FCC WEIGHS LETTING NEXTWAVE BIDDERS OPT OUT OF $16 BILLION BIDS

Commission decision was unanimous, with Comr. Copps issuing concurring statement in which he voiced concern about timing of public notice. While speculation about notice had been mounting in last week (CD Sept 10 p6) and support for giving NextWave auction winners relief had been increasing on Hill, Commission action had caught some in industry by surprise.

FCC said it sought balance between telecom market downturn and auction integrity. “As we have seen in the past, market downturns affect the value of spectrum licenses won at auction and licensees’ (or applicants') ability to meet auction payment obligations,” notice said. “Concerns about the state of the capital markets must be balanced against this important public interest consideration.” Commission sought comment on 2 scenarios: (1) NextWave auction winners could receive full amount of downpayments and choose to dismiss their applications. If FCC ultimately prevailed in pending litigation and NextWave had to return licenses to Commission, spectrum would be auctioned at future date. (2) Winning bidders could selectively opt out, meaning they could pick and choose which applications to keep and which to dismiss. In both cases, bidders that chose to dismiss their licenses would lose all claims to that spectrum. In this case, FCC sought comment on whether down payment refunds should be issued for all of bidder’s license applications or just ones that were dismissed. Under both scenarios, FCC sought feedback on whether bidder that relinquished claims to license should be barred from competing in future re-auction of that spectrum. Under all- or-nothing, full refund scenario, FCC also asked whether bidders that wanted to keep their applications active should take proactive action or “just remain silent.” Comments are due Oct. 11, which is 3 days after Supreme Court hears oral argument, with replies Oct. 21. One expectation had been that FCC also would weigh voiding auction altogether, but that didn’t make it into final notice.

Notice acknowledged Supreme Court oral argument was “fast approaching” and said FCC had “utmost confidence in the merits of its case.” But Commission said possibility for prolonged litigation still existed “during uncertain and trying economic conditions.” Even high court ruling in favor of FCC could leave unresolved issues over NextWave licenses, leading to more litigation, it said. Industry observers have said if FCC wins at Supreme Court, D.C. Circuit still would have to take up several issues left unresolved in its last ruling on case, meaning further litigation could last until as late as 2005. “Depending on the length of the delay, capital market conditions may continue to change, increasing the possibility that winning bidders in Auction 35 will be in a significantly different position than at the time of the auction,” notice said. FCC sought comment on alternatives it laid out based on changed economic circumstances since partial refund. It asked whether alternative scenarios would promote or run counter to FCC’s public interest obligations under Sec. 309(j) of Communications Act, including promoting “economic opportunity and competition” and ensuring efficient spectrum use.

Another issue on which FCC sought comment was whether it would waive its default rules or extend debt forgiveness “in whole or in part” if NextWave auction winners were allowed to opt out of license obligations. When Commission issued partial refund in March, it waived rules requiring that it hold down payments equal to 20% of winning bidders’ total net bids until licensing process was resolved. Agency said at time that 3% represented maximum amount that bidder must pay if it defaulted on its bid obligation. In both March order for partial refund and public notice that weighed possibility of full refund, licenses at issue were those of both NextWave and Urban Communicators, another bankrupt C-block bidder, that had been re-auctioned in Jan. 2001.

Earlier this year, FCC turned down refund request from Verizon Wireless, which was largest re-auction winner with $8.8 billion in successful bids. Other winners included VoiceStream Wireless, now called T-Mobile; Alaska Native Wireless, which has financial backing from AT&T Wireless; Salmon PCS, which has backing from Cingular. Verizon had argued to FCC that it no longer had obligation to pay full amount it bid because auctions created contractual relationship between FCC and winners, and FCC’s inability to deliver license in timely way had voided that contract. In rejecting that argument, FCC said just because spectrum wasn’t yet available for re-auction winners to use didn’t mean Commission was required to provide relief to Verizon. Verizon is pursuing contractual argument in U.S. Court of Federal Claims, seeking to void auction and receive damages. It also is pursuing case in D.C. Circuit that its auction obligations should be nullified. “We stand by our legal obligations in the partial refund order and do not through this public notice suggest any support for Verizon’s legal argument,” FCC said. Asked whether Verizon Wireless would continue to pursue litigation, spokesman said: “We will continue to assess that situation.”

