprise) or
selling a greater portion of their companies' equity (up to 75 percent
of the equity) to passive investors in smaller increments. Either of
these structures should enhance the ability of these entities to obtain
the necessary funding to meet long-term construction, operation and
expansion goals.\184\
---------------------------------------------------------------------------
\184\See Fifth Report and Order at 185.
---------------------------------------------------------------------------
145. Given the diversity of services that may be subject to
competitive bidding and the varied spectrum costs and build-out
requirements associated with each, we conclude that it is more
appropriate to define the eligibility requirements for small businesses
on a service-specific basis, taking into account the capital
requirements of each particular service in establishing the appropriate
threshold. Therefore we will amend our generic auction rules to replace
the small business definition with a provision enabling the Commission
to establish a small businesses definition in the context of each
particular service.
V. Final Regulatory Flexibility Analysis
146. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.
Sec. 604, the Commission's final analysis is as follows:
A. Need for, and Purpose of, this Action
147. As a result of new statutory authority, the Commission may
utilize competitive bidding mechanisms in the granting of certain
initial licenses. The Commission published an Initial Regulatory
Flexibility Analysis, see generally 5 U.S.C. Sec. 603, within the
Notice of Proposed Rule Making in this proceeding, and published a
Final Regulatory Flexibility Analysis within the Second Report and
Order (at 299-302). As noted in these previous final analyses, this
proceeding will establish a system of competitive bidding for choosing
among certain applications for initial licenses, and will carry out
statutory mandates that certain designated entities, including small
entities, be afforded an opportunity to participate in the competitive
bidding process and in the provision of spectrum-based services.
B. Summary of the Issues Raised by the Public Comments in Response to
the Initial Regulatory Flexibility Analysis
148. No comments were submitted in response to our Initial
Regulatory Flexibility Analysis.
C. Significant Alternatives Considered
149. Although, as described in (B) above, no comments were received
pertaining to our Initial Regulatory Flexibility Analysis, the Second
Report and Order addressed at length the general policy considerations
raised as a result of the Commission's new auction authority.
VI. Procedural Matters and Ordering Clauses
150. Accordingly, It Is Ordered, that the petitions for
reconsideration Are Granted to the extent described above and Denied in
all other respects, and that the petition of William E. Zimsky Is
Dismissed as moot.
151. It Is Further Ordered, that Part 1 of the Commission's Rules
Is Amended as set forth in Appendix B, attached. It Is Ordered that the
rule changes made herein Will Become Effective 30 days after their
publication in the Federal Register. This action is taken pursuant to
Sections 4(i), 303(r) and 309(j) of the Communications Act of 1934, as
amended, 47 U.S.C. Secs. 154(i), 303(r) and 309(j).
List of Subjects in 47 CFR Part 1:
Administrative practice and procedure, Reporting and recordkeeping
requirements, Telecommunications.
Federal Communications Commission.
LaVera F. Marshall,
Acting Secretary.
Final Rules
Part 1 of Chapter I of Title 47 of the Code of Federal Regulations
is amended as follows:
PART 1--PRACTICE AND PROCEDURE
1. The authority citation for Part 1 continues to read as follows:
Authority: 47 U.S.C. 151, 154, 303, and 309(j) unless otherwise
noted.
2. Subpart Q of Part 1 is revised to read as follows:
Subpart Q--Competitive Bidding Proceedings
General Procedures
1.2101 Purpose.
1.2102 Eligibility of applications for competitive bidding.
1.2103 Competitive bidding design options.
1.2104 Competitive bidding mechanisms.
1.2105 Bidding application and certification procedures; prohibition
of collusion.
1.2106 Submission of upfront payments.
1.2107 Submission of down payment and filing of long-form
applications.
1.2108 Procedures for filing petitions to deny against long-form
applications.
1.2109 License grant, denial, default, and disqualification.
1.2110 Designated entities.
1.2111 Assignment or transfer of control: unjust enrichment.
Subpart Q--Competitive Bidding Proceedings
Sec. 1.2101 Purpose.
The provisions of this subpart implement Section 309(j) of the
Communications Act of 1934, as added by the Omnibus Budget
Reconciliation Act of 1993 (P.L. 103-66), authorizing the Commission to
employ competitive bidding procedures to choose from among two or more
mutually exclusive applications for certain initial licenses.
Sec. 1.2102 Eligibility of applications for competitive bidding.
(a) Mutually exclusive initial applications in the following
services or classes of services are subject to competitive bidding:
(1) Interactive Video Data Service (see 47 CFR Part 95, Subpart F).
This paragraph does not apply to applications which were filed prior to
July 26, 1993;
(2) Marine Public Coast Stations (see 47 CFR Part 80, Subpart J);
(3) Multipoint Distribution Service and Multichannel Multipoint
Distribution Service (see 47 CFR Part 21, Subpart K). This paragraph
does not apply to applications which were filed prior to July 26, 1993;
(4) Exclusive Private Carrier Paging above 900 MHz (see 47 CFR Part
90, Subpart P.)
(5) Public Mobile Services (see 47 CFR Part 22), except in the 800
MHz Air-Ground Radiotelephone Service, and in the Rural Radio Service.
