Implement Competitive Bidding for Interactive Video and Data Services (IVDS)
Federal RegisterMay 13, 1994
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FEDERAL COMMUNICATIONS COMMISSION
47 CFR Parts 0, 1, 95
[FCC 94-99]
Implement Competitive Bidding for Interactive Video and Data
Services (IVDS)
AGENCY: Federal Communications Commission.
ACTION: Final rule.
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SUMMARY: The Commission has adopted a Fourth Report and Order to
authorize procedures for auctioning licenses in the IVDS. This action
implements new section 309(j) of the Communications Act of 1934, as
amended. This will permit the Commission to employ competitive bidding
procedures to choose from among two or more mutually exclusive
applications for initial license.
EFFECTIVE DATE: June 13, 1994.
FOR FURTHER INFORMATION CONTACT:
Eric Malinen, (202) 632-6497, Private Radio Bureau.
SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fourth
Report and Order, FCC 94-99, adopted April 20, 1994, and released May
10, 1994. The full text of this Fourth Report and Order is available
for inspection and copying during normal business hours in the FCC
Reference Center, room 230, 1919 M Street NW., Washington, DC. The
complete text may be purchased from the Commission's copy contractor,
International Transcription Service, Inc., 2100 M Street, suite 140,
Washington, DC 20037, telephone (202) 857-3800.
Summary of Order
I. Introduction
1. On March 8, 1994, the Commission adopted a Second Report and
Order in this proceeding (Second Report and Order)\1\ establishing
general rules and procedures governing competitive bidding for radio
spectrum (auctions). The Second Report and Order identified the types
of services and licenses that may be subject to auctions, described a
menu of competitive bidding methods, and adopted generic auction
procedures. The Commission stated that specific competitive bidding
rules for licensing individual services would be addressed in
subsequent Reports and Orders. This Fourth Report and Order establishes
rules and procedures for auctioning licenses in the Interactive Video
and Data Service (IVDS).\2\
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\1\Second Report and Order in PP Docket No. 93-253, FCC 94-61,
released April 20, 1994 (Second Report and Order). On February 3,
1994, we adopted the First Report and Order in this proceeding,
which, pursuant to 47 U.S.C. 309(i)(4)(C), prescribed transfer
disclosure requirements with respect to licenses or permits awarded
by random selection. First Report and Order in PP Docket No. 93-253,
FCC 94-32 (released February 4, 1994), petitions for reconsideration
pending.
\2\Concurrent with this Fourth Report and Order, we are adopting
a Third Report and Order, FCC 94-98, in this docket addressing the
specific competitive bidding rules and procedures for ``narrowband''
Personal Communications Services (PCS).
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2. In this Fourth Report and Order, we find that the value of IVDS
licenses is not expected to be sufficiently high to justify the use of
simultaneous multiple round bidding. We therefore conclude that the
auction methods most appropriate to the IVDS are oral bidding (open
outcry) and single round sealed bidding. We also establish rules and
procedures to deter possible abuses of the bidding and licensing
procedures. Last, we establish preferences for small businesses and
businesses owned by minorities or women to enhance their participation
in the competitive bidding process and in the provision of IVDS system
offerings.
II. Background and Auction Eligibility
3. The IVDS is a point-to-multipoint, multipoint-to-point, short
distance communications service in which licensees may provide
information, products, or services to individual subscribers located at
fixed locations in the service area, and subscribers may provide
responses.\3\ The rules governing IVDS were adopted in 1992 in Gen.
Docket No. 91-2.\4\ In that proceeding, the Commission decided to
define specific service areas and license IVDS channels in these areas
on an exclusive basis. As so defined, the IVDS has 734 service areas,
with two licenses of 500 kilohertz each (218.0-218.5 and 218.5-219.0
MHz) available in each area.\5\ In the event of mutually exclusive
applications\6\ for license, the Commission decided in that earlier
proceeding to use the lottery processes specified in our rules.\7\
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\3\Service offerings might include subscriber opportunities to
provide real-time responses to educational and pay-per-view
programming, commercial data applications such as home banking, and
the downloading of data. See Report and Order in Gen. Docket No. 91-
2, 7 FCC Rcd 1630, 1630 2, 1637 54 (1992).
\4\Report and Order, supra note 3; see 47 CFR part 95, Subpart
F.
\5\See 47 C.F.R. Secs. 95.803, 95.853. IVDS service or market
areas are defined in terms of the 734 cellular system service areas.
See Public Notice, Report No. 92-40, released January 24, 1992; 47
C.F.R. 22.903 (cellular). Many of these service areas cover rural or
remote, sparsely populated areas.
\6\The Commission, in general, ``considers two or more
applications to be `mutually exclusive' if their conflicts are such
that the grant of one application would effectively preclude, by
reason of harmful electrical interference, the grant of one or more
of the other applications.'' Second Report and Order at 12 n. 5.
\7\See 47 CFR 1.972 (1992). On September 15, 1993, a lottery for
nine IVDS markets was conducted. This lottery was permitted under
the Budget Act described below, the pertinent applications having
been accepted for filing by the Commission prior to July 26, 1993.
See Budget Act, infra note 8, Sec. 6002(e).
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4. The Omnibus Budget Reconciliation Act of 1993 (Budget Act)\8\
added a new Section 309(j) to the Communications Act of 1934, as
amended (Communications Act),\9\ to permit the Commission to employ
competitive bidding procedures to choose from among two or more
mutually exclusive accepted applications for initial license. In the
Notice of Proposed Rule Making in this proceeding, we stated that ``the
principal use of IVDS-allocated spectrum is reasonably likely to
involve the licensee receiving compensation from subscribers for
communications services,'' and therefore proposed to subject IVDS to
competitive bidding.\10\ Following our subsequent review of comments
and reply comments, we concluded that IVDS should be subject to
auctions.\11\ In this Fourth Report and Order we have attempted to
design IVDS auction rules and procedures that meet Congressional
objectives.\12\ We believe that these objectives are embodied in two
basic Commission policy goals: promoting economic growth, and enhancing
access to telecommunications service offerings for consumers,
procedures, and new entrants.\13\
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\8\Pub. L. No. 103-66, Title VI, Sec. 6002(a), 107 Stat. 312,
387 (1993) (Budget Act); see H.R. Conf. Rep. No. 213, 103d Cong.,
1st Sess. 480-89 (1993), reprinted in 1993 U.S. Code Cong. & Admin.
News 1169-78.
\9\47 U.S.C. 151-713.
\10\8 FCC Rcd 7635, 7659 143 (1993); see generally 47 U.S.C.
Sec. 309(j)(2).
\11\Second Report and Order at 49-53.
\12\47 U.S.C. Sec. 309(j)(3).
\13\Second Report and Order at 3-7.
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III. Competitive Bidding Design
5. As noted, we have determined that mutually exclusive IVDS
applications are subject to auctions. We must, therefore, identify the
methodology and procedure we will use to auction the licenses. We do so
in the paragraphs below, pursuant to Section 309(j)(3) of the
Communications Act and based on the record in this proceeding.\14\ As
described below, some further details about specific competitive
bidding procedures will be provided later by Public Notice(s).\15\
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\14\We received comments or reply comments on auctioning
licenses in the IVDS from the following: American Group (American);
Quentin L. Breen (Breen); Chase McNulty Group, Inc. (Chase); EON
Corporation (EON) (ex parte filings); Independent Cellular
Consultants (ICC); Andrea L. Johnson (Johnson); Kingswood Associates
(Kingswood); NYNEX Corporation (NYNEX); Radio Telecom and
Technology, Inc. (RTT); Harry Stevens, Jr. (Stevens); and Richard L.
Vega Group (RLV). Of these, five--American (reply comment at 23-25),
Kingswood (reply comment at 23-25), NYNEX (comment at 11), Stevens
(reply comment at 1), and RLV (comment at 11-14)--commented in this
context only on whether IVDS should be subject to auctions, an issue
we addressed in the Second Report and Order. See 3, supra.
\15\The Public Notice(s) will be issued by either the Commission
or the Private Radio Bureau.
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A. General Competitive Bidding Designs
6. The Second Report and Order established the criteria to be used
in selecting the auction design method for each auctionable service.
Generally, we concluded that awarding licenses to those parties that
value them most highly will foster Congress' policy objectives. In this
regard, we noted that because a bidder's ability to introduce valuable
new services and to deploy them quickly, intensively, and efficiently
increases the value of the license to that bidder, an auction design
that awards licenses to those bidders who are willing to pay the
highest bid tends to promote the development and rapid deployment of
new services and the efficient and intensive use of the spectrum.
