CARRIERS URGE RELIEF FROM NEXTWAVE OBLIGATIONS IN DOWNTURN

Senate aide told us Senate Commerce Committee Chmn. Hollings (D-S.C.) was working on attempt to pass NextWave re- auction legislation (S-2869) before session ended. Aide told us Hollings and bill sponsors Sens. Kerry (D-Mass.) and Brownback (R-Kan.) were likely to try to move bill under unanimous consent. Draft of revised S-2869 showed that companies would be granted 30 days, instead of 15, to request to be relieved of auction licenses and that act wasn’t intended to interfere with FCC v. NextWave Supreme Court case heard last week. Senate aide said Sen. Stevens (R-Alaska) still was likely to object to bill, which would make unanimous consent passage impossible. Bill, which was introduced in Aug., hasn’t had committee hearing or markup. Spokesman for Hollings said senator supported return of auction deposits as means to revitalize lagging telecom industry.

Among common threads of filings, which were response to comments FCC sought on options (CD Sept 13 p4), was dismal economic state of wireless industry. Salmon PCS, which has financial backing from Cingular Wireless, submitted new economic study commissioned from BIA Financial Network. Even since FCC in March refunded 15% of down payments for Jan. 2001 re-auction, sector has taken precipitous downturn, Salmon told FCC. “The length and severity of the financial crisis were neither predicted nor predictable,” said Salmon, which bid $1.7 billion in re-auction. “As a result, auction bids that were rational and justifiable had the licenses been promptly awarded in early 2001 cannot be sustained in current economic conditions.” Verizon Wireless, which bid $8.7 billion in auction, also stressed that 20 months after bidding closed, Commission hadn’t been able to deliver licenses and carriers had been forced to restructure their business plans, in part by turning to costly re-engineering such as cell splitting to make better use of existing spectrum.

Nextel, which withdrew from auction before it closed, said applicants for NextWave or Urban Comm licenses that opted out should be barred from participating in re-auction or otherwise buying them for “at least” 3 years. “This prohibition is crucial to the Commission’s effort to preserve the integrity of its spectrum auction program and its general spectrum management authority,” Nextel said. Carrier said that if NextWave re-auction winners were able to obtain refunds of remaining deposits held by govt. and could seek voluntary dismissal of applications, returned licenses would be re-auctioned yet again if FCC prevailed in pending litigation over licenses. (U.S. Supreme Court heard oral argument last week on FCC’s appeal of D.C. Circuit ruling that reversed its decision to cancel those licenses [CD Oct 9 p1].) Among issues on which FCC sought comment on opt-out plans was whether winning bidders receiving waiver of FCC default rules or debt forgiveness should be barred from obtaining those licenses for period of time. “The Commission must not take lightly a decision to relieve some of the most sophisticated and wealthy providers in the telecommunications marketplace of their commitments, a step that would be unprecedented if they were also permitted to acquire the very same spectrum in auctions or the secondary market,” Nextel said.

Nextel told FCC that such re-acquisition prohibitions on licenses that bidders chose to relinquish should apply both to entities that won licenses and those “with a substantial equity interest” in bidder. That would extend such restrictions to Cingular and AT&T Wireless, which respectively had provided financial stakes to Salmon and Alaska Native Wireless. “If Cingular and AT&T Wireless were permitted to participate in a ‘discount’ re-auction of this spectrum by bidding themselves or assuming a similar financial interest in new front companies, such opportunism would frustrate the Commission’s goals of protecting the integrity of its auctions and preventing unjust enrichment,” Nextel said. Company argued that FCC shouldn’t give cellular carriers “yet another regulatory windfall.”