This paragraph does not apply to applications in the cellular radio
service, such as cellular unserved area applications, that were filed
prior to July 26, 1993;
(6) Specialized Mobile Radio Service (SMR) (see 47 CFR Part 90,
Subpart S) including applications based on finder's preferences for
frequencies allocated to the SMR service (see 47 CFR 90.173); and
(7) Personal Communications Services (PCS) (see 47 CFR Part 24).
Note to paragraph (a): To determine the rules that apply to
competitive bidding in the foregoing services, specific service
rules should also be consulted.
(b) The following types of license applications are not subject to
competitive bidding procedures:
(1) Applications for renewal of licenses;
(2) Applications for modification of license; provided, however,
that the Commission may determine that applications for modification
that are mutually exclusive with other applications should be subject
to competitive bidding;
(3) Applications for subsidiary communications services. A
``subsidiary communications service'' is a class of service where the
signal for that service is indivisible from that of the main channel
signal and that main channel signal is exempt from competitive bidding
under other provisions of these rules. See, e.g., Sec. 1.2102(c)
(exempting broadcast services). Examples of such subsidiary
communications services are those transmitted on subcarriers within the
FM baseband signal (see 47 CFR 73.295), and signals transmitted within
the Vertical Blanking Interval of a broadcast television signal; and
(4) Applications for frequencies used as an intermediate link or
links in the provision of a continuous, end-to-end service where no
service is provided directly to subscribers over the frequencies.
Examples of such intermediate links are:
(i) Point-to-point microwave facilities used to connect a cellular
radio telephone base station with a cellular radio telephone mobile
telephone switching office; and
(ii) Point-to-point microwave facilities used as part of the
service offering in the provision of telephone exchange or
interexchange service.
(c) Applications in the following services or classes of services
are not subject to competitive bidding:
(1) Alaska-Private Fixed Stations (see 47 CFR Part 80, Subpart O);
(2) Broadcast radio (AM and FM) and broadcast television (VHF, UHF,
LPTV) under 47 CFR Part 73;
(3) Broadcast Auxiliary and Cable Television Relay Services (see 47
CFR Part 74, Subparts D, E, F, G, H and L and Part 78, Subpart B);
(4) Instructional Television Fixed Service (see 47 CFR Part 74,
Subpart I);
(5) Maritime Support Stations (see 47 CFR Part 80, Subpart N);
(6) Marine Operational Fixed Stations (see 47 CFR Part 80, Subpart
L);
(7) Marine Radiodetermination Stations (see 47 CFR Part 80, Subpart
M);
(8) Personal Radio Services (see 47 CFR Part 95), except
applications filed after July 26, 1993, in the Interactive Video Data
Service (see 47 CFR Part 95, Subpart F);
(9) Public Safety, Industrial/Land Transportation, General and
Business Radio categories above 800 MHz, including finder's preference
requests for frequencies not allocated to the SMR service (see 47 CFR
90.173), and including, until further notice of the Commission, the
Automated Vehicle Monitoring Service (see 47 CFR 90.239);
(10) Private Land Mobile Radio Services between 470-512 MHz (see 47
CFR Part 90, Subparts B-F), including those based on finder's
preferences, (see 47 CFR 90.173);
(11) Private Land Mobile Radio Services below 470 MHz (see 47 CFR
Part 90, Subparts B-F) except in the 220 MHz band (see 47 CFR Part 90,
Subpart T), including those based on finder's preferences (see 47 CFR
Section 90.173); and
(12) Private Operational Fixed Services (see 47 CFR Part 94).
Sec. 1.2103 Competitive bidding design options.
(a) The Commission will select the competitive bidding design(s) to
be used in auctioning particular licenses or classes of licenses on a
service-specific basis. The choice of competitive bidding design will
generally be made pursuant to the criteria set forth in PP Docket No.
93-253, FCC 94-61, adopted March 8, 1994, available for purchase from
the International Transcription Service, Inc., 2100 M St. NW, suite
140, Washington, DC 20037, telephone (202) 857-3800, but the Commission
may design and test alternative methodologies. The Commission will
choose from one or more of the following types of auction designs for
services or classes of services subject to competitive bidding: (1)
Single round sealed bid auctions (either sequential or simultaneous);
(2) Sequential oral auctions; (3) Simultaneous multiple round auctions.
(b) The Commission may use combinatorial bidding, which would allow
bidders to submit all or nothing bids on combinations of licenses, in
addition to bids on individual licenses. The Commission may require
that to be declared the high bid, a combinatorial bid must exceed the
sum of the individual bids by a specified amount. Combinatorial bidding
may be used with any type of auction.
(c) The Commission may use single combined auctions, which combine
bidding for two or more substitutable licenses and award licenses to
the highest bidders until the available licenses are exhausted. This
technique may be used in conjunction with any type of auction.
Sec. 1.2104 Competitive bidding mechanisms.
(a) Sequencing. The Commission will establish the sequence in which
multiple licenses will be auctioned.
(b) Grouping. In the event the Commission uses either a
simultaneous multiple round competitive bidding design or combinatorial
bidding, the Commission will determine which licenses will be auctioned
simultaneously or in combination.
(c) Reservation Price. The Commission may establish a reservation
price, either disclosed or undisclosed, below which a license subject
to auction will not be awarded.
(d) Minimum Bid Increments. The Commission may, by announcement
before or during an auction, require minimum bid increments in dollar
or percentage terms. The Commission may also establish suggested
minimum opening bids on a service-specific basis.
