Implementation of Section 309(j) of the Communications Act Competitive Bidding
Federal RegisterJul 22, 1994
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SUMMARY: In this Fifth Report and Order, the Commission adopts rules
governing competitive bidding to award initial licenses in the Personal
Communications Services in the 2 GHz band (broadband PCS''). This
action is taken to implement Section 309(j) of the Communications Act
of 1934, as amended. The new rules will promote the development and
rapid deployment of new technologies, products, and services for the
benefit of the public, including those residing in rural areas. These
rules also will promote economic opportunity and competition, and
disseminate licenses among a wide variety of applicants, including
small businesses, rural telephone companies, and businesses owned by
members of minority groups and women. This action will result in
recovery for the public of a portion of the value of the public
spectrum made available for commercial use.
EFFECTIVE DATE: August 22, 1994.
FOR FURTHER INFORMATION CONTACT:
Sara Seidman, Office of General Counsel, (202) 418-1700, or Jonathan
Cohen, Office of Plans and Policy, (202) 418-2030.
SUPPLEMENTARY INFORMATION: This Fifth Report and Order in PP Docket No.
93-253, adopted June 29, 1994, and released July 15, 1994, is available
for inspection and copying during normal business hours in the FCC
Dockets Branch, 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, NW., Suite
140, Washington, DC 20037, telephone (202) 857-3800.
Paperwork Reduction Act
In the Fifth Report and Order in PP Docket No. 93-253, the
Commission has amended 47 CFR Part 24 to add new Subparts H and I which
contain rules and requirements governing the award of broadband PCS
licenses through a system of competitive bidding. Applicants are
required to file certain information so that the Commission can
determine whether the applicants are legally, technically, and
financially qualified to be licensed. Affected public are any member of
the public who wants to become a licensee. Implementation of the rules
contained in the Fifth Report and Order will impose reporting and
recordkeeping requirements on the public. The Federal Communications
Commission will submit an information collection request to OMB for
review and clearance under the Paperwork Reduction Act of 1980, 44
U.S.C. Section 3507. Persons wishing to comment on this information
collection should contact Timothy Fain, Office of Management and
Budget, Room 3225, New Executive Office Building, Washington, DC 20503,
(202) 395-3561. For further information, contact Judy Boley, Federal
Communications Commission, (202) 418-0210.
Fifth Report and Order
Adopted: June 29, 1994
Released: July 15, 1994
By the Commission: Commissioners Quello, Barrett, Ness and Chong
issuing separate statements.
Table of Contents
I. Introduction
II. Executive Summary
III. Auctionability of Broadband PCS
IV. Competitive Bidding Design
A. General Competitive Bidding Rules
B. Competitive Bidding Design for Broadband PCS Licenses
1. Simultaneous Multiple Round Auctions
2. Sequential Auctions
3. Combinatorial Bidding
C. Bidding Procedures
1. Grouping of Licenses
2. Bid Increments
3. Stopping Rules for Multiple Round Auctions
4. Duration of Bidding Rounds
5. Activity Rules
V. Procedural, Payment and Penalty Issues
A. Pre-Auction Application Procedures
B. Upfront Payment
C. Payment and Procedures for Licenses Awarded by Competitive
Bidding
1. Down Payment
2. Bid Withdrawal and Default Penalties
3. Re-Offering Licenses When Auction Winners Default
4. Long-Form Application
5. Processing and Procedural Rules
D. Procedures in Alternative Auction Design
VI. Regulatory Safeguards
A. Transfer Disclosure Requirements
B. Performance Requirements
C. Rules Prohibiting Collusion
VII. Treatment of Designated Entities
A. Overview and Objectives
B. Summary of Special Provisions for Designated Entities
C. Summary of Eligibility Requirements and Definitions
1. Entrepreneurs' Blocks and Small Business Eligibility
2. Definition of Women and/or Minority-Owned Business
D. The Entrepreneurs' Blocks
E. Bidding Credits
F. Installment Payments
G. Tax Certificates
H. Provisions for Rural Telephone Companies
I. Upfront Payments
J. Definitions and Eligibility
1. Eligibility To Bid in the Entrepreneurs' Blocks
a. Attribution Rules for the Entrepreneurs' Blocks
b. Limit on Licenses Awarded in Entrepreneurs' Blocks
2. Definition of Small Business
3. Definition of Women and Minority-Owned Business
4. Definition of Rural Telephone Company
5. Definition of an Affiliate
VIII. Conclusion, Procedural Matters and Ordering Clauses
A. Conclusion
B. Final Regulatory Flexibility Analysis
C. Ordering Clauses
Final Rules
I. Introduction
1. In this Fifth Report and Order, we adopt rules to conduct
auctions for the award of more than 2,000 licenses to provide personal
communications services in the 2 GHz band, which we call ``broadband
PCS.'' These broadband PCS auctions will constitute the largest auction
of public assets in American history and are expected to recover
billions of dollars for the United States Treasury. More importantly,
the auctions will lead to the introduction of an array of new
telecommunications products and services that are expected to fuel our
nation's economic growth and revolutionize the way in which Americans
communicate.
2. We also adopt in this Order provisions to fulfill Congress's
mandate that we ensure that small businesses, rural telephone companies
and businesses owned by minorities and women are given the opportunity
to participate in the provision of broadband PCS. These rules will
provide unprecedented opportunities for these designated entities to
become meaningfully involved in the provision of a new
telecommunications service. This action seeks to ensure that licenses
for broadband PCS are disseminated to a wide variety of applicants and
to remedy the serious underrepresentation of minorities and women in
the provision of telecommunications services. Further, by the actions
we take today we seek to ensure that PCS is provided to all communities
in this country, including rural areas.
3. Broadband PCS will provide a variety of mobile services that
will compete with existing cellular services. In addition, broadband
PCS is expected to provide new mobile communications capabilities that
are not currently available. These services will be provided by means
of a new generation of communications devices that will include small,
lightweight, multi-function portable phones, portable facsimile and
other imaging devices, new types of multi-channel cordless phones, and
advanced paging devices with two-way data capabilities.\1\ The
introduction of broadband PCS should benefit consumers by raising the
overall level of competition in many already competitive segments of
the telecommunications industry and by providing competition in other
segments for the first time. The broadband PCS industry should also
generate thousands of jobs in this country and improve the
international competitiveness of the American economy.
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\1\We already have adopted rules for competitive bidding on
licenses to be awarded to provide personal communications services
in the 900 MHz band (narrowband PCS), which will be used primarily
to provide advanced paging services, and for licenses to provide
Interactive Video and Data Service (IVDS), which will be used to
provide services such as home shopping and pay-per-view programming.
See Third Report and Order in PP Docket No. 99-253, FCC 94-98, 59 FR
26741, May 24, 1994 (narrowband PCS); and Fourth Report and Order in
PP Docket No. 93-253, FCC 94-99, 59 FR 24947, May 13, 1994 (IVDS).
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4. Auctions for broadband PCS licenses will be conducted pursuant
to Section 309(j) of the Communications Act, 47 U.S.C. Sec. 309(j),
which was enacted in August 1993. Section 309(j) granted the Commission
express authority to employ competitive bidding procedures to award
licenses to use the electromagnetic spectrum.\2\ Section 309(j)(1)
permits auctions only where mutually exclusive applications for initial
licenses are accepted for filing by the Commission and where the
principal use of the spectrum is reasonably likely to involve the
receipt by the licensee of compensation from subscribers in return for
enabling those subscribers to receive or transmit communications
signals. In the Second Report and Order in his proceeding, we concluded
that PCS as a class of service satisfies the Section 309(j)(1)
criteria. See Second Report and Order in PP Docket No. 93-253, 9 FCC
Rcd 2348, 59 FR 22980, May 4, 1994 (Second Report and Order), at 54-
58. Accordingly, if mutually exclusive applications for a broadband PCS
license are accepted for filing, we will award that license through
competitive bidding.
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\2\We adopted a Notice of Proposed Rule Making to implement
Section 309(j) on September 23, 1993. Notice of Proposed Rule Making
in PP Docket No. 93-253, 8 FCC Rcd 7635, 58 FR 53489, Oct. 15, 1993
(hereinafter ``NPRM'' or ``Notice''). The Commission received 222
comments, 169 reply comments and numerous ex parte presentations
relating to this proceeding. Commenters may be referred to herein by
abbreviations.
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5. We also concluded in the Second Report and Order that we could
design auction procedures to govern the award of broadband PCS licenses
that would promote the objectives listed in Section 309(j)(3). More
specifically, in the Second Report and Order, we determined that the
use of competitive bidding to award broadband PCS licenses, as compared
with other licensing methods, would speed the development and
deployment of new services to the public and would encourage efficient
use of the spectrum, as required by Section 309(j)(3) (A) and (D). In
this regard, we noted that auctions would generally award licenses
quickly to those parties who value them most highly and who are
therefore most likely to introduce service rapidly to the public. Id.
at 57. We also concluded that competitive bidding would recover for
the public a portion of the value of the spectrum, as envisioned in
Section 309(j)(3)(C). Id. We considered a variety of methods to
implement Congress's remaining objectives, set forth in Section
309(j)(3)(B), of ``promoting economic opportunity'' and ``avoiding
excessive concentration of licenses'' by disseminating licenses ``among
a wide variety of applicants.'' In the Second Report and Order, we
adopted rules which provide the Commission with a menu of options to
choose from to promote these objectives with respect to particular
spectrum services to be auctioned, such as broadband PCS, in service-
specific rules.
6. In our Broadband PCS Reconsideration Order, we established
bandwidth assignments and area designations for broadband PCS. See
Memorandum Opinion and Order in GEN Docket No. 90-314, FCC 94-144, 59
FR 32830, June 24, 1994 (``Broadband PCS Reconsideration Order''); see
also Second Report and Order in GEN Docket No. 90-314, FCC 93-451, 8
FCC Rcd 7700, 58 FR 59174, Nov. 8, 1993. In that Order, we allocated
120 MHz of spectrum for licensed broadband PCS. We divided the licensed
broadband PCS spectrum into three 30 MHz blocks (blocks A, B and C) and
three 10 MHz blocks (blocks D, E and F). We also designated two
different service areas: 493 Basic Trading Areas (``BTAs'') and 51
Major Trading Areas (``MTAs'').\3\ The licenses in frequency blocks A
and B will be awarded on an MTA basis, and the licenses on frequency
blocks C, D, E and F will be awarded on a BTA basis. A total of 2,074
broadband PCS licenses will therefore be issued.\4\ The Broadband PCS
Reconsideration Order sets forth eligibility rules for obtaining
broadband PCS licenses, and establishes construction requirements to
facilitate the provision of PCS services. See Broadband PCS
Reconsideration Order at 102-132, 147-158. By these rules, we intend
to promote competition in the wireless telecommunications market by as
many different qualified providers as the spectrum can reasonably
accommodate and to promote the rapid deployment of the infrastructure
required to provide broadband PCS.
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\3\The 493 BTAs and 51 MTAs used in our broadband PCS licensing
rules have been adapted from the Rand McNally 1992 Commercial Atlas
and Marketing Guide, 123rd Edition, at 38-39.
\4\The Commission has granted pioneer's preference to three
broadband PCS applicants, and stated that the parties awarded
pioneer's preferences may apply for a 30 MHz MTA broadband PCS
license without facing competing applications. See Third Report and
Order in GEN Docket No. 90-314, 9 FCC Rcd 1337, 59 FR 9419, Feb. 28,
1994. If the Commission grants licenses to the three pioneer's
preference grantees, three fewer licenses will be awarded through
competitive bidding.
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II. Executive Summary
7. In this Fifth Report and Order, we set forth the specific
auction procedures for broadband PCS licenses. We have decided to
conduct three auctions: the first for the 99 available PCS licenses in
MTA blocks A and B, the second for the 986 PCS licenses in BTA blocks C
and F, and the third for the remaining 986 PCS licenses in BTA blocks D
and E. That is, the first auction will award licenses for the 30 MHz
blocks for large geographic areas. The second auction will award
licenses for smaller geographic areas for the two blocks that, as
explained below, we have reserved for bidding by relatively small
companies. In these ``entrepreneurs' blocks,'' we have designed
procedures to ensure that small businesses, rural telephone companies
and businesses owned by women and minorities, which we collectively
refer to as designated entities, have ``the opportunity to participate
in the provision'' of PCS, as Congress directed in Section
309(j)(4)(D). In the third auction we will award licenses for the
remaining 10 MHz blocks.
8. We intend to conduct each auction through simultaneous multiple
round bidding with simultaneous stopping rules. Under that approach, no
license awarded until the bidding closes on all licenses in the
auction. We have determined that simultaneous multiple round bidding is
appropriate where the value of the licenses is high compared to the
cost of conducting the auction and the values of licenses are
interdependent. See Second Report and Order at 106-111. We believe the
former condition is met here because other government agencies project
that the boardband PMS licenses will be auctioned for as much as $10.6
billion. See id. at 177. The latter condition is also satisfied
because the record demonstrates, for example, that a license for the
Philadelphia MTA or the Richmond MTA will likely be valued more highly
if it is held in conjunction with the license for the Washington-
Baltimore MTA. We are adopting a variety of rules governing bid
increments and bidding activity to move the auctions toward completion
in a reasonable period of time. We are also retaining the ability to
use other approaches, including sequential auctions for the licenses,
and to make other adjustments to the auction process as necessary.
9. As mentioned above, we establish by this Order a number of rules
to implement Congress's mandate in Section 309(j)(4)(D) that we ensure
that designated entities are ``given the opportunity to participate in
the provision of spectrum-based services'' such as broadband PCS. To
accomplish this objective, Congress directed us to ``consider the use
of tax certificates, bidding preferences, and other procedures.'' 47
U.S.C. Sec. 309(j)(4)(D). We construe this congressional directive as a
mandate that we take the steps that are necessary to ensure that
designated entities have a realistic opportunity to obtain broadband
PCS licenses. We apply that mandate in light of Metro Broadcasting,
Inc. v. FCC, 497 U.S. 547, 564-565 (1990), which held that ``benign
race-conscious measures mandated by Congress * * * are constitutionally
permissible to the extent that they serve important governmental
objectives within the power of Congress and are substantially related
to achievement of those objectives.'' The rules we adopt also further
Congress's objectives, set forth in Section 309(j)(3)(B), of
``promoting economic opportunity and competition and ensuring that new
and innovative technologies are readily accessible to the American
people by avoiding excessive concentration of licenses and by
disseminating licenses among a wide variety of applicants, including
small business, rural telephone companies, and businesses owned by
members of minority groups and women.'' Each of the steps adopted here
is directly related to carrying out Congress's stated objective of
promoting economic opportunity by disseminating broadband PCS licenses
to a wide variety of applicants, including designated entities.
10. The record clearly demonstrates that the primary impediment to
participation by designated entities is lack of access to capital. This
impediment arises for small businesses from the higher costs they face
in raising capital and for businesses owned by minorities and women
from lending discrimination as well. In this regard, it should be noted
that although auctions have many beneficial aspects, they threaten to
erect another barrier to participation by small businesses and
businesses owned by minorities and women by raising the cost of entry
into spectrum-based services.
