Wireless Spectrum Auctions

ORLANDO -- One theme that emerged at CTIA Wireless 2002 here this week was need for more flexible federal spectrum policy, although govt. and industry officials pointed to new crop of questions raised by regulatory changes in that direction. “It’s an important concept and I congratulate the FCC for introducing it,” said Brian Fontes, vp-federal relations, Cingular Wireless. “However, I express a great deal of caution as you address the issue of flexibility that it doesn’t have the effect of reallocation,” he said on panel discussion. Flexible allocation issues have involved secondary markets proceeding at FCC, Spectrum Policy Task Force recently created by Commission and pending proceedings such as New ICO petition to deploy terrestrial services in mobile satellite service spectrum.

ORLANDO -- NTIA Dir. Nancy Victory told CTIA Wireless 2002 show here that her agency was “on track” for completing “viability assessment” by end of spring on how to free up 120 MHz of commercial and govt. spectrum for advanced wireless uses. She cautioned: “It’s hard to know what we're going to end up with until the process is over. It may be we are not able to clear all 120 MHz of spectrum.” She told standing- room-only session here: “The idea was not necessarily to make an allocation decision.” Victory said evaluation was examining issues such as cost of relocating incumbent users and possibilities for replacement spectrum. Resulting proposal will look at “how fast you could clear it,” she said.

On issue of request by wireless carriers for more time to implement wireless local number portability (LNP), Peter Tenhula, senior legal adviser to FCC Chmn. Powell, said: “I personally believe you have to get pooling right first.” Verizon Wireless has asked FCC to exercise forbearance on Nov. 24 deadline for wireless LNP, citing challenges associated with implementation deadline of pooling on same date as porting. Other large wireless carriers have sought at least delay, and state PUCs have been urging Commission to keep deadline. Speaking on CTIA Wireless 2002 legal adviser panel Mon. on wireless LNP, Tenhula said: “We're going to go forward with that, it’s just a matter of when.” Priority should be implementing pooling correctly, because unless that’s done right, LNP can’t be carried out effectively, Tenhula said. Bryan Tramont, senior legal adviser to FCC Comr. Abernathy, said she had been on record as supporting “substantial” delay for carriers. She believes it’s in consumers’ interest and “consumer interest deserves attention,” he said. Tramont cited factors such as extent to which consumer churn has remained in wireless industry even though users can’t take their number with them when they switch carriers. Such “guideposts” point to greater consumer interest in issues such as better network coverage, he said. “We understand carriers’ concerns about doing LNP and pooling at the same time,” said Sam Feder, legal adviser to FCC Comr. Martin. Paul Margie, legal adviser to FCC Comr. Copps, said, “We are hearing from NARUC and they are hearing from consumers. I think this is something folks have known about for a long time.” On issue of spectrum cap, Tenhula said FCC had been examining potential guidelines that could be put in place on wireless merger reviews in light of cap that’s set to sunset Jan. 1, 2003. “The next step is to reach out to industry” for ideas, Tenhula said in response to question. He said that when Commission voted last fall to phase out cap by 2003 and lift it to 55 MHz in all markets in interim, it said it would consider guidelines for evaluation of wireless mergers on case-by-case basis. Economists at FCC have been looking at merger guidelines used by FTC and Justice Dept. to determine whether any of their aspects could be adapted for FCC to use when processing license transfer applications with mergers. Process still is taking shape, Tenhula said. “I don’t anticipate a need for a rulemaking process. I don’t think we are talking about substantive replacement rules. We are talking about guidelines” so industry players know what to expect, he said. On 700 MHz auction that’s scheduled for June, although Administration budget proposal would push that back again, he said FCC was preparing to hold auction on time unless Congress acted in time to change date.

FCC took first step Thurs. toward remedying interference problems for public safety users at 800 MHz by unanimously approving notice of proposed rulemaking (NPRM) that covered potential solutions. Proposal adopted at agenda meeting requested information on how much spectrum would be necessary to meet public safety needs. It seeks comments on band restructuring proposals by Nextel and National Assn. of Mfrs., as well as alternatives submitted by others. Most closely watched so far has been Nextel plan submitted to FCC last fall that would swap spectrum at 700 MHz, 800 MHz and 900 MHz for new capacity at 800 MHz and 2.1 GHz. NPRM tentatively concluded that increasing levels of harmful interference to public safety operations at 800 MHz “must be remedied.” Citing several recent moves Commission has taken to free up public safety spectrum, FCC Chmn. Powell said item showed “Commission’s redoubled commitment” to make sure users had adequate spectrum for critical needs in emergencies.