(e) Stopping Rules. The Commission may establish stopping rules
before or during multiple round auctions in order to terminate the
auctions within a reasonable time.
(f) Activity Rules. The Commission may establish activity rules
which require a minimum amount of bidding activity.
(g) Withdrawal, Default and Disqualification Penalties. As
specified below, when the Commission conducts a simultaneous multiple
round auction pursuant to Sec. 1.2103, the Commission will impose
penalties on bidders who withdraw high bids during the course of an
auction, or who default on payments due after an auction closes or who
are disqualified.
(1) Bid withdrawal prior to close of auction. A bidder who
withdraws a high bid during the course of an auction will be subject to
a penalty equal to the difference between the amount bid and the amount
of the winning bid the next time the license is offered by the
Commission. No withdrawal penalty would be assessed if the subsequent
winning bid exceeds the withdrawn bid. This penalty amount will be
deducted from any upfront payments or down payments that the
withdrawing bidder has deposited with the Commission.
(2) Default or disqualification after close of auction. If a high
bidder defaults or is disqualified after the close of such an auction,
the defaulting bidder will be subject to the penalty in paragraph
(g)(1) plus an additional penalty equal to 3 percent of the subsequent
winning bid. If the subsequent winning bid exceeds the defaulting
bidder's bid amount, the 3 percent penalty will be calculated based on
the defaulting bidder's bid amount. These amounts will be deducted from
any upfront payments or down payments that the defaulting or
disqualified bidder has deposited with the Commission. When the
Commission conducts single round sealed bid auctions or sequential oral
auctions, the Commission may modify the penalties to be paid in the
event of bid withdrawal, default or disqualification; provided,
however, that such penalties shall not exceed the penalties specified
above.
(h) The Commission will generally release information concerning
the identities of bidders before each auction but may choose, on an
auction-by-auction basis, to withhold the identity of the bidders
associated with bidder identification numbers.
(i) The Commission may delay, suspend, or cancel an auction in the
event of a natural disaster, technical obstacle, evidence of security
breach, unlawful bidding activity, administrative necessity, or for any
other reason that affects the fair and efficient conduct of the
competitive bidding. The Commission also has the authority, at its sole
discretion, to resume the competitive bidding starting from the
beginning of the current or some previous round or cancel the
competitive bidding in its entirety.
Sec. 1.2105 Bidding application and certification procedures;
prohibition of collusion.
(a) Submission of Short Form Application (FCC Form 175). In order
to be eligible to bid, an applicant must timely submit a short-form
application (FCC Form 175), together with any appropriate filing fee
set forth by Public Notice. Unless otherwise provided by Public Notice,
the Form 175 need not be accompanied by an upfront payment (see
Sec. 1.2106).
(1) All Form 175s will be due:
(i) On the date(s) specified by Public Notice; or
(ii) In the case of application filing dates which occur
automatically by operation of law (see, e.g., 47 CFR 22.902), on a date
specified by Public Notice after the Commission has reviewed the
applications that have been filed on those dates and determined that
mutual exclusivity exists.
(2) The Form 175 must contain the following information:
(i) Identification of each license on which the applicant wishes to
bid;
(ii) The applicant's name, if the applicant is an individual. If
the applicant is a corporation, then the short-form application will
require the name and address of the corporate office and the name and
title of an officer or director. If the applicant is a partnership,
then the application will require the name, citizenship and address of
all partners, and, if a partner is not a natural person, then the name
and title of a responsible person should be included as well. If the
applicant is a trust, then the name and address of the trustee will be
required. If the applicant is none of the above, then it must identify
and describe itself and its principals or other responsible persons;
(iii) The identity of the person(s) authorized to make or withdraw
a bid;
(iv) If the applicant applies as a designated entity pursuant to
Sec. 1.2110, a statement to that effect and a declaration, under
penalty of perjury, that the applicant is qualified as a designated
entity under Sec. 1.2110.
(v) Certification that the applicant is legally, technically,
financially and otherwise qualified pursuant to Section 308(b) of the
Communications Act of 1934, as amended. The Commission will accept
applications certifying that a request for waiver or other relief from
the requirements of Section 310 is pending;
(vi) Certification that the applicant is in compliance with the
foreign ownership provisions of Section 310 of the Communications Act
of 1934, as amended;
(vii) Certification that the applicant is and will, during the
pendency of its application(s), remain in compliance with any service-
specific qualifications applicable to the licenses on which the
applicant intends to bid including, but not limited to, financial
qualifications. The Commission may require certification in certain
services that the applicant will, following grant of a license, come
into compliance with certain service-specific rules, including, but not
limited to, ownership eligibility limitations;
(viii) An exhibit, certified as truthful under penalty of perjury,
identifying all parties with whom the applicant has entered into
partnerships, joint ventures, consortia or other agreements,
arrangements or understandings of any kind relating to the licenses
being auctioned, including any such agreements relating to the post-
auction market structure.
(ix) Certification under penalty of perjury that it has not entered
and will not enter into any explicit or implicit agreements,
arrangements or understandings of any kind with any parties other than
those identified pursuant to paragraph (a)(2)(viii) regarding the
amount of their bids, bidding strategies or the particular licenses on
which they will or will not bid;
Note to paragraph (a): The Commission may also request
applicants to submit additional information for informational
purposes to aid in its preparation of required reports to Congress.