11. Congress has recognized that ``small business concerns, which
represent higher degrees of risk in financial markets than do large
businesses, are experiencing increased difficulties in obtaining
credit.''\5\ Congress further found that women and minorities face
particularly severe problems in raising capital.\6\ A study of mortgage
lending conducted by the Federal Reserve Bank of Boston in 1992
illustrates how problems arise. That study showed that in cases in
which lenders exercised discretion in deciding whether to make a loan
to a borrower who presented some problems (which includes most mortgage
applicants), that discretion tended to be exercised in favor of whites.
As a result, a minority applicant for a mortgage who was identical in
all pertinent respects to a white applicant nevertheless was 60 percent
more likely to be denied a mortgage loan.\7\ At the same time,
discrimination was difficult to show in any particular case, although
it emerged clearly when data concerning hundreds of mortgage
applications were reviewed.
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\5\Small Business Credit and Business Opportunity Enhancement
Act of 1992, Section 331(a)(3), Pub. L. 102-366, Sept. 4, 1992.
\6\Id. Sections 112(4) and 331(a)(4).
\7\Mortgage Lending in Boston: Interpreting HMDA Data, Federal
Reserve Bank of Boston, Working Paper 92-7 (October 1992).
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12. The first measure we adopt to fulfill Congress's mandate that
we ensure that designated entities have the opportunity to participate
in providing broadband PCS is to reserve the 30 MHz licenses on block C
and the 10 MHz licenses on block F, both of which are to be licensed in
each of the 493 BTAs, for bidding by entities with annual gross
revenues of less than $125 million and total assets of less than $500
million. These limits will exclude many large telecommunications
companies from bidding on these two blocks. We will not allow one
entity to obtain more than 10 percent (i.e., 98) of the licenses on
these two blocks. By excluding large companies from bidding in these
two blocks and by limiting the total number of licenses that one entity
can obtain in these blocks we create numerous opportunities for small
entities to become PCS providers and thereby ensure that broadband PMS
licenses will be disseminated ``among a wide variety of applicants,''
as required by Section 309(j)(3)(B).
13. Reserving blocks C and F for bidding by relatively small
companies will not, by itself, be sufficient to ensure that small
businesses and businesses owned by members of minority groups and women
have the opportunity to obtain broadband PCS licenses. Under the
definition we apply or purposes of this Order, ``small businesses'' are
those with gross revenues not exceeding $40 million, and those
businesses will be at a disadvantage in competing against companies
with gross revenues of as much as $125 million. In addition, businesses
owned by members of minority groups and women face discrimination that
poses additional obstacles for these firms. Accordingly, we take five
related steps within the entrepreneurs' blocks to assist designated
entities in attracting the capital necessary to obtain a broadband PCS
license.
14. First, we will structure our attribution rules to allow those
extremely large companies that may not bid on blocks C and F to invest
in entities that bid on those blocks. More specifically, we will allow
the relatively small companies eligible to bid in these blocks to
obtain investment representing up to 75 percent of their passive equity
from larger companies so long as each investor holds no more than a 25
percent passive equity interest. In addition, eligible businesses owned
by minorities and women may choose to have a single investor, no matter
how large, hold a passive equity interest up to 49.9 percent. These
rules, and others that we establish in this Order, are designed to
enhance access to capital by businesses owned by minorities and women.
15. Second, to encourage large companies to invest in designated
entities and to assist designated entities without large investors to
overcome the additional hurdle presented by auctions, we will make
bidding credits available to designated entities. More specifically,
small businesses will receive a 10 percent bidding credit (or a 10
percent discount on their winning bids). Businesses owned by minorities
and women will receive a 15 percent bidding credit to compensate for
the substantial problems they face in attracting capital. The credits
will be cumulative, so that a business owned by minorities or women
that also qualifies as a small business will receive a 25 percent
bidding credit. Under these rules, it still will be more expensive for
designated entities to participate in the provision of spectrum-based
services than it was before Congress granted us authority to hold
auctions, because they will have to purchase licenses. But by adopting
bidding credits, which are explicitly authorized by Section
309(j)(4)(D), the Commission seeks to promote economic opportunity and
to counterbalance the tendency of auctions to concentrate license
ownership in the hands of several very large companies.
16. Third, we will allow most successful bidders within the
entrepreneurs' blocks to pay for their licenses in installments for
generally the same reasons--encouraging large companies to invest in
designated entities, promoting economic opportunity by assisting
designated entities in overcoming the additional hurdle presented by
auctions, and ensuring that licenses are disseminated widely. In
general, successful bidders will be permitted to defer payments of
principal on their debt to the government for some period. Small
businesses and businesses owned by minorities and women will be
permitted to defer payments of principal for a longer period than other
successful bidders in these blocks. Finally, businesses owned by
minorities and women will be charged a lower interest rate.
17. Fourth, we will extend our tax certificate policies to promote
participation by minorities and women in the provision of broadband
PCS. The holder of a tax certificate is permitted to defer payment of
the capital gains tax that would otherwise be recognized upon the sale
of an investment. Our extension of the tax certificate policy to
broadband PCS will promote involvement by minorities and women in
spectrum-based services in three ways. First, initial investors in such
businesses will be eligible for tax certificates upon the sale of their
investments. We expect that the availability of such favorable tax
treatment will enable minority- and women-owned businesses to attract
investors more easily. Second, holders of broadband PCS licenses will
be able to obtain tax certificates upon the sale of the business to a
company controlled by minorities and women. Third, a cellular operator
that sells its interest in an overlapping cellular system to a
minority- or woman-owned business to come into compliance with our PCS/
cellular cross-ownership rule will be eligible for a tax certificate.
Both the second and third policy will further Congress' objective of
ensuring that spectrum licenses are disseminated widely and, in
particular, to designated entities.
18. Finally, we will reduce the upfront payment for all bidders in
the entrepreneurs' block. Bidders in the other blocks will pay $0.02
per MHz per pop while winners in the entrepreneurs' blocks will receive
a 25 percent discount and pay only $0.015 per MHz per pop as a pre-
auction payment.
19. Congress was also concerned that rural areas not go unserved by
PCS, and therefore directed us to ensure participation in auctions for
spectrum-based services by rural telephone companies who have a history
of service to rural areas and an established infrastructure on which to
build a PCS business effectively. Thus, we establish partitioning rules
in this Order that will allow them to use their existing wireline
network to efficiently and expeditiously provide PCS in rural areas. In
addition, most rural telephone companies will qualify to bid on the
entrepreneurs' blocks, and hence will be eligible for installment
payments. Those rural telephone companies that qualify as small or
minority- or women-owned businesses will also be able to take advantage
of the applicable bidding credits.
20. The rules that we adopt today are designed to ensure that only
bona fide designated entities qualify for the special provisions
established to ensure their participation in broadband PCS. The rules
are designed to enable designated entities to attract passive equity
from non-designated entities, provided that designated entities
maintain control and a substantial entity stake in the ventures at all
times. The Commission will not tolerate ``fronts'' that are controlled
by supposedly passive investors, and we will be vigilant in preventing
abuse of the designated entity provisions. Our rules are also designed
to prevent designated entities from assigning licenses obtained through
the use of these special measures or who otherwise lose their
designated entity status before the end of a required five-year holding
period.
21. The following sections of this Fifth Report and Order discuss
in detail the actions we have outlined above.
III. Auctionability of Broadband PCS
22. Section 309(j)(1) of the Communications Act, as amended, 47
U.S.C. Sec. 309(j)(1), permits auctions only where mutually exclusive
applications for initial licenses or construction permits are accepted
for filing by the Commission and where the principal use of the
spectrum will involve or is reasonably likely to involve the receipt by
the licensee of compensation from subscribers in return for enabling
those subscribers to receive or transmit communications signals. In the
Second Report and Order, we concluded that PCS as a class of service
would satisfy the section 309(j)(1) criteria for auctionability. See
Second Report and Order at 54-58. Specifically, based on the record
in this proceeding and in GEN Docket No. 90-314, we concluded that the
principal use of broadband PCS spectrum satisfied these auction
criteria. Id. at 56. Thus, if mutually exclusive applications for a
broadband PCS license are accepted for filing, we will award that
license through competitive bidding.\8\
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\8\In the Second Report and Order, we addressed the only
commenter who argued that the Commission should not find that the
principal use of PCS is likely to be for the provision of service to
subscribers for compensation. See Second Report and Order at 55-
56. The Commission rejected the argument of Millin Publications, a
publisher of specialized information services that intends to
utilize PCS frequencies on a non-subscription basis, that the
Commission should refrain from making the principal use finding
because PCS does not yet exist. We concluded that the overwhelming
weight of the comments in this proceeding, as well as our experience
with the PCS experiments that we have licensed, reflect that
licensed PCS spectrum is likely to be used principally for the
provision of service to subscribers for compensation. See id. at
56. We find no basis in the record to depart from this conclusion.
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23. As noted above, we concluded in the Second Report and Order
that the criteria in Section 309(j)(3) will be satisfied by competitive
bidding for broadband PCS licenses, and thus that broadband PCS should
be subject to our competitive bidding procedures. We determined that
the use of competitive bidding to award broadband PCS licenses, as
compared with other licensing methods, will speed the development and
deployment of new services to the public with minimal administrative or
judicial delay, and will encourage efficient use of the spectrum as
required by Section 309(j)(3) (A) and (D). We also concluded that
competitive bidding would recover for the public a portion of the value
of the spectrum, as envisioned in Section 309(j)(3)(C). Id. Finally, in
accordance with Section 309(j)(3)(B), we adopted a set of open
competitive bidding procedures and a menu of special provisions
designed to increase opportunities for designated entities who might
otherwise face entry barriers. Our views on this matter remain
unchanged since adoption of the Second Report and Order. We therefore
affirm in this Order the use of competitive bidding procedures to award
broadband PCS licenses.
IV. Competitive Bidding Design
A. General Competitive Bidding Rules
24. The Second Report and Order established the criteria to be used
in selecting which auction design method to use for each particular
auctionable service. Generally, we concluded that awarding licenses to
those parties who value them most highly will foster Congress' policy
objectives. In this regard, we noted that since a bidder's ability to
introduce valuable new services and to deploy them quickly,
intensively, and efficiently increases the value of a license to that
bidder, an auction design that awards licenses to those bidders with
the highest willingness to pay tends to promote the development and
rapid deployment of new services and the efficient and intensive use of
the spectrum. In articulating our auction design principles we further
stated that: (1) Licenses with strong value interdependencies should be
auctioned simultaneously; (2) multiple round auctions, by providing
bidders with information regarding other bidders' valuations of
licenses, generally will yield more efficient allocations of licenses
and higher revenues, especially where there is substantial uncertainty
as to value; and (3) because they are relatively expensive to implement
and time-consuming, simultaneous and/or multiple round auctions become
less cost-effective as the value of licenses decreases. See Second
Report and Order at 69.
25. Based on the foregoing, we concluded that where the licenses to
be auctioned are interdependent and their value is expected to be high,
simultaneous multiple round auctions would best achieve the
Commission's goals for competitive bidding. See Second Report and Order
at 109-111. We indicated that compared with other bidding
mechanisms, simultaneous multiple round bidding will generate the most
information about license values during the course of the auction and
provide bidders with the most flexibility to pursue back-up strategies.
Thus, we concluded that simultaneous multiple round bidding is most
likely to award interdependent licenses to the bidders who value them
the most. We also indicated that this method will facilitate efficient
aggregation of licenses across spectrum bands, thereby resulting in
vigorous competition among several strong service providers who will be
able rapidly to introduce a wide variety of services highly valued by
end users. Second Report and Order at 106. In addition, we concluded
that because of the superior information and flexibility it provides,
this method is likely to yield greater revenues than other auction
designs. Thus, we found that the use of simultaneous multiple round
auctions would generally be preferred. Id.
26. However, because simultaneous multiple round bidding is likely
to be more administratively complex and costly both for bidders and for
the FCC than sequential or single round bidding, we indicated that we
would use this auction design only where license values are
interdependent and the expected value of the licenses to be auctioned
is high relative to the costs of conducting a simultaneous multiple
round auction. See Second Report and Order at 110-111.
B. Competitive Bidding Design for Broadband PCS Licenses
27. In the Second Report and Order we considered several auction
methods including simultaneous multiple round bidding, sequential
bidding, and combinatorial bidding. We discuss each of these below. We
have chosen to adopt simultaneous multiple round auctions as our
auction methodology for broadband PCS licenses. We believe that for
broadband licenses this method will best meet Congress' goals in
authorizing competitive bidding in section 309(j) of the Communications
Act.
1. Simultaneous Multiple Round Auctions
28. There is considerable support in the record for the use of
simultaneous multiple round auctions, in which two or more licenses are
put up for bid at the same time, and there are multiple bidding rounds
in which bidders have the opportunity to top the high bids from the
previous round. Several comments and studies in the record by academic
auction experts advocate simultaneous multiple round bidding for
broadband PCS. See comments of PacTel Corporation, Attachment of R.
Preston McAfee; comments of Pacific Bell and Nevada Bell, Attachment of
Paul R. Milgrom and Robert B. Wilson; comments of NYNEX, Attachment by
Robert G. Harris and Michael L. Katz. NTIA also recommends simultaneous
multiple round bidding.\9\ Comments of NTIA at 14-16. Other experts
recommend using some combination of sequential and simultaneous
bidding. See comments of Bell Atlantic Personal Communications, Inc.,
Attachment by Barry Nalebuff and Jeremy Bulow; and comments of
Telephone and Data Systems, Attachment by Robert J. Weber. Some
commenters who originally expressed no opinion on the issue or
supported other methods in their comments supported proposals for
simultaneous bidding in their reply comments. See reply comments of
AT&T, GTE Service Corp. and Community Service Telephone Co.
---------------------------------------------------------------------------
\9\NTIA also supports all-or-nothing bids on groups of licenses,
i.e., combinatorial bidding, in conjunction with simultaneous
multiple round bidding.
---------------------------------------------------------------------------
29. The analysis in the Second Report and Order also supports
simultaneous multiple round bidding for broadband PCS auctions. We
concluded that multiple round bidding is generally superior to single
round bidding, and that when licenses are interdependent, simultaneous
bidding is generally superior to sequential bidding. As we noted in the
Second Report and Order, multiple-round auctions have the advantage
over single-round auctions insofar as they provide more information to
bidders about the value that other bidders place on licenses,
increasing the likelihood that the licenses are acquired by those who
value them most highly and increasing the revenue likely to be gained
from the auction. Multiple-round auctions are also more likely to be
perceived as open and fair. The disadvantage of multiple round auctions
is that they have higher administrative costs than single round
auctions. Second Report and Order at 82-85.
30. As noted in the Second Report and Order, simultaneous auctions
are more likely than sequential auctions to award interdependent
licenses efficiently because they provide more information about the
value of interdependent licenses and allow the use of that information
because all licenses remain available throughout the bidding process.
