[Federal Register Volume 62, Number 180 (Wednesday, September 17, 1997)]
[Rules and Regulations]
[Pages 48787-48797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24789]
-----------------------------------------------------------------------
FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 101
[CC Docket No. 92-297; FCC 97-323]
The Local Multipoint Distribution Service (``LMDS'')
AGENCY: Federal Communications Commission.
ACTION: Final rule; order on reconsideration
-----------------------------------------------------------------------
SUMMARY: On September 9, 1997, the Federal Communications Commission
adopted a Second Order on Reconsideration amending certain rules
pertaining to Local Multipoint Distribution Service (``LMDS'')
operations in the 27.5-28.35 GHz, 29.1-29.25 GHz, and 31.0-31.3 GHz
bands. These amendments are being made in response to certain petitions
for reconsideration of the Second Report and Order in this proceeding
which established rules and policies for LMDS. The effect of this
action is to make amendments to the rules regarding favorable small
business provisions available to qualifying applicants for LMDS
licenses.
EFFECTIVE DATE: November 17, 1997.
FOR FURTHER INFORMATION CONTACT: Matthew Moses, Wireless
Telecommunications Bureau, (202) 418-0660.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Second
Order on Reconsideration in CC Docket No. 92-297, FCC 97-323. The
complete Second Order on Reconsideration is available for inspection
and copying during normal business hours in the FCC Reference Center
(Room 239), 1919 M Street, N.W., Washington, D.C., and also may be
purchased from the Commission's copy contractor, International
Transcription Service, Inc., (202) 857-3800, 1231 20th Street, N.W.,
Washington, D.C. 20036. The complete Second Order on Reconsideration is
also available on the Commission's Internet home page (http://
www.fcc.gov).
SUMMARY of THE SECOND ORDER on RECONSIDERATION
1. The Commission has before it several petitions for
reconsideration of the Second Report and Order, Order on
Reconsideration, and Fifth Notice of Proposed Rulemaking in this
proceeding. Rulemaking To Amend Parts 1, 2, 21, and 25 of the
Commission's Rules To Redesignate the 27.5-29.5 GHz Frequency Band, To
Reallocate the 29.5-30.0 GHz Frequency Band, To Establish Rules and
Policies for Local Multipoint Distribution Service and for Fixed
Satellite Services, Petitions for Reconsideration of the Denial of
Applications for Waiver of the Commission's Common Carrier Point-to-
Point Microwave Radio Service Rules, CC Docket No. 92-297, Suite 12
Group Petition for Pioneer Preference, PP-22, Second Report and Order,
Order on Reconsideration, 62 FR 23148 (April 29, 1997), and Fifth
Notice of Proposed Rulemaking, 62 FR 16514 (April 7, 1997) (``LMDS
Second Report and Order'') (``Fifth Notice of Proposed Rulemaking'')
(``Order on Reconsideration''), adopting subpart L of part 101 of the
Commission's rules, 47 CFR 101.1001-1112; appeal pending sub nom.
Melcher v. FCC, Case Nos. 93-1110, et al. (D.C. Cir., filed February 8,
1993) (eligibility restrictions); Errata (released April 7 and May 1,
1997); Order on Reconsideration, 62 FR 28373 (May 23, 1997). The
Commission defers the comments and all matters raised for comment in
the Fifth Notice of Proposed Rulemaking to a separate Report and Order
to be issued in the near future. CellularVision USA, Inc.
(``CellularVision''), WebCel Communications, Inc. (``WebCel''), Cook
Inlet Region, Inc. (``Cook Inlet''), LBC Communications, Inc.
(``LBC''), the Rural Telecommunications Group (``RTG''), the
Independent Alliance, and Sierra Digital Communications, Inc. filed
petitions for reconsideration of the LMDS Second Report and Order. LDH
International, Inc., Celltel Communications Corporation, and CT
Communications Corporation jointly filed a petition for reconsideration
of the Order on Reconsideration, and M3 Illinois Telecommunications
Corporation filed a petition for review of the Order on
Reconsideration. This Second Order on Reconsideration addresses those
portions of the petitions of CellularVision, WebCel, and Cook Inlet
that deal with the participation of small businesses in the upcoming
auction of LMDS licenses.
2. In authorizing the Commission to use competitive bidding,
Congress mandated that the Commission ``ensure that small businesses,
rural telephone
[[Page 48788]]
companies, and businesses owned by members of minority groups and women
are given the opportunity to participate in the provision of spectrum-
based services.'' Section 309(j)(4)(D) of the Communications Act of
1934, as amended (``Communications Act''), 47 U.S.C. 309(j)(4)(D).
These categories are collectively known as ``designated entities.''
Noting the lack of a record to support special provisions for
businesses owned by members of minority groups and women, the
Commission adopted provisions for small businesses in the belief that
they would also assist minority-and women-owned entities, many of which
are small businesses. For the reasons set forth below, the Commission
reconsiders and modifies certain rules affecting small business
participation in the LMDS license auction. Specifically, the
Commission:
Eliminates installment payments for LMDS licensees in
favor of revised, tiered bidding credits for very small, small, and
entrepreneurial businesses participating in this auction;
Denies a request to adopt an ``asset test'' for evaluating
business size; and
Declines to further address the qualifications of
licensees that are delinquent or in default on FCC licenses in other
services for obtaining favorable provisions for this auction.
Those portions of the aforementioned petitions that do not deal with
the small business participation rules will be addressed in a separate
Commission ruling.
3. In the LMDS Second Report and Order, the Commission adopted
service and competitive bidding rules for LMDS which included, inter
alia, provisions designed to assist two distinct sizes of small
businesses and entities. Entities with average gross revenues for the
preceding three years of more than $40 million but not more than $75
million hereinafter are referred to as ``entrepreneurs.'' The
Commission notes that this is the first time in the LMDS proceeding in
which the term ``entrepreneurs'' has been used to refer to entities
with average gross revenues for the preceding three years of more than
$40 million but not more than $75 million. A small business is defined
as ``an entity that, together with its affiliates and controlling
principals, has average gross revenues for the three preceding years of
not more than $40 million.'' For entrepreneurs, the Commission made
available 15 percent bidding credits and installment payments at the
same interest rate as for small businesses. Installment payments for
entrepreneurs consist of both interest and principal amortized over the
ten years of the license term. Small businesses are eligible for 25
percent bidding credits and installment payments, the interest rate for
which is based on the rate for ten-year U.S. Treasury obligations,
fixed at the time of licensing, plus 2.5 percent. Installment payments
for small businesses consist of interest-only payments for the first
two years, and interest and principal amortized over the remaining
eight years of the license term.
4. CellularVision, WebCel, and Cook Inlet request that the
Commission reconsider certain aspects of the small business provisions
established in the LMDS Second Report and Order. These petitioners also
variously seek reconsideration of other aspects of the LMDS rules, but
this proceeding addresses only their designated entity proposals. Zip
Communications Corporation (``Zip''), RTG, and CellularVision filed
oppositions to various portions of these petitions. Bell Atlantic
Corporation also opposes the WebCel Petition, which it characterizes as
an ``effort to suppress bidding competition,'' but does not
specifically address WebCel's arguments regarding designated entity
provisions. WebCel and CellularVision also replied to some of the
oppositions. Finally, the Commission received ex parte communications
from the National Venture Capital Association (``NVCA''), U.S. WaveLink
Telecommunications Group, L.P. (``U.S. WaveLink''), WebCel,
CellularVision, and LBC. Petitions for judicial stay of the LMDS Second
Report and Order have also been filed. Those cases have since been
consolidated in the U.S. Court of Appeals for the District of Columbia
in Melcher v. FCC.