(b) Modification and Dismissal of Form 175. (1) Any Form 175 that
is not signed or otherwise does not contain all of the certifications
required pursuant to this section is unacceptable for filing and cannot
be corrected subsequent to any applicable filing deadline. The
application will be dismissed with prejudice and the upfront payment,
if paid, will be returned.
(2) The Commission will provide bidders a limited opportunity to
cure defects specified herein (except for failure to sign the
application and to make certifications) and to resubmit a corrected
application. Form 175 may be amended or modified to make minor changes
or correct minor errors in the application (such as typographical
errors). The Commission will classify all amendments as major or minor,
pursuant to rules applicable to specific services. An application will
be considered to be a newly filed application if it is amended by a
major amendment and may not be resubmitted after applicable filing
deadlines.
(3) Applicants who fail to correct defects in their applications in
a timely manner as specified by Public Notice will have their
applications dismissed with no opportunity for resubmission.
(c) Prohibition of Collusion. (1) Except as provided in paragraphs
(c)(2) and (c)(3) of this section, after the filing of short-form
applications, all bidders are prohibited from cooperating,
collaborating, discussing or disclosing in any manner the substance of
their bids or bidding strategies, or discussing or negotiating
settlement agreements, with other bidders until after the high bidder
makes the required down payment, unless such bidders are members of a
bidding consortium or other joint bidding arrangement identified on the
bidder's short-form application pursuant to Sec. 1.2105(a)(2)(viii).
(2) Applicants may modify their short-form applications to reflect
formation of consortia or changes in ownership at any time before or
during an auction, provided such changes do not result in a change in
control of the applicant, and provided that the parties forming
consortia or entering into ownership agreements have not applied for
the same license. Such changes will not be considered major
modifications of the application.
(3) after the filing of short-form applications, applicants may
make agreements to bid jointly for licenses, provided the parties to
the agreement have not applied for the same license.
Sec. 1.2106 Submission of upfront payments.
(a) The Commission may require applicants for licenses subject to
competitive bidding to submit an upfront payment. In that event, the
amount of the upfront payment and the procedures for submitting it will
be set forth in a Public Notice. No interest will be paid on upfront
payments.
(b) Upfront payments must be made either by wire transfer or by
cashier's check drawn in U.S. dollars from a financial institution
whose deposits are insured by the Federal Deposit Insurance Corporation
and must be made payable to the Federal Communications Commission.
(c) If an upfront payment is not in compliance with the
Commission's Rules, or if insufficient funds are tendered to constitute
a valid upfront payment, the applicant shall have a limited opportunity
to correct its submission to bring it up to the minimum valid upfront
payment prior to the auction. If the applicant does not submit at least
the minimum upfront payment, it will be ineligible to bid, its
application will be dismissed and any upfront payment it has made will
be returned.
(d) The upfront payment(s) of a bidder will be credited toward any
down payment required for licenses on which the bidder is the high
bidder. Where the upfront payment amount exceeds the required deposit
of a winning bidder, the Commission may refund the excess amount after
determining that no bid withdrawal penalties are owed by that bidder.
(e) In accordance with the provisions of paragraph (d), in the
event a penalty is assessed pursuant to Sec. 1.2104 for bid withdrawal
or default, upfront payments or down payments on deposit with the
Commission will be used to satisfy the bid withdrawal or default
penalty before being applied toward any additional payment obligations
that the high bidder may have.
Sec. 1.2107 Submission of down payment and filing of long-form
applications.
(a) After bidding has ended, the Commission will identify and
notify the high bidder and declare the bidding closed.
(b) Within five (5) business days after being notified that it is a
high bidder on a particular license(s), a high bidder must submit to
the Commission's lockbox bank such additional funds (the ``down
payment'') as are necessary to bring its total deposits (not including
upfront payments applied to satisfy penalties) up to twenty (20)
percent of its high bid(s). (In single round sealed bid auctions
conducted under Sec. 1.2103, however, bidders may be required to submit
their down payments with their bids.) This down payment must be made by
wire transfer or cashier's check drawn in U.S. dollars from a financial
institution whose deposits are insured by the Federal Deposit Insurance
Corporation and must be made payable to the Federal Communications
Commission. Winning bidders who are qualified designated entities
eligible for installment payments under Sec. 1.2110(d) are only
required to bring their total deposits up to ten (10) percent of their
winning bid(s). Such designated entities must pay the remainder of the
twenty (20) percent down payment within five (5) business days of grant
of their application. See Sec. 1.2110(e) (1) and (2). Down payments
will be held by the Commission until the high bidder has been awarded
the license and has paid the remaining balance due on the license, in
which case it will not be returned, or until the winning bidder is
found unqualified to be a licensee or has defaulted, in which case it
will be returned, less applicable penalties. No interest will be paid
on any down payment.