Simultaneous auctions are also likely to raise more revenue than
sequential auctions for two reasons. First, they increase the value of
the licenses by facilitating efficient aggregation. Second, because
they provide more information about the value of interdependent
licenses they reduce the propensity of sophisticated bidders to bid
cautiously in order to avoid the ``winner's curse''--the tendency for
the winner to be the bidder who most overestimates the value of the
item up for bid. Simultaneous auctions also eliminate the need to
choose the order in which licenses will be auctioned. The advantage
offered by simultaneous auctions depends on how much interdependence
exists among licenses. Second Report and Order at 89-94. The
disadvantages of simultaneous multiple round auctions appear to be that
they may be difficult to implement and there is little experience in
their use. Second Report and Order at 95.
31. We agree with commenters who support simultaneous multiple
round bidding for awarding broadband PCS licenses. Estimates of total
PCS revenues by the Office of Management and Budget and the
Congressional Budget Office indicate that the value of broadband PCS
licenses will likely be sufficiently high to warrant the use of
simultaneous auctions.\10\ We further believe that the values of most
broadband PCS licenses will be significantly interdependent because of
the desirability of aggregation across spectrum blocks and geographic
regions and because there is a high degree of substitutability among
licenses with the same amount of spectrum and covering the same
geographic area. See Second Report and Order at 90-91. Compared with
other bidding mechanisms, simultaneous multiple round bidding generates
the most information about license values during the course of the
auction and provides bidders with the most flexibility to pursue back-
up strategies, and is therefore most likely to award licenses to the
bidders who value them the most. Simultaneous multiple round auctions
will also facilitate efficient aggregation across spectrum bands, where
permitted, thereby enhancing competition among wireless products and
services.
---------------------------------------------------------------------------
\10\A study by the Congressional Budget Office estimated that an
auction for PCS licenses on two 25 MHz nationwide blocks of spectrum
could raise $1.3 billion to $5.7 billion in revenues. Congressional
Budget Office, Auctioning Radio Spectrum Licenses, at 23 (March
1992). The Office of Management and Budget estimated that auctioning
broadband PCS licenses would generate $12.6 billion in revenues.
Budget of the United States Government, Analytical Perspective,
Fiscal Year 1995, at 220 (February 1994).
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32. We recognize, however, that simultaneous multiple round bidding
may involve a greater degree of complexity than other competitive
bidding methods, and that it may present greater operational
difficulties both for the FCC and for bidders, especially where many
bidders are expected to participate. Therefore, we will use a sequence
of simultaneous auctions. Licenses that are highly interdependent will
be grouped together and auctioned simultaneously.
2. Sequential Auctions
33. In a pure sequential auction, whether oral or electronic,
licenses are put up for bid one at a time, so that bidding ends on one
item before it begins on the next item. Sequential multiple round oral
or electronic auctions generate valuable information about earlier
auctioned licenses, which can assist bidders in valuing later auctioned
licenses. If license values are interdependent, however, sequential
oral or electronic auctions are less likely than simultaneous auctions
to award interdependent licenses to the parties who value them most
highly and to result in the efficient aggregation of licenses, because
bidders for licenses that are auctioned early must bid with less
information about the value of licenses to be auctioned later, and they
will have less opportunity to pursue backup bidding strategies. For
these reasons, we conclude that sequential multiple round auctions are
less preferred in the award of broadband PCS licenses than simultaneous
multiple round auctions. Nevertheless, if, as a result of our auction
experience, we determine that the operational costs or complexities
associated with simultaneous multiple round auctions outweigh their
benefits, we may decide instead to employ pure sequential oral or
electronic (multiple round) auctions or a sequence of single combined
oral auctions in which bidding is combined for all licenses in a given
band with the same bandwidth and the same geographic service area. If
such a change becomes necessary, the auction method will be announced
by Public Notice before each auction.
34. If we should decide in the future to use sequential oral or
sequential electronic bidding for relatively homogeneous licenses, we
will employ a single combined auction design. Under this approach, the
Commission will combine bidding for all licenses in the same band with
the same amount of spectrum and same geographic service area.\11\
Licenses will be awarded market by market to the highest bidders until
all the available licenses are exhausted, e.g., two relatively
homogeneous licenses would be awarded to the two highest bidders.
Because broadband PCS licenses may not be perfectly homogeneous (i.e.,
bidders may prefer one frequency over another within the same
geographic region for purposes of efficient aggregation), winning
bidders will be given the opportunity to choose among licenses for
which bidding is combined in descending order of their bid amounts
(i.e., the highest bidder will pick first).
---------------------------------------------------------------------------
\11\This approach was proposed by Bell Atlantic. See comments of
Bell Atlantic Personal Communications Inc., Attachment by Barry
Nalebuff and Jeremy Bulow at 4-5. Single combined auctions are used
by the U.S. Department of the Treasury to sell U.S. securities.
---------------------------------------------------------------------------
3. Combinatorial Bidding
35. In general terms, combinatorial bidding allows bidders to bid
for multiple licenses as all-or-nothing packages.\12\ Combinatorial
bidding can be implemented with either simultaneous or sequential
auction designs. Although we recognized in the Second Report and Order
that there may be significant benefits associated with combinatorial
bidding, especially in terms of efficient aggregation of licenses, we
concluded that simultaneous multiple round auctions offer many of the
same advantages without the same degree of administrative and
operational complexity and without biasing auction outcomes in favor of
combination bids. See Second Report and Order at 101-105. On
balance, we believe that the advantages of combinatorial bidding appear
unlikely to outweigh the disadvantages. While broadband PCS licenses
are likely to be worth more to some bidders as a part of a package, we
believe that simultaneous multiple round bidding will provide these
bidders with ample opportunity to express the value of interdependent
licenses. Moreover, we conclude that there will not be any extreme
discontinuity in value if some licenses in a package are not obtained.
We believe that the opportunity to acquire licenses in post-auction
transactions and the ability to withdraw bids (upon payment of the bid
withdrawal penalty) will limit the risks associated with failing to
acquire all of the licenses in a desired package. Nevertheless, if,
based on our experience with the initial simultaneous multiple round
auctions and auction experiments, we determine that such auctions do
not result in efficient aggregation of licenses, and if there are
significant advances in the development of combinatorial auctions, we
may, by public notice prior to a specific auction, choose to use
combinatorial bidding techniques in conjunction with simultaneous
multiple round auctions.
---------------------------------------------------------------------------
\12\In combinatorial bidding, if a bid for a group of licenses
exceeds the sum of the highest bids for the individual licenses that
comprise the package, then the package bid would win. In the Second
Report and Order we also indicated that if we were to utilize
combinatorial bidding we might institute a premium so that the
combinatorial bid would win only if it exceeded the sum of the bids
for individual licenses by a set amount. See Second Report and Order
at 114. NTIA is the main advocate of combinatorial bidding. See
comments of NTIA, and ex parte submission of NTIA in PP Docket No.
93-253, February 28, 1994.
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C. Bidding Procedures
1. Grouping of Licenses
36. In the Second Report and Order, the Commission concluded that
highly interdependent licenses should be grouped together and put up
for bid at the same time in a multiple round auction. See Second Report
and Order at 106-107. This will facilitate awarding licenses to the
bidders who value them most highly because it will provide bidders
information about the prices of complementary and substitutable
licenses while such licenses are still up for bid. The magnitude of the
benefit of auctioning a group of licenses together in a simultaneous
multiple round auction increases with the degree of interdependence
among the licenses. On the other hand, the Second Report and Order also
noted that the cost and complexity, both for the FCC and for bidders,
of auctioning a very large number of interdependent licenses
simultaneously may outweigh the informational and bidding flexibility
advantages. See Second Report and Order at 107. Accordingly, although
we believe that all broadband PCS licenses are interdependent, we will
not auction them all simultaneously. Instead, we will divide the
licenses into three groups by combining those licenses that are most
closely related so that there will be limited interdependence across
groups. Then we will sequentially conduct a separate simultaneous
multiple round auction for each group. We formed the three groups in
two conceptual steps. First, we separated the ``entrepreneurs''' blocks
(C and F) from all other blocks.\13\ Then, we separated the large
unrestricted blocks (A and B, with 30 MHz of spectrum and MTA
geographic scope) from the small ones (D and E, with 10 MHz of spectrum
and BTA geographic scope).
---------------------------------------------------------------------------
\13\As explained in more detail below, we establish economic
eligibility criteria for bidders in blocks C and F.
---------------------------------------------------------------------------
37. In the first auction, the 99 available MTA licenses in blocks A
and B will be put up for bid. In the second auction, the 986 BTA
licenses in blocks C and F will be put up for bid. And in the last
auction, the 986 BTA licenses in blocks D and E will be put up for bid.
As explained below, we believe that this grouping strikes a proper
balance among the competing concerns of awarding licenses to the
parties who value them most highly, keeping the auction process simple
and manageable, minimizing administrative delay, and fostering
designated entity participation.
38. Separating the entrepreneurs' blocks (C and F) from all other
blocks entails little loss of efficiency because most firms are likely
to be interested in licenses in either the entrepreneurs' blocks or the
non-restricted blocks, but not both. Large firms cannot bid on
entrepreneurs' licenses, although they may partner with firms that can.
Small firms can bid on all blocks, but are likely to be most interested
in the entrepreneurs' blocks because on these blocks they would not be
placed in the position of bidding against large firms.
39. In addition to reducing the complexity of the auctions,
auctioning block C licenses after the block A and B licenses is likely
to further another objective of auction design--fostering designated
entity participation--by enabling designated entities to more easily
attract partners. Many potential partners may be unwilling to commit
themselves to a partnership arrangement with designated entities prior
to the auction of licenses on the A and B blocks. So, designated
entities that are unable to raise independent financing for at least
the required upfront and down payments may have difficulty
participating in an auction in which block C is put up for bid
simultaneously with blocks A and B. If, however, block C is auctioned
after blocks A and B, we expect that non-designated entities who are
unsuccessful in acquiring MTA licenses on blocks A and B will want to
become partners with or make investments in designated entities so as
to gain an interest in 30 MHz licenses on block C. In addition, the
auction on blocks A and B will produce price information that would be
valuable to designated entities in their business planning.
40. The efficiency loss associated with separating the large
unrestricted blocks (A and B) from the small ones (D and E) depends on
the degree of substitutability and complementarity between licenses in
these two groups. Auctioning licenses on the D and E blocks separately
from those on the A and B blocks may make it more difficult for bidders
to pursue a back-up strategy of combining two 10 MHz licenses in the
same geographic areas as an alternative to acquiring 30 MHz licenses in
the A or B blocks. We believe, however, that this is not likely to be a
widely used strategy, because the licenses are defined on a BTA basis
while the licenses on the A and B blocks are defined on a MTA basis. It
is also possible that some bidders may wish to combine a 10 MHz license
with a 30 MHz license in the same geographic area. Although this
approach would be easier to pursue if blocks A, B, D and E were
auctioned together, we believe that in most cases the amount bidders
would be willing to pay for a block A or B license would not be
strongly affected by whether they were able to acquire a complementary
block D or E license. So auctioning blocks D and E after blocks A and B
would not significantly hinder combining 30 MHz and 10 MHz licenses. We
conclude that the benefits of administrative simplicity from auctioning
license on blocks A and B separately from those on blocks D and E are
likely to outweigh the possible loss of efficiency.
2. Bid Increments
41. In using simultaneous multiple round auctions to award
broadband PCS licenses, it is important to specify minimum bid
increments.\14\ The bid increment is the amount or percentage by which
the bid must be raised above the previous round's high bid in order to
be accepted as a valid bid in the current bidding round. The
application of a minimum bid increment speeds the progress of the
auction and, along with activity and stopping rules, helps to ensure
that the auction comes to closure within a reasonable period of time.
Establishing an appropriate minimum bid increment is especially
important in a simultaneous auction with a simultaneous closing rule.
In that case, all markets remain open until there is no bidding on any
license, and a delay in closing one market will delay the closing of
all markets.
---------------------------------------------------------------------------
\14\See Second Report and Order at 124-126. Commenters who
addressed the issue supported minimum bid increments. See comments
of Telephone and Data Systems, Inc. at 24; comments of PacTel
Corporation, Attachment of R. Preston McAfee at 16, 18; comments of
Pacific Bell and Nevada Bell, Attachment of Paul R. Milgrom and
Robert B. Wilson at 19; reply comments of Telephone and Data
Systems, Inc., Attachment of Robert J. Weber at 11; reply comments
of PacTel Corporation, Attachment of R. Preston McAfee at 10; reply
comments of Pacific Bell and Nevada Bell, Attachment of Paul Milgrom
and Robert Wilson, Appendix at 8, 9.
---------------------------------------------------------------------------
42. Because we plan to use simultaneous multiple round auctions to
award broadband PCS licenses, we believe that it is necessary to impose
a minimum bid increment to ensure that the broadband PCS auctions
conclude within a reasonable period of time. Commenters addressing the
issue generally supported a minimum bid increment of 5 percent. PacTel,
for example, argues that this amount will provide a reasonable
compromise between the goal of completing the auction quickly and that
of revealing information about the distribution of valuations among
bidders.\15\ As we recognized in the Second Report and Order, it is
important in establishing the amount of the minimum bid increment to
express such increment as the greater of a percentage and fixed dollar
amount. See Second Report and Order at 126. This will ensure a timely
completion of the auction even if bidding begins at a very low dollar
amount. Accordingly, we will impose a minimum bid increment of some
percentage of the high bid from the previous round or a dollar amount
per MHz per pop, whichever is greater, in broadband PCS auctions where
multiple round bidding is used.\16\
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\15\See comments of PacTel, Exhibit by R. Preston McAfee,
Auction Design for Personal Communications Services at 16. Milgrom
and Wilson also recommend a minimum bid increment of 5 percent
(subject to a dollar minimum and maximum) for stage I of the
auction, and smaller percentages for stages II and III. Reply
comments of PacBell, Attachment of Paul Milgrom and Robert Wilson,
Appendix at 8, 9.
\16\``Pop'' refers to each member of the population of the
license service area and ``MHz'' refers to the amount of spectrum,
in megahertz, that the licensee is permitted to use. For example,
for a 30 MHz license with a population of 10 million, if the minimum
bid increment were the greater of 5 percent or $0.02 per MHz per
pop, the minimum bid increment would be $6 million ($0.02 x 30
MHz x 10,000,000) when the high bid from the previous round is less
than $120 million. If the high bid from the previous round exceeds
$120 million, the minimum bid would be 5 percent of the value of
that bid (since 5 percent of a bid over $120 million is greater than
$6 million).
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43. PacTel also suggests, in the context of simultaneous auctions,
that the Commission should vary the bid increment, reducing it as the
number of active bidders declines.\17\ Similarly, PacBell suggests that
the bid increment depend on the stage of the auction, with a 5 percent
increment in stage I, 2 percent in stage II, and 1 percent in stage
III.\18\ This would move the auction quickly at the beginning, when
prices have limited informational content and there is little benefit
to either bidders or the Commission of refined price movements, while
allowing bidders to express small differences in valuations as the
auction nears a close, increasing both efficiency and auction revenues.