I. Commencement of the Auction
5. Petitions. U.S. WaveLink urges the Commission to announce that
the LMDS auction will begin no later than November, 1997, believing
expedition imperative to ensure sound business planning. U.S. WaveLink
asserts that the LMDS auction is already long overdue, that capital
markets have been poised to invest, and that further delay will dampen
investors' interest, slow the delivery of innovative video programming
and telecommunications services to the public, and irreparably harm
competition in LMDS and in the video programming and telecommunications
markets in which LMDS licensees seek to compete. U.S. WaveLink notes
that it has already been several months since the Commission last
directed the Wireless Telecommunications Bureau to implement procedures
for auctioning LMDS licenses pursuant to the LMDS Second Report and
Order, and that it has been more than four years since the Commission
first proposed to authorize LMDS operation and almost a year since the
Commission designated spectrum for LMDS use. Zip also urges the
Commission to commence the LMDS auction as expeditiously as possible.
6. Discussion. The Commission agrees with U.S. WaveLink and Zip
regarding the need to move expeditiously to auction the LMDS licenses.
The Commission believes that the public will significantly benefit from
the availability of new services via LMDS and from the benefits of
competition between LMDS and established services. The Commission is
concerned that further delay may slow the delivery of new services to
the public and harm the growth of competition. The Commission also
wants to give sufficient time from the date of the release of this
Second Order on Reconsideration for potential bidders to arrange
financing. Therefore, the Commission has recently announced that the
LMDS auction will begin on December 10, 1997. This issue is therefore
moot.
II. Installment Payments
7. Petitions. Cook Inlet urges us to eliminate the installment
payment plans for LMDS licensees. Cook Inlet asserts that installment
payment plans fueled speculation in the broadband Personal
Communications Services (``PCS'') auctions, encouraged expectations of
Commission relief from payment obligations, and saddled the Commission
with difficult credit-related tasks for which it has no experience.
Cook Inlet Petition also notes the Commission's statement in the
current proceeding to modify its general competitive bidding rules:
We note that substituting a system of larger bidding credits
might eliminate the administrative and market concerns associated
with installment payments, while nonetheless ensuring opportunities
for small businesses to participate in auctions.
Amendment of Part 1 of the Commission's Rules--Competitive Bidding
Proceeding, WT Docket No. 97-82, Order, Memorandum Opinion and Order,
and Notice of Proposed Rule Making, 62 FR 13540 (March 21, 1997), at
para. 34 (``Part 1 Order and NPRM''). Cook Inlet further argues that
installment payment programs force the Commission to balance its duty
to regulate the provision of wireless services with its sometimes
conflicting obligation to manage the federal debt responsibly. To
ensure that small businesses have the opportunity to compete for LMDS
licenses, Cook Inlet urges the Commission to offer increased
[[Page 48789]]
bidding credits in place of installment payment plans, which it asserts
will allow responsible small bidders with appropriately tailored
business plans to secure private financing, without sacrificing market
driven bidding discipline.
8. CellularVision, WebCel, Zip and LBC oppose Cook Inlet's proposal
to eliminate installment payment plans for LMDS licensees.
CellularVision and WebCel argue that section 309(j)(4) of the
Communications Act requires the Commission to consider the use of
installment payments as a means of ensuring that licenses are held by a
wide variety of applicants, including small businesses. WebCel further
argues that installment payments were successful in past auctions, and
that in this proceeding the Commission lacks the requisite degree of
justification to eliminate them, citing 47 U.S.C. 309(j)(4)(A) and (D),
the Administrative Procedures Act, generally, and Motor Vehicle
Manufacturers Ass'n v. State Farm Mutual Ins. Co., 463 U.S. 29 (1983)
(``Motor Vehicle Manufacturers''). CellularVision, WebCel and LBC also
express doubts that private financing will be available or sufficient
for participation in the LMDS auction and subsequent build-out,
marketing and operations. Zip agrees with Cook Inlet that its proposal
would curb speculative bidding, but also believes that it would
eliminate any meaningful opportunity for small businesses to
participate in the LMDS auction. If the Commission does eliminate
installment payments for LMDS licensees, CellularVision proposes that
small businesses, as currently defined, receive a 50 percent bidding
credit in order to attract the necessary private financing to compete
in the LMDS auction.
9. Contrary to Cook Inlet's proposal, CellularVision asserts that
an additional, ``deferred incremental repayment'' installment payment
option, that takes into account the special resource-intensive
characteristics of LMDS, is necessary to ensure maximum small business
participation in the LMDS auction. Under CellularVision's proposal,
payments of interest, at a rate equal to a 10-year U.S. Treasury note,
would commence in year six, while payments of principal would commence
in year seven under an incremental structure of five percent in year
seven, 10 percent in years eight and nine, and the remaining 75 percent
in the final year. WebCel, for its part, suggests the creation of two
additional ``very small'' business categories which would include
proportionally favorable installment payment plans. Zip opposes
CellularVision's proposal, asserting that the elimination of any
immediate financial obligation would give bidders an incentive to
engage in speculation, and that it may encourage bidders to drive
prices beyond the range of small businesses, with the expectation that
the Commission will forgive the winners' debt obligations if they later
find that they have overreached. CellularVision asserts in reply that
the auction process itself virtually eliminates the possibility of
speculation.
10. Discussion. The Commission grants Cook Inlet's petition and
eliminates installment payment plans for LMDS licensees.
Notwithstanding the arguments of CellularVision and WebCel, Congress
did not require the use of installment payments in all auctions, but
rather recognized them as one means of promoting the objectives of
section 309(j)(3) of the Communications Act. Section 309(j)(4) of the
Communications Act states that the Commission shall, in prescribing
regulations pursuant to these objectives and others, ``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 that promote the objectives
described in paragraph (3)(B) * * * .'' 47 U.S.C. 309(j)(4)(A)
(emphasis added). The legislative history of section 309(j) of the
Communications Act indicates that:
While it is clear that, in many instances, the objectives of
section 309(j) will be best served by a traditional, ``cash-on-the-
barrelhead'' auction, it is important that the Commission employ
different methodologies as appropriate. Under this subsection, the
Commission has the flexibility to utilize any combination of
techniques that would serve the public interest.
Omnibus Budget Reconciliation Act of 1993, Report of the Committee on
the Budget, House of Representatives, to Accompany H.R. 2264, A Bill to
Provide for Reconciliation Pursuant to section 7 of the Concurrent
Resolution of the Budget for Fiscal Year 1994, May 25, 1993, at p. 255.
The Commission continues to experiment with different means for
achieving its obligations under the statute, and has offered
installment payments to licensees in several auctioned wireless
services. By no means, however, has Congress dictated that installment
payments are the only tool in assisting small business. Indeed, the
Commission has conducted several auctions without installment payments.