(c) A high bidder that meets its down payment obligations in a
timely manner must, within ten (10) business days after being notified
that it is a high bidder, submit an additional application (the ``long-
form application'') pursuant to the rules governing the service in
which the applicant is the high bidder (unless it has already submitted
such an application, as contemplated by Sec. 1.2105(a)(1)(b). For
example, if the applicant is high bidder for a license in the
Interactive Video Data Service (see 47 CFR Part 95, Subpart F), the
long form application will be submitted on FCC Form 574 in accordance
with Sec. 95.815 of this chapter. Notwithstanding any other provision
in title 47 of the Code of Federal Regulations to the contrary, high
bidders need not submit an additional application filing fee with their
long-form applications. Notwithstanding any other provision in Title 47
of the Code of Federal Regulations to the contrary, the high bidder's
long-form application must be mailed or otherwise delivered to: Office
of the Secretary, Federal Communications Commission, Attention: Auction
Application Processing Section, 1919 M Street, N.W., Room 222,
Washington, D.C. 20554.
An applicant that fails to submit the required long-form
application as required under this subsection, and fails to establish
good cause for any late-filed submission, shall be deemed to have
defaulted and will be subject to the penalties set forth in
Sec. 1.2104.
(d) As an exhibit to its long-form application, the applicant must
provide a detailed explanation of the terms and conditions and parties
involved in any bidding consortia, joint venture, partnership or other
agreement or arrangement it had entered into relating to the
competitive bidding process prior to the time bidding was completed.
Such agreements must have been entered into prior to the filing of
short-form applications pursuant to Sec. 1.2105.
Sec. 1.2108 Procedures for filing petitions to deny against long-form
applications.
(a) Where petitions to deny are otherwise provided for under the
Act or the commission's Rules, and unless other service-specific
procedures for the filing of such petitions are provided for elsewhere
in the Commission's Rules, the procedures in this section shall apply
to the filing of petitions to deny the long-form applications of
winning bidders.
(b) Within thirty (30) days after the Commission gives public
notice that a long-form application has been accepted for filing,
petitions to deny that application may be filed. Any such petitions
must contain allegations of fact supported by affidavit of a person or
persons with personal knowledge thereof.
(c) An applicant may file an opposition to any petition to deny,
and the petitioner a reply to such opposition. Allegations of fact or
denials thereof must be supported by affidavit of a person or persons
with personal knowledge thereof. The times for filing such opposition
and replies will be those provided in Sec. 1.45.
(d) If the Commission determines that:
(1) an applicant is qualified and there is no substantial and
material issue of fact concerning that determination, it will grant the
application.
(2) an applicant is not qualified and that there is no substantial
issue of fact concerning that determination, the Commission need not
hold a evidentiary hearing and will deny the application.
(3) substantial and material issues of fact require a hearing, it
will conduct a hearing. The Commission may permit all or part of the
evidence to be submitted in written form and may permit employees other
than administrative law judges to preside at the taking of written
evidence. Such hearing will be conducted on an expedited basis.
Sec. 1.2109 License grant, denial, default, and disqualification.
(a) Unless otherwise specified in these rules, auction winners are
required to pay the balance of their winning bids in a lump sum within
five (5) business days following award of the license. Grant of the
license will be conditioned on full and timely payment of the winning
bid.
(b) If a winning bidder withdraws its bid after the Commission has
declared competitive bidding closed or fails to remit the required down
payment within five (5) business days after the commission has declared
competitive bidding closed, the bidder will be deemed to have
defaulted, its application will be dismissed, and it will be liable for
the default penalty specified in Sec. 1.2104(g)(2). In such event, the
Commission may either re-auction the license to existing or new
applicants or offer it to the other highest bidders (in descending
order) at their final bids. The down payment obligations set forth in
Sec. 1.2107(b) will apply.
(c) A winning bidder who is found unqualified to be a licensee,
fails to remit the balance of its winning bid in a timely manner, or
defaults or is disqualified for any reason after having made the
required down payment, will be deemed to have defaulted and will be
liable for the penalty set forth in Sec. 1.2104(g)(2). In such event,
the Commission will conduct another auction for the license, affording
new parties an opportunity to file applications for the license.
(d) Bidders who are found to have violated the antitrust laws or
the Commission's rules in connection with their participation in the
competitive bidding process may be subject, in addition to any other
applicable sanctions, to forfeiture of their upfront payment, down
payment or full bid amount, and may be prohibited from participating in
future auctions.
Sec. 1.2110 Designated entities.
(a) Designated entities are small businesses, businesses owned by
members of minority groups and/or women, and rural telephone companies.
(b) Definitions.
(1) Small businesses. The Commission will establish the definition
of a small business on a service-specific basis, taking into
consideration the characteristics and capital requirements of the
particular service.
(2) Businesses owned by members of minority groups and/or women.
Unless otherwise provided in rules governing specific services, a
business owned by members of minority groups and/or women is one in
which minorities and/or women who are U.S. citizens control the
applicant, have at least 50.1 percent equity ownership and, in the case
of a corporate applicant, a 50.1 percent voting interest. For
applicants that are partnerships, every general partner either must be
a minority and/or woman (or minorities and/or women) who are U.S.
citizens and who individually or together own at least 50.1 percent of
the partnership equity, or an entity that is 100 percent owned and
controlled by minorities and/or women who are U.S. citizens. The
interests of minorities and women are to be calculated on a fully-
diluted basis; agreements such as stock options and convertible
debentures shall be considered to have a present effect on the power to
control an entity and shall be treated as if the rights thereunder
already have been fully exercised. However, upon a demonstration that
options or conversion rights held by non-controlling principals will
not deprive the minority and female principals of a substantial
financial stake in the venture or impair their rights to control the
designated entity, a designated entity may seek a waiver of the
requirement that the equity of the minority and female principals must
be calculated on a fully-diluted basis. The term minority includes
individuals of African American, Hispanic-surnamed, American Eskimo,
Aleut, American Indian and Asian American extraction.