Small bid increments also reduce the chances of ties. Where a tie does
occur, the high bidder will be determined by the order in which the
bids were received by the Commission.\19\
---------------------------------------------------------------------------
\17\See comments of PacTel, Exhibit by R. Preston McAfee,
Auction Design for Personal Communications Services, at 18.
\18\See reply comments of PacBell, Appendix to Exhibit by Paul
Milgrom and Robert Wilson, auction Rules and Procedures, at 8-9. For
a discussion of auction stages in simultaneous multiple round
auctions see the section on activity rules infra.
\19\See Second Report and Order at 125.
---------------------------------------------------------------------------
44. Accordingly, we will start the auction with large bid
increments, and reduce the increments as bidding activity falls. The
minimum bid increment in stage I of the auction will be 5 percent of
the high bid in the previous round or $.02 per MHz per pop, whichever
is greater.\20\ We will reduce the minimum bid increment as we move
through the auction stages, with a minimum bid increment of the greater
of 2 percent or $.01 per MHz per pop in stage II, and the greater of 1
percent or $.005 per MHz per pop in stage III.\21\ The Commission,
however, retains the discretion in broadband PCS auctions to set and,
by announcement before or during the auction, vary the minimum bid
increments for individual licenses or groups of licenses over the
course of an auction if the auction is not moving at an appropriate
pace.
---------------------------------------------------------------------------
\20\$0.02 per MHz per pop would represent almost 6 percent of
the value of a license based on an extrapolation from the $10.6
billion estimated value of the 120 MHz of broadband PCS spectrum to
be licensed. See Second Report and Order at 177.
\21\In oral or electronic sequential auctions the auctioneer may
within his or her sole discretion establish and vary the amount of
the minimum bid increment in each round of bidding.
---------------------------------------------------------------------------
45. In addition, the Commission will establish a suggested minimum
bid on each license. Bids below the suggested minimum bid will count as
activity under the activity rule (see infra) only if no bids at or
above the suggested minimum bid are received. Initial bids must be
above the minimum bid increment of $.02 per MHz per pop, but may be
below the suggested minimum bid. Once a bid has been received on a
license, the suggested minimum bid is no longer applicable in
subsequent rounds. The amount of the suggested minimum bid may vary by
market size, with a larger minimum bid in larger markets, and will be
announced by public notice prior to each auction. We will establish
suggested minimum bids at no less than $.05 per MHz per pop and not
more than $.20 per MHz per pop. The suggested minimum bid provides
bidders an incentive to start bidding at a substantial fraction of the
final prices of licenses, thus ensuring a rapid conclusion of the
auction, while still allowing for bidding on licenses whose market
values are below the suggested minimum bids.\22\
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\22\If the Commission were to preclude bidding below a starting
minimum bid, a bidder who is interested in only a single license for
which the minimum bid is set above the market value would be forced
to use an activity rule waiver or drop out of the auction under the
activity rules adopted infra.
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3. Stopping Rules for Multiple Round Auctions
46. We also noted in the Second Report and Order that with multiple
round auctions a stopping rule must be established for determining when
the auction is over.\23\ In simultaneous multiple round auctions,
bidding may close separately on individual licenses, simultaneously on
all licenses, or a hybrid approach may be used. Under an individual,
license-by-license approach, bidding closes on each license after one
round passes in which no new acceptable bids are submitted for that
particular license. With a simultaneous stopping rule, bidding remains
open on all licenses until there is no new acceptable bid on any
license. This approach has the advantage of providing bidders full
flexibility to bid for any license as more information becomes
available during the course of the auction, but it may lead to very
long auctions, unless an activity rule (see discussion infra) is
imposed. A hybrid approach combines the first two stopping rules. For
example, we may use a simultaneous stopping rule (along with an
activity rule designed to expedite closure for licenses subject to the
simultaneous stopping rule) for the higher value licenses. For lower
value licenses, where the loss from eliminating some back-up strategies
is less, we may use simpler license-by-license closings. In the Second
Report and Order we recognize that such a hybrid approach might
simplify and speed up the auction process without significantly
sacrificing efficiency or expected revenue. Id.
---------------------------------------------------------------------------
\23\See Second Report and Order at 127. Commenters agreed on
the importance of the appropriate stopping rule. PacTel proposes
that bidding on an individual license close if there are no new bids
on that license within a given round, or if there are fewer than two
bids greater than a ``suggested minimum bid.'' Comments of PacTel,
Attachment of R. Preston McAfee at 16-18. Pacific Bell recommends
simultaneous closing of bidding on all licenses when there are no
new acceptable bids on any license. Comments of PacBell, Attachment
of Paul Milgrom and Robert Wilson at 19; reply comments of PacBell,
Attachment of Paul Milgrom and Robert Wilson, Appendix at 5. Bell
Atlantic Personal Communications, on the other hand, asserts that in
simultaneous auctions, no stopping rule can prevent strategic
delays. They provide no evidence for this, however, and do not
discuss any closing rule in detail. In discussing the Milgrom-Wilson
closing rule they fail to account for the Milgrom-Wilson activity
rule, which will reduce the likelihood of delay, and the fail-safe
closing mechanism proposed by Milgrom and Wilson. Reply comments of
Bell Atlantic Personal Communications, Inc., Attachment of Barry J.
Nalebuff and Jeremy I. Bulow at 12.
---------------------------------------------------------------------------
47. For broadband PCS we believe that a simultaneous stopping rule
is preferable for all MTA licenses. MTA licenses are expected to have
relatively high values and are fewer in number than BTA licenses, which
will reduce the complexity of implementing a simultaneous stopping
rule. Since we intend to impose an activity rule (as discussed below),
we believe that allowing simultaneous closing for all licenses will
afford bidders flexibility to pursue back-up strategies without running
the risk that bidders will hold back their bidding until the final
rounds. We also intend to use a simultaneous stopping rule for BTA
licenses. However, because of the large number of BTA licenses, we
retain the discretion either to use a hybrid stopping rule or to allow
bidding to close individually for these licenses if as we gain
experience with auctions we determine that simultaneous stopping rules
are too complex to implement for very large numbers of licenses. The
specific stopping rule for ending bidding on BTA licenses will be
announced by Public Notice prior to auction.
48. In addition, we will retain the discretion to declare at any
point after 40 rounds in a simultaneous multiple round auction that the
auction will end after some specified number of additional rounds.\24\
This gives the Commission a means to prevent bidders from continuing to
bid on a few low value licenses solely to delay the closing for all
licenses in an auction with a simultaneous closing rule. This will also
ensure that the Commission can end the auction if it determines that
the benefits from ending the auction, and hence issuing licenses more
rapidly, exceeds the possible efficiency loss from cutting off bidding
on a few low value licenses. If we exercise this option, we favor the
use of three final rounds. Allowing more than one additional round
provides some opportunity for counter-offers, thus reducing the risk
that a license will not be awarded to the party that values it most
highly.
---------------------------------------------------------------------------
\24\PacBell proposed that in case of inordinate delays in the
auction the Commission should have the ability to conclude the
auction at any time after 40 rounds by issuing a call for final bids
on the following business day for each of those licenses for which
the highest bid increased in at least 1 of the preceding 3 rounds.
See reply comments of PacBell, Attachment of Paul Milgrom and Robert
Wilson, Appendix at 5.
---------------------------------------------------------------------------
49. Moreover, if this fail-safe mechanism is used, we will accept
bids in the final round(s) only for licenses on which the highest bid
increased in at least one of the preceding three rounds. No new bids
will be accepted for other licenses.\25\ There are two reasons not to
take bids on licenses on which there has been no recent bidding. First,
the fact that bidding on an individual license may close will provide
an additional incentive to bid actively and thus speed the conclusion
of the auction. If bids are accepted on all licenses in the final
round(s) there is less cost to a bidder in holding back. Second,
closing bidding on licenses for which activity has ceased ensures high
bidders for those licenses that they will not lose a license without
having an opportunity to make a counter-offer.\26\ This reduces the
uncertainty associated with aggregating licenses that are worth more as
a package than individually. If final bids are accepted on all
licenses, a high bidder on an aggregation of licenses may unexpectedly
lose a critical part of the aggregation and have no chance to regain it
except in the post-auction market, where bargaining or other
transaction costs may be high.
---------------------------------------------------------------------------
\25\See reply comments of PacBell, Appendix to attachment by
Milgrom and Wilson at 5. See also Second Report and Order at 130,
n. 106.
\26\Either the auction will close only when bidding ceases on
all licenses, so the high bidder will have an opportunity to respond
to any new bids, or the Commission will call for final bids but not
accept new bids on licenses on which there have been no new bids in
the previous three rounds, so no other bidder will have the
opportunity to outbid the high bidder in a final round.
---------------------------------------------------------------------------
4. Duration of Bidding Rounds
50. In simultaneous multiple round auctions for large numbers of
interdependent high-value licenses, bidders may need a significant
amount of time to evaluate back-up strategies and consult with their
principals. For this reason, PacBell proposes one bidding round per day
and PacTel proposes three business days per bidding round for broadband
PCS.\27\ We will provide bidders with a single business day to submit
bids, and conduct one round of bidding each business day.\28\ However,
we reserve the discretion to vary, by public notice or announcement,
the duration of bidding rounds or the interval at which bids are
accepted (e.g., run two or more rounds per day rather than one), in
order to move the auction toward closure more quickly. We are more
likely to conduct more than one round per day early in an auction than
towards the end of an auction. At early stages of an auction prices
will be low and contain relatively little information, so bidders will
need less time to deliberate. It is in the final stages of an auction,
when the consequences of bidding decisions are greatest, that bidders
need the most time to deliberate. We will indicate either by Public
Notice prior to an auction, or by announcement during an auction any
changes to the duration of and intervals between bidding rounds.
---------------------------------------------------------------------------
\27\Comments of PacBell, Attachment by Milgrom and Wilson at 19;
comments of PacTel, Attachment by McAfee at 16.
\28\With one round per day, the auction may take weeks to
complete. This should not impose an excessive burden on bidders,
however, because bids may be submitted by telephone or by a computer
connected to a telephone line, so bidders need not have a
representative in Washington throughout the auction.
---------------------------------------------------------------------------
5. Activity Rules
51. As discussed above, in order to ensure that simultaneous
auctions with simultaneous stopping rules close within a reasonable
period of time and to increase the information conveyed by bid prices
during the auction, we believe that it is necessary to impose an
activity rule to prevent bidders from waiting until the end of the
auction before participating. Because simultaneous stopping rules
generally keep all licenses open for bidding as long as anyone wishes
to bid, they also create an incentive for bidders to hold back until
prices approach equilibrium before making a bid. As noted above, this
could lead to very long auctions. Delaying serious bidding until late
in the auction also reduces the information content of prices during
the course of an auction. Without an activity rule, bidders cannot know
whether a low level of bidding on a license means that the license
price is near its final level or if instead many serious bidders are
holding back and may bid up the price later in the auction.\29\ An
activity rule is less important when licenses close one-by-one because
failure to participate in any given round may result in losing the
opportunity to bid at all, if that round turns out to be the last.
---------------------------------------------------------------------------
\29\See ex parte presentation by Paul Milgrom on behalf of
PacBell, June 21, 1994.
---------------------------------------------------------------------------
52. In the Second Report and Order we adopted the Milgrom-Wilson
activity rule as our preferred activity rule where a simultaneous
stopping rule is used. See Second Report and Order at 144-145. The
Milgrom-Wilson approach encourages bidders to participate in early
rounds by limiting their maximum participation to some multiple of
their minimum participation level. Bidders are required to declare
their maximum eligibility in terms of MHz-pops, and make an upfront
payment equal to $0.02 per MHz-pop.\30\ (See discussion of upfront
payments infra.) That is, in each round bidders will be limited to
bidding on licenses encompassing no more than the number of MHz-pops
covered by their upfront payment. Licenses on which a bidder is the
high bidder from the previous round count against this bidding limit.
Under this approach, bidders will have the flexibility to shift their
bids among any licenses for which they have applied so long as, within
each round, the total MHz-pops encompassed by those licenses does not
exceed the total number of MHz-pops on which they are eligible to bid.
Bidders will be able to secure the option to participate at whatever
maximum level they deem appropriate by making a sufficient upfront
payment. To preserve their maximum eligibility, however, bidders will
be required to maintain activity during each round of the auction. A
bidder is considered active on a license in the current round if the
bidder has submitted an acceptable bid for that license in the current
round, or has the high bid for that license from the previous round, in
which case, the bidder does not need to bid on that license in the
current round to be considered active on that license.
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\30\The number of ``MHz-pops'' is calculated by multiplying the
population of the license service area by the amount of spectrum
authorized by the license. We use the terms ``per MHz-pop'' and
``per MHz per pop'' interchangeably.
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53. Under the Milgrom-Wilson proposal, the minimum activity level,
measured as a fraction of the bidder's eligibility in the current
round, will increase during the course of the auction.\31\ Milgrom and
Wilson divide the auction into three stages. During the first stage of
the auction, a bidder is required to be active on licenses encompassing
one-third of the MHz-pops for which it is eligible. The ``penalty'' for
falling below that activity level is a reduction in eligibility. At
this stage, bidders will lose three MHz-pops in eligibility for each
MHz-pop below the minimum required activity level.\32\ In the second
stage, bidders are required to be active on two-thirds of the MHz-pops
for which they are eligible. The penalty for falling below that
activity level is a loss of 1.5 MHz-pops in eligibility for each MHz-
pop below the minimum required activity level. In the third stage,
bidders are required to be active on licenses encompassing all of the
MHz-pops for which they are eligible. The penalty for falling below
that activity level is a loss of one MHz-pop in eligibility for each
MHz-pop below the minimum required activity level. Thus in the final
stage, each bidder retains eligibility (for the next round) equal to
the MHz-pops for which it is an active bidder in the current round.
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\31\Absent waivers (discussed infra), a bidder's eligibility (in
terms of MHz-pops) in the current round is determined by the
bidder's activity level and eligibility in the previous round. In
the first round, however, eligibility is determined by the bidder's
upfront payment and is equal to the upfront payment divided by $.02
per MHz-pop.
\32\An alternative way to state the rule for determining
eligibility in stage I of an auction is that each bidder will be
eligible to bid in the next round on three times the MHz-pops for
which it is an active bidder in the current round, or the MHz-pops
for which it is eligible in the current round, whichever is less.
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54. The auction will start in stage I and move from stage I to
stage II when, in each of three consecutive rounds of bidding, the high
bid has increased on 10 percent or less of the spectrum (measured in
terms of MHz-pops) being auctioned.\33\ The auction will move from
stage II to stage III when the high bid has increased on 5 percent or
less of the spectrum being auctioned (measured in terms of MHz-pops),
in each of three consecutive rounds of bidding in stage II.\34\ In
order to speed up an auction, the Commission may also announce, at any
time after the initial 15 rounds, that the next stage of the auction
(with a higher minimum participation level) will begin in the next
bidding round.\35\ Moreover, if as the Commission gains experience with
auctions that use activity rules it determines that such auctions tend
to move too slowly, it may, by public notice prior to a specific
auction, increase the activity levels at which that auction moves
between stages. Conversely, if the Commission determines that auctions
tend to move too quickly, depriving bidders of sufficient time to
deliberate and pursue back-up strategies, it may decrease the activity
levels at which an auction moves between stages.