7. We concluded that where the licenses to be auctioned are
interdependent (that is, either substitutes for, or complements to,
each other) and their value is expected to be high, ``simultaneous
multiple round'' auctions would best achieve the Commission's goals for
competitive bidding.\16\ We also noted that simultaneous multiple round
bidding is more complex for bidders and may be administratively more
expensive than other auction methods we may select, and indicated that
we would use this design only in instances where the expected value of
the licenses to be auctioned is high relative to the costs of
conducting a simultaneous multiple round auction.\17\
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\16\See Second Report and Order at 106-111. With this method,
all licenses or classes of licenses are auctioned at once, using
multiple rounds, and the bidding continues until bidding activity
subsides. Thus, bidders may repeatedly ``top'' the previously high
bids. See id. at 82, 86.
\17\Id. at 111.
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8. In the Second Report and Order we stated our intention to tailor
the auction design to fit the characteristics of the licenses to be
awarded. We noted that simultaneous multiple round auctions may not be
appropriate for all licenses.\18\ The less the interdependence among
licenses, the less the benefit to auctioning them simultaneously. To
the extent that simultaneous auctions are more costly and complex to
run, we indicated that we may choose a sequential auction design,
including sequential oral auctions, when there is little
interdependence among individual licenses.
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\18\Id. at 112.
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9. We further explained that when the values of particular licenses
to be auctioned are low relative to the costs of conducting a
simultaneous multiple round auction, we may consider auction designs
that are relatively simple, with low administrative costs and minimal
costs to the auction participants. We noted that as the value of
licenses decreases, and thus the benefits of simultaneous multiple
round bidding diminish relative to the cost and complexity of such
auctions, a less complex auction method may be more suitable. For
example, with large numbers of low value licenses we noted that we may
decide that it is preferable to implement a low cost auction method
such as single round sealed bidding to minimize cost and expedite the
licensing process.
10. Last, in the Second Report and Order we noted that Congress
directed us to ``design and test multiple alternative methodologies
under appropriate circumstances.''\19\ Thus, where appropriate, we
intend to choose bidding methods other than simultaneous multiple round
auctions and periodically reevaluate the effectiveness of all methods
utilized.
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\19\Id. at 115, quoting 47 U.S.C. Sec. 309(j)(3); see also ICC
comment at 9 (supporting IVDS as a candidate for testing alternative
methodologies).
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B. IVDS Competitive Bidding Design
11. We find that the generally preferred method of simultaneous
multiple round auctions is not the most appropriate for IVDS, and that
IVDS also presents a good opportunity to test less complex alternative
procedures. As discussed below, of the auction methods described in the
Second Report and Order, oral bidding (open outcry) and single round
sealed bidding appear best suited to the IVDS. Both are relatively
inexpensive for the Commission to administer, and the costs of
participation by bidders are fairly low. Moreover, both have the
advantage of being relatively simple for bidders to understand and also
generally can be completed quickly. Thus, these methods are likely to
promote the statutory goal of rapid implementation of service to the
public.\20\ We therefore adopt these two methods to auction IVDS
licenses.\21\
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\20\See 47 U.S.C. Sec. 309(j)(3)(A).
\21\If, as we gain experience, we find that another auction
design for the IVDS would better achieve the goals of the Budget
Act, we may revisit this issue.
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12. The IVDS offers two 500 kilohertz channels (frequency segments
A and B) in each of 734 service areas, and the aggregation of both
channels in a market is not permitted. While there may be some degree
of interdependency among the IVDS licenses for geographically
contiguous areas,\22\ we do not believe that it is great enough to
justify the greater costs and administrative complexities associated
with holding a simultaneous multiple round auction.\23\ Last, with
large numbers of IVDS licenses covering only rural areas,\24\ we
anticipate that the demand for, and value of, most markets will not be
great enough to justify the use of more complex methods such as
simultaneous multiple round auctions.\25\
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\22\Two commenters, EON and ICC, very briefly address the issue
of potential interdependence among IVDS licenses. EON argues that
the sequence of IVDS auctions should track ``ADIs,'' a proposal we
discuss and adopt infra. EON does not state, however, that bidders
might perceive the aggregation of licenses to result in additional
efficiencies of IVDS operation. EON ex parte filing of Jan. 26,
1994, at 4. ICC states that auction procedures favoring license
aggregation run counter to policies favoring licensee diversity. ICC
Comment at 7.
\23\The interdependencies for IVDS are likely to be less than
for services where roaming is important. See generally Second Report
and Order at 91. The IVDS rules do not permit ``roaming'' across
service areas.
\24\See note 5, supra.
\25\See Second Report and Order at 112-113.
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13. For IVDS open outcry auctions, each service area (with two
licenses each) will be auctioned individually, and the two highest
bidders in each service area will be awarded a license. The highest
bidder will get first choice of frequency segment A or segment B at the
highest bid price. The second highest bidder will be awarded the
remaining segment at the amount it bid.
14. With single round sealed bidding, we will auction the two
frequency segments separately. Licenses for frequency segment B will be
auctioned first. As soon as practicable thereafter, we will announce
the high bidders for licenses on frequency segment B and announce a
deadline date for short-form applications for segment A licenses. In
the event of a tie in single round sealed bidding, we will hold one
additional round between the parties that tied.
15. Having both oral and sealed bidding methods available permits
us the flexibility to fit the right auction method to the particular
IVDS licenses being auctioned. Further, it is consistent with Congress'
directive that we design and test multiple alternative methodologies
under different circumstances. ICC comments that, of the two methods,
sealed (or electronic) bidding is preferable to oral bidding because
some potential bidders perhaps cannot afford to attend an auction in
person.\26\ As noted in the Second Report and Order, however, such
sealed bidding generates no information about license values until
after the auction closes, tending to decrease bid levels and reduce the
efficiency of the license assignment.\27\ We therefore believe that
oral bidding should be used in the potentially higher valued markets,
where having license value information during the auction is especially
important, and that sealed bidding should be used for the remaining
markets.\28\
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\26\ICC comment at 6-7, reply comment at 7-8. Chase would prefer
that we randomly alternate between oral and sealed methodologies.
Chase comment at 1-2.
\27\Second Report and Order at 89 n. 81.
\28\For example, when choosing between the two methods, we do
not want to hold the more expensive oral bidding auction in
instances where we believe that the operational costs of holding the
auction might outweigh the benefits (efficient allocation and
revenues generated).
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16. We believe that, in general, the greater the population in the
service area, the greater will be the perceived value of, and demand
for, the license. The 734 service areas for the IVDS are identical to
those of cellular radio service areas: 306 ``Metropolitan Statistical
Areas'' (MSAs) and 428 ``Rural Service Areas'' (RSAs).\29\ We have
concluded that we should conduct oral auctions for the IVDS service
areas corresponding to MSAs, and sealed bid auctions for the remaining
service areas, or RSAs. We reserve the discretion to reconsider this
bidding design if, in light of experience gained with auctions, a
change appears warranted.\30\
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\29\See note 5, supra.
\30\For instance, sealed bidding might be appropriate if we re-
auction a small number of MSAs, or postpone initially the auctioning
of MSAs located near international borders while agreements are
negotiated.
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C. Bidding Procedures
17. Sequencing. We must choose the sequence in which IVDS licenses
will be auctioned. We believe that, in general, the higher valued IVDS
licenses should be auctioned first: the cost to the public from
delaying licensing increases with the value of the license, and, to the
limited extent that aggregation of license is important, auctioning the
higher valued licenses first facilities it.\31\ In determining the
sequence for auctioning IVDS licenses we are persuaded by EON's
argument that the IVDS is a television-driven service and that the
licenses should therefore be auctioned in a manner consistent with the
geographic areas defined by ``Areas of Dominant Influence'' (ADIs),\32\
rather than by numerical order of service area. EON and ICC also
commented generally that licenses for the more densely populated IVDS
service areas should be auctioned prior to the other areas.\33\
Therefore, we will auction licenses in ADI order, starting with the
lowest numbered ADI (having the highest population) and proceeding in
numerical order.\34\ Prior to starting the auction process, we will
issue a Public Notice listing the pertinent ADIs, and the order in
which licenses for the corresponding service areas will be auctioned
(by open outcry) in each ADI. We anticipate that we will hold sealed
bid auctions for licenses in rural areas as soon as practicable after
auctioning the more populated areas. For the rural areas, licenses on
frequency segment B will be auctioned first, and then a separate sealed
bid auction will be held for licenses on frequency segment A.
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\31\Second Report and Order at 117-120. We have noted,
``Knowing who has won [the] large markets is likely to be more
important for bidding decisions about small markets than the
converse.'' Id. at 119.
\32\This standard market definition, developed by Arbitron
Ratings Company, places each county in the continental U.S. within
one of 210 ADIs.
\33\EON ex parte filing of Jan. 26, 1994, at 2, 4; ICC comment
\34\The majority of ADIs comprise a number of MSAs. See
generally note 5, supra. We will auction the lowest numbered service
area in the ADI first, also auction the remaining service areas
(MSAs) that make up the ADIs for the 9 markets that were lotteried.