In separate statement, Copps said he agreed there were “strong equitable arguments” to support returning remaining funds on NextWave auction deposits and “even for dismissing all pending applications… But I am frankly somewhat concerned about the timing of today’s public notice, as drafted. I have been in this town long enough to know that there is something called the Law of Unintended Consequences, and I never underestimate its power.” To that end, Copps said he concurred rather than approved of action.

As expected, Verizon Wireless CEO Denny Strigl lauded FCC action, but encouraged congressional advocates of giving carriers auction relief “to maintain their efforts until the Auction 35 issue is resolved.” He said, however, that FCC Chmn. Powell was “doing the right thing. With an overhang of more than $16 billion for nearly 2 years, the entire U.S. wireless industry has suffered in limbo.” He said FCC should act “promptly” on proposals.

CTIA Pres. Tom Wheeler said Powell earlier had said industry faced “a severe capital crisis.” Wheeler said: “Today the Commission has helped to ease that crisis.” With proposed release of $16 billion in overhang, which had affected credit ratings of carriers such Verizon, CTIA estimated wireless industry would have $5 billion available in next year to spend on new equipment and network improvements.

NextWave Senior Vp Michael Wack said proposed cancellation of auction was in line with carrier’s objective “of moving forward with commercialization of the licenses. The public will benefit if the FCC takes the next step and permits NextWave to pay its auction bid in full and complete its reorganization.”

While FCC is considering these steps just before Supreme Court oral argument, “in a pure substantive legal sense, it doesn’t moot the case,” Schwab Washington Research analyst Paul Glenchur said: “It doesn’t make the underlying dispute go away, which is how does the bankruptcy law affect the FCC’s administration of its spectrum licenses and policies. That issue is still alive.” Govt.’s eventual relinquishing of $16 billion in payment obligations has implications that are more “atmospheric” than legal, he said. Because Supreme Court doesn’t elaborate on why it grants certiorari in cases, Glenchur said it wasn’t possible to gauge how heavily $16 billion budgetary impact played in court’s impetus to take case. “They [FCC] realize that the industry is under some financial stress and it’s in the public interest” to potentially let carriers out of their auction obligations, Glenchur said. (Commitments are such that if FCC ultimately were to win litigation and could uphold NextWave re-auction, carriers would have 10 days to make full payments they had bid.) “You have to give Chairman Powell and the FCC credit for recognizing that you can’t do policy in a vacuum,” he said.

Industry source expressed surprise that FCC’s public notice didn’t contain more details about implications of $16 billion involved in decision on possible refunds. Source said FCC had noted in petition for certiorari that D.C. Circuit had overturned $16 billion auction and that FCC should be allowed to require winning bidders to make good on their auction commitments. Valuation of licenses at time that FCC filed petition for certiorari was generally considered higher than now because settlement agreement had been reached that entailed full bid amount that licenses brought in 2001.

Rep. Stearns (R-Fla.), who sponsored legislation in House (HR-4738) to release NextWave re-auction bidders, praised FCC for its order. He said order was step in right direction and “ensures that confidence is returned to the auction process and that revenues from future auctions will not be diminished.” However, he said he wouldn’t stop pushing for hearing on HR-4738. “Although I am encouraged by the FCC’s decision, it is merely seeking comment without a commitment to initiate the steps in my bill,” Stearns said. Senate aide familiar with similar bill introduced by Sen. Kerry (D-Mass.) said FCC orders often didn’t go as far as would legislation and that Senate would continue to push measure.