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\33\The transition rule may also be defined in terms of the
``auction activity level''--the sum of the MHz-pops of those
licenses whose highest bid increased in the current round, as a
percentage of the total MHz-pops of all licenses in that auction.
(Note that this definition differs slightly from that used by
Milgrom and Wilson. See reply comments by PacBell, Appendix to
attachment by Milgrom and Wilson at 1.) The auction moves from stage
I to stage II when the auction activity level is less than or equal
to 10 percent for three consecutive rounds in stage I. The auction
moves from stage II to stage III when the auction activity level is
less than or equal to 5 percent for three consecutive rounds in
stage II. For example, if two nationwide 30 MHz blocks of spectrum
are put up for bid and the national population is approximately 250
million, a total of approximately 15,000 million MHz-pops would be
available in the auction. If in stage I of the auction, the high bid
increases on licenses encompassing less than 1,500 million MHz-pops
for three consecutive rounds, the auction moves to stage II. This
would be the case, for example, if in three consecutive rounds new
bids were received on only a license for the New York MTA (26
million pops) and a license for the Los Angeles MTA (19 million
pops), since the two licenses encompass a total of 1,350 million
MHz-pops. Once in stage II, if in each of three consecutive rounds
new acceptable bids are received on licenses encompassing less than
750 million MHz-pops, the auction would move to stage III.
\34\Once an auction is in stage II, it cannot revert to stage I.
Once an auction is in stage III, it remains there.
\35\Moving to stage II prematurely might result in an auction
moving too quickly to allow adequate time for consideration and may
excessively limit the ability of bidders to pursue alternative
backup strategies. See Second Report and Order at 142.
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55. Finally, to avoid the consequences of clerical errors and to
compensate for unusual circumstances that might delay a bidder's bid
preparation or submission on a particular day, Milgrom and Wilson
recommend permitting each bidder to request and automatically receive a
waiver of the activity rule once every three rounds. We believe that
some waiver procedure is a critical element of the Milgrom-Wilson
activity rule, since the Commission would not wish to reduce a bidder's
eligibility due to an accidental act or circumstances not under the
bidder's control.
56. We believe that the Milgrom-Wilson approach will best achieve
the Commission's goals of affording bidders flexibility to pursue
backup strategies, while at the same time ensuring that simultaneous
auctions are concluded within a reasonable period of time. Accordingly,
we plan to impose such an activity rule in conjunction with a
simultaneous stopping rule to award higher value broadband PCS
licenses. We intend, however, to use a simpler waiver procedure than
that proposed by Milgrom and Wilson. We will permit bidders one
automatic waiver from the activity rule during each stage of an
auction. A waiver will permit a bidder to maintain its eligibility at
the same level as in the round for which the waiver is submitted.\36\ A
waiver may be submitted either in the round in which bidding falls
below the minimum required level to maintain (for the next round) the
same eligibility as in that round, or prior to submitting a bid in the
next round. If an activity rule waiver is entered in a round in which
no other bidding activity occurs, the auction will remain open.\37\
However, an activity rule waiver entered after a round in which no
other bidding activity occurs will not reopen the auction. If, as we
gain both experimental and actual auction experience, we determine that
permitting one automatic waiver per auction stage is insufficient to
prevent the inadvertent reduction in eligibility of serious bidders, we
may, by public notice prior to a specific broadband auction, increase
the number of automatic activity rule waivers, or instead allow one
automatic waiver during a specified number of bidding rounds.
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\36\An activity rule waiver cannot be used to correct an error
in the amount bid.
\37\If, however, we determine, based on evidence from
experimental and actual auctions, that this is likely to excessively
delay the close of an auction or result in other adverse strategic
manipulation of an auction, we any announce by public notice prior
to a specific broadband auction that submission of a waiver will not
keep an auction open under any circumstances.
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57. Furthermore, if, as we gain experience with auctions, we
determine that the Milgrom-Wilson three stage activity rule is too
complicated or costly to administer, we may alternatively impose a less
complex activity rule. See Second Report and Order at 144. We will
announce by Public Notice before each auction the activity rule that
will be employed in that particular auction.
V. Procedural, Payment, and Penalty Issues
A. Pre-Auction Application Procedures
58. In the Second Report and Order, the Commission established
general competitive bidding rules and procedures which we noted may be
modified on a service-specific basis. See 47 CFR Part 1, subpart Q. As
discussed below, we will generally follow the procedural, payment and
penalty rules established in the Second Report and Order with certain
minor modifications designed to address the particular characteristics
of the broadband PCS service. These rules are structured to ensure that
bidders and licensees are qualified and will be able to construct
systems quickly and other service to the public. By ensuring that
bidders and license winners are serious, qualified applicants, these
rules will minimize the need to re-auction licenses and prevent delays
in the provision of broadband PCS service to the public. In addition,
as we proposed in the Notice at 129, we adopt general procedural and
processing rules based on Part 22 of the Commission's Rules.
59. Section 309(j)(5) provides that no party may participate in an
auction ``unless such bidder submits such information and assurances as
the Commission may require to demonstrate that such bidder's
application is acceptable for filing.'' 47 U.S.C. Sec. 309(j)(5).
Moreover, ``[n]o license shall be granted to an applicant selected
pursuant to this subsection unless the Commission determines that the
applicant is qualified pursuant to [Section 309(a)] and Sections 308(b)
and 310'' of the Communications Act. id. As the legislative history of
Section 309(j) makes clear, the Commission may require that bidders'
applications contain all information and documentation sufficient to
demonstrate that the application is not in violation of Commission
rules, and applications not meeting those requirements may be dismissed
prior to the competitive bidding. See H.R. Rep. No. 111, 103d Cong.,
1st Sess. 258 (1993) (H.R. Rep. No. 103-111).
60. In the MPRM, we proposed that all parties interested in
participating in an auction for spectrum licenses would be required to
file a short-form application (modeled on the Commission's
``Transmittal Sheet for Cellular Applications''), and asked whether
applicants should also be required to submit a long-form application
prior to the auction, or whether the long-form application should be
submitted subsequent to the auction. NPRM at 97. The comments
generally agreed that we should require only a short-form application
prior to competitive bidding, and that only winning bidders should be
required to submit a long-form license application after the auction.
Because we believed that such a procedure would fulfill the statutory
requirements and objectives and adequately protect the public interest,
we incorporated these requirements into the rules adopted in the Second
Report and Order. See 47 CFR Secs. 1.2105 and 1.2107. We will extend
the application of these rules to the competitive bidding process for
broadband PCS.
61. We will be guided by the following procedures in conducting
broadband PCS auctions. The Commission will release an initial Public
Notice announcing that it will accept applications for specific
broadband PCS licenses. This initial Public Notice will specify the
licenses and identify the time and place of an auction in the event
that mutually exclusive applications are filed. The Public Notice also
will specify the method of competitive bidding to be used, including
applicable bid submission procedures, stopping rules and activity
rules, as well as the deadline by which short-form applications must be
filed, and the amounts and deadlines for submitting the upfront
payment. See Second Report and Order at 164. We will not accept
applications filed before or after the dates specified in Public
Notices. Applications submitted before release of a Public Notice
announcing the availability of particular license(s), or before the
opening date of the filing window specified therein, will be returned
as premature. Applications submitted after the deadline specified by
Public Notice will be dismissed, with prejudice, as untimely. Soon
after release of the initial Public Notice, an auction information
package will be made available to prospective bidders.
62. Bidders will be required to submit short-form applications on
FCC Form 175 (and FCC Form 175-S, if applicable), together with any
applicable filing fee\38\ by the date specified in the initial Public
Notice.\39\ The short-form applications will require applicants to
provide the information required by Section 1.2105(a)(2) of the
Commission's Rules, 47 CFR Sec. 1.2105(a)(2). Specifically, each
applicant will be required to specify on its Form 175 applications
certain identifying information, including its status as a designated
entity (if applicable), its classification (i.e., individual,
corporation, partnership, trust or other), the markets and frequently
blocks for which it is applying, and assuming that the licenses will be
auctioned, the names of persons authorized to place or withdraw a bid
on its behalf. In addition, applicants will be required to provide
detailed ownership information (see Section 24.813(a) of the
Commission's Rules) and identify all 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. Applicants will also be required to certify that they
have not entered and will not enter 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. In
addition, applicants for licenses in the entrepreneurs' blocks will be
required, as part of their short-form applications, to certify that
they are eligible to bid on and win licenses in those blocks. Among
other things, this means that they are in compliance with our PCS-
cellular and PCS-PCS cross-ownership limitations. As we indicated in
the Second Report and Order, if the Commission receives only one
application that is acceptable for filing for a particular license, and
thus there is no mutual exclusivity, the Commission by Public Notice
will cancel the auction for this license and establish a date for the
filing of a long-form application, the acceptance of which will trigger
the procedures permitting petitions to deny. See Second Report and
Order at 165.
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\38\Because Section 8 of the Communications Act, 47 U.S.C.
Sec. 158, does not currently afford the Commission authority to
charge an application fee in connection with PCS applications,
broadband PCS applicants will not be required to submit a fee with
their short-form application. However, the Commission has requested
that Congress amend Section 8 of the Communications Act to provide a
specific application fee for PCS services. If the Commission
receives application fee authority, the general rules governing
submission of fees will apply. See 47 CFR Sec. 1.1101 et seq. These
rules currently 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. Whenever funds are remitted to the Commission,
applicants also must file FCC Form 159.
\39\Applicants should submit one paper original and one
microfiche original of their application, as well as two microfiche
copies.
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63. A number of commenters in this proceeding objected to our
original tentative conclusion that short-form applications should be
judged by a letter-perfect standard. See NPRM at 100. Parties
proposed that the Commission allow a brief period for correcting errors
in short-form applications. See, e.g., comments of AT&T at 30-31,
BellSouth at 36-37. As we stated in the Second Report and Order, we
believe that the public interest would be better served by encouraging
maximum bidder participation in auctions. See Second Report and Order
at 167. Therefore, we will provide applicants with an opportunity to
correct minor defects in their short-form applications (e.g.,
typographical errors, incorrect license designations, etc.) prior to
the auction. Applicants will not be permitted until after the auction,
however, to make any major modifications to their applications,
including cognizable ownership changes or changes in the identification
of parties to bidding consortia. In addition, applications that are not
signed will be dismissed as unacceptable.
64. After reviewing the short-form applications, the Commission
will issue a second Public Notice listing all defective applications,
and applicants whose applications contain minor defects will be given
an opportunity to cure defective applications and resubmit a correction
version.\40\ After reviewing the corrected applications, the Commission
will release a third Public Notice announcing the names of all
applicants whose applications have been accepted for filing. These
applicants will be required to submit an upfront payment to the
Commission, as discussed below.
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\40\On the date set for submission of corrected applications
that on their won discover minor errors in their applications also
will be permitted to file corrected applications.
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B. Upfront Payment
65. The comments in this proceeding generally supported the
Commission's proposal to require prospective bidders to make
substantial upfront payments prior to auction. See, e.g., comments of
Comcast at 18, PacBell at 28, Nextel at 16, and AWCC at 31-32.
Consistent with the weight of the comments, we concluded in the Second
Report and Order that a substantial upfront payment prior to the
beginning of an auction is necessary to ensure that only serious and
qualified bidders participate. See Second Report and Order at 171. By
requiring such a payment we also help to ensure that any bid withdrawal
or default penalties are paid. These considerations apply to broadband
PCS auctions. We will therefore require all broadband PCS auction
participants to tender in advance to the Commission a substantial
upfront payment as a condition of bidding.
66. In the Notice, we proposed to require upfront payments based on
a $0.02 per MHz per pop formula. Though some commenters favor a fixed
upfront payment set by the Commission prior to the auction,\41\ most
support the Commission's proposed $0.02 per MHz per pop formula, which
would enable prospective bidders to tailor their upfront payment to
their bidding strategies.\42\ Commenters suggest that there should be
some fixed minimum on the amount of upfront payment made prior to
auction (suggestions range from $2,500 to $100,000 for different
services).\43\ Some commenters also favor setting a maximum upfront
payment, pointing out that our proposed formula yields very high
payments in the broadband PCS context.\44\
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\41\See, e.g., comments of Edward M. Johnson at 2; and LuxCel
Group, Inc. at 8.
\42\See, e.g., comments of PacBell at 28; Telocator (now PCIA)
at 13; CTIA at 30; and Rochester Telephone Corporation at 13.
\43\See, e.g., comments of Telocator at 20-21; Cellular
Communications, Inc. at 15; AT&T at 34; and BellSouth at 41.
\44\See, e.g., comments of Southwestern Bell at 38-40 (arguing
generally for a maximum deposit of $50 million for all markets) and
AT&T at 34 (supporting a maximum upfront payment of $5 million, with
a down payment following the auction).
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67. We believe that the standard upfront payment formula of $0.02
per pop per MHz for the largest combination of MHz-pops a bidder
anticipates bidding on in any single round of bidding is appropriate
for broadband PCS services.\45\ Using this formula will provide bidders
with the flexibility to change their strategy during an auction and to
bid on a larger number of smaller licenses or a smaller number of
larger licenses, so long as the total MHz-pops combination does not
exceed that amount covered by the upfront payment. For example, when we
auction licenses covering the nation simultaneously, a bidder would not
be required to file an upfront payment representing national coverage
unless it intended to bid on licenses covering the entire nation in a
single bidding round. The $0.02 per MHz per pop formula also works well
with the Milgrom-Wilson activity rule that we plan to employ in
broadband PCS auctions, as described in Section III above. In the
initial Public Notice issued prior to each auction, we will announce
population information corresponding to each license to enable bidders
to calculate their upfront payments.
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\45\As discussed in Section VII, infra, designated entities will
be subject to a lesser upfront payment requirement of $0.015 per MHz
per pop. Further, we retain the flexibility to consider using a
simpler payment requirement if circumstances warrant.
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68. As we indicated in the Second Report and Order, we will not set
a maximum on upfront payments.\46\ We decline to do so because we wish
to ensure that those bidding on large numbers of valuable broadband PCS
licenses are bidding in good faith and are financially capable of
constructing those systems quickly. We recognize that upfront payments
for broadband PCS licenses may amount to millions of dollars, but we do
not believe that it is unreasonable to expect prospective bidders to
tender such sums given the expected overall value of some of these
licenses and the expected financial requirements to construct the
systems. Indeed, such a requirement is necessary to ensure the
seriousness of bidders for these valuable licenses.
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\46\See Second Report and Order at 179.
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69. In the Second Report and Order, we accepted commenters'
suggestions and established a general minimum upfront payment of $2,500
to ensure that the use of our preferred formula would result in a
substantial enough payment that bidders would be deterred from making
frivolous bids.\47\ Such a minimum upfront payment is needed in
connection with auctions where the $0.02 per MHz per pop formula would
yield a comparatively small upfront payment (such as those for
narrowband PCS licenses in BTAs). Because of the wider bandwidth of
broadband PCS licenses, however, this minimum upfront payment will not
be relevant in auctions for this service.\48\
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\47\Id. at 180.