See id.
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18. Bid Increments. In a multiple round auction, a bid increment is
the amount or percentage by which a bid must be raised above the
previous round's high bid in order to be accepted as a valid bid in the
current round of bidding. For IVDS auctions, the Commission, including
the auctioneer, retains the discretion to impose bid increments before
or during the auction.\35\
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\35\See generally id. at 126.
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IV. Procedural Payment and Penalty Issues
A. Pre-Auction Application Procedures
19. The Second Report and Order established general rules and
procedures for participating in auctions. Again, however, we noted that
these might be modified on a service-specific basis. As described
below, we have determined that we will follow the procedural, payment,
and penalty rules established in the Second Report and Order, with
certain minor modifications to fit the IVDS. Certain procedural details
will be supplied later by Public Notice(s). Our objective has been to
design rules and procedures that will reduce administrative burdens and
costs on bidders and the Commission, ensure that bidders and licensees
are qualified and able to construct their systems, and minimize the
potential for delay of service to the public.
20. We will require applicants to follow the application filing and
processing rules outlined in the Second Report and Order.\36\ Before
each scheduled IVDS auction the Commission, or, pursuant to delegated
authority, the Private Radio Bureau, will release Public Notices
concerning the auction. The Public Notices will specify the license(s)
to be auctioned and the time, place, and method of competitive bidding
to be used, as well as applicable bid submission and payment
procedures. A Public Notice will also specify the filing deadline date
for short-form applications.
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\36\Second Report and Order at 160-188. In its comments, RTT
sets forth a waiver request and asks that we rule on it in advance
of the IVDS auctions. RTT comment at 1-5. Specifically, RTT requests
that the Commission, by declaratory ruling, rule that any IVDS
licensee using ``T-NET'' technology, with a power level greater than
that permitted in our rules, will be granted a rule waiver to permit
the power level. We will not make the requested ruling at this time.
All requests for waiver must be evaluated in the context of a
specific system design for avoidance of interference to television
reception. This information can be provided when the applicant files
a long-form application for license in a particular market. See
generally Second Memorandum Opinion and Order in Gen. Docket No. 91-
2, 8 FCC Rcd 2787, 2788 8 (1993).
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21. Bidders will be required to submit short-form applications on
FCC form 175 by the date specified in the Public Notice.\37\ If the
Commission receives only one application that is acceptable for filing
for a particular frequency segment, and there is thus no mutual
exclusivity,\38\ the Commission will by Public Notice cancel the
auction for this license and established a date for the filing of a
long-form application (FCC Form 574). In order to encourage maximum
bidder participation, we will provide applicants whose short-form
applications are substantially complete, but which contain minor errors
or defects, with an opportunity to correct their applications prior to
the auction. However, applicants will not be permitted to make any
major modifications to their applications, including ownership changes
or changes in the identification of parties to bidding consortia.\39\
In addition, applications that are not signed or that fail to make the
required certifications will be dismissed and may not be resubmitted.
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\37\Applicants should note whether they intend to bid for one or
both frequency segments. Applicants need not submit microfiche
originals or copies.
\38\As noted previously, absent mutually exclusive applications,
the Commission is prohibited from auctioning the license. 47 U.S.C.
Sec. 309(j)(1).
\39\See Second Report and Order at 167
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22. The Commission will issue a subsequent Public Notice listing
all applications containing minor defects, and applicants will be given
an opportunity to cure and resubmit defective applications. After
reviewing the corrected applications, the Commission will release
another Public Notice announcing the names of all applicants whose
applications have been accepted for filing.
B. Upfront Payment
23. In the Second Report and Order, we described three types of
payments: upfront payments, down payments, and final payments. Chase
favors upfront payments, while ICC believes that such a requirement
would constitute a hardship on small entrepreneurs.\40\ We believe an
upfront payment is needed for oral outcry IVDS auctions. Requiring this
payment provides some degree of assurance that only serious, qualified
bidders will participate and serves as a deterrent to the filing of
speculative applications which tend to slow down the provision of
service to the public. It also provides the Commission with a source of
funds to satisfy any penalties assessed. Therefore, we will require the
upfront payment and retain the flexibility to determine the payment
amount on an auction-by-auction basis. We will not, however, require an
upfront payment for applicants in sealed bid IVDS auctions.
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\40\Chase comment at 2; ICC comment at 8, reply comment at 7.
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24. A bidder may file applications for every IVDS license being
auctioned, but, for open outcry auctions, its upfront payment should
reflect the maximum number of licenses it desires to win. Once a bidder
is a ``winning'' bidder for the maximum number of licenses reflected by
its upfront payment, it will be precluded from bidding further. We will
use the following procedure for collecting this payment for oral
bidding IVDS auctions. The applicant or its representative will be
required to show the Commission, immediately prior to the auction, a
cashier's check for at last $2,500\41\ in order to get a bidding number
and enter the designated area in the room where the bidding will take
place. Bidders will be required to have $2,500 upfront money for every
five licenses they win.\42\ The $2,500 upfront payment will be
collected immediately after the first license is won by an
applicant.\43\ The highest bidder will be asked to sign a bid
confirmation form. The upfront money will later be counted toward the
down payment. We believe these procedures will keep the auction process
simple, keep costs down for small businesses who wish to bid on only a
few licenses, and eliminate Commission expenses due to issuing refunds.
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\41\In establishing procedures for auctioning IVDS licenses, we
have tried to reduce the complexities of the auction process for
both the Commission and potential applicants. To this end, we have
established a standard, reasonable upfront payment amount in lieu of
an amount based on a formula (e.g., $0.02/pop/MHz). Such a formula,
when used in the context of more populated areas, can result in a
very substantial upfront payment. In the context of IVDS, we believe
$2,500 strikes a good balance between ensuring that only serious,
qualified bidders participate and not placing an unreasonable
financial burden on small businesses. This amount was established in
the Second Report and Order, see id. at 180, as the general minimum
upfront payment, consistent with comments submitted.
\42\For example, if a bidder brings only one check for $2,500
and wins five licenses, he or she will not be allowed to bid on
another license. If a bidder brings two $2,500 checks, he or she may
bid until 10 licenses are won. Therefore, if a bidder anticipates
winning 16 licenses, he or she must bring four $2,500 cashier's
checks.
\43\The upfront money will be collected immediately after the
first license is won in each group of five licenses (1, 6, 11,
etc.). Bidders should bring a $2,500 cashier's check for each five
licenses they desire to purchase. The Commission will not refund
money to those bringing a single check to cover the total upfront
payment required, rather than multiple $2,500 checks, if the single
check is for an amount ultimately greater than the upfront payment
required. On request we will, however, apply such balance to any
further monies owed in the context of IVDS auctions.
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C. Payment for Licenses Awarded by Competitive Bidding
25. To provide further assurance that winning bidders will be able
to pay the full amount of their bids, we decided generally in the
Second Report and Order that each winning bidder must tender a down
payment sufficient to bring the total deposit up to 20 percent of the
winning bid. We believe a down payment is appropriate for IVDS.
Therefore, winning bidders will be required to supplement their upfront
payments to bring their total deposit with the Commission up to at
least 20 percent\44\ of the final payment due for the license(s) won in
that particular auction.\45\ The down payment will be due within five
business days after the close of bidding.\46\ The down payment will be
held by the Commission until the high bidder has been awarded the
license and has paid the remaining balance due on the license, or until
the winning bidder is found unqualified to be a licensee or has
defaulted, in which case it will be returned, less applicable
penalties. During the period that deposits are held pending ultimate
award of the license, the interest that accrues, if any, will be
retained by the Government.
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\44\Small businesses using the preference of installment
payments, see Section VI below, need only bring their deposits up to
10 percent within 5 business days, with the remaining 10 percent due
within five days of the license grant. See Second Report and Order
at 192 n. 145, 238.
\45\If the upfront payment already tendered amounts to 20
percent or more of the winning bid, no additional deposit will be
required.
\46\Second Report and Order at 192. For single round sealed
bidding, we will notify the high bidders soon after the auction. The
down payment will then be due within five business days.
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26. Long-form applications (FCC Form 574) will be due from
successful bidders within 10 business days after they have been
notified of their winning bidder status.\47\ Once we have reviewed the
application and made a determination that the applicant is qualified,
we will grant the license, conditioned on the timely payment of all
monies due. In the Second Report and Order, we decided to require
auction winners to make full payment of the balance of their winning
bids within 5 business days of the grant of their license, except for
small businesses using the preference of installment payments.\48\ This
time frame appears to be appropriate for IVDS, and we will therefore
use it.
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\47\If a filing fee is required, the general rules governing the
submission of fees will apply. See 47 C.F.R. Sec. 1.1101 et seq.