Moreover, in recent legislation, Congress dictated that certain future
auctions effectively be conducted without installment payments. Section
3001 of the Omnibus Consolidated Appropriations Act for 1997, Public
Law 104-208, 110 Stat. 3009 (1996) (``Omnibus Consolidated
Appropriations Act'') is one example. Another example is the Balanced
Budget Act of 1997, Public Law 105-33, 111 Stat. 251 (1997). Section
3007 of the Balanced Budget Act of 1997, which significantly amends
section 309(j) of the Communications Act, requires that:
The Commission shall conduct the competitive bidding required
under this title or the amendments made by this title in a manner
that ensures that all proceeds of such bidding are deposited in
accordance with section 309(j)(8) of the Communications Act of 1934
not later than September 30, 2002.
The Conference Report on the Balanced Budget Act of 1997 indicates that
the deadline set forth in section 3007 ``applies to all competitive
bidding provisions in this title of the conference agreement and any
amendments to other law made in this title.'' Conference Report on H.R.
2015, Balanced Budget Act of 1997, Congressional Record--House, Vol.
143, No. 109--Part II, at H6176. The Commission has carefully
considered the use of installment payment plans for LMDS licensees. The
Commission concludes that it can meet its statutory obligations absent
these provisions.
11. The Commission must balance competing objectives in section
309(j) that require that it promote the development and rapid
deployment of new spectrum-based services and ensure that designated
entities are given the opportunity to participate in the provision of
such services. In assessing the public interest, the Commission must
try to ensure that all the objectives of section 309(j) are considered.
While the Commission disagrees with Cook Inlet's contention that
installment payments necessarily encourage speculation, the
Commission's experience with the installment payment program leads it
to conclude that installment payments may not always serve the public
interest. The Commission has found, for example, that obligating
licensees to pay for their licenses as a condition of receipt requires
greater financial accountability from applicants. Amendment of Part 90
of the Commission's Rules to Facilitate Future Development of SMR
Systems in the 800 MHz Frequency Band, PR Docket No. 93-144, RM-8117,
RM-8030, RM-8029, Implementation of Section 3(n) and 322 of the
Communications Act--Regulatory Treatment of Mobile Services, GN Docket
No. 93-252, Implementation of
[[Page 48790]]
Section 309(j) of the Communications Act--Competitive Bidding, PP
Docket No. 93-253, Memorandum Opinion and Order, 62 FR 41225 (July 31,
1997) (``800 MHz MO&O'') at para. 130. The Commission is presently
examining issues relating to its administration of installment
payments, including those raised by Cook Inlet, in several other
proceedings. Because of the importance of these issues, the Commission
plans to incorporate its decisions regarding installment payments for
the broadband PCS C and F Blocks and other financial issues into its
part 1 rulemaking. Nevertheless, the Commission agrees with U.S.
WaveLink and Zip about the need to move expeditiously to auction the
LMDS licenses. The Commission believes that the public interest is best
served by going forward with the LMDS auction without extending
installment payments to LMDS licensees. In place of installment
payments, the Commission establishes other changes that will provide
for the interests of new entrants.
12. The Commission disagrees with the contentions of WebCel, LBC,
and Zip that installment payments are necessary to ensure a meaningful
opportunity for small businesses to participate in LMDS. In other
auctions in which installment payments were not available, small
businesses were the high bidders on a significant number of licenses.
In the Wireless Communications Service (``WCS'') auction, which had
bidding credits of 25 percent for small businesses and 35 percent for
very small businesses and no installment payments, 25 percent of the
licenses went to small or very small businesses. In the cellular
auction of licenses for unserved areas, which had no special bidding
provisions, 36 percent of the licenses went to small or very small
businesses. CellularVision, although expressing some doubts regarding
the ability of small businesses to attract private financing, suggests
that a large enough bidding credit would enable small businesses to do
so, while Cook Inlet contends that increased bidding credits will allow
responsible small bidders with appropriately tailored business plans to
secure private financing. WebCel, Cook Inlet, and NVCA also point out,
as discussed below, that LMDS may be built out incrementally, which may
allow for lower levels of front-end system financing than other
services. Further, as the Commission has already noted, section 309(j)
requires it to consider alternative methods to allow for dissemination
of licenses among designated entities, including small businesses. The
Commission believes that the methods discussed below will both fulfill
the mandate of section 309(j) to provide small business with the
opportunity to participate in auctions and ensure that new services are
offered to the public without delay.
13. Since the Commission has decided not to offer installment
payments, it rejects as moot both CellularVision's proposed deferred
incremental repayment and WebCel's suggestion of a favorable interest
rate for very small businesses. The Commission further disagrees with
WebCel that it lacks adequate justification to eliminate installment
payment plans for LMDS licensees under the Administrative Procedures
Act and Motor Vehicle Manufacturers. Section 706(2)(A) of the
Administrative Procedures Act states that agency actions, findings, and
conclusions shall be held unlawful and set aside if they are found to
be ``arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law * * *.'' Motor Vehicle Manufacturers held that this
standard is applicable to rescission or modification of rules. Under
Motor Vehicle Manufacturers and other cases, an agency acts arbitrarily
or capriciously if it fails to examine the relevant data and articulate
a satisfactory explanation for its action including a ``rational
connection between the facts found and the choices made.'' Motor
Vehicle Manufacturers, 463 U.S. at 43, citing Burlington Truck Lines v.
United States, 371 U.S. 156 (1962). Motor Vehicle Manufacturers also
acknowledged that `` `regulatory agencies do not establish rules of
conduct to last forever,' * * * and that an agency must be given ample
latitude to `adapt their rules and policies to the demands of changing
circumstances.' '' Motor Vehicle Manufacturers, 463 U.S. at 42
(citations omitted). The Commission has fully considered the issue
based on its experience with installment payment plans and the record
before it in this proceeding.
III. Very Small Business Category
14. Petitions. In place of the current installment payment plan,
Cook Inlet requests the institution of a ``very small business''
category, featuring a 35 percent bidding credit, for entities that,
together with affiliates and controlling principals, have average gross
revenues for the preceding three years of not more than $15 million.
Cook Inlet opines that while substantial capital will be necessary to
acquire and construct LMDS systems, LMDS may provide better
opportunities for smaller entities than did broadband PCS because LMDS
operators will be able to build out systems incrementally without
compromising their provision of service to end users. Cook Inlet notes
the examples of wireless local loop or video offerings, in which it
asserts that ``a smaller system may stand on its own on a more
localized basis without the need for immediate `total area' coverage or
even national systems support.''
15. NVCA and WebCel also advocate very small business categories,
although not in place of installment payments, arguing that the fixed
nature of LMDS service allows cell sites and network infrastructure to
be deployed incrementally to match revenue generation. Therefore, the
initial capital-raising requirements for one or a few markets are not
as formidable as services that require extensive buildout before they
are put into service. NVCA also asserts that because the fixed nature
of LMDS obviates the need for nationwide roaming and national branding,
very small businesses can be successful with only one or a few
licenses. NVCA characterizes LMDS as potentially ``one of the best new
venture opportunities for locally-owned small businesses and
entrepreneurial start-ups to enter the telecommunications industry.''