\48\The smallest bandwidth that a broadband PCS licensee will be
authorized to use is 10 MHz, so a $2,500 upfront payment would
result for a license area with a population of only 12,500 persons.
The least populous BTA in the United States (Williston, North
Dakota) has a population of approximately 27,500, and the upfront
payment for a 10 MHz license in that BTA would be approximately
$5,500.
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70. For broadband PCS auctions, we will follow the procedures for
submission of upfront payments outlined in the Second Report and Order.
Applicants whose short-form applications have been accepted for filing
will be required to submit the full amount of their upfront payment to
the Commission's lock-box bank by a date certain, which will be
announced in a Public Notice and generally will be no later than 14
days before the scheduled auction.\49\ After the Commission receives
from its lock-box bank the names of all applicants who have submitted
timely upfront payments, the Commission will issue a Public Notice
announcing the names of all applicants that have been determined to be
qualified to bid. An applicant who fails to submit a sufficient upfront
payment to qualify it to bid on any license being auctioned will not be
identified on this Public Notice as a qualified bidder, and it will be
prohibited from bidding in the auction. That is, we will require that
applicants for broadband PCS licenses submit a sufficient upfront
payment to reflect the MHz-pops of the smallest license being put up
for bid in a particular auction.\50\
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\49\Upfront payments must be made by wire transfer or by
cashier's check drawn in U.S. dollars from a financial institution
whose deposits are insured by the Federal Deposit Insurance
Corporation and must be made payable to the Federal Communications
Commission.
\50\For example, in our first broadband PCS auction (the 30 MHz
MTA licenses on blocks A and B), the smallest upfront payment that
may be submitted to qualify an applicant to bid will be calculated
by multiplying the population of the least populous MTA (American
Samoa: population 47,000) times 30 times two cents, or $28,200. It
should be noted, however, that this minimal upfront payment will
entitle the bidder to bid only on a license to serve American Samoa.
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71. Although it would be simpler to require the submission of
upfront payments at the same time short-form applications are filed, we
agree with those commenters that argued that they should not be
required to commit the large sums that will likely be involved in
broadband PCS upfront payment for longer than is necessary.
Accordingly, applicants will not be required to tender upfront payments
with their short-form applications. Instead, as noted above, upfront
payments will be due by a date specified by Public Notice, but
generally no later than 14 days before a scheduled auction. This period
should be sufficient to allow the Commission adequate time to process
upfront payment data and release a Public Notice listing all qualified
bidders, but not so long as to impose undue burdens upon bidders. The
rules set forth in Section 1.2106 of the Commission's Rules concerning
upfront payments will be applicable in broadband PCS auctions. Each
qualified bidder will be issued a bidder identification number and
further information and instructions regarding the auction procedures.
During an auction, bidders will be required to provide their bidder
identification numbers when submitting bids.
C. Payment and Procedures for Licenses Awarded by Competitive Bidding
1. Down Payment
72. The Second Report and Order established a 20 percent down
payment by winning bidders to discourage default between the auction
and licensing and to ensure payment of the penalty if such default
occurs. We concluded that a 20 percent down payment was appropriate to
ensure that auction winners have the necessary financial capabilities
to complete payment for the license and to pay for the costs of
constructing a system, while at the same time not being so onerous as
to hinder growth or diminish access. Most of the commenters addressing
this issue generally support our proposal that winning bidders increase
their deposits with the Commission up to an amount equalling 20 percent
of their winning bid or bids. See, e.g., comments of BellSouth at 43-
44, PageNet at 35-36, and Telocator at 13. Some commenters feel that a
20 percent down payment requirement would be too high. See comments of
Sprint at 18 (prefers a 10 percent down payment).
73. We believe that the reasoning that led us to conclude that 20
percent is the appropriate down payment applies to broadband PCS
auctions. We therefore will require that, with the exception of bidders
eligible for installment payments in the entrepreneurs' blocks (see
Section VII, infra), winning bidders in broadband PCS auctions
supplement their upfront payments with a down payment sufficient to
bring their total deposits up to 20 percent of their winning
bid(s).\51\ Winning bidders will be required to submit the required
down payment by cashier's check or wire transfer to our lock-box bank
by a date to be specified by Public Notice, generally within five (5)
business days following the close of bidding. All auction winners will
generally be required to make full payment of the balance of their
winning bids within five (5) business days following award of the
license. Grant of the license will be conditioned on this payment.
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\51\If the upfront payment already tendered by a winning bidder,
after deducting any bid withdrawal and default penalties due,
amounts to 20 percent or more of its winning bids, no additional
deposit will be required. If the upfront payment amount on deposit
is greater than 20 percent of the winning bid amount after deducting
any bid withdrawal and default penalties due, the additional monies
will be refunded. If a bidder has withdrawn a bid or defaulted but
the amount of the penalty cannot yet be determined, the bidder will
be required to make a deposit of 20 percent of the amount bid on
such licenses. When it becomes possible to calculate and assess the
penalty, any excess deposit will be refunded. Upfront payments will
be applied to such deposits and to bid withdrawal and default
penalties due before being applied toward the bidder's down payment
on licenses the bidder has won and seeks to acquire.
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74. An auction winner that is eligible to make payments through an
installment plan (see Section VII, infra) will be subject to different
payment requirements. Such an entity will be required to bring its
deposits with the Commission up to only 5 percent of its winning bid
after the bidding closes, and will pay an additional 5 percent of its
winning bid to the Commission after a license is granted.
2. Bid Withdrawal and Default Penalties
75. As we discussed in the Second Report and Order, it is
critically important to the success of our system of competitive
bidding that potential bidders understand that there will be a
substantial penalty assessed if they withdraw a high bid, are found not
to be qualified to hold licenses or default on payment of a balance
due. There was substantial support in the comments for the notion that
the Commission is authorized to and should order forfeiture of upfront
and down payments if the auction winner later defaults or is
disqualified. See, e.g., comments of CTIA at 29-30, AT&T at 35, n.43,
PageNet at 35-36, Cook Inlet at 47, and BellSouth at 42-44. We
concluded, however, that forfeiture of all amounts that a bidder may
have on deposit with the Commission may, in some circumstances, be too
severe a penalty and would not necessarily be rationally related to the
harm caused by withdrawal, default or disqualification. See Second
Report and Order at 197.
76. This logic applies to broadband PCS auctions, so for these
auctions we will employ the bid withdrawal, default and
disqualification penalties adopted in the Second Report and Order,
which are reflected in Sections 1.2104(g) and 1.2109 of the
Commission's Rules. Any bidder who withdraws a high bid during an
auction before the Commission declares bidding closed will be required
to reimburse the Commission in the amount of the difference between its
high bid and the amount of the winning bid the next time the license is
offered by the Commission, if this subsequent winning bid is lower than
the withdrawn bid.\52\ No withdrawal penalty will be assessed if the
subsequent winning bid exceeds the withdrawn bid. After bidding closes,
a defaulting auction winner (i.e., a winner who fails to remit the
required down payment within the prescribed time, fails to pay for a
license, or is otherwise disqualified) will be assessed an additional
penalty of three percent of the subsequent winning bid or three percent
of the amount of the defaulting bid, whichever is less. See 47 CFR
Secs. 1.2104(g) and 1.2109. The additional three percent penalty is
designed to encourage bidders who wish to withdraw their bids to do so
before bidding ceases. We will hold deposits made by defaulting or
disqualified auction winners until full payment of the penalty.\53\ We
believe that these penalties will adequately discourage default and
ensure that bidders have adequate financing and that they meet all
eligibility and qualification requirements. As we explained in the
Second Report and Order, we further believe that this approach is well
within our authority under both Section 309(j)(4)(B) and Section 4(i)
of the Communications Act, 47 U.S.C. Sec. 154(i), as it is clearly
necessary to carry out the rapid deployment of new technologies through
the use of auctions.\54\
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\52\If a license is re-offered by auction, the ``winning bid''
refers to the high bid in the auction in which the license is re-
offered. If a license is re-offered in the same auction, the winning
bid refers to the high bid amount, made subsequent to the
withdrawal, in that auction. If the subsequent high bidder also
withdraws its bid, that bidder will be required to pay a penalty
equal to the difference between its withdrawn bid and the amount of
the subsequent winning bid the next time the license is offered by
the Commission. If a license which is the subject of withdrawal or
default is not re-auctioned, but is instead offered to the highest
losing bidders in the initial auction, the ``winning bid'' refers to
the bid of the highest bidder who accepts the offer. Losing bidders
would not be required to accept the offer, i.e., they may decline
without penalty. We wish to encourage losing bidders in simultaneous
multiple round auctions to bid on other licenses, and therefore we
will not hold them to their losing bids on a license for which a
bidder has withdrawn a bid or on which a bidder has defaulted.
\53\In rare cases in which it would be inequitable to retain a
down payment, we will entertain requests for waiver of this
provision.
\54\See Second Report and Order at 198.
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77. In addition, if a default or disqualification involves gross
misconduct, misrepresentation or bad faith by an applicant, the
Commission may declare the applicant and its principals ineligible to
bid in future auctions, and may take any other action that it deems
necessary, including institution of proceedings to revoke any existing
licenses held by the applicant. See Second Report and Order at 198.
3. Re-Offering Licenses When Auction Winners Default
78. In the event that an auction winner defaults or is otherwise
disqualified, the Commission must determine whether to hold a new
auction or simply offer the license to the second-highest bidder.
Parties commenting on this issue generally favored re-auctioning the
license, pointing out that changing market and even technological
developments since the initial auction may change the amounts that
bidders are willing to pay for a license, especially if the intervening
period is relatively long. They urge that any re-auction be open to new
bidders, arguing that such a procedure would reduce the incentive of
losing bidders to file unmeritorious petitions to deny against the
auction winner. See, e.g., comments of BellSouth at 37, Utilities
Telecommunications Council at 21.
79. As we stated in the Second Report and Order, we believe that,
as a general rule, when an auction winner defaults or is otherwise
disqualified after having made the required down payment, the best
course of action is to re-auction the license. See Second Report and
Order at 204. Although we recognize that this may cause a brief delay
in the initiation of service to the public, during the time between the
original auction and the disqualification circumstances may have
changed so significantly as to alter the value of the license to
auction participants as well as to parties who did not participate. In
this situation, awarding licenses to the parties that value them most
highly can best be assured through a re-auction. However, if the
default occurs within five (5) business days after the bidding has
closed, the Commission retains the discretion to offer the license to
the second highest bidder at its final bid level, or if that bidder
declines the offer, to offer the license to other bidders (in
descending order of their bid amounts) at the final bid levels.\55\
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\55\If only a small number of relatively low-value licenses are
to be re-auctioned and only a short time has passed since the
initial auction, the Commission may choose to offer the license to
the highest losing bidders because the cost of running another
auction may exceed the benefits.
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80. If a new auction becomes necessary because of default or
disqualification more than five (5) business days after bidding has
ended, the Commission will afford new parties an opportunity to file
applications. One of our primary goals in conducting auctions is to
assure that all serious interested bidders are in the pool of qualified
bidders at any re-auction. We believe that allowing new applications
will promote achievement of this goal, which outweighs the short delay
that we recognize may result from allowing new applications in a re-
auction. Indeed, if we were not to allow new applicants in a re-
auction, interested parties might be forced into an after-market
transaction to obtain the license, which would itself delay service to
the public and may prevent the public from recovering a reasonable
portion of the value of the spectrum resource.
4. Long-Form Application
81. If the winning bidder makes the down payment in a timely
manner, a long-form application filed on FCC Form 401 (as modified), or
such other form as may be adopted for Commercial Mobile Radio Service
use in GEN Docket No. 93-252, will be required to be filed by a date
specified by Public Notice, generally within ten (10) business days
after the close of bidding.\56\ After the Commission receives the
winning bidder's down payment and the long-form application, we will
review the long-form application to determine if it is acceptable for
filing. In addition to the information required in the long-form
application of all winning bidders, each winning bidder on licenses in
frequency blocks C and F will be required to submit evidence of its
eligibility to bid on licenses in these blocks, as well as evidence to
support its claim to any special provisions made available to
designated entities. This information may be included in an exhibit to
FCC Form 401, and must include the gross revenues and total assets of
the applicant and all attributable investors in the applicant, and a
certification that the personal net worth of each individual investor
does not exceed the eligibility limitation. This information will
enable the Commission, and other interested parties, to ensure the
validity of the applicant's certification of eligibility to bid in
blocks C and F (submitted as part of its FCC Form 175) and its
eligibility for any bidding credits, installment payment options, or
other special provision. Upon acceptance for filing of the long-form
application, the Commission will issue a Public Notice announcing this
fact, triggering the filing window for petitions to deny. If the
Commission denies all petitions to deny, and is otherwise satisfied
that the applicant is qualified, the license(s) will be granted to the
auction winner.
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\56\Schedule B to FCC Form 401 will not be required to be
submitted by broadband PCS applicants. However, applicants for
broadband PCS licenses proposing to use any portion of broadband PCS
spectrum to offer service on a private mobile radio service basis
must overcome the presumption that PCS is a commercial mobile radio
service. Regulatory Treatment of Mobile Services, Second Report and
Order in GEN Docket No. 93-252, 9 FCC Rcd 1411, 1460-63, 59 FR
18493, Apr. 19, 1994; 47 CFR Sec. 20.9(a)(11), (b). Applicants (or
licensees) seeking to dedicate a portion of the spectrum for private
mobile radio service will be required to attach as an exhibit to the
Form 401 application a certification that it will offer PCS service
on a private mobile radio basis. The certification must include a
description of the proposed service sufficient to demonstrate that
it is not within the definition of commercial mobile radio service
in Section 20.3 of the Commission's Rules. Id.
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5. Processing and Procedural Rules
82. In the Notice, we proposed to adopt general processing and
procedural rules for broadband PCS based on Part 22 of the Commission's
Rules. One commenter, AIDE, argues that the Commission's reference to
proposed PCS rules is vague and legally insufficient for a Notice of
Proposed Rule Making. Comments of AIDE at 16-17. AIDE also asserts that
the adoption of PCS processing and procedural rules is beyond the scope
of the Notice in this rule making proceeding. Id. We disagree. The
Notice sought comment on specific rule sections contained in Part 22 of
our Rules and asked commenters to indicate what modifications should be
made to those rules to adapt them for PCS services. See Notice at 128.
In addition, the Notice specifically requested comment on the general
procedural, processing and petition to deny procedures that should be
used for auctionable services. The Notice's proposal to adopt
processing rules based on Part 22 of the Commission's Rules, with any
appropriate modifications for PCS services, clearly indicated to
commenters the terms of the proposed rules, as is required by 5 U.S.C.
Sec. 553 and 47 CFR Sec. 1.413(c). Accordingly, we believe that the
Notice's description of the proposed rules was sufficiently specific to
alert interested parties to the substance of our proposal and to
provide an adequate opportunity for comment on those proposals.
Moreover, we conclude that these issues are well within the scope of
the Notice.