These rules provide for dismissal of an application if the
application fee is not paid, is insufficient, is in improper form,
is returned for insufficient funds, or is otherwise not in
compliance with our fee rules. See also Second Report and Order at
167 n. 127.
\48\Id. at 194.
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D. Default and Disqualification
27. In the Second Report and Order, we concluded that strong
incentives are needed to ensure that potential bidders are financially
and otherwise qualified to participate in auction proceedings, so as to
avoid delays in the deployment of new services to the public.\49\ We
stated that, for open outcry auctions, we will assess a default penalty
if a bidder fails to make the down payment on a license, fails to pay
for a license, or is disqualified after the close of an auction. In the
case of single round bidding, we stated that we will impose a penalty
in instances where the default occurs after the high bidder has been
notified by the Commission that it has submitted the high bid.\50\
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\49\Id. at 195-197.
\50\Id. at 156-157.
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28. In an oral auction, a winning bidder that withdraws its bid
after signing a bid confirmation form or fails to remit the required
down payment or balance of its winning bid in the time frame specified,
will be deemed to have defaulted. In a sealed bid auction, a winning
bidder is deemed to have defaulted if it withdraws its bid after
publication of the initial public notice notifying auction winners or
fails to remit the required down payment or balance of its winning bid
in the time frame specified. In such instances, we may re-auction the
license or offer it to the next highest bidder(s). In cases where
disqualification or default occurs after the full down payment has been
made, we will hold a new auction for the license. Further, ``if a
default or disqualification involves gross misconduct,
misrepresentation or bad faith by an applicant, the Commission also may
declare the applicant and its principals ineligible to bid in future
auctions, and may take any other action that it may deem necessary,
including institution of proceedings to revoke any existing licenses
held by the applicant.''\51\ Entities who obtain their licenses through
the auction process are put on notice that if their licenses are
revoked or canceled they will forfeit all monies paid to the Commission
regarding those licenses.\52\
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\51\Id. at 198.
\52\This includes licensees who fail to meet the construction
benchmarks contained in 47 C.F.R. Sec. 95.833.
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29. We believe it is important to adopt default penalties for IVDS
auctions. If a bidder in an oral auction defaults or is disqualified, a
default penalty will be impose equal to the difference between the
bidder's high ``winning'' bid and the amount of the winning bid the
next time the license is offered by the Commission, if this latter
amount is lower. In addition, with open outcry auctions, the defaulting
auction winner will be assessed a penalty of three (3) percent of the
subsequent winning bid or three percent of its own (the defaulting
bidder's) bid, whichever is less.\53\ The additional three percent
penalty is designed to discourage insincere bidding and to compensate
the government for the cost of reauctioning a license. In single round
sealed bid auctions, if a high bidder defaults prior to making the
required down payment, we will impose a default penalty equal to the
difference between the high bid and the next highest bid. If a high
bidder defaults after having made the down payment, the additional
three percent penalty will be applied.\54\
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\53\Id. at 154-157.
\54\See id. at 157.
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V. Regulatory Safeguards
A. Unjust Enrichment Provisions
30. Congress directed that we take steps to prevent unjust
enrichment due to trafficking in licenses that were obtained through
competitive bidding. 47 U.S.C. Sec. 309(j)(4)(E). In Section VI, below,
we adopt specific rules governing unjust enrichment by designated
entities.\55\ The IVDS rules already contain provisions to reduce
trafficking,\56\ and ICC argues that these rules are sufficient.\57\
Consistent with the Second Report and Order, however, the IVDS-specific
anti-trafficking provisions will not apply to licenses obtained through
competitive bidding, although we will enforce the new transfer
disclosure requirements contained in Section 1.2111 of our rules.\58\
Generally, applicants seeking to transfer their licenses within five
years of the initial license grant will be required to file, together
with their transfer application, the associated contracts for sale,
option agreements, management agreements, and all other documents
disclosing the total consideration received in return for the transfer
of the license. We will give particular scrutiny to auction winners who
have not yet begun commercial service and who seek approval for an
assignment or transfer of control of their licenses, in order to
determine whether any unforeseen problems relating to unjust enrichment
have arisen outside of the designated entity context.
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\55\See 47, 52, 54 & n. 90, infra. We have amended 47 CFR
95.819 to clarify the procedures for the transfer or assignment of
IVDS licenses.
\56\For example, current IVDS licenses must meet the five-year
construction benchmark before they may transfer, sell, assign, or
give an IVDS license to another entity. See 47 CFR 95.819.
\57\ICC comment at 7.
\58\See 47 CFR 1.2111; Second Report and Order at 263-265.
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B. Performance Requirements
31. Congress has directed that the Commission, in implementing
auction procedures, ``include performance requirements, such as
appropriate deadlines and penalties for performance failures, to ensure
prompt delivery of service to rural areas, to prevent stockpiling or
warehousing of spectrum by licensees or permittees, and to promote
investment in and rapid deployment of new technologies and
services.''\59\ In the Second Report and Order, we decided that it was
unnecessary and undesirable to impose additional performance
requirements for auctionable services beyond those already provided in
service rules.\60\ The IVDS rules already contain specific performance
requirements, such as the requirement to build-out the system within a
specified period of time. See, e.g., 47 CFR 95.833. Entities that
obtain, by transfer or assignment, an IVDS license that was awarded by
competitive bidding, take such license subject to the existing
performance requirements.
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\59\47 U.S.C. 309(j)(4)(B).
\60\Second Report and Order at 219.
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C. Rules Prohibiting Collusion
32. In the Second Report and Order we adopted special rules
prohibiting collusive conduct in the context of competitive bidding.
See 47 CFR 1.2105(c). We indicated that such rules would serve the
objectives of the Budget Act by preventing parties, especially larger
firms, from agreeing in advance to bidding strategies that might divide
the market according to their strategic interests and to the
disadvantage of other bidders. These rules apply to all auctionable
services, including the IVDS. Bidders are required to identify on their
FCC Form 175 applications any parties with whom they have entered into
any consortium arrangements, joint ventures, partnerships or other
agreements or understandings which relate to the competitive bidding
process. Bidders are also required to certify that they have not
entered into any explicit or implicit agreements, arrangements or
understandings with any parties, other than those identified, regarding
the amount of their bid, bidding strategies or the particular
properties on which they will or will not bid. After the short-form
applications are filed and prior to the time that the winning bidder
has made its required down payment, all bidders are prohibited from
cooperating, collaborating, discussing or disclosing in any manner the
substance of their bids or bidding strategies with other bidders,
unless such bidders are members of a bidding consortium or other joint
bidding arrangement identified on the bidder's short-form application.
33. Concerning bidding consortia, joint venture, partnership or
other such agreements or arrangements, all such arrangements must have
been entered into prior to the filing of short-form applications. Where
specific instances of collusion in the competitive bidding process are
alleged, the Commission may conduct an investigation or refer such
complaints to the United States Department of Justice for
investigation. Bidders who are found to have violated the antitrust
laws or the Commission's rules in connection with participation in the
auction process may be subject to forfeiture of their down payment or
their full bid amount, revocation of their license(s), and may be
prohibited from participating in future auctions.
VI. Treatment of Designated Entities
A. Introduction
34. As discussed in the Second Report and Order, Congress mandated
that the Commission ``ensure that small businesses, rural telephone
companies, and businesses owned by members of minority groups and women
are given the opportunity to participate in the provision of spectrum-
based services.'' 47 U.S.C. 309(j)(4)(D). The statute requires the
Commission to ``consider the use of tax certificates, bidding
preferences, and other procedures'' in order to achieve this
congressional goal. In addition, Section 309(j)(3)(B) provides that in
establishing eligibility criteria and bidding methodologies the
Commission shall promote ``economic opportunity and competition . . .
by avoiding excessive concentration of licenses and by disseminating
licenses among a wide variety of applicants, including small
businesses, rural telephone companies, and businesses owned by members
of minority groups and women.'' 47 U.S.C. 309(j)(3)(B). Finally,
Section 309(j)(4)(A) provides that to promote these objectives, the
Commission shall consider alternative payment schedules, including lump
sums or guaranteed installment payments.
35. In the Second Report and Order we established the eligibility
criteria and general rules that would govern the award of preferences
for designated entities. We also established a menu of preferences,
including installment payments and bidding preferences, that we could
choose from in selecting the preferences that will be applicable to a
particular service, and specified the circumstances under which a tax
certificate program would be established. In addition, we set forth
rules to prevent unjust enrichment by designated entities seeking to
transfer licenses obtained through use of one of the preferences.