Both NVCA and WebCel express concern that without a very small business
category, entrepreneurial entities with differentiated business plans
and adequate venture financing, who would otherwise succeed in building
local LMDS businesses, will be outbid by much larger entities that
currently qualify for the same provisions. WebCel consequently requests
the adoption of a very small business category for entities with
average gross revenues for the three preceding years of not more than
$15 million, and an additional very small business category for
entities with average gross revenues for the three preceding years of
not more than $3 million, and seeks advantageous installment payment
rates and bidding credits for these categories. RTG concurs with
parties advocating inclusion of a very small business category in the
LMDS auction, asserting that LMDS is capital-intensive and that small
businesses will not be able to afford licenses or effectively deploy
their systems without additional incentives.
16. CellularVision opposes implementation of WebCel's plan if it
would reduce current incentives for small businesses or entrepreneurs,
believing that any incentives granted for very small businesses must be
in addition to the current bidding credits and installment payment
plans for those entities. Zip also opposes WebCel's
[[Page 48791]]
proposal for a very small business category, without elaboration.
17. Discussion. The Commission will create an additional category
to benefit ``very small'' businesses bidding for LMDS licenses, along
the lines suggested by Cook Inlet, NVCA, WebCel, and RTG. The
Commission agrees that a unique category for very small businesses will
serve as an effective method of leveling the competitive imbalance
between very small businesses and other entrepreneurial entities. The
Commission will define ``very small'' businesses as entities that,
together with controlling principals and affiliates, have average gross
revenues for the three preceding years of not more than $15 million.
The Commission will also re-define ``small'' businesses as entities
that, together with controlling principals and affiliates, have average
gross revenues for the three preceding years of more than $15 million
but not more than $40 million. These categories are identical to those
adopted for the broadband PCS F Block auction, as petitioners argue.
The Commission will apply to the very small business category the same
attribution, control, consortia, upfront payment, and unjust enrichment
rules that it adopted for its small business and entrepreneur
categories.
18. The Commission declines to adopt WebCel's suggestion of another
category for entities that, together with controlling principals and
affiliates, have average gross revenues for the three preceding years
of not more than $3 million. Under the revised ``tiered'' approach, the
Commission will have three categories of bidders: ``entrepreneurs,''
``small businesses,'' and ``very small businesses.'' Creating an
additional category (i.e., ``very, very small'' businesses) adds
another layer of complexity with little countervailing benefit to
bidders. The Commission believes that the three categories will
adequately serve to diversify opportunity in its LMDS auction.
IV. Bidding Credits
19. Petitions. As previously described, Cook Inlet supports
heightened bidding credits in lieu of installment payment plans for
LMDS licenses. Specifically, Cook Inlet suggests the establishment of
the aforementioned very small business category with a 35 percent
bidding credit, and the retention of a 25 percent bidding credit for
small businesses and a 15 percent bidding credit for entrepreneurs.
Cook Inlet asserts that ``increased bidding credits such as these'' are
appropriate in the absence of installment payment plans. To the extent
that installment payments are no longer available for LMDS licensees,
CellularVision proposes a 50 percent bidding credit for small
businesses, as currently defined, in order to attract the necessary
private financing to compete in the LMDS auction. WebCel requests that
the Commission offer either a bidding credit of 35 percent for its two
very small business categories, or adopt the tiered scheme employed for
the broadband PCS F Block auction--a 25 percent bidding credit for very
small businesses, a 15 percent bidding credit for small businesses, and
no bidding credit for entrepreneurs.
20. Discussion. The Commission will offer higher bidding credits
than those adopted in the LMDS Second Report and Order for small
businesses and entrepreneurs. The Commission agrees with Cook Inlet and
CellularVision that heightened bidding credits are appropriate in the
absence of installment payment plans. Also, contrary to WebCel's
assertions, the Commission believes that heightened bidding credits
will fulfill the mandate of section 309(j)(4)(D) of the Communications
Act to provide small businesses with the opportunity to participate in
spectrum-based services. As noted above, this approach was successful
in enabling small businesses to participate in the WCS auction, in
which the Commission was unable to employ installment payments because
of the statutory deadline for depositing auction revenues in the U.S.
Treasury. The Commission also recently used this approach in
establishing rules for the auction of licenses for 800 MHz Specialized
Mobile Radio (``SMR''). However, the Commission does not agree with the
bidding credit levels suggested by the petitioners. Except for entities
that would qualify as very small businesses, Cook Inlet's proposed
levels would not account for the loss of installment payment plans.
WebCel's alternative suggestion of conforming the LMDS bidding credit
levels to those employed in the broadband PCS F Block auction would
entail reducing the bidding credits available to small businesses and
entrepreneurs at the same time that the Commission is eliminating
installment payments. CellularVision has not provided any support for
its assertion that small businesses will require a 50 percent bidding
credit to attract private financing.
21. The Commission will raise the bidding credit available to small
businesses (entities with average gross revenues for the three
preceding years of more than $15 million but not more than $40 million)
to 35 percent and the bidding credit available to entrepreneurs
(entities with average gross revenues for the preceding three years of
more than $40 million but not more than $75 million) to 25 percent.
These levels reflect the thresholds adopted in the LMDS Second Report
and Order, with a reasonable adjustment of ten percent for the
unavailability of installment payment plans for LMDS licensees. In
addition, the Commission will adopt a 45 percent bidding credit for
very small businesses (entities with average gross revenues for the
three preceding years of not more than $15 million) in the LMDS
auction. This level reflects the 35 percent threshold requested by
WebCel, plus a reasonable adjustment for the lack of bidding credits.
The Commission notes that it is difficult to accurately calculate the
net present value of an installment payment plan (which value would
depend on several variables, including future commercial interest
rates), and the Commission does not in any event commit to an exact
accommodation or reimbursement of the value of installment payments.
Nor does the Commission intend to exactly match its small business
provisions for LMDS to those employed in other services such as WCS or
800 MHz SMR. The Commission's small business provisions for LMDS have
historically deviated from those adopted for other services, and the
Commission believes that an effort to conform them to the provisions
adopted for other types of wireless services would be pointless.
V. Asset Test
22. Petitions. WebCel, Zip, and NVCA suggest the institution of an
asset test in the Commission's small business size standards to
differentiate start-ups from larger entities. WebCel's suggested asset
test would consist of a ``financial eligibility threshold'' excluding
firms with total assets in excess of $500 million, the measure of which
would include the value of other licenses held. Zip suggests financial
eligibility thresholds of $250 million for small businesses, and $500
million for entrepreneurs. Zip theorizes that the lack of discussion in
the LMDS Second Report and Order of the Commission's decision not to
adopt an asset threshold test, as well as the requirement in
Sec. 101.1109(c) of the Commission's rules that winning bidders'
records include asset information, indicates that the absence of an
asset test may have been an oversight. NVCA would have us apply the
$500 million threshold employed in other auctions.