83. As we proposed, we adopt for broadband PCS a modified version
of the application processing rules contained in Part 22 of the
Commission's Rules. These rules, which will comprise Subpart I of Part
24 of our Rules, will govern application filing and content
requirements, waiver procedures for return of defective applications,
regulations regarding modification of applications, and general
application processing rules. We also adopt petition to deny procedures
based on Section 22.30 of the Commission's Rules. In addition, as we
proposed in the Notice, we adopt rules similar to Sections 22.927,
22.928 and 22.929 of our existing rules (47 CFR Secs. 22.927, 22.928,
22.929) to prevent the filing of speculative applications and pleadings
(or threats of the same) designed to extract money from sincere
broadband PCS applicants. In this regard, we limit the consideration
that an applicant or petitioner is permitted to receive for agreeing to
withdraw an application or a petition to deny to the legitimate and
prudent expenses of the withdrawing applicant or petitioner.
84. With regard to petitions to deny, we adopt expedited procedures
consistent with the provisions of Section 309(i)(2) of the
Communications Act to resolve substantial and material issues of fact
concerning qualifications.\57\ This provision requires us to entertain
petitions to deny the application of the auction winner if petitions to
deny are otherwise provided for under the Communications Act or our
Rules.
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\57\The adoption of such procedures is necessary because Section
309(j)(5) of the Communications Act forbids the granting of licenses
through competitive bidding unless the Commission determines that
the applicant is qualified.
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85. As we indicated in the Second Report and Order, the Commission
need not conduct a hearing before denying an application if it
determines that an applicant is not qualified and no substantial issue
of fact exists concerning that determination. See Second Report and
Order at 202. In the event that the Commission identifies substantial
and material issues of fact in need of resolution, Section 309(i)(2) of
the Communications Act permits in any hearing the submission of all or
part of evidence in written form and allows employees other than
administrative law judges to preside over the taking of written
evidence. We will incorporate these principles into our broadband PCS
procedural rules.
D. Procedures in Alternative Auction Design
86. If we decide to employ a sequential auction design (using
either oral or electronic bid submission), the same general rules and
procedures described above will be used with certain modifications to
fit the oral or electronic auction format. In the case of oral
auctions, bidders would be required to follow the procedures described
above, including the submission of the standard upfront payment of
$0.02 per MHz-pop prior to the auction. Applicants would submit a
sufficient upfront payment to cover the total number of MHz-pops they
desire to win. Once a bidder has won the maximum number of MHz-pops
covered by its upfront payment, that bidder will be precluded from
further bidding in the auction.\58\ Immediately after bidding closes on
a license, the winning bidder (i.e., the high bidder on a license on
which bidding has closed) will be asked to sign a bid confirmation
form. No other license will be put up for bid until a bid confirmation
form is signed by a high bidder on the previous license.\59\ Because we
recognize that in an oral auction the chances of a bidder accidentally
placing a high bid are greater than in other auction methods, and
because the harm will be limited if the license is immediately re-
offered, we will not impose a penalty on a high bidder who withdraws a
high bid by refusing to sign the bid confirmation form. Thus, in an
sequential oral auction in which a high bidder declines to sign the bid
confirmation form, the license will be immediately put up for bid
again. If, however, a high bidder signs a bid confirmation form but
subsequently fails to submit the 20 percent down payment or otherwise
defaults, the standard default penalties (described supra) will
apply.\60\
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\58\This is similar to the procedure adopted in the Fourth
Report and Order for the oral auctioning of IVDS licenses. See
Fourth Report and Order in PP Docket No. 93-253, 9 FCC Rcd 2330, 59
FR 24947, May 13, 1994.
\59\If we use single combined bidding, described supra, no other
licenses will be put up for bid until a bid confirmation form is
signed for each license put up for bid together in a combined
auction.
\60\See 47 CFR Secs. 1.2104 and 1.2109.
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87. If we decide to use sequential electronic bidding, bidders
would again follow the general procedures described above including the
submission of the standard upfront payment amount of $0.02 per MHz per
pop prior to the auction. Applicants would submit a sufficient upfront
payment to cover the total number of MHz-pops they desire to win. An
applicant will not be eligible to bid on a license for which it has not
applied or which contains more MHz-pops than the total MHz-pops covered
by the bidder's upfront payment less any MHz-pops already won by that
bidder. Once a bidder has won licenses representing the maximum number
of MHz-pops reflected in its upfront payment, that bidder will be
precluded from further bidding in the auction. Each bidder's
eligibility will be computed and tracked by the auction software and
bids placed by ineligible bidders will not be accepted. After the
auctioneer declares bidding on a license closed and the high bidder has
been notified, that bidder will be asked to confirm its high bid. If
the high bidder in a sequential electronic auction declines to confirm
its high bid, the license will be immediately re-auctioned and no
penalty will be imposed. No other licenses will be put up for bid until
a bid confirmation form is signed by a high bidder on the previous
license.\61\ As with sequential oral auctions, if a high bidder signs a
bid confirmation form but subsequently fails to submit the 20 percent
down payment or otherwise defaults, the standard default penalties
(described supra) will apply.
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\61\See also n. 59, supra.
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VI. Regulatory Safeguards
A. Transfer Disclosure Requirements
88. In Section 309(j), Congress directed the Commission to
``require such transfer disclosures and anti-trafficking restrictions
and payment schedules as may be necessary to prevent unjust enrichment
as a result of the methods employed to issue licenses and permits.'' 47
U.S.C. Sec. 309(j)(4)(E). In the Second Report and Order, the
Commission adopted safeguards designed to ensure that the requirements
of Section 309(j)(4)(E) are satisfied. See Second Report and Order at
210-226 and 258-265.
89. In the Second Report and Order (at 214), we stated our belief
that it is important to monitor transfers of licenses awarded by
competitive bidding in order to accumulate the data necessary to
evaluate our auction designs and to judge whether ``licenses [have
been] issued for bids that fall short of the true market value of the
license.'' H.R. Rep. No. 103-111 at 257. Therefore, we imposed a
transfer disclosure requirement on licenses obtained through the
competitive bidding process, whether by a designated entity or not. See
47 CFR Sec. 1.2111(a). We believe that the transfer disclosure
requirements contained in Section 1.2111(a) of the Commission's Rules
should apply to all broadband PCS licenses obtained through the
competitive bidding process. Generally, licensees transferring their
licenses within three years after the initial license grant will be
required to file, together with their transfer applications, the
associated contracts for sale, option agreements, management
agreements, and all other documents disclosing the total consideration
received in return for the transfer of its license. As we indicated in
the Second Report and Order, we will give particular scrutiny to
auction winners who have not yet begun commercial service and who seek
approval for a transfer of control or assignment of their licenses
within three years after the initial license grant, in order to
determine if any unforeseen problems relating to unjust enrichment have
arisen outside the designated entity context. See Second Report and
Order at 214.\62\
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\62\We note that these transfer disclosure provisions are in
addition to the limitations on transfers that we have adopted in the
Broadband PCS Reconsideration Order (with respect to spectrum
disaggregation) or elsewhere in this Order (with respect to
transfers of licenses in the entrepreneurs' block).
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B. Performance Requirements
90. The Budget Act requires the Commission to ``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.''\63\ In the Second Report and Order we
decided that it was unnecessary and undesirable to impose additional
performance requirements, beyond those already provided in the service
rules, for all auctionable services. The broadband PCS service rules
already contain specific performance requirements, such as the
requirement to construct within a specified period of time. See, e.g.,
47 CFR Sec. 24.203. Failure to satisfy these construction requirements
will result in forfeiture of the license. Accordingly, we do not see
the need to adopt any additional performance requirements in this
Report and Order.
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\63\See Section 309(j)(4)(B) of the Communications Act, as
amended.
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C. Rules Prohibiting Collusion
91. In the Second Report and Order, we adopted a special rule
prohibiting collusive conduct in the context of competitive bidding.
See 47 CFR Sec. 1.2105(c). We referred to the Notice, wherein we
indicated our belief that such a rule would serve the objectives of the
Budget Act by preventing parties, especially the largest firms, from
agreeing in advance to bidding strategies that divide the market
according to their strategic interests and disadvantage other bidders.
See Second Report and Order at 221. We believe that this rule is
nowhere more necessary than with respect to broadband PCS auctions,
where we expect bidder interest to be high and the incentives to
collude to be great. Thus, Section 1.2105(c) will apply to broadband
PCS auctions. This rule provides that from the time the short-form
applications are filed until the winning bidder has made its required
down payment, all bidders will be 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. In
addition, as discussed in Section IV, supra, bidders will be required
by Section 1.2105(a)(2) of the Commission's Rules to identify on their
Form 175 applications all 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 will also be required to certify that they have not
entered and will not enter 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.
92. Winning bidders in broadband PCS auctions will also be subject
to Section 1.2107 of the Commission's Rules, which among other things
requires each winning bidder to attach as an exhibit to the Form 401
long-form application a detailed explanation of the terms and
conditions and parties involved in any bidding consortium, joint
venture, partnership, or other agreement or arrangement they had
entered into relating to the competitive bidding process prior to the
close of bidding. All such arrangements must have been entered into
prior to the filing of short-form applications. In addition, where
specific instances of collusion in the competitive bidding process are
alleged during the petition to deny process, 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 and revocation of their
license(s), and they may be prohibited from participating in future
auctions.
VII. Treatment of Designated Entities
A. Overview and Objectives
93. 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.
Sec. 309(j)(4)(D). To achieve this goal, the statute requires the
Commission to ``consider the use of tax certificates, bidding
preferences, and other procedures.'' Thus, while providing that we
charge for licenses, Congress has ordered that the Commission design
its auction procedures to ensure that designated entities have
opportunities to obtain licenses and provide service. For that purpose,
the law does not mandate the use of any particular procedure, but it
specifically approves the use of ``tax certificates, bidding
preferences, and other procedures.'' The use of any such procedure is,
in our view, mandated where necessary to achieve Congress's objective
of ensuring that designated entities have the opportunity to
participate in broadband PCS.
94. In addition to this mandate, the statute sets forth various
congressional objectives. For example, it provides that in establishing
eligibility criteria and bidding methodologies the Commission shall
``promot[e] economic opportunity and competition and ensur[e] that new
and innovative technologies are readily accessible to the American
people 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. Sec. 309(j)(3)(B);
see also id. Sec. 309(j)(4)(C) (requiring the Commission when
prescribing area designations and bandwidth assignments, to promote
``economic opportunity for a wide variety of applicants, including
small businesses, rural telephone companies, and businesses owned by
members of minority groups and women).\64\ Further, Section
309(j)(4)(A) provides that to promote the statute's objectives the
Commission shall ``consider alternative payment schedules and methods
of calculation, including lump sums or guaranteed installment payments,
with or without royalty payments, or other schedules or methods * * *
and combinations of such schedules and methods.''
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\64\As noted in the Second Report and Order, the statute also
requires the Commission to promote the purposes specified in Section
1 of the Communications Act, which include, among other things, ``to
make available, so far as possible, to all the people of the United
States a rapid, efficient, Nation-wide, and world-wide wire and
radio communication service with adequate facilities at reasonable
charges.'' 47 U.S.C. Sec. 151; Second Report and Order at n. 3.
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95. To satisfy these statutory mandates and objectives, we
established in the Second Report and Order eligibility criteria and
general rules that would govern the special measures for small
businesses, rural telephone companies, and businesses owned by members
of minority groups and women. We also identified several measures,
including installment payments, spectrum set-asides, bidding credits
and tax certificates, that we could choose from in establishing rules
for auctionable spectrum-based services. We stated that we would decide
whether and how to use these special provisions, or others, when we
developed specific competitive bidding rules for particular services.
In addition, we set forth rules designed to prevent unjust enrichment
by designated entities who transfer ownership in licenses obtained
through the use of these special measures or who otherwise lose their
designated entity status.
96. We intend in the new broadband personal communications service
to meet fully the statutory mandate of Section 309(j)(4)(D), as well as
the objectives of promoting economic opportunity and competition, of
avoiding excessive concentration of licenses, and of ensuring access to
new and innovative technologies 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. As explained more fully in this Order, in some respects it is
necessary to do more to ensure that businesses owned by members of
minority groups and women have a meaningful opportunity to participate
in the provision of personal communications services than is necessary
to ensure participation by other designated entities. In particular, we
have concluded that steps such as adoption of bidding credits, tax
certificates, alternate payment plans and relaxed attribution rules,
must be taken to encourage investment in minority and women-owned
businesses. These special provisions are tailored to address the major
problem facing minorities and women desiring to offer PCS--lack of
access to capital. Moreover, because broadband PCS licenses in many
cases are expected to be auctioned for large sums of money in the
competitive bidding process, and because buildout costs are likely to
be high, it is necessary to do more to ensure that designated entities
have the opportunity to participate in broadband PCS than is necessary
in other, less costly spectrum-based services. In our view, these steps
and the others we adopt are required to fulfill Congress' mandate that
designated entities have the opportunity to participate in the
provision of PCS. The measures we adopt today will also increase the
likelihood that designated entities who win licenses in the auctions
become strong competitors in the provision of broadband PCS service.
97. In instructing the Commission to ensure the opportunity for
designated entities to participate in auctions and spectrum-based
services, Congress was well aware of the difficulties these groups
encounter in accessing capital. Indeed, less than two years ago,
Congress made specific findings in the Small Business Credit and
Business Opportunity Enhancement Act of 1992, that ``small business
concerns, which represent higher degrees of risk in financial markets
than do large businesses, are experiencing increased difficulties in
obtaining credit.''\65\ Because of these problems, Congress resolved to
consider carefully legislation and regulations ``to ensure that small
business concerns are not negatively impacted'' and to give priority to
passage of ``legislation and regulations that enhance the viability of
small business concerns.''\66\
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\65\Small Business Credit and Business Opportunity Enhancement
Act of 1992, Section 331(a)(3), Pub. Law 102-366, Sept. 4, 1992.
\66\Id., Section 331(b) (2), (3).
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98. Congress also recognized that these funding problems are even
more severe for minority and women-owned businesses, who face
discrimination in the private lending market. For example, Congress
explicitly found that businesses owned by minorities and women have
particular difficulties in obtaining capital and that problems
encountered by minorities in this regard are ``extraordinary.''\67\ A
number of studies also amply support the existence of widespread
discrimination against minorities in lending practices. In October
1992, the year prior to passage of the auction law, the Federal Reserve
Bank of Boston released an important and highly-publicized study
demonstrating that a black or Hispanic applicant in the Boston area is
roughly 60 percent more likely to be denied a mortgage loan than a
similarly situated white applicant.\68\ The researchers measured every
variable mentioned as important in numerous conversations with lenders,
underwriters, and examiners and found that minority applicants are more
likely to be denied mortgages even where they have the same obligation
ratios, credit history, loan to value and property characteristics as
white applicants. The lending discrimination that occurs, the study
found, does not involve the application of specific rules, but instead
occurs where discretionary decisions are made. Based on the Boston
study, it is reasonable to expect that race would affect business loans
that are based on more subjective criteria to an even greater extent
than the mortgage loan process, which uses more standard rules.
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\67\Id., Sections 112(4), 331(a)(4).