36. In this Fourth Report and Order we adopt specific preferences
for the IVDS designed to ensure that designated entities are given the
opportunity to participate both in the competitive bidding process and
in the provision of the service. In particular, we adopt the following
preferences:
(1) A 25 percent bidding credit will be available for one license
in each service area (for either frequency segment A or B), for
businesses owned by minorities and/or women;
(2) Tax certificates will be available to initial investors in
minority and women-owned enterprises upon divestiture of their non-
controlling interests, and to licensees who transfer their
authorizations to minority or women-owned businesses; and
(3) Installment payments will be made available to small
businesses. We also incorporate and adopt the unjust enrichment
provisions adopted in the Second Report and Order applicable to each of
the preferences we adopt here, and adopt the designated entities
eligibility requirements of the Second Report and Order.\61\
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\61\See 47 CFR 1.2111; Second Report and Order at 267-278.
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37. We received IVDS-specific comments favoring the preferences of
spectrum set-asides\62\ and royalty payments.\63\ As we noted in the
Second Report and Order, however, the appropriateness of preferences is
best determined in light of the characteristics of the particular
service and the nature of its expected pool of bidders, and we find
that these preferences are not appropriate for the IVDS. Concerning
set-asides, we note that the total spectrum available in the service is
small: two 500 kilohertz channels available in each service area. Thus
for the IVDS, with its licensing scheme of two licenses per market, the
use of set-asides would result in one of every two licenses being
reserved for designated entities. We decline to reserve so great a
proportion of the service's spectrum. Furthermore, in the Second Report
and Order we decided, for all services, not to use the preference of
royalty payments.\64\ While we will continue to assess the feasibility
of these preferences as we gain experience with auctions in the context
of this and other services, we are not persuaded to change our decision
for the IVDS.
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\62\Breen and ICC favor set-asides as a means to encourage
applications from small businesses. Comments of Breen 9; ICC at 4-6.
ICC also argues that, without set-asides, large telecommunications
providers might attempt to stifle IVDS technology or permit it only
as an adjunct to existing offerings. ICC comments at 5-6.
\63\Breen and ICC state that this option will encourage
participation by designated entities. Breen at 7; ICC comment at 7,
reply comment at 8.
\64\Id. at 252-253.
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38. We note that the IVDS, with its expected relatively low capital
entry requirements, is well suited for ownership by designated entities
and other potential bidders that might otherwise lack the financial
resources to compete by auction for a license. This, combined with the
variety of uses possible with the service, makes it likely that the
IVDS will promote economic growth and enhance the access of consumers
to new and innovative service offerings. As we gain experience with
IVDS auctions, we intend continually to assess the effectiveness of our
measures, and will apply any knowledge gained to subsequent auctions
for other services.
B. Bidding Credits
39. In the Second Report and Order we stated that we would consider
using bidding credits to encourage participation by designated entities
in auctions. Upon consideration and review of the record on this
subject, we believe that affording businesses owned by minorities and
women a substantial bidding credit for certain specified IVDS licenses
is the most cost-effective and efficient means of achieving Congress'
objective of ``ensuring'' the opportunity of these designated entities
to participate in the provision of IVDS offerings. Bidding credits will
provide minority and women-owned firms with a significant advantage,
which we believe is necessary to achieve this congressional goal, while
preserving the advantages of open bidding competition. In effect, the
bidding credit will function as a discount on the bid price a minority-
or women-owned firm will actually have to pay to obtain a license and,
thus, will address directly the financing obstacles encountered by
these entities. We believe that a bidding credit in the amount of
twenty-five (25) percent is necessary to provide these designated
entities with a significant enough advantage to ensure their ability to
compete successfully for some IVDS licenses. Thus, in each market, a
single 25 percent bidding credit will be awarded to a business owned by
minorities and/or women if it is a winning bidder.\65\
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\65\Only one bidding credit is available in each market. If it
happens that the two highest bidders are both designated entities
eligible for a bidding credit, the second highest bidder will be
given the option of accepting the remaining license without the
credit, or declining the remaining license.
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40. As discussed in the Second Report and Order, Congress mandated
that the Commission ``ensure'' the opportunity for participation in
spectrum-based services by each category of designated entity,
including businesses owned by minorities and women. This plain language
leads us to conclude that adequate measures must be taken to assure
that minority and women-owned businesses have the ability to
participate in the provision of services subject to competitive
bidding. Moreover, in enacting this legislation, it is clear that
Congress was concerned about disseminating licenses to a wide variety
of applicants and wanted the Commission to take meaningful steps to
accomplish this goal.\66\ Indeed, Congress included a requirement in
the statute that the Commission report to it in 1997 about, among other
things, whether competitive bidding facilitated the introduction of new
companies into the telecommunications market and whether designated
entities ``were able to participate successfully in the competitive
bidding process.'' 47 U.S.C. 309(j)(12)(iv).
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\66\We have decided not to provide bidding credits (or other
separate preferences) to rural telephone companies bidding on IVDS
spectrum because we conclude that, given the relatively modest
build-out costs for systems in this service, such preferences are
unnecessary to ensure the participation of rural telephone companies
in the provision of IVDS offerings to rural areas. The preferences
are also, therefore, unnecessary in this context to meet Congress'
intent to ensure that rural consumers receive the benefit of new
technologies such as IVDS. Rural telephone companies will, however,
be eligible for bidding credits if they are owned by minorities or
women. They may also qualify for installment payments if they
satisfy the eligibility criteria for small businesses.
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41. Apart from Congress' directive, we think that ensuring
opportunities for women and minorities to participate in the IVDS is
important for the telecommunications industry. These companies can play
a vital role in serving inner city areas and other niche markets that
may be overlooked by other companies, thus promoting our goal of
universal access to telecommunications services. Not only will the
industry become more diverse through the adoption of meaningful
preferences, but we believe that a much wider customer base will obtain
access to innovative technologies. Moreover, studies show that even
when minority-owned firms do not locate within urban minority
communities, they employ more minorities relative to other companies,
thereby promoting our goals of equal employment opportunity and
economic growth.\67\
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\67\See e.g., 47 CFR 21.307, 22.307 (equal employment
opportunity rules for common carriers); Implementation of the
Commission's Equal Employment Opportunity Rules (Notice of Inquiry),
FCC 94-103 (released April 21, 1994) (``[O]ur EEO rules enhance
access by minorities and women to increase employment opportunities
which are the foundation for increasing opportunities for minorities
and women in all facets of the communications industry, including
participation in ownership. Thus the rules * * * promote the further
development of the broader communications infrastructure.'') See
also Banking on Black Enterprise at 3.
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42. The general record in this proceeding\68\ reflects a severe
underrepresentation of minorities and women in telecommunications.
Indeed, the Commission's Small Business Advisory Committee (SBAC) found
only 11 minority firms engaged in the delivery of cellular, specialized
mobile radio, radio paging, or messaging services.\69\ Likewise,
American Women in Radio and Television (AWRT) found that only 24
percent of small communications businesses are owned by women (when
companies without paid employees are excluded, women own less than 15
percent of small communications firms).\70\ Many commenters observe
that the factors that preclude minorities and women from effective
participation concern access to financing. With regard to women, they
note that no existing FCC policy provides an incentive for women to
enter the communications business, and that access to capital remains
the biggest obstacle women business owners must face. Similarly, the
SBAC states that minorities frequently do not or cannot use traditional
sources of financing. Citing the U.S. Senate amicus brief in Metro
Broadcasting, Inc. v. FCC, 110 S. Ct. 2997 (1990), the SBAC asserts
that ``spectrum for radio facilities was first allocated at a time when
undisguised discrimination in education, employment opportunities, and
access to capital excluded minorities from all but token
participation.'' The SBAC concludes that minorities were impeded from
successfully competing for licenses when they were first awarded and,
due to systematic barriers to technical training and employment
opportunities, this situation has continued over time.
---------------------------------------------------------------------------
\68\For a list of all commenters in this proceeding, see
Appendix A, Second Report and Order. Footnote 14, supra, lists those
commenters that made IVDS-specific comments.
\69\Report of the FCC Small Business Advisory Committee to the
FCC Regarding Gen. Docket No. 90-314 (Sept. 15, 1993), reprinted at
8 FCC Rcd 7820, 7827 (1993).
\70\See Comments of AWRT at 5.
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43. Given this history of underrepresentation of minorities and
women in telecommunications and the inability of these groups to access
financing, we find that the best way we can accomplish these statutory
mandates is to provide bidding credits exclusively to minority and
women-owned businesses. The record demonstrates that women and
minorities face barriers to entry not encountered by other firms,
including other designated entities, and it is, therefore, appropriate
and necessary that we provide them with a substantial bidding
advantage.\71\ In other contexts, Congress has recognized that the use
of preferences in the licensing process can be necessary to remedy
underrepresentation by minorities. For example, in 1982, Congress
mandated the grant of a ``significant preference'' to minority
applicants participating in lotteries for spectrum-based services. 47
U.S.C. 309(i)(3)(A). And, in 1988, Congress attached a provision to the
FCC appropriations legislation that precluded the Commission from
spending any appropriated funds to examine or change its minority
broadcast preference policies.\72\ Absent such measures targeted
specifically to women and minorities, it would be virtually impossible
to assure that these groups achieve any meaningful measure of
opportunity for actual participation in the provision of the services
in question.\73\
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\71\See e.g., Comments of AWRT at 4-7; Call-Her at 5; Cook Inlet
at 38-39.