Alaska Native Wireless (ANW), which bid $2.9 billion in re-auction, wants FCC to give winning bidders flexibility to make license-by-license decisions on which ones they will keep outstanding obligations and on which ones they will relinquish all claims. “Simply put, winning bidders must have the time and flexibility to make informed decisions regarding their individual business plans and to take the actions necessary to implement those decisions in advance of making a binding election choice,” ANW said. At least 180 days should be provided to make choices on spectrum for which relief options would be exercised, it said, because: (1) Election decisions require “material due diligence,” which requires time for winners to inventory their licenses. (2) Winners may need to restructure contractual arrangements, which can be complex and may have been “structured to govern potentially billions of dollars of investments among multiple parties.” Such complicated tools can include debt instruments and loan and bank covenants, ANW said. (3) “Many more licenses will be returned to the Commission if winning bidders do not have the time to restructure contractual arrangements.” (4) Designated entities often need FCC approval before they undertake restructuring. (5) Future re- auctions wouldn’t be hampered by 180-day decision window and no winning bidder in Auction No. 35, which is Jan. 2001 NextWave re-auction, would be put at disadvantage.

Verizon Wireless reiterated its arguments that under “well-established principles of contract and auction law,” its auction obligations already had terminated. Carrier has made same arguments in pending litigation before Court of Federal Claims. Verizon said FCC still had discretion to allow either “all-or-nothing” approach, in which bidders that opted out must leave auction altogether, or “pick-and-choose” approach on license-by-license basis. “The harms caused by retention of auction deposits without interest pales in comparison to the continuing damage to the wireless industry wreaked by the massive contingent liability and economic uncertainty created by Auction 35,” Verizon Wireless said: “These harms include depressed capital investment, lost jobs, increased costs of service and delays in the rollout of new technologies and services.” Carrier said that because winners were faced with possibility that they would have to make good on their auction commitments at some point in future, they had been forced to disclose “overhang” situation in financial statements. That has led ratings agencies to downgrade credit outlooks of winning bidders, making costs of borrowing money substantially higher, it said. Altogether, 22 wireless carriers have outstanding liability in auction, either directly or indirectly, filing said. They collectively have nearly 75% of all wireless subscribers, Verizon said: “They are prime candidates for bidding on future licenses. But as long as the Auction 35 liability remains on open issue, this uncertainty will either foreclose auction participation altogether or, at the very least, suppress bid prices and undermine all participants’ confidence in the ability of the competitive bidding scheme to meet their needs.”

DCC PCS said it was “fundamentally unfair” to keep NextWave re-auction obligations alive on speculation that FCC at some point might be able to grant licenses to Jan. 2001 winners. DCC argued that there was no “down side” to FCC’s allowing most flexible “pick-and-choose” option for bidders: “While some applicants will opt out of substantially all of their winning bids, under this flexible approach, it is also likely that the Commission will be able to obtain the Auction 35 results as to some number of the Auction 35 licenses.” DCC also contended that decision to allow winning bidders to dismiss certain license obligations wouldn’t constitute default. Instead, it said, that would be “mutual recission of obligations” by both FCC and carrier in recognition that Commission couldn’t deliver licenses won at auction and that “with the passage of time, the winning bids no longer appropriately reflect the value of the licenses.”

T-Mobile USA acknowledged it had intervened on side of FCC in oral argument before U.S. Supreme Court last week in which Commission challenged D.C. Circuit decision that led to return of licenses to NextWave. “Based upon the general state of the wireless communications sector and the fragile capital markets that have continued to deteriorate, especially over the last 6 months, however, T-Mobile now concludes that the Commission must permit the applicants to withdraw their pending applications without penalty, and expeditiously return, in full, their downpayments.” Like other carriers, T-Mobile told FCC that final legal disposition on NextWave licenses wasn’t expected soon. “It is patently unfair to handcuff the applicants’ ability to exercise business decisions while awaiting the fate of the NextWave legal and regulatory proceedings,” T-Mobile said.

Salmon also told FCC that under “pick-and-choose” system in which bidders could make opt-out decisions on license-by- license basis, “there is no reason to force applicants to make the choices sooner rather than later. Even if an applicant opts out of a particular license, the Commission will not be in a position to re-auction the license immediately so long as the NextWave litigation remains unresolved.” Salmon sought “prompt” relief for bidders on contingent liability associated with auction, but “adequate period of time to consider their options, present and future demand, and their economic circumstances.” To that end, carrier floated “2-step” opt-out process in which applicants would be required by date certain to earmark which licenses they no longer would pursue, leading to refund of associated down payments. As for license applications that would remain pending, applicants would have “a single final opportunity” to dismiss with respect particular licenses at a future date, it said.