\68\Mortgage Lending in Boston: Interpreting HMDA Data, Federal
Reserve Bank of Boston, Working Paper 92-7 (October 1992).
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99. Importantly, the Boston study also found that, because most
loan applicants have some negative attributes, most loan denials will
appear legitimate by some objective standard. Accordingly, the study
stated, the lending discrimination that occurs is very difficult to
document at the institution level, so legal remedies may be largely
ineffective. Indeed, Congress had already attempted to address
discriminatory lending practices through laws that bar discrimination
in lending, such as the Equal Credit Opportunity Act, enacted in 1974
and amended many times since then. Congress, therefore, could
reasonably assume, based on the Boston study, and its legislative
experience regarding discriminatory lending practices, that minority
applicants for licenses issued in spectrum auctions would face
substantial (albeit subtle) barriers to obtaining financing. Any legal
remedies, even if effective, would, moreover, come too late to ensure
that minorities are able to participate in spectrum auctions and obtain
licenses.
100. Similar evidence presented in testimony before the House
Minority Enterprise Subcommittee on May 20, 1994 indicates that African
American business borrowers have difficulty raising capital mainly
because they have less equity to invest, they receive fewer loan
dollars per dollar of equity investment, and they are less likely to
have alternate loan sources, such as affluent family or friends.
Assuming two hypothetical college educated, similarly-situated male
entrepreneurs, one black, one white, the testimony indicated that the
white candidate would have access to $1.85 in bank loans for each
dollar of owner equity invested, while the black candidate would have
access to only $1.16. According to the testimony, the problems
associated with lower incomes and intergenerational wealth, as well as
the discriminatory treatment minorities receive from financial
institutions, make it much more likely that minorities will be shut out
of capital intensive industries, such as telecommunications. This
testimony also noted that African American representation in
communications is so low that it was not possible to generate
meaningful summary statistics on underrepresentation.\69\
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\69\Testimony of Dr. Timothy Bates, Visiting Fellow, The Woodrow
Wilson Center, before the U.S. House of Representatives Committee on
Small Business, Subcommittee on Minority Enterprise, Finance, and
Urban Development (House Minority Enterprise Subcommittee), May 20,
1994.
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101. The inability to access capital is also a major impediment to
the successful participation of women in broadband PCS auctions. In
enacting the Women's Business Ownership Act in 1988, Congress made
findings that women, as a group, are subject to discrimination that
adversely affects their ability to raise or secure capital.\70\ As AWRT
documents, these discriminatory barriers still exist today. Indeed,
AWRT reports that while venture capital is an important source of
funding for telecommunications companies, women-owned companies
received only approximately one percent of the $3 billion invested by
institutional venture capitalists in 1993. Citing a 1992 National
Women's Business Council report, AWRT further argues that even
successful women-owned companies did not overcome these financing
obstacles after they had reached a level of funding and profitability
adequate for most other businesses.\71\
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\70\Pub. L. 100-533 (1988). In 1991, Congress enacted the
Women's Business Development Act of 1991 to further assist the
development of small businesses owned by women. See Pub. L. 102-191
(1991).
\71\See Letter of AWRT to the Honorable Kweisi Mfume, Chairman,
House Minority Enterprise Subcommittee, June 1, 1994.
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102. A study prepared in 1993 by the National Foundation for Women
Business Owners (NFWBO) further illustrates the barriers faced by
women-owned businesses. For example, it finds that women-owned firms
are 22 percent more likely to report problems dealing with their banks
than are businesses at large. In addition, the NFWBO study finds that
the largest single type of short-term financing used by women business
owners is credit cards and that over half of women-owned firms use
credit cards for such purposes, as compared to 18 percent of all small
to medium-sized businesses, which generally use bank loans and vendor
credit for short-term credit needs. With regard to long-term financing,
the study states that a greater proportion of women-owned firms are
turning, or are forced to turn, to private sources, and to a wider
variety of sources, to fulfill their needs. Based on these findings,
the NFWBO study concludes that removal of financial barriers would
encourage stronger growth among women-owned businesses, resulting in
much greater growth throughout the economy.\72\
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\72\See The National Foundation for Women Business Owners,
Financing the Business, A Report on Financial Issues from the 1992
Biennial Membership Survey of Women Business Owners, October 1993.
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103. If we are to meet the congressional goals of promoting
economic opportunity and competition by disseminating licenses among a
wide variety of providers, we must find ways to counteract these
barriers to entry. Over the years, both Congress and the Commission
have tried various methods to enhance access to the broadcast and cable
industries by minorities and women. For example, in the late 1960s, the
FCC began to promote nondiscriminatory employment policies by broadcast
licensees. These equal employment opportunity efforts have taken the
form of Commission rules and policies that require licensees not to
discriminate, to report hiring and promotion statistics, and to
implement affirmative action programs.\73\ The Commission also has
adopted similar equal employment rules for licensees in the common
carrier, public mobile, and international fixed public radio
communication services,\74\ as well for cable operators.\75\ The cable
EEO rules were recently revised as part of the implementation of the
Cable Act of 1992, and they now apply to cable entities, satellite
master antenna television operators serving 50 or more subscribers and
any multichannel video programming distributor.\76\
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\73\47 CFR Sec. 73.2080 (broadcasters must ``establish,
maintain, and carry out a positive continuing program of specific
practices designed to ensure equal opportunity in every aspect of
the station's employment policy and practice'').
\74\47 CFR Secs. 21.307, 22.307, 23.55.
\75\47 CFR Secs. 76.71-76.79.
\76\See 47 U.S.C. Sec. 554. In addition, the Commission has
proposed adopting EEO requirements for all CMRS licensees, including
PCS licensees. Regulatory Treatment of Mobile Services, Further
Notice of Proposed Rule Making, GN Docket 93-252, FCC 94-100, 59 FR
28042, May 31, 1994.
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104. A decade after it first addressed discriminatory hiring
practices, the Commission began to look into the serious
underrepresentation of minorities among owners of broadcast stations.
Recognizing that it could play an important role in alleviating this
problem through the licensing process, the Commission adopted its tax
certificate and distress sale policies in 1978 to encourage minority
ownership of broadcast facilities.\77\ It noted that full minority
participation in the ownership and management of broadcast facilities
would result in a more diverse selection of programming and would
inevitably enhance the diversity of control of a valuable resource, the
electromagnetic spectrum.\78\
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\77\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) (1978 Policy
Statement).
\78\Because of the role of cable television systems in
retransmitting broadcast signals, the Commission has also issued tax
certificates in connection with sales of cable systems. See
Statement of Policy on Minority Ownership of CATV Systems, FCC 82-
524, released December 22, 1982.
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105. In implementing these ownership policies, the Commission
identified lack of access to capital as one of the principal barriers
to minority entry. Thus, in 1981, the Commission created the Advisory
Committee on Alternative Financing for Minority Opportunities in
Telecommunications (the ``Rivera Committee'') to investigate financing
methods and to give recommendations to the FCC on ways to encourage
minority ownership of telecommunications facilities.\79\ The Rivera
Committee confirmed that the shortage of capital is a principal problem
facing minorities seeking ownership opportunities and further found
that this shortage was due to minority inexperience in obtaining
financial institution misconceptions about potential minority
borrowers, and marketplace structural problems, such as high interest
rates and low broadcast industry earnings growth. Among other things,
the Rivera Committee suggested educational and outreach programs and
expanding the tax certificate program to nonbroadcast properties such
as common carrier and land mobile. In response to this recommendation,
the FCC submitted draft legislation to Congress proposing to broaden
the scope of the Commission's authority to issue tax certificates in
connection with the sale or exchange of any type of telecommunications
facilities.\80\ On March 24, 1983, The Minority Telecommunications
Ownership Tax Act of 1983, H.R. 2331, which incorporated the
Commission's proposals, was introduced in the House of
Representatives.\81\
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\79\Strategies for Advancing Minority Ownership Opportunities in
Telecommunications, The Final Report of the Advisory Committee on
Alternative Financing for Minority Opportunities in
Telecommunications to the Federal Communications Commission, May
1982 (Rivera Committee Report).
\80\See Federal Communications Draft Legislation Revising
Section 1071 of the Internal Revenue Code of 1994 (January 17,
1983).
\81\The Minority Telecommunications Ownership Tax Act of 1983,
H.R. 2331, 98th Congress, 1st Sess., March 24, 1983.
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106. Congress also took steps to address the problem of minority
underrepresentation in communications. In 1982, it mandated the grant
of a ``significant preference'' to minority applicants participating in
lotteries for spectrum-based services. 47 U.S.C. Sec. 309(i)(3)(A).
And, in 1988 and each fiscal year thereafter, Congress attached a
provision to the FCC appropriations legislation, which precluded the
Commission from spending any appropriated funds to examine or change
its minority broadcast preference policies.\82\
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\82\See Continuing Appropriations Act for Fiscal Year 1988, Pub.
L. 100-102, 101 Stat. 1329-31; Departments of Commerce, Justice, and
State, the Judiciary, and Related Agencies Appropriations Act of
1994, Pub. L. 103-121, 107 Stat. 1167.
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107. These efforts have met with limited success. The record shows
that women and minorities have not gained substantial ownership
representation in either the broadcast or non-broadcast
telecommunications industries. For example, a 1993 report conducted by
the National Telecommunications and Information Administration's (NTIA)
Minority Telecommunications Development Program shows that, as of
August 1993, only 2.7 percent of commercial broadcast stations were
owned by minorities. Another study commissioned by the Commerce
Department's Minority Business Development Agency in 1991 found that
only one half of one percent of the telecommunications firms in the
country were minority owned. The study also identified only 15 minority
cable operators and 11 minority firms engaged in the delivery of
cellular, specialized mobile radio, radio paging or messaging services
in the United States.\83\ And, according to the last available U.S.
Census, only 24 percent of the communications firms in the country were
owned by women, and these women-owned firms generated only
approximately 8.7 percent of the revenues earned by communications
companies.\84\ When companies without paid employees are removed from
the equation, firms with women owners represent only 14.5 percent of
the communications companies in the country.\85\ One result of these
low numbers is that there are very few minority or women-owned
businesses that bring experience or infrastructure to PCS. They thus
face an additional barrier relative to many existing service providers.
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\83\See Testimony of Larry Irving, Assistant Secretary for
Communications and Information, U.S. Department of Commerce, before
the House Minority Enterprise Subcommittee, May 20, 1994. In his
testimony at this same hearing, FCC Chairman Reed Hundt cited some
of these statistics and noted that in light of this serious
underrepresentation, there remains ``a fundamental obligation for
both Congress and the FCC to examine new and creative ways to ensure
minority opportunity.'' Testimony of Reed E. Hundt, Chairman,
Federal Communications Commission, before the House Minority
Enterprise Subcommittee, May 20, 1994.
\84\See Women-Owned Businesses, 1987 Economic Censuses, U.S.
Department of Commerce, issued August 1990, at 7, 147. The census
data includes partnerships, and subchapter S corporations. We have
no statistics regarding women representation among owners of larger
communications companies.
\85\Id.
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108. Small businesses also have not become major participants in
the telecommunications industry. For instance, one commenter asserts
that ten large companies--six Regional Bell Operating Companies
(RBOCs), AirTouch (formerly owned by Pacific Telesis), McCaw, GTE and
Sprint--control nearly 86 percent of the cellular industry. This
commenter further contends that nine of these ten companies control 95
percent of the cellular licenses and population in the 50 BTAs that
have one million or more people.\86\
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\86\Ex parte filing of DCR Communications, May 31, 1994.
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109. Congress directed the Commission to ensure that, together with
other designated entities, rural telephone companies have the
opportunity to participate in the provision of PCS. Rural areas,
because of their more dispersed populations, tend to be less profitable
to serve than more densely populated urban areas. Therefore, service to
these areas may not be a priority for many PCS licensees. Rural
telephone companies, however, are well positioned because of their
existing infrastructure to serve these areas profitably. We, therefore,
have adopted special provisions to encourage their participation,
increasing the likelihood of rapid introduction of service to rural
areas.
110. In the new auction law, Congress directed the Commission to
remedy this serious imbalance in the participation by certain groups,
especially minorities and women. The record indicates that, in the
absence of meaningful efforts to assist designated entities, there
would be good reason to think that participation by these groups,
particularly businesses owned by women and minorities, would continue
to be severely limited. Indeed, the auction law itself envisions a
process that requires payment of funds to acquire an initial license,
unlike existing licensing methods such as comparative hearings or
lotteries. It is therefore possible that participation by those with
limited access to capital could be further diminished by operation of
the statute, absent affirmative provisions to create competitive
opportunity for designated entities. The measures we adopt in this
Fifth Report and Order thus will carry out Congress's directive to
provide meaningful opportunities for small entities, rural telephone
companies, and businesses owned by women and minorities to provide
broadband PCS services. The rules also are expressly designed to
address the funding problems that face these groups and that are their
principal barriers to entry.
111. We also intend that designated entities who win licenses have
the opportunity to become strong competitors in this service. While the
new broadband PCS service presents tremendous opportunities for
designated entities to participate in the provision of the next
generation of innovative wireless mobile telecommunications services,
it is expected to be a highly competitive service, and the estimated
costs of acquiring a license and constructing facilities are
substantial. In the Broadband PCS Reconsideration Order, which was
adopted June 9, 1994, we took specific steps to assist designated
entities to become viable competitors in the provision of broadband
PCS. For example, we modified the PCS spectrum allocation plan by
shifting all channels blocks to a contiguous lower segment of the
``emerging technologies band'' in part to bolster the ability of
designated entities to obtain more competitively viable licenses. In
addition, we relaxed some of the ownership and attribution rules with
respect to cellular operators' participation in PCS to foster
investment in designated entity ventures,\87\ and we also relaxed the
PCS/cellular cross-ownership rule for designated entities with cellular
holdings to allow them to further expand their opportunities in
broadband PCS.\88\ Further, we took steps that will result in lower
capital costs for designated entities that obtain PCS licenses,
including adoption of a band plan that will reduce the costs of
clearing the PCS spectrum of incumbent microwave users as well as
relaxing the construction requirements.
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\87\Broadband PCS Reconsideration Order at 127.
\88\Id. at 125.
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112. The measures we establish today to encourage the entry of
designated entities also are designed to promote strong, long-term bona
fide competitors. For example, we have revised the definition of a
small business set forth in the Second Report and Order to include
entities with up to $40 million in gross revenues, and we will allow
these small businesses to pool their resources and form consortia to
bid in the entrepreneurs' blocks. We also adopt rules that allow
entrepreneurial businesses, small businesses, and businesses owned by
women and minorities to raise capital by attracting passive equity
investors. At the same time, we have designed these rules to ensure
that the special provisions adopted for such businesses accrue to the
intended beneficiaries.
B. Summary of Special Provisions for Designated Entities
113. As discussed more fully below, many commenters in this
proceeding believe that the inability of designated entities to obtain
adequate funding has a profoundly adverse effect on the potential for
these businesses to bid successfully in auctions against very large,
established businesses. Therefore, we take a number of steps in this
Order to help address this imbalance.
We establish two ``entrepreneurs' blocks'' (frequency
blocks C and F) in which large companies (those with $125 mil
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