\72\Continuing Appropriations Act for Fiscal Year 1988, Public
Law No. 100-102, 101 Stat. 1329-31.
\73\In the Second Report and Order, we addressed the
constitutionality of race and gender-based preferences and concluded
that the proper standard of scrutiny to be employed in this context
is the ``intermediate scrutiny'' standard used in the Metro case.
Second Report and Order at 289-297; see 110 S.Ct at 2997. We
further concluded that under such a standard, preferences for
minority and women-owned businesses are constitutionally
permissible. We recognize that Metro's standard of review applies to
measures approved by Congress. 110 S. Ct. at 3008-09. As noted
above, the bidding credits in question here were expressly approved
and, indeed, are required to achieve the statutory goals. See 47
U.S.C. Sec. 309(j)(4)(D) (The Commission must ``consider the use of
tax certificates, bidding preferences, and other procedures'' to
ensure the participation of ``small businesses, rural telephone
companies, and businesses owned by members of minority groups and
women.''). Moreover, an argument might be made that IVDS licensees
will be able to control the content of the transmissions carried on
their facilities and that the service can therefore be analogized
(at least) to mass communications media. See, e.g., Johnson comment
at 1-4, 8 (like other emerging subscription-based services, IVDS
will, in practice, increasingly converage with broadcast and cable
services). To the extent that this control exists or is later
developed with regard to the IVDS, the preferences we adopt for
minorities and women would be consistent with the important
governmental interest identified in Metro: increasing minority
ownership to encourage diversity in the provision of content.
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44. We also agree with Call-Her that even comparatively large
businesses owned by women and minorities face discriminatory lending
practices and other discriminatory barriers to entry and, therefore,
eligibility for bidding credits should not be limited to small firms.
The IVDS auctions present a unique licensing opportunity for these
historically disadvantaged groups to gain a foot-hold in the
communications industry.\74\ Our goal is to encourage businesses owned
by minorities and women to provide viable, sustained competition to
larger businesses. Therefore, we have accorded preferences to minority
and women-owned firms regardless of their size. This approach is
consistent with our auction rules and will further the statutory
mandate to ensure participation by designated entities.\75\
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\74\Because of the discrimination suffered by minorities and
women as contractors and subcontractors in the telecommunications
industry, see MBELDEF Study, this unique chance to enter the field
as primary telecommunications providers, competing with, rather than
dependent upon, other providers, is especially important.
\75\See Banking on Black Enterprise at 13 (government assistance
should accrue to more capable black entrepreneurs, who are most
likely to contribute to the goal of economic development).
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45. Further, Congress clearly intended that businesses owned by
minorities and women must be given the opportunity to participate in
the provision of spectrum-based services independent of their status as
small businesses. The plain language of section 309(j)(4)(D) states
that the Commission ``shall . . . ensure'' the opportunity for
participation by ``small businesses . . . and businesses owned by
members of minority groups and women . . .'' (emphasis added). If
Congress had intended to limit the directive of Section 309(j)(4)(D)
only to small businesses, no need would have existed to mention
separately minorities and women. Moreover, Section 309(j)(4)(D) was
added to Conference, and the Conference Report does not offer any
suggestion that, to come within the section's purview, businesses owned
by minorities or women must be small businesses. In contrast, and as we
discussed more fully in the Second Report and Order, the legislative
history of Section 309(j)(4)(A), relating to installment payments,
expressly indicates that the provision was intended only to promote
financial assistance for small businesses.\76\ Accordingly, we shall
interpret Section 309(j)(4)(D) in accordance with its plain language
and will not limit its application to small businesses.\77\
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\76\See Second Report and Order at 234-236.
\77\Even though small businesses are also mentioned in Section
309(j)(4)(D), we do not believe bidding preferences for small
businesses are appropriate for IVDS auctions. We believe the
installment payments preference, as outlined below, will be
sufficient to ensure their participation.
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46. In determining the appropriate amount of the bidding credit we
considered several factors. First, we agree with those commenters that
support a bidding credit of 25 percent or more\78\ because we think
that a substantial credit is necessary to ensure meaningful
participation by minority and women-owned businesses. In the broadcast
context, we have noted that licensees can transfer their stations to
minorities in distress sales provided that the price is no more than 75
percent of market value.\79\ This policy is based upon our finding that
25 percent is an appropriate discount to eliminate financial entry
barriers for minority-owned companies seeking to become broadcast
licensees. Likewise, we believe that a bidding credit of 25 percent
will adequately ensure participation by a wide variety of minority and
women-owned firms in IVDS auctions and service provision. The amount is
not so substantial, however, as to foster participation by firms that
are not otherwise financially capable of building-out an IVDS system.
We will monitor carefully the effectiveness of the 25 percent bidding
credit in the IVDS context and continually assess whether it is
achieving the goal of ensuring that minority and women-owned firms
participate successfully in auctions for this services.
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\78\See comments of AIDE at 7, Devsha at 5, NABOB at 10-11, and
ex parte filing of Personal Communications Network Services of New
York at 2-3, each suggesting a bidding credit of 25 percent. Rocky
Mountain Telephone proposes of 50 percent bidding credit. Comments
of Rocky Mountain Telephone at 16. And Richard Vega proposes a 100
percent bidding credit for certain designated entities. Comments of
Richard Vega at 7.
\79\See Lee Broadcasting Corp., 76 FCC 2d 462 (1980).
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47. To prevent any unjust enrichment by minorities or women
trafficking in licenses acquired through the use of bidding credits, we
will impose a forfeiture requirement on transfers or assignments of
such licenses to entities that are not owned by minorities or
women.\80\ Minority and women-owned businesses seeking to transfer or
assign a license to an entity that is not owned by minorities or women
will be required to reimburse the government for the amount of the
bidding credit, plus interest at the rate imposed for installment
financing at the time the license was awarded, before transfer or
assignment will be permitted. The amount of the penalty will be reduced
over time: a transfer or assignment in the first two years of the
license term will result in a forfeiture of 100 percent of the value of
the bidding credit; during year three, of 75 percent of the bidding
credit; in year four, of 50 percent; in year five, of 25 percent; and
thereafter, no penalty.\81\ Furthermore, as noted earlier, we will use
the eligibility criteria from the Second Report and Order to ensure
that only legitimate minority and women-owned firms are able to take
advantage of bidding credits. In addition, to further ensure that our
rules are as narrowly tailored as possible, while still fulfilling the
statutory goal, we are prohibiting publicly-traded companies from
taking advantage of the bidding credits and we are providing bidding
credits for only one license in each market for businesses owned by
minorities or women.
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\80\See Second Report and Order at 264.
\81\Interest will also be charged according to the total number
of years the license was held.
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C. Tax Certificates
48. Congress instructed the Commission to consider the use of tax
certificates to ensure designated entity participation in a spectrum-
based services. See 47 U.S.C. 309(j)(4)(D). In the Second Report and
Order we observed that tax certificates could be useful as a means of
attracting investors to designated entity enterprises and to encourage
licensees to assign or transfer control of licenses to designated
entities in post-auction transactions. We stated further that we would
examine the feasibility of using this measure in subsequent service-
specific auction rules.\82\ After further consideration of this matter,
we believe that tax certificates would be an appropriate tool to assist
minority and women-owned businesses to attract start-up capital from
non-controlling investors. In addition, we believe that tax
certificates will give licensees the incentive to assign or transfer
their authorizations to such entities in post-auction sales, thereby
providing added assurance that minority and women-owned entities will
have the opportunity to participate in the provision of IVDS offerings.
Accordingly, we will issue tax certificates to initial investors in
minority and women-owned IVDS applicants upon the sale of their non-
controlling interests. We will also issue tax certificates to IVDS
licensees who assign or transfer control of their licenses to minority
and/or women-owned entities.
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\82\Second Report and Order at 251.
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49. As stated previously, the record reveals that women and
minorities face barriers to entry not encountered by other designated
entities.\83\ In particular, they have an especially difficult time
accessing capital and, as a result, are severely under-represented in
the telecommunications industry. Together with the other preferences we
adopt today, tax certificates should help to ensure the participation
of minority and women-owned businesses in this service. This measure
will make it easier for these designated entities to attract start-up
capital because investors will know that they can defer taxes on any
gains made when their interests are sold. In addition, tax certificates
will provide incentives to licensees to seek out minority and female
buyers in after-market sales because the licensees will be able to
defer taxes on profits made in the sale.