23. Discussion. The Commission will not adopt an asset test for the
LMDS
[[Page 48792]]
auction. Although the Commission has adopted an asset test for
eligibility for particular blocks of licenses in broadband PCS
auctions, the Commission has never before employed an asset test for
eligibility for small business size standards. The Commission also
notes that the Small Business Administration, the rules of which have
formed the basis for much of its own consideration of small business
provisions, presently does not employ asset tests in its business size
standards except in the context of banks. Assets, being potentially
fluid and subject to inconsistent valuation (e.g., intangibles) are
generally much less ascertainable than gross revenues or numbers of
employees. The Commission further notes that it has never counted
licenses won in other auctions as assets for purposes of calculating
total assets, as requested by WebCel, and there would appear to be
significant questions of proper valuation (e.g., amortization
schedules) in doing so. Given the complexity and significance of the
issues associated with asset tests and the importance of proceeding
with the LMDS auction without further delay, the Commission do not feel
that it has enough data at this time to do adopt an asset test for
LMDS. However, the Commission will consider adopting an asset test in
future auctions in its part 1 rulemaking.
VI. Exclusion of Delinquent and Defaulted Debtors
24. Petitions. Cook Inlet suggests that licensees that are
delinquent or in default on their installment payment obligations in
other services should be ineligible for special bidding provisions in
LMDS. Cook Inlet's limitation would also apply to the delinquent and/or
defaulting licensees' affiliates and attributable investors. Cook Inlet
considers this particularly appropriate if installment payment plans
are not offered, believing that a bidder that is prepared to pay in
full should be required to dedicate those funds to the satisfaction of
an existing Commission obligation before acquiring new licenses. Cook
Inlet asserts that ``bidders should not expect that delinquency or
default exists as a money management system in one auction without
consequence in another.'' Cook Inlet accordingly suggests that the
Commission require entities that are seeking favorable provisions in
the LMDS auction to certify on their short-form applications (FCC Form
175) that neither they nor their affiliates or attributable investors
are delinquent or in default on any Commission competitive bidding
installment payment obligation.
25. Discussion. The Commission declines to further address the
qualifications of licensees that are delinquent or in default on other
FCC licenses for obtaining favorable provisions for the LMDS auction.
The Commission agrees with Cook Inlet that, as a matter of policy, it
may be desirable to exclude licensees that have defaulted on existing
obligations from further favorable small business provisions. However,
the Commission has already amended Sec. 1.2105(a) of its part 1 rules
to indicate that ``an applicant's signature on FCC Form 175 or its
electronic submission of this form will serve to certify that the
applicant is not in default on any payment for Commission licenses
(including down payments) and that it is not delinquent on any non-tax
debt owed to any federal agency.'' Moreover, Sec. 1.2105(a)(2)(v) of
the Commission's part 1 rules requires a certification that the
applicant is legally, technically, financially and otherwise qualified
to bid. The Commission therefore believes that its existing rules
address this issue.
VII. Supplemental Final Regulatory Flexibility Analysis
26. As required by the Regulatory Flexibility Act, 5 U.S.C. 603
(``RFA''), a Final Regulatory Flexibility Analysis (``FRFA'') was
incorporated in Appendix D of the LMDS Second Report and Order in this
proceeding. The Commission's Supplemental Final Regulatory Flexibility
Analysis (``SFRFA'') in this Second Order on Reconsideration reflects
revised or additional information to that contained in the FRFA, and
incorporates the FRFA by reference. The SFRFA is thus limited to
matters raised in petitions for reconsideration of the LMDS Second
Report and Order and addressed in the Second Order on Reconsideration.
This SFRFA conforms to the RFA, as amended by the Contract with America
Advancement Act of 1996 (``CWAAA''), Public Law 104-121, 110 Stat. 846
(1996). Title II of the CWAAA is the ``Small Business Regulatory
Enforcement Fairness Act of 1996,'' codified at 5 U.S.C. 601 et seq.
A. Need For, and Objectives of, the Second Order on Reconsideration
27. This Second Order on Reconsideration is issued in response to
certain petitions for reconsideration of the LMDS Second Report and
Order. The revisions in the Commission's rules made in the Second Order
on Reconsideration are intended to address concerns raised in the
record concerning the competitive bidding rules for LMDS, while
otherwise reaffirming the Commission's commitment to the rapid
implementation of LMDS throughout the United States.
B. Summary of Significant Issues Raised by the Public Comments in
Response to the Final Regulatory Flexibility Statement
28. No comments were received in direct response to the FRFA, but
the Second Order on Reconsideration addresses three petitions for
reconsideration of the LMDS Second Report and Order that raise issues
affecting small businesses. One petitioner asks that the Commission
reconsider its rules making installment payments available to small
business LMDS licensees and replace the installment payment plans with
heightened bidding credits. Contrary to that request, another
petitioner requests that the Commission augment its LMDS installment
payment plan with an additional ``deferred incremental repayment''
installment payment option delaying payment of principal until late in
the license term. One petitioner supporting retention of installment
payments alternatively suggests that the Commission adopt higher
bidding credits if installment payments are eliminated. Two petitioners
ask that the Commission reconsider its rules defining small business
size categories and that it consider establishing additional categories
for very small businesses, with heightened bidding credits and/or more
favorable installment payment terms. One of those petitioners also
requests that the Commission adopt an asset test to distinguish between
the various existing and proposed small business size categories.
Finally, one petitioner asks that the Commission hold licensees that
are delinquent or in default on their installment payment obligations
in other services ineligible for special bidding preferences in LMDS.
Oppositions, replies to oppositions, and ex parte comments were filed
in response to the petitions and were considered before a decision was
reached.
C. Description and Estimate of the Number of Small Entities to Which
Rules Will Apply
29. As in the FRFA, the service regulations the Commission adopts
to implement LMDS would apply to all entities seeking an LMDS license.
As discussed in the FRFA, using the Small Business Administration
(``SBA'') definitions applicable to radiotelephone
[[Page 48793]]
companies and to cable and pay television services, the majority of
LMDS entities to provide video distribution and telecommunications
services may be small businesses. See FRFA at 8-10.
30. The commission had not developed a more refined definition of
small entities applicable to LMDS prior to the LMDS Second Report and
Order because LMDS is a new service. The RFA amendments were not in
effect until shortly before the Fourth NPRM in this proceeding was
released. Rulemaking to Amend Parts 1, 2, 21, and 25 of the
Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to
Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and
Policies for Local Multipoint Distribution Service and for Fixed
Satellite Services, CC Docket No. 92-297, First Report and Order and
Fourth Notice of Proposed Rulemaking, 61 FR 39425 (July 29, 1996). No
data has been received establishing the number of small businesses
associated with LMDS. However, in the Third NPRM in this proceeding,
the Commission proposed to auction the spectrum for assignment and
requested information regarding the potential number of small
businesses interested in obtaining LMDS spectrum, in order to determine
their eligibility for special provisions such as bidding credits and
installment payments to facilitate participation of small entities in
the auction process. Rulemaking to Amend Parts 1, 2, 21, and 25 of the
Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to
Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and
Policies for Local Multipoint Distribution Service and for Fixed
Satellite Services, CC Docket No. 92-297, and Suite 12 Petition for
Pioneer's Preference, PP-22, Third Notice of Proposed Rulemaking and
Supplemental Tentative Decision, 60 FR 43740 (August 23, 1995) (``Third
NPRM''). In the LMDS Second Report and Order the Commission adopted
criteria for defining small businesses for purposes of determining such
eligibility. The Commission will use this definition for estimating the
potential number of entities applying for auctionable spectrum that are
small businesses.