(3) Rural telephone companies. A rural telephone company is any
local exchange carrier including affiliates (as defined in
1.2110(b)(4)), with 100,000 access lines or fewer.
(4) Affiliate. (i) An individual or entity is an affiliate of an
applicant or of a person holding an attributable interest in an
applicant under Sec. 24.709 (both referred to herein as ``the
applicant'') if such individual or entity--
(A) directly or indirectly controls or has the power to control the
applicant, or
(B) is directly or indirectly controlled by the applicant, or
(C) is directly or indirectly controlled by a third party or
parties that also controls or has the power to control the applicant,
or
(D) has an ``identity of interest'' with the applicant.
(ii) Nature of control in determining affiliation.
(A) Every business concern is considered to have one or more
parties who directly or indirectly control or have the power to control
it. Control may be affirmative or negative and it is immaterial whether
it is exercised so long as the power to control exists.
Example. An applicant owning 50 percent of the voting stock of
another concern would have negative power to control such concern
since such party can block any action of the other stockholders.
Also, the bylaws of a corporation may permit a stockholder with less
than 50 percent of the voting stock to block any actions taken by
the other stockholders in the other entity. Affiliation exists when
the applicant has the power to control a concern while at the same
time another person, or persons, are in control of the concern at
the will of the party or parties with the power to control.
(B) Control can arise through stock ownership; occupancy of
director, officer or key employee positions; contractual or other
business relations; or combinations of these and other factors. A key
employee is an employee who, because of his/her position in the
concern, has a critical influence in or substantive control over the
operations or management of the concern.
(C) Control can arise through management positions where a
concern's voting stock is so widely distributed that no effective
control can be established.
Example. In a corporation where the officers and directors own
various size blocks of stock totaling 40 percent of the
corporation's voting stock, but no officer or director has a block
sufficient to give him or her control or the power to control and
the remaining 60 percent is widely distributed with no individual
stockholder having a stock interest greater than 10 percent,
management has the power to control. If persons with such management
control of the other entity are persons with attributable interests
in the applicant, the other entity will be deemed an affiliate of
the applicant.
(iii) Identity of interest between and among persons. Affiliation
can arise between or among two or more persons with an identity of
interest, such as members of the same family or persons with common
investments. In determining if the applicant controls or has the power
to control a concern, persons with an identity of interest will be
treated as though they were one person.
Example. Two shareholders in Corporation Y each have
attributable interests in the same PCS application. While neither
shareholder has enough shares to individually control Corporation Y,
together they have the power to control Corporation Y. The two
shareholders with these common investments (or identity in interest)
are treated as though they are one person and Corporation Y would be
deemed an affiliate of the applicant.
(A) Spousal Affiliation. Both spouses are deemed to own or control
or have the power to control interests owned or controlled by either of
them, unless they are subject to a legal separation recognized by a
court of competent jurisdiction in the United States. In calculating
their net worth, investors who are legally separated must include their
share of interests in property held jointly with a spouse.
(B) Kinship Affiliation. Immediate family members will be presumed
to own or control or have the power to control interests owned or
controlled by other immediate family members. In this context
``immediate family member'' means father, mother, husband, wife, son,
daughter, brother, sister, father- or mother-in-law, son- or daughter-
in-law, brother- or sister-in-law, step-father or -mother, step-brother
or -sister, step-son or -daughter, half brother or sister. This
presumption may be rebutted by showing that the family members are
estranged, the family ties are remote, or the family members are not
closely involved with each other in business matters.
Example. A owns a controlling interest in Corporation X. A's
sister-in-law, B, has an attributable interest in a PCS application.
Because A and B have a presumptive kinship affiliation, A's interest
in Corporation Y is attributable to B, and thus to the applicant,
unless B rebuts the presumption with the necessary showing.
(iv) Affiliation through stock ownership.
(A) An applicant is presumed to control or have the power to
control a concern if he or she owns or controls or has the power to
control 50 percent or more of its voting stock.
(B) An applicant is presumed to control or have the power to
control a concern even though he or she owns, controls or has the power
to control less than 50 percent of the concern's voting stock, if the
block of stock he or she owns, controls or has the power to control is
large as compared with any other outstanding block of stock.
(C) If two or more persons each owns, controls or has the power to
control less than 50 percent of the voting stock of a concern, such
minority holdings are equal or approximately equal in size, and the
aggregate of these minority holdings is large as compared with any
other stock holding, the presumption arises that each one of these
persons individually controls or has the power to control the concern;
however, such presumption may be rebutted by a showing that such
control or power to control, in fact, does not exist.
(v) Affiliation arising under stock options, convertible
debentures, and agreements to merge. Stock options, convertible
debentures, and agreements to merge (including agreements in principle)
are generally considered to have a present effect on the power to
control the concern. Therefore, in making a size determination, such
options, debentures, and agreements are generally treated as though the
rights held thereunder had been exercised. However, an affiliate cannot
use such options and debentures to appear to terminate its control over
another concern before it actually does so.