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\83\See 42-44, supra.
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50. We have used tax certificates over the years to encourage
broadcast licensees and cable television operators to transfer their
stations and systems to minority buyers.\84\ We also have granted tax
certificates to shareholders in minority-controlled broadcast or cable
entities who sell their shares, when such interests were acquired to
assist in the financing of the acquisition of the facility.\85\ These
broadcast and cable tax certificates are issued pursuant to the
Internal Revenue Code, 26 U.S.C. 1071. While Congress' goal in
authorizing tax certificates under Section 309(j)(4)(D) of the Act is
somewhat different, and focuses on ensuring the opportunity for
designated entities to participate in auctions and spectrum-based
services, we think that it will be an equally valuable program.
Issuance of tax certificates to investors and licensees that sell to
minorities and women will augment the bidding credits preference, and
together the measures should increase the ability of these entities to
access financing, thus ensuring their opportunity to participate in
IVDS auctions and services.
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\84\See Commission Policy Regarding the Advancement of Minority
Ownership in Broadcasting, 92 FCC 2d 849 (1982) (``1982 Policy
Statement''); See also Statement of Policy on Minority Ownership of
Broadcasting Facilities, 68 FCC 2d 979 (1978).
\85\1982 Policy Statement, 92 FCC 2d at 855-58.
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51. In implementing this program, we will borrow from our existing
tax certificate program and grant tax certificates, upon request, that
will enable the licensees and investors meeting the criteria outlined
here to defer the gain realized upon a sale either by: (1) Treating it
as an involuntary conversion under 26 U.S.C. 1033, with the recognition
of gain avoided by the acquisition of qualified replacement property;
or (2) electing to reduce the basis of certain depreciable property; or
both. Tax certificates will be available to initial investors in
minority and women-owned businesses who provide ``start-up'' financing,
which allows these businesses to acquire licenses at auction or in the
aftermarket, and those investors who purchase interests within the
first year after license issuance, which allows for the stabilization
of the designated entities' capital base. Also, in accordance with our
existing policy, to be eligible for a tax certificate, such investor
transactions must not reduce minority or female ownership or control in
the entity below 50.1 percent. The definition of a minority or female-
owned entity is set forth in the Second Report and Order and, with
regard to our investor tax certificate policy, the entity in which the
investment is made must satisfy that definition at the time of the
original investment as well as after the investor's shares are sold.
For after-market sales, tax certificates will only be issued to
licensees who sell to entities that meet that definition. Tax
certificates will be granted only upon completion of the sale, although
parties can request a declaratory ruling from the Commission regarding
the tax consequences of prospective transactions.
52. As with our other tax certificate policies, we wish to deter
``sham'' arrangements to obtain tax certificates and, pursuant to
Section 309(j)(4)(E), therefore adopt measures to prevent unjust
enrichment. First, we intend to enforce strictly the definitions
adopted in the Second Report and Order and will carefully review
investment and purchase arrangements to ensure that 50.1 percent
control and equity by minorities and women was, and will be maintained.
Second, like our existing tax certificate program,86 we will
impose a one-year holding requirement on the transfer or assignment of
IVDS licenses obtained through the benefit of tax certificates. We
believe that the rapid resale of such licenses to non-minorities or
women at a profit would subvert our goal of ensuring the opportunity to
participate by minority and women-owned businesses. The well-
established one-year holding period would prevent this type of unjust
enrichment. While this restriction will not be applied to assignments
or transfers to qualified minority and female-owned businesses,
assignees and transferees obtaining licenses pursuant to this exception
will be subject to the one-year holding requirement.
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\8\6See Amendment of Section 73.3597 of the Commission's Rules,
Memorandum Opinion and Order, 99 FCC 2d 971, 974 (1985).
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D. Installment Payments
53. In this Fourth Report and Order, we adopt the preference of
installment payments and limit its use to small businesses. Permitting
a winning bidder to pay by installment payments is the equivalent of
having the government extend credit to the bidder. Using this option, a
prospective licensee may not need to rely as heavily on private
financing either before or after an auction. As a result, this method
is an effective way to promote the participation of designated entities
in the provision of spectrum-based services, and is an effective means
to distribute licenses and services among geographics areas.87 In
the Second Report and Order, we decided that the option of installment
payments should be extended only to small businesses (including those
held by minorities and women), and then only in instances where smaller
spectrum blocks are being auctioned and the use of the blocks is very
likely to match the business objectives of bona fide small
businesses.88 With the IVDS, the spectrum blocks are relatively
small and the potential difficulties associated with permitting this
option in the context of larger spectrum blocks (e.g.,
undercapitalization) are not present. We also find that, because of the
expected relatively low capital entry requirements for the IVDS and the
potential variety of offerings89 that might result from the
service, the IVDS will offer a bona fide business opportunity to small
businesses.
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\8\7Second Report and Order at 231-233.
\8\8Id. at 234-237. We noted that the legislative history of
the Budget Act indicates that large entities with established
revenue streams are not intended beneficiaries of the installment
payments preference. Id. at 236.
\8\9See note 3, supra.
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54. Therefore, we will permit the use of installment plans for all
IVDS auctions, and follow the general procedures given in the Second
Report and Order for the use of this preference.90. The
installment payment option will enable all small businesses to pay the
full amount of their winning bid in installments (less the upfront
payment, which must be paid in full, and the down payment, half of
which is due five days after the auction closes and the other half five
days after the application is granted). Timely payments of all
installments will be a condition of the license grant, and failure to
make such timely payments on or before the date due may be grounds for
revocation.91.
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\9\0Under these general procedures, for example, only interest
payments will be due for the first two years, with principal and
interest both being amortized over the remaining years of the
license. Also, interest charges will be fixed at the time of
licensing at a rate equal to that of five-year U.S. Treasury notes,
to track the IVDS license term of five years. See Second Report and
Order at 239. If a small business making installment payments seeks
to transfer a license to a non-small business entity during the term
of the license, we will require payment of the remaining principal
balance as a condition of the license transfer. Id. at 263.
\9\1Limited grace periods for defaulting licensees may be
considered on a case-by-case basis. Id. at 240.
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VII. Conclusion
55. In summary, the rules and procedures we adopt in this Fourth
Report and Order for auctioning licenses in the IVDS are designed to
minimize the regulatory burdens on both applicants and the Commission,
reduce the potential for delay of service to the public, and maintain
safeguards to preserve the integrity of the bidding process. The rules
also seek to meet Congressional objectives and serve two basic goals:
promoting economic growth, and enhancing access to telecommunications
service offerings for consumers, producers, and new entrants. We also
take account of Congress' desire that designated entities previously
underrepresented in the provision of telecommunications services be
afforded preferences to encourage their participation. We expect that
these procedures will lead to the development and rapid deployment of
IVDS offerings across the country.
VIII. Final Regulatory Flexibility Analysis
56. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.
604, the Commission's final analysis is as follows:
A. Need For, and Purpose of, This Action
As a result of the Budget Act referenced above, the Commission may
utilize competitive bidding mechanisms in the granting of certain
initial licenses. The Commission published an Initial Regulatory
Flexibility Analysis, see generally 5 U.S.C. 603, within the Notice of
Proposed Rule Making in this proceeding, and published a Final
Regulatory Flexibility Analysis within the Second Report and Order (at
299-304). As noted in that previous final analysis, this proceeding
will establish a system of competitive bidding for choosing among
certain applications for initial licenses, and will carry out
Congressional mandates that certain designated entities be afforded an
opportunity to participate in the competitive bidding process and the
provision of spectrum-based services.
B. Summary of the Issues Raised by the Public Comments in Response to
the Initial Regulatory Flexibility Analysis
In regard to the specific IVDS issues addressed by this Fourth
Report and Order, no comments were submitted in response to our Initial
Regulatory Flexibility Analysis.
C. Significant Alternatives Considered
Although, as described in (B) above, no comments were received
pertaining to IVDS, the Second Report and Order addressed at length the
general policy considerations raised as a result of the new
legislation.
IX. Ordering Clauses
57. Accordingly, it is ordered that, pursuant to the authority of
Sections 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), this Fourth Report and
Order is adopted, and Parts 0, 1, and 95 of the Commission's Rules are
amended as set forth in the attached Appendix.
58. It is further ordered that the rule amendments set forth in the
Appendix will become effective 30 days after their publication in the
Federal Register.
List of Subjects
47 CFR Part 0
Organization and functions
47 CFR Part 1
Administrative practice and procedure
47 CFR Part 95
Radio.
Federal Communications Commission.
William F. Caton,
Acting Secretary.