Citing tight capital markets, Dobson Communications CEO Everett Dobson told FCC Chmn. Powell Thurs. that Commission, by continuing to hold down payments for NextWave re-auction without interest, was “doing substantial and immediate harm to the public interest.” Dobson subsidiary DCC PCS had made $546 million in winning bids for 14 licenses in Jan. 2001 re- auction, results of which were overturned when U.S. Appeals Court, D.C., reversing FCC decision to cancel NextWave licenses for missed payment. Verizon Wireless last week also asked FCC again to “promptly” refund its entire $1.7 billion deposit from re-auction. U.S. Supreme Court agreed last week to hear oral argument in FCC’s appeal of D.C. Circuit ruling. Earlier this year, 12 winning bidders in re-auction, including Verizon and Dobson, had asked FCC for immediate refund of $3.1 billion in down payments after settlement agreement on licenses expired Dec. 31 when Congress failed to approve pact. While Verizon has sought full return of its down payment, Dobson said it believed both FCC and re-auction winners’ interests could be protected “by promptly refunding” all but 15% of each applicant’s down payments. “The Commission must be aware of the severe capital restrictions that currently face the wireless industry, many of whose members are Auction 35 winners,” Dobson wrote. Now most wireless carriers face capital market pressure to reduce leverage, he said. “Uncertain future” of NextWave spectrum means Wall St. is viewing this negatively by attributing little or no value to spectrum even though deposits are treated as expended funds, he said. “Indeed, in Wall Street’s view, the Auction 35 winners are, at this time, actually worse off for having won licenses in that auction.” Since carriers submitted joint request for return of down payments in Jan., they have collectively lost $29 million of additional interest and “unknown number of lost opportunities to expand existing services.”

Ex-FCC Comr. Harold Furchtgott-Roth criticized Commission Mon. for not returning $3.3 billion in deposits that wireless companies such as Verizon Wireless paid for spectrum that was returned to its original owner, NextWave. Furchtgott-Roth said agency might have conflict of interest in retaining that money because interest was being paid to Telecom Development Fund, organization created by Telecom Act with board appointed by FCC. Fund gives financial help to start-up businesses using money from interest earned while auction monies, such as upfront payments, are being held by agency. Interest from NextWave deposits amounts to at least $100 million per year, assuming very low interest rate of 3%, he said. Furchtgott-Roth said there was nothing wrong with fund but it was questionable for FCC to deliberately hold onto that money, particularly since U.S. Supreme Court review of NextWave auction could delay resolution for at least year: “I don’t think there’s any doubt that [deposits] have to be returned.”

Verizon Wireless asked FCC to “promptly” refund its entire deposit from Jan. 2001 NextWave re-auction after U.S. Appeals Court, D.C., threw case into disarray by reversing FCC decision to cancel NextWave licenses for missed payment. D.C. Circuit on March 1 turned down Verizon petition asking that court compel “full compliance” with its June 2001 ruling, meaning that auction was void and all down payments should be returned (CD March 5 p2). Letter was written on same day as U.S. Supreme Court agreed to hear oral argument in FCC’s appeal of D.C. Circuit’s NextWave ruling. Re- auction winners asked FCC earlier this year to return $3.1 billion in down payments that agency has held without interest since Feb. 2001. Verizon Wireless, as largest re- auction winner, has largest deposit at stake, $1.7 billion. Citing D.C. Circuit’s denying Verizon’s petition that it enforce June 2001 ruling, company said in letter to FCC Deputy Gen. Counsel John Rogovin March 5: “We want to make clear that, to the extent the contract is not already void or voided, and to the extent we have the right to void the auction contract as to the NextWave licenses, we elect to void the contract.” Verizon Wireless said it didn’t want Commission to retain 3% or any portion of original bid prices. One expectation earlier this year had been that Commission might hang on to small portion of deposits after completing refunds to make it easier to revive settlement that expired Dec. 31. That proposed agreement by govt., re- auction winners and NextWave lapsed after Congress failed to approve pact. “The fact that we worked with the Commission in making a failed attempt at a legislated settlement plainly does not bar us from asserting the Commission’s breach of the auction contract,” Verizon Wireless Gen. Counsel Mark Tuller told Rogovin. Carrier hasn’t been able to “derive any value” from PCS licenses that were returned to NextWave, he said. Carrier said it had “had to incur costs in making alternative arrangements to satisfy capacity demands.” Saying it had been 13 months since auction and deposits hadn’t been returned, Verizon said that was “well beyond any reasonable time frame in which the government had the obligation to deliver the licenses to the winning bidder.” Meanwhile, status hearing in case was held last week in U.S. Bankruptcy Court, White Plains, N.Y. Judge Adlai Hardin reportedly set next status hearing for Oct. 22. He told participants at brief hearing that he expected that Supreme Court processes would take significant time and he suggested that participants in last round of settlement talks might want to talk again about fate of licenses. Legg Mason issued note to investors Fri. saying “one key question” in light of Supreme Court decision to take case was whether FCC would hold re- auction winners to their bid commitments “if the FCC definitively wins back the licenses, no matter how long it takes.” Legg Mason said: “This is critical because if the FCC does not release the winners from those obligations, the market will assume that almost $16 billion is tied up and cannot be used on other capital expenditures.” Report said that unless something short-circuited litigation, FCC was expected eventually to release re-auction winners from their obligations. “Keeping the winners on the hook to buy spectrum that could be tied up for several years may not be seen as serving the public interest, even if bidders were warned they assumed all litigation risks,” Legg Mason report said.