Example 1. If company B holds an option to purchase a
controlling interest in company A, who holds an attributable
interest in a PCS application, the situation is treated as though
company B had exercised its rights and had come owner of a
controlling interest in company A. The gross revenues of company B
must be taken into account in determining the size of the applicant.
Example 2. If a large company, BigCo, holds 70% (70 of 100
outstanding shares) of the voting stock of company A, who holds an
attributable interest in a PCS application, and gives a third party,
SmallCo, an option to purchase 50 of the 70 shares owned by BigCo,
BigCo will be deemed to be an affiliate of company A, and thus the
applicant, until SmallCo actually exercises its option to purchase
such shares. In order to prevent BigCo from circumventing the intent
of the rule which requires such options to be considered on a fully
diluted basis, the option is not considered to have present effect
in this case.
Example 3. If company A has entered into an agreement to merge
with company B in the future, the situation is treated as though the
merger has taken place.
(vi) Affiliation under voting trusts.
(A) Stock interests held in trust shall be deemed controlled by any
person who holds or shares the power to vote such stock, to any person
who has the sole power to sell such stock, and to any person who has
the right to revoke the trust at will or to replace the trustee at
will.
(B) If a trustee has a familial, personal or extra-trust business
relationship to the grantor or the beneficiary, the stock interests
held in trust will be deemed controlled by the grantor or beneficiary,
as appropriate.
(C) If the primary purpose of a voting trust, or similar agreement,
is to separate voting power from beneficial ownership of voting stock
for the purpose of shifting control of or the power to control a
concern in order that such concern or another concern may meet the
Commission's size standards, such voting trust shall not be considered
valid for this purpose regardless of whether it is or is not recognized
within the appropriate jurisdiction.
(vii) Affiliation through common management. Affiliation generally
arises where officers, directors, or key employees serve as the
majority or otherwise as the controlling element of the board of
directors and/or the management of another entity.
(viii) Affiliation through common facilities. Affiliation generally
arises where one concern shares office space and/or employees and/or
other facilities with another concern, particularly where such concerns
are in the same or related industry or field of operations, or where
such concerns were formerly affiliated, and through these sharing
arrangements one concern has control, or potential control, of the
other concern.
(ix) Affiliation through contractual relationships. Affiliation
generally arises where one concern is dependent upon another concern
for contracts and business to such a degree that one concern has
control, or potential control, of the other concern.
(x) Affiliation under joint venture arrangements.
(A) A joint venture for size determination purposes is an
association of concerns and/or individuals, with interests in any
degree or proportion, formed by contract, express or implied, to engage
in and carry out a single, specific business venture for joint profit
for which purpose they combine their efforts, property, money, skill
and knowledge, but not on a continuing or permanent basis for
conducting business generally. The determination whether an entity is a
joint venture is based upon the facts of the business operation,
regardless of how the business operation may be designated by the
parties involved. An agreement to share profits/losses proportionate to
each party's contribution to the business operation is a significant
factor in determining whether the business operation is a point
venture.
(B) The parties to a joint venture are considered to be affiliated
with each other.
(C) The Commission may set aside specific licenses for which only
eligible designated entities, as specified by the Commission, may bid.
(D) The Commission may permit partitioning of service areas in
particular services for eligible designated entities.
(E) The Commission may permit small businesses (including small
businesses owned by women, minorities, or rural telephone companies
that qualify as small businesses) and other entities determined to be
eligible on a service-specific basis, which are high bidders for
licenses specified by the Commission, to pay the full amount of their
high bids in installments over the term of their licenses pursuant to
the following:
(1) Unless otherwise specified, each eligible applicant paying for
its license(s) on an installment basis must deposit by wire transfer or
cashier's check in the manner specified in Sec. 1.2107(b) sufficient
additional funds as are necessary to bring its total deposits to ten
(10) percent of its winning bid(s) within five (5) business days after
the Commission has declared it the winning bidder and closed the
bidding. Failure to remit the required payment will make the bidder
liable to pay penalties pursuant to Sec. 1.2104(g)(2).
(2) Within five (5) business days of the grant of the license
application of a winning bidder eligible for installment payments, the
licensee shall pay another ten (10) percent of the high bid, thereby
commencing the eligible licensee's installment payment plan. Failure to
remit the required payment will make the bidder liable to pay penalties
pursuant to Sec. 1.2104(g)(2).
(3) Upon grant of the license, the Commission will notify each
eligible licensee of the terms of its installment payment plan. Unless
other terms are specified in the rules of particular services, such
plans will:
(i) impose interest based on the rate of U.S. Treasury obligations
(with maturities closest to the duration of the license term) at the
time of licensing;
(ii) allow installment payments for the full license term;
(iii) begin with interest-only payments for the first two years;
and
(iv) amortize principal and interest over the remaining term of the
license.
(4) A license granted to an eligible entity that elects installment
payments shall be conditioned upon the full and timely performance of
the licensee's payment obligations under the installment plan.
(i) If an eligible entity making installment payments is more than
ninety (90) days delinquent in any payment, it shall be in default.
(ii) Upon default or in anticipation of default of one or more
installment payments, a licensee may request that the Commission permit
a three to six month grace period, during which no installment payments
need be made. In considering whether to grant a request for a grace
period, the Commission may consider, among other things, the licensee's
payment history, including whether the licensee has defaulted before,
how far into the license term the default occurs, the reasons for
default, whether the licensee has met construction build-out
requirements, the licensee's financial condition, and whether the
licensee is seeking a buyer under an authorized distress sale policy.