Rule Changes
Parts 0, 1, and 95 of Chapter I of Title 47 of the Code of Federal
Regulations are amended as follows:
PART 0--COMMISSION ORGANIZATION
1. The authority citation for Part 0 continues to read as follows:
Authority: Sec. 5, 48 Stat. 1068, as amended; 47 U.S.C. 155.
2. Section 0.131 is amended by adding new paragraph (k) to read as
follows:
Sec. 0.131 Functions of the Bureau.
* * * * *
(j) Develops, in coordination with the Office of Plans and Policy,
policies for selection of licensees from mutually exclusive applicants
in the Private Radio Services subject to competitive bidding; issues
Public Notices announcing auctions of Private Radio Services licenses;
specifies the licenses to be auctioned, the time, place and method of
competitive bidding, including applicable bid submission procedures,
bid withdrawal procedures, stopping rules and activity rules; specifies
the filing windows for short-form applications, bidder certifications,
and the deadlines for submitting filing fees, upfront payments and down
payments.
PART 1--PRACTICE AND PROCEDURE
3. The authority citation for Part 1 continues to read as follows:
Authority: Secs. 4, 303, 48 Stat. 1066, 1082, as amended; 47
C.F.R. 154, 303: Implement, 5 U.S.C. 552 and 21 U.S.C. 853a, unless
otherwise noted.
4. Section 1.912 is amended by redesignating paragraph (e) as
paragraph (f) and adding new paragraph (e) to read as follows:
Sec. 1.912 Where applications are to be filed.
* * * * *
(e) Applicants submitting long-form applications pursuant to
competitive bidding procedures (see Sec. 1.2107(c)) must mail or
otherwise deliver their application to: Office of the Secretary,
Federal Communications Commission, 1919 M Street NW., Room 222,
Washington, DC 20554, Attention: Auction Application Processing
Section.
* * * * *
5. Section 1.922 is amended by adding two entries at the beginning
of the table to read as follows:
Sec. 1.922 Forms to be used.
FCC Form and Title
175--Application to Participate in an FCC Auction
175-S Supplemental Application to Participate in an FCC Auction.
* * * * *
Sec. 1.972 [Amended]
6. In Sec. Section 1.972, paragraph (a)(1) is amended by removing
the words ``Part 95-Subpart F-Personal Radio Services'' and paragraph
(c) is amended by removing the words ``or part 95-subpart F'', removing
the comma and adding the word ``or'' after ``part 90'' in the first
sentence.
PART 95--PERSONAL RADIO SERVICES
7. The authority citation for Part 95 continues to read as follows:
Authority: Secs. 4, 303, 48 Stat. 1066, 1082, as amended; 47
U.S.C. 154, 303.
8. New Sec. 95.816 is added to read as follows:
Sec. 95.816 Competitive bidding proceedings.
(a) Mutually exclusive IVDS initial applications are subject to
competitive bidding.
(b) The General Procedures set forth in 47 CFR Part 1, Subpart Q
are applicable to competitive bidding proceedings used to select among
mutually exclusive applicants for initial IVDS licenses.
(c) The specific procedures applicable to auctioning particular
IVDS licenses will be set forth by Public Notice. Generally, the
following competitive bidding procedures will be used to auction
mutually exclusive IVDS licenses. The Commission, however, may design
and test alternative procedures.
(1) Competitive bidding design. Sequential oral (oral outcry)
auctions will be used to assign licenses in and around large urban
areas and single-round sealed bidding will be used for rural areas
unless otherwise specified by the Commission. See 47 CFR 1.2103 and
1.2104.
(2) Forms. (i) Applicants must submit short-form applications (FCC
Form 175) as specified in Commission Public Notices. Minor deficiencies
may be corrected prior to the auction. Major modifications such as
changes in ownership, failure to sign an application or failure to
submit required certifications will result in the dismissal of the
application. See 47 CFR 1.2105(a) and (b).
(ii) Applicants must submit a long-form application (FCC Form 574)
within ten (10) business days after being notified that it is the
winning bidder for a license. See 47 CFR 1.2107 (c) and (d).
(3) Upfront payments. For oral outcry bidding, applicants will be
required to show the Commission or its representative, immediately
prior to the auction, a cashiers check for at least $2500 in order to
get a bidding number and secure a place in the room where the bidding
will take place. Bidders will be required to have $2500 upfront money
for every five licenses they win. No upfront payment will be required
from applicants in single-round sealed bid auctions. See 47 CFR 1.2106.
(4) Down payments. Within five (5) business days after an oral
outcry auction is over, or within five (5) business days after being
notified that it is the high bidder in a single round sealed bid
auction, a high bidder on a particular license(s) must submit to the
Commission's lockbox bank such additional funds as are necessary to
bring total deposits (upfront payment plus down payment) up to twenty
(20) percent of the high bid(s). Small businesses eligible and electing
to use installment payments pursuant to Sec. 95.816(d)(3) are required
to bring their total deposits up to ten (10) percent of their winning
bid. The remainder of the twenty (20) percent down payment must be
submitted within five (5) business days of the grant of their
license(s). See 47 CFR 1.2107(b).
(5) Full payment. Auction winners, except for small businesses
eligible for installment payments, must pay the balance of their
winning bids in a lump sum within five (5) business days following the
grant of their license(s). The grant of a license(s) to an auction
winner(s) will be conditioned on the timely payment of all monies due
the Commission. See 47 CFR 1.2109(a).
(6) Default or disqualification, see 47 CFR 1.2104(g).
(i) Sequential oral auctions. If a high bidder, after signing a bid
confirmation form, fails to make the required down payment, fails to
pay for a license, or is otherwise disqualified, it will be assessed a
penalty equal to the difference between its winning bid and the winning
bid the next time the license is auctioned by the Commission, plus
three (3) percent of the lower of these two amounts.
(ii) Single round sealed bid auctions. If a high bidder withdraws
its bid prior to making the required down payment, it will be assessed
a penalty equal to the difference between its bid and the next highest
bid. If a high bidder, after having made the required down payment for
a license, fails to pay the remaining amount for the license, or is
otherwise disqualified, it will be assessed a penalty equal to the
difference between its winning bid and the winning bid the next time
the license is auctioned by the Commission plus three (3) percent of
the lower of these two amounts.
(d) Designated entities. Designated entities are small businesses,
and businesses owned by members of minority groups and/or women, as
defined in 47 CFR 1.2110(b).
(1) Bidding credits. A winning bidder that qualifies as a business
owned by women and/or minorities may use a bidding credit of twenty-
five (25) percent to lower the cost of its winning bid. A bidding
credit is available for a license for either frequency segment A or
frequency segment B in each service area. A bidding credit, however,
may be applied to only one of the two licenses available in each
service area.
(2) Tax certificates. Any initial investor in a business owned by
minorities and/or women and who provides ``start-up'' financing, which
allows such business to acquire a IVDS license(s), and any investor who
purchases ownership in an interest in a IVDS license owned by
minorities and/or women within the first year after license issuance,
which allows for the stabilization of the entity's capital base, may,
upon the sale of such investment or interest, request from the
Commission a tax certificate, so long as such investor transaction does
not reduce minority or female ownership or control in the entity below
50.1 percent. Any IVDS licensee who assigns or transfers control of its
license to a business owned by minorities and/or women may request that
the Commission issue it a tax certificate.
(3) Installment payments. Small businesses, including small
businesses owned by women and/or minorities may elect to pay the full
amount of their bid in installments over the term of their licenses.
See 47 CFR 1.2110(d).
(e) Unjust enrichment. Any business owned by minorities and/or
women that obtains a IVDS license through the benefit of tax
certificates shall not assign or transfer control of its license within
one year of its license grant date. If the assignee or transferee is a
business owned by minorities and/or women, this paragraph shall not
apply; Provided, however, that the assignee or transferee shall not
assign or transfer control of the license within one year of the grant
date of the assignment or transfer.
9. Section 95.819 is revised to read as follows:
Sec. 95.819 License transferability.
(a) IVDS system licenses acquired through competitive bidding
procedures may be transferred, assigned, sold, or given away only in
accordance with the provisions and procedures set forth in 47 CFR
1.2111.
(b) Except for licenses acquired through competitive bidding
procedures, the licensees may not transfer, assign, sell, or give the
IVDS system licenses or any component CTS licenses to any other entity
until the five year construction benchmark (50 percent coverage) has
been met.
(c) Once the five year construction benchmark has been met,
licensees of IVDS systems that were not acquired through competitive
bidding may transfer, sell, assign, or give the IVDS system licenses
together with all of its component CTS licenses to any other entity in
accordance with the provisions of Sec. 95.821. If the licensee sells or
gives away the apparatus the new owner must obtain a new IVDS system
license and CTS licenses before placing it in operation.
[FR Doc. 94-11779 Filed 5-12-94; 8:45 am]
BILLING CODE 6712-01-M
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.