Verizon expressed concerns to FCC Chmn. Powell this week about high-powered terrestrial repeaters that satellite digital audio radio service (DARS) providers have sought permission to operate. Wireless Communications Service (WCS) providers have told FCC they were concerned that high-powered repeaters would cause interference to their operations. Verizon Senior Vp-Federal Govt. Relations Edward Young said WCS licenses company purchased at auction in 1997 now represented “an economically viable platform for broadband services.” He said WCS “provides an important complement to our current strategy for delivering broadband via DSL technology.” Young told Powell WCS would facilitate economical deployment of broadband offerings in places where DSL wasn’t available “while providing comparable levels of service to our broadband customers.” Young said Verizon planned “in coming months” to conduct trial of broadband fixed wireless service using WCS band and equipment developed by BeamReach. “Commercial deployment could begin as early as next year, depending on the results of the technical trial and the outcome of the Commission’s proceeding,” Young said. WCS licensees have argued that SDARS licensees should be made to operate terrestrial repeater networks at power levels not greater than 2 kw. But SDARS licensees have said their repeater network design relies on repeaters operating at up to 40 kw to provide proper synchronization. Verizon said it bought WCS licenses at auction under assumption it would have “full use” of its spectrum without harmful interference. “Bidders, and in fact licensees, require certainty about how their spectrum can be used,” Young said. “Changing the rules for a service after the licenses have been sold at auction and after significant investments have been made will have a chilling effect on the development of innovative technologies and services.”

Progeny LMS, which owns Location & Monitoring Service (LMS) licenses at 902-928 MHz, petitioned FCC Tues. to provide flexibility to licensees in that band and to change certain restrictions on that spectrum. Progeny, which won LMS licenses in 1999 FCC auction, asked agency to relax restrictions on type and content of messages and spectrum aggregation. Carrier said it wanted Commission to apply “to the LMS band its market-oriented policy of allowing licensees flexibility to offer whatever services the market can support and demand, so long a those operations do not hinder or interfere with the operations of primary users in the band.” Restrictions represent “outmoded approach” to spectrum management, Progeny said. It said service dated to early 1970s, when Commission adopted order allowing introduction of automatic vehicle monitoring service, later renamed LMS. Service was seen as providing tracking and monitoring of large vehicle fleets and providing information to allow vehicles to be better used through dispatch and routing information. In 1999, of 528 LMS licenses that were auctioned, nearly 250 were unsold, Progeny said. “Attempts at implementing this service demonstrate that some modifications are necessary in order for LMS to succeed,” it said. If LMS operators were given additional flexibility by FCC, they could compete with commercial wireless operators, which “are rolling out enhanced 911 location technologies that will provide similar economic and public safety benefits,” Progeny said. Eliminating certain restrictions would allow LMS licensees to offer voice and data messaging services in addition to advanced location technologies, petition said. Progeny urged FCC to consider eliminating or modifying: (1) LMS spectrum cap so single licensee could hold all of LMS licenses in given economic area. (2) Restriction on real-time interconnection with public switched telephone network. (3) Restriction on types of communications services. (4) Safe harbor provision that creates presumption of non-interference for secondary users. Progeny cited additional regulatory flexibility that commercial wireless operators had been granted, including ability to offer range of services. In period of substantial growth for commercial wireless sector, “the 902-928 MHz LMS industry, unfortunately, languished,” Progeny said. “As a result, LMS remains subject to a regulatory scheme born out of political compromises that more appropriately characterize the stratified wireless industry of 1993 than today’s competitively robust wireless industry,” petition said.

U.S. Supreme Court agreed Mon. to hear oral argument in FCC’s appeal of D.C. Circuit’s NextWave ruling, creating another layer of uncertainty for spectrum on which carriers and govt. had failed to reach settlement late last year. Some industry observers said high court’s grant of certiorari in NextWave case could heighten incentives to reopen settlement talks over licenses that fetched $15.8 billion in Jan. 2001 re-auction. But several analysts and industry sources pointed out that FCC had strong legal interest in having Supreme Court uphold what it viewed as integrity of auction process under Communications Act compared with limitations of U.S. Bankruptcy Code. Valuations of licenses also are widely seen as lower than they were even several months ago as carriers’ stocks have been battered on Wall St. Grant of certiorari marks victory for FCC, which sought review of June decision by U.S. Appeals Court, D.C. D.C. Circuit had reversed agency’s decision to cancel NextWave’s licenses for missed payment, throwing results of $17 billion re-auction of those licenses into disarray. With high court’s decision to review that ruling, “the mess just got messier,” said Legg Mason analyst David Kaut: “There’s a new round of legal uncertainty.”