If the Commission grants a request for a grace period, or otherwise
approves a restructured payment schedule, interest will continue to
accrue and will be amortized over the remaining term of the license.
(iii) Following expiration of any grace period without successful
resumption of payment or upon denial of a grace period request, or upon
default with no such request submitted, the license will automatically
cancel and the Commission will initiate debt collection procedures
pursuant to Part 1, Subpart O.
(f) The Commission may award bidding credits (i.e., payment
discounts) to eligible designated entities. Competitive bidding rules
applicable to individual services will specify the designated entities
eligible for bidding credits, the licenses for which bidding credits
are available, the amounts of bidding credits and other procedures.
(g) The Commission may establish different upfront payment
requirements for categories of designated entities in competitive
bidding rules of particular auctionable services.
(h) The Commission may offer designated entities a combination of
the available preferences or additional preferences.
(i) Designated entities must describe on their long-form
applications how they satisfy the requirements for eligibility for
designated entity status, and must list and summarize on their long-
form applications all agreements that effect designated entity status,
such as partnership agreements, shareholder agreements, management
agreements and other agreements, including oral agreements, which
establish that the designated entity will have both de facto and de
jure control of the entity. Such information must be maintained at the
licensees' facilities or by their designated agents for the term of the
license in order to enable the Commission to audit designated entity
eligibility on an ongoing basis.
(j) The Commission may, on a service-specific basis, permit
consortia, each member of which individually meets the eligibility
requirements, to qualify for any designated entity provisions.
(k) The Commission may, on a service-specific basis, permit
publicly-traded companies that are owned by members of minority groups
or women to qualify for any designated entity provisions.
Sec. 1.2111 Assignment or transfer of control: unjust enrichment.
(a) Reporting requirement. An applicant seeking approval for a
transfer of control or assignment (otherwise permitted under the
Commission's Rules) of a license within three years of receiving a new
license through a competitive bidding procedure must, together with its
application for transfer of control or assignment, file with the
Commission's statement indicating that its license was obtained through
competitive bidding. Such applicant must also file with the Commission
the associated contracts for sale, option agreements, management
agreements, or other documents disclosing the local consideration that
the applicant would receive in return for the transfer or assignment of
its license. This information should include not only a monetary
purchase price, but also any future, contingent, in-kind, or other
consideration (e.g., management or consulting contracts either with or
without an option to purchase; below market financing).
(b) Unjust enrichment payment: set-aside. As specified in this
paragraph an applicant seeking approval for a transfer of control or
assignment (otherwise permitted under the Commission's Rules) of a
license acquired by the transferor or assignor pursuant to a set-aside
for eligible designated entities under Sec. 1.2110(c), or who proposes
to take any other action relating to ownership or control that will
result in loss of status as an eligible designated entity, must seek
Commission approval and may be required to make an unjust enrichment
payment (Payment) to the Commission by cashier's check or wire transfer
before consent will be granted. The Payment will be based upon a
schedule that will take account of the term of the license, any
applicable construction benchmarks, and the estimated value of the set-
aside benefit, which will be calculated as the difference between the
amount paid by the designated entity for the license and the value of
comparable non-set-aside license in the free market at the time of the
auction. The Commission will establish the amount of the Payment and
the burden will be on the applicants to disprove this amount. No
payment will be required if:
(1) The license is transferred or assigned more than five years
after its initial issuance, unless otherwise specified; or
(2) The proposed transferee or assignee is an eligible designated
entity under Sec. 1.2110(c) or the service-specific competitive bidding
rules of the particular service, and so certifies.
(c) Unjust enrichment payment: installment financing. An applicant
seeking approval for a transfer of control or assignment (otherwise
permitted under the Commission's Rules) of a license acquired by the
transferor or assignor through a competitive bidding procedure
utilizing installment financing available to designated entities under
Sec. 1.2110(d) will be required to pay the full amount of the remaining
principal balance as a condition of the license transfer. No payment
will be required if the proposed transferee or assignee assumes the
installment payment obligations of the transferor or assignor, and if
the proposed transferee or assignee is itself qualified to obtain
installment financing under Sec. 1.2110(d) or the service-specific
competitive bidding rules of the particular service, and so certifies.
(d) Unjust enrichment payment: bidding credits. An applicant
seeking approval for a transfer of control or assignment (otherwise
permitted under the Commission's Rules) of a license acquired by the
transferor or assignor through a competitive bidding procedure
utilizing bidding credits available to eligible designated entities
under Sec. 1.2110(e) or who proposes to take any other action relating
to ownership or control that will result in loss of status as an
eligible designated entity, must seek Commission approval and will be
required to make an unjust enrichment payment (Payment) to the
government by wire transfer or cashier's check before consent will be
granted. The Payment will be the sum of the amount of the bidding
credit plus interest at the rate applicable for installment financing
in effect at the time the license was awarded. See Sec. 1.2110(e). No
payment will be required if the proposed transferee or assignee is an
eligible designated entity under Sec. 1.2110(e) or the service-specific
competitive bidding rules of the particular service, and so certifies.
[FR Doc. 94-21182 Filed 8-25-94; 8:45 am]
BILLING CODE 6712-01-M