31. In Section II.D.2.e. of the LMDS Second Report and Order the
Commission adopted criteria for defining small businesses and other
eligible entities for purposes of defining eligibility for bidding
credits and installment payments. The Commission defined a small
business as an entity that, together with affiliates and controlling
principals, has average gross revenues not exceeding $40 million for
the three preceding years. Additionally, bidding credits and
installment payments were made available to applicants that, together
with affiliates and controlling principals, have average gross revenues
for the three preceding years of more than $40 million but not more
than $75 million (``entrepreneurs''). In the Second Order on
Reconsideration the Commission adopts a ``very small business''
category. A very small business is defined as an entity that, together
with controlling principals and affiliates, has average annual gross
revenues for the three preceding years of not more than $15 million.
These entities were previously included within the small business
definition. The SBA has not yet approved these definitions in the
context of LMDS. The definitions have received SBA approval in the
context of broadband Personal Communications Services (``PCS'').
32. No parties submitting or commenting on the petitions giving
rise to the Second Order on Reconsideration commented on the potential
number of entities that would be very small businesses, and the
Commission is unable to predict accurately the number of applicants for
LMDS that would fit the definition of a small business or very small
business for competitive bidding purposes. However, in the FRFA, the
Commission estimated the number of applicants that are small businesses
based on the rules for the Multipoint Distribution Service (``MDS''),
which use the same size standard as was adopted for LMDS. In MDS, a
small business is ``an entity that together with its affiliates has
average annual gross revenues that are not more than $40 million for
the preceding three years.'' Amendment of Parts 21 and 74 of the
Commission's Rules With Regard to Filing Procedures in the Multipoint
Distribution Service and in the Instructional Fixed Television Service,
MM Docket No. 94-131, Implementation of Section 309(j) of the
Communications Act--Competitive Bidding, PP Docket No. 93-253, Report
and Order, 60 FR 36524 (July 17, 1995), adopting 47 CFR
Sec. 21.961(b)(1). A total of 154 applications were received in the MDS
auction, of which 141, or 92 percent, qualified as small businesses.
MDS rules did not provide a very small business definition. The
Commission notes, however, that in the broadband PCS F Block rules, it
adopted a very small business definition like the one adopted for LMDS.
Amendment of Parts 20 and 24 of the Commission's Rules--Broadband PCS
Competitive Bidding and the Commercial Mobile Radio Service Spectrum
Cap, WT Docket No. 96-59, Amendment of the Commission's Cellular/PCS
Cross-Ownership Rule, GN Docket No. 90-314, Report and Order, 61 FR
33859 (July 1, 1996), adopting 47 CFR Sec. 24.720(b)(2). In the
broadband PCS F Block auction, 53.9 percent of the applicants were very
small businesses. Specifically, 82 of 152 applicants in the broadband
PCS F Block auction, and 70 of the 125 winners (56 percent), were very
small businesses.
33. The Commission plans to issue two licenses for each of the 492
BTAs, excluding New York, that are the geographic basis for licensing
LMDS. Thus, 984 licenses will be made available for authorization in
the LMDS auction. Inasmuch as 92 percent of the applications received
in the MDS auction were from entities qualifying as small businesses,
the Commission anticipates receiving at least the same proportion of
applications from small business entities seeking LMDS licenses.
Further, as many as 53.9 percent of these entities could be very small
businesses.
D. Description of Projected Reporting, Recordkeeping, and Other
Compliance Requirements
34. These descriptions will remain unchanged, for purposes of this
Second Order on Reconsideration, from those in the FRFA.
E. Steps Taken to Minimize Significant Economic Impact on Small
Entities, and Significant Alternatives Considered
35. While installment payment plans for small entities in LMDS are
eliminated in the Second Order on Reconsideration, the Commission found
that better alternatives to assist small businesses, as well as ensure
provision of new services to the public, are to raise bidding credits
for existing categories of small entities and adopt an additional
category for very small businesses. The Commission agrees with the
suggestions of two petitioners that bidding credits of sufficient size
will enable small businesses to secure private financing. This
suggestion is consistent with the Commission's experience in other
auctions in which installment payments were not offered and small
entities nevertheless have been successful. The Commission notes, for
example, the auction of Wireless Communications Service licenses, for
which bidding credits were heightened to accommodate the lack of
installment payments. Amendment of the Commission's Rules to Establish
Part 27, the Wireless Communications Service (``WCS''), GN Docket No.
96-228, Report and Order, 62 FR 9636 (March 3, 1997).
[[Page 48794]]
Prior to the Second Order on Reconsideration, bidding credits of 15
percent were offered to entrepreneurs, and 25 percent to small
businesses. The Commission now offers bidding credits of 25 percent for
entrepreneurs, 35 percent for small businesses, and 45 percent for very
small businesses. As noted in the Second Order on Reconsideration, it
is difficult to calculate accurately the net present value of an
installment payment plan (which value would depend on several
variables, including future commercial interest rates), and the
Commission does not in any event commit to an exact accommodation or
reimbursement of the value of installment payments. Additionally, the
adoption of a category for very small businesses, featuring a bidding
credit higher than those offered to small businesses and entrepreneurs,
will serve as an effective method of leveling the competitive imbalance
between those entities, as well as allowing very small businesses to
compete more effectively with large entities. Since the Commission
decided not to offer installment payments in LMDS, it rejected as moot
both the suggestion of a deferred incremental repayment option and the
suggestion of a favorable interest rate for very small businesses.
36. The Commission disagreed with the assertion that small
businesses would require a 50 percent bidding credit to attract private
financing in the absence of installment payments. This assertion is
unsupported and is at odds with the levels suggested by another
petitioner as being sufficient to attract private financing without
installment payments. The levels of bidding credits adopted offer a
reasonable accommodation for the elimination of installment payments
and constitute a reasonable compromise between the levels suggested in
lieu thereof. Also, although adopting the suggestion of an additional
category for very small businesses, the Commission rejected the
suggestion of a second additional category for entities that, together
with controlling principals and affiliates, have average annual gross
revenues for the three preceding years of not more than $3 million.
This suggestion, which was part of an ex parte comment and not
significantly elucidated, would create, in essence, a ``very, very
small business'' category that would add another layer of complexity
with little apparent countervailing benefit to bidders.
37. The Commission also declined to adopt an asset test to
distinguish between the small business size categories. Assets, being
potentially fluid and subject to inconsistent valuation, are generally
less ascertainable than gross revenues or numbers of employees.
Although the Commission has adopted an asset test for eligibility for
particular blocks of licenses in broadband PCS auctions, it has never
employed an asset test in its small business size standards. Nor does
the SBA employ an asset test in its business size standards, except in
the context of national and commercial banks, savings institutions, and
credit unions (for which asset reporting obligations exist for other
regulatory purposes). 13 CFR Sec. 121.201, Standard Industrial
Classifications 6021-6082 and n.7.
38. Finally, the Commission declined to further address the
qualifications of licensees that are delinquent or in default on FCC
licenses in other services for obtaining favorable provisions for the
LMDS auction. While the Commission agrees that, as a matter of policy,
it may be desirable to exclude licensees that have defaulted on
existing obligations from further small business provisions, its
existing rules already address this issue. An applicant's signature on
FCC Form 175 or its electronic submission of that form serves to
certify that the applicant is not in default on any payment for
Commission licenses (including down payments), that it is not
delinquent on any non-tax debt owed to any federal agency, and that it
is legally, technically, financially and otherwise qualified to bid. 47
CFR 1.2105(a)(2)(x) and (v).
VIII. Report to Congress
39. The Commission will enclose a copy of the Second Order on
Reconsideration, including this SFRFA, in a report to be sent to
Congress pursuant to the Small Business Regulatory Enforcement Fairness
Act. 5 U.S.C. 801(a)(1)(A). A copy of the Second Order on
Reconsideration and this SFRFA (or summary thereof) will also be
published in the Federal Register and will be sent to the Chief Counsel
for Advocacy of the SBA. 5 U.S.C. 604(b).
IX. Ordering Clauses
40. Accordingly, it is ordered that the Petition for Partial
Reconsideration filed by WebCel Communications, Inc., is granted in
part and denied in part; the Petition for Reconsideration filed by Cook
Inlet Region, Inc., is granted in part and denied in part; and the
Petition for Partial Reconsideration filed by CellularVision USA, Inc.,
is granted in part and denied in part.
41. It is further ordered that part 101 of the Commission's Rules
is amended as set forth below.
42. It is further ordered that the rule changes made herein will
become effective November 17, 1997. This action is taken pursuant to
Section 4(i), 303(r) and 309(j) of the Communications Act of 1934, as
amended, 47 U.S.C. 154(i), 303(r) and 309(j).
43. It is further ordered that the Commission shall send a copy of
this Second Order on Reconsideration, including the Supplemental Final
Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of
the Small Business Administration.
List of Subjects in 47 CFR Part 101
Fixed microwave service.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Rule Changes
Part 101 of title 47 of the Code of Federal Regulations is amended
as follows:
PART 101--FIXED MICROWAVE SERVICE
1. The authority citation continues to read as follows:
Authority: 47 U.S.C. Sections 154, 303.
2. Section 101.1105 is revised to read as follows:
Sec. 101.1105 Submission of payments.
(a) Each applicant to participate in an LMDS auction will be
required to submit an upfront payment in accordance with Sec. 1.2106 of
this chapter as announced by the Wireless Telecommunications Bureau by
Public Notice.
(b) Winning bidders in LMDS auctions must submit a down payment to
the Commission in an amount sufficient to bring their total deposits up
to 20 percent of their winning bids within ten business days following
the release of a Public Notice announcing the close of the auction.
Winning bidders must pay the full balance of their winning bids within
ten business days following the release of a Public Notice that the
Commission is prepared to award the licenses.
3. Section 101.1107 is revised to read as follows:
Sec. 101.1107 Bidding credits for very small businesses, small
businesses and entrepreneurs; unjust enrichment.
(a) A winning bidder that qualifies as a very small business or a
consortium of very small businesses pursuant to Sec. 101.1112 may use a
bidding credit of
[[Page 48795]]
45 percent to lower the cost of its winning bid.
(b) A winning bidder that qualifies as a small business or a
consortium of small businesses pursuant to Sec. 101.1112 may use a
bidding credit of 35 percent to lower the cost of its winning bid.
(c) A winning bidder that qualifies as an entrepreneur or a
consortium of entrepreneurs pursuant to Sec. 101.1112 may use a bidding
credit of 25 percent to lower the cost of its winning bid.
(d) The bidding credits referenced in paragraphs (a), (b) and (c)
of this section are not cumulative.
(e) Unjust enrichment.
(1) A licensee that utilizes a bidding credit, and that during the
initial license term seeks to assign or transfer control of a license
to an entity that does not meet the eligibility criteria for a bidding
credit, will be required to reimburse the U.S. Government for the
amount of the bidding credit, plus interest based on the rate for ten
year U.S. Treasury obligations applicable on the date the license is
granted, as a condition of Commission approval of the assignment or
transfer. If, within the initial term of the license, a licensee that
utilizes a bidding credit seeks to assign or transfer control of a
license to an entity that is eligible for a lower bidding credit, the
difference between the bidding credit obtained by the assigning party
and the bidding credit for which the acquiring party would qualify,
plus interest based on the rate for ten year U.S. Treasury obligations
applicable on the date the license is granted, must be paid to the U.S.
Government as a condition of Commission approval of the assignment or
transfer. If, within the initial license term, a licensee that utilizes
a bidding credit seeks to make any ownership change that would result
in the licensee losing eligibility for a bidding credit (or qualifying
for a lower bidding credit), the amount of the bidding credit (or the
difference between the bidding credit originally obtained and the
bidding credit for which the restructured licensee would qualify), plus
interest based on the rate for ten year U.S. Treasury obligations
applicable on the date the license is granted, must be paid to the U.S.
Government as a condition of Commission approval of the ownership
change.
(2) The amount of payments made pursuant to paragraph (e)(1) of
this section will be reduced over time as follows:
(i) A transfer in the first two years of the license term will
result in a forfeiture of 100 percent of the value of the bidding
credit (or the difference between the bidding credit obtained by the
original licensee and the bidding credit for which the post-transfer
licensee is eligible);
(ii) In year three of the license term the payment will be 75
percent;
(iii) In year four of the license term the payment will be 50
percent; and
(iv) In year five of the license term the payment will be 25
percent, after which there will be no required payment.
Sec. 101.1108 [Removed and reserved]
4. Section 101.1108 is removed and reserved.
5. Section 101.1109 is revised to read as follows:
Sec. 101.1109 Certifications, disclosures, records maintenance and
audits.
(a) Short-form applications: certifications and disclosure. In
addition to certifications and disclosures required in part 1, subpart
Q, of this chapter, each applicant for an LMDS license which qualifies
as a very small business, small business or entrepreneurs pursuant to
Sec. 101.1112 shall append the following information as an exhibit to
its short-form applications (FCC Form 175):
(1) The identities of the applicant's affiliates and controlling
principals; and
(2) The applicant's gross revenues, computed in accordance with
Sec. 101.1112.
(b) Long-form applications: certifications and disclosure. In
addition to the requirements in Sec. 1.2107 of this chapter, each
applicant submitting a long-form application for an LMDS license and
qualifying as a very small business, small business or entrepreneur
pursuant to Sec. 101.1112 shall, in an exhibit to its long-form
application:
(1) Disclose separately and in the aggregate the gross revenues,
computed in accordance with Sec. 101.1112, for each of the following:
the applicant, the applicant's affiliates, the applicant's controlling
principals, and, if a consortium of very small businesses, small
businesses or entrepreneurs, the members of the consortium;
(2) List and summarize all agreements or other instruments (with
appropriate references to specific provisions in the text of such
agreements and instruments) that support the applicant's eligibility as
a very small business, small business or entrepreneur, including the
establishment of de facto and de jure control; such agreements and
instruments include, but are not limited to, articles of incorporation
and bylaws, shareholder agreements, voting or other trust agreements,
franchise agreements, and any other relevant agreements including
letters of intent, oral or written; and
(3) List and summarize any investor protection agreements,
including rights of first refusal, supermajority clauses, options, veto
rights, and rights to hire and fire employees and to appoint members to
boards of directors or management committees.
(c) Records maintenance. All winning bidders qualifying as very
small businesses, small businesses or entrepreneurs shall maintain at
their principal place of business an updated file of ownership,
revenue, and asset information, including any document necessary to
establish eligibility as a very small business, small business or
entrepreneur. Licensees (and their successors-in-interest) shall
maintain such files for the term of the license. Applicants that do not
obtain the license(s) for which they applied shall maintain such files
until the grant of such license(s) is final, or one year from the date
of the filing of their short-form application (FCC Form 175), whichever
is earlier.
(d) Audits.
(1) Applicants and licensees claiming eligibility as a very small
business, small business or entrepreneur pursuant to Sec. 101.1112
shall be subject to audits by the Commission. Selection for audit may
be random, on information, or on the basis of other factors.
(2) Consent to such audits is part of the certification included in
the short-form application (FCC Form 175). Such consent shall include
consent to the audit of the applicant's or licensee's books, documents
and other material (including accounting procedures and practices)
regardless of form or type, sufficient to confirm that such applicant's
or licensee's representations are, and remain, accurate. Such consent
shall include inspection at all reasonable times of the facilities, or
parts thereof, engaged in providing and transacting business, or
keeping records regarding licensed LMDS service, and shall also include
consent to the interview of principals, employees, customers and
suppliers of the applicant or licensee.
6. Section 101.1112 is revised to read as follows:
Sec. 101.1112 Definitions.
(a) Scope. The definitions in this section apply to Secs. 101.1101
through 101.1112, unless otherwise specified in those sections.
(b) Very small business. A very small business is an entity that,
together with its affiliates and controlling principals, has average
gross revenues for the three preceding years of not more than $15
million.
[[Page 48796]]
(c) Small business. A small business is an entity that, together
with its affiliates and controlling principals, has average gross
revenues for the three preceding years of more than $15 million but not
more than $40 million.
(d) Entrepreneur. An entrepreneur is an entity that, together with
its affiliates and controlling principals, has average gross revenues
for the three preceding years of more than $40 million but not more
than $75 million.
(e) For purposes of determining whether an entity meets the
definition of very small business, small business or entrepreneur, the
gross revenues of the applicant, its affiliates and controlling
principals shall be considered on a cumulative basis and aggregated.
(f) Consortium. A consortium of very small businesses, small
businesses or entrepreneurs is a conglomerate organization formed as a
joint venture between or among mutually independent business firms,
each of which individually satisfies the definition of a very small
business, small business or entrepreneur. Each individual member must
establish its eligibility as a very small business, small business or
entrepreneur. Where an applicant (or licensee) is a consortium of very
small businesses, small businesses or entrepreneurs, the gross revenues
of each business shall not be aggregated.
(g) Gross revenues. Gross revenues shall mean all income received
by an entity, whether earned or passive, before any deductions are made
for costs of doing business (e.g., cost of goods sold), as evidenced by
audited financial statements for the relevant number of most recently
completed calendar years, or, if audited financial statements were not
prepared on a calendar-year basis, for the most recently completed
fiscal years preceding the filing of the applicant's short-form
application (FCC Form 175). If an entity was not in existence for all
or part of the relevant period, gross revenues shall be evidenced by
the audited financial statements of the entity's predecessor-in-
interest or, if there is no identifiable predecessor-in-interest,
unaudited financial statements certified by the applicant as accurate.
When an applicant does not otherwise use audited financial statements,
its gross revenues may be certified by its chief financial officer or
its equivalent.
(h) Affiliate.
(1) Basis for affiliation. An individual or entity is an affiliate
of an applicant if such individual or entity:
(i) Directly or indirectly controls or has the power to control the
applicant;
(ii) Is directly or indirectly controlled by the applicant;
(iii) Is directly or indirectly controlled by a third party or
parties who also control or have the power to control the applicant; or
(iv) Has an ``identity of interest'' with the applicant.
(2) Nature of control in determining affiliation.
(i) 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 for paragraph (h)(2)(i). 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 of control.
(ii) 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 her position in the concern,
has a critical influence in or substantive control over the operations
or management of the concern.
(iii) Control can arise through management positions if the voting
stock is so widely distributed that no effective control can be
established.
Example for paragraph (h)(2)(iii). 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 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 controlling principals of
the applicant, the other entity will be deemed an affiliate of the
applicant.
(3) 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 is controlled
by a concern, persons with an identity of interest will be treated as
though they were one person.
(i) 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.
(ii) 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, and half-brother or -sister. This
presumption may be rebutted by showing that:
(A) The family members are estranged;
(B) The family ties are remote; or
(C) The family members are not closely involved with each other in
business matters.
Example for paragraph (h)(3)(ii). A owns a controlling interest
in Corporation X. A's sister-in-law, B, has a controlling interest
in an LMDS license application. Because A and B have a presumptive
kinship affiliation, A's interest in Corporation X is attributable
to B, and thus to the applicant, unless B rebuts the presumption
with the necessary showing.
(4) Affiliation through stock ownership.
(i) An applicant is presumed to control or have the power to
control a concern if she owns or controls or has the power to control
50 percent or more of its voting stock.
(ii) An applicant is presumed to control or have the power to
control a concern even though he owns, controls, or has the power to
control less than 50 percent of the concern's voting stock, if the
block of stock she owns, controls, or has the power to control is large
as compared with any other outstanding block of stock.
(iii) 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.
(5) Affiliation arising under stock options, convertible
debentures, and agreements to merge. Stock options, convertible
debentures, and agreements
[[Page 48797]]
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 will generally be treated as though the rights held
thereunder had been exercised. However, neither an affiliate nor an
applicant can use such options and debentures to appear to terminate
its control over another concern before it actually does so.
Example 1 for paragraph (h)(5). If company B holds an option to
purchase a controlling interest in company A, which holds a
controlling interest in an LMDS applicant, the situation is treated
as though company B had exercised its rights and had become 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 for paragraph (h)(5). If a large company, BigCo, holds
70 percent (70 of 100 outstanding shares) of the voting stock of
company A, who holds a controlling interest in an LMDS license
applicant, 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 options 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 for paragraph (h)(5). 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.
(6) Affiliation under voting trusts.
(i) 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.
(ii) 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.
(iii) 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.
(7) 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 or the management (or both) of another entity.
(8) Affiliation through common facilities. Affiliation generally
arises where one concern shares office space, employees, or other
facilities (or any combination of the foregoing) 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.
(9) 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.
(10) Affiliation under joint venture arrangements. A joint venture
for size determination purposes is an association of concerns or
individuals (or both), 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 joint venture.
(11) Exclusion from affiliation coverage. For purposes of this
section, Indian tribes or Alaska Regional or Village Corporations
organized pursuant to the Alaska Native Claims Settlement Act (43
U.S.C. 1601 et seq.), or entities owned and controlled by such tribes
or corporations, are not considered affiliates of an applicant (or
licensee) that is owned and controlled by such tribes, corporations or
entities, and that otherwise complies with the requirements of this
section, except that gross revenues derived from gaming activities
conducted by affiliated entities pursuant to the Indian Gaming
Regulatory Act (25 U.S.C. 2701 et seq.) will be counted in determining
such applicant's (or licensee's) compliance with the financial
requirements of this section, unless such applicant establishes that it
will not receive a substantial unfair competitive advantage because
significant legal constraints restrict the applicant's ability to
access such gross revenues.
[FR Doc. 97-24789 Filed 9-16-97; 8:45 am]
BILLING CODE 6712-01-P
