Future Development of SMR Systems in the 800 MHz Frequency Band

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 90

[PR Docket No. 93-144; FCC 97-223]

Future Development of SMR Systems in the 800 MHz Frequency Band

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This Second Report and Order resolves issues raised in the

Second Further Notice of Proposed Rulemaking and completes the process

by establishing technical and operational rules for the lower 230 800

MHz channels. Specifically, this order establishes the U.S. Department

of Commerce Bureau of Economic Analysis Economic Areas (EAs) as the

relevant geographic service area for licensing these channels and

defines the rights of incumbent SMR licensees already operating on the

lower 230 channels. It also provides further details concerning the

mandatory relocation rules adopted in the 800 MHz Report and Order, and

establishes rules for partitioning and disaggregation of EA licenses.

Coupled with the rules adopted in the 800 MHz Report and Order, the

decisions reached in this order complete the process of converting to

new rules for the 800 MHz SMR service and enable us to commence

geographic area licensing of the service. These rule revisions not only

eliminate a cumbersome and outdated regulatory regime, they will

promote competition and provide SMR licensees with flexibility to

deploy multiple technologies in response to a changing marketplace, and

they further the Congressionally mandated goal of establishing

regulatory symmetry between 800 MHz SMR licensees and other competing

providers of Commercial Mobile Radio Services (CMRS).

EFFECTIVE DATE: September 29, 1997.

FOR FURTHER INFORMATION CONTACT: Shaun Maher or Michael Hamra, Policy

and Rules Branch, Commercial Wireless Division, Wireless

Telecommunications Bureau at (202) 418-0620 or Alice Elder, Auctions

and Industry Analysis Division, Wireless Telecommunications Bureau at

(202) 418-0660.

SUPPLEMENTARY INFORMATION: This Second Report and Order in PR Docket

No. 93-144, GN Docket No. 93-252, and PP Docket No. 9-253, adopted June

23, 1997, and released July 10, 1997, 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).

I. Background

1. As described in the 800 MHz Report and Order in PR Docket 93-

144, 61 FR 6138 (February 16, 1996), the Commission formerly used a

site-by-site licensing approach for 800 MHz SMR channels, which were

primarily used to provide dispatch radio service. In recent years,

however, a number of SMR licensees have expanded the geographic scope

of their services, aggregated channels, and developed digital networks

to enable them to provide a type of service comparable to that provided

by cellular and Personal Communications Service (PCS) operators. This

trend led us to rethink our site-by-site licensing procedures, which

were very cumbersome for systems comprised of several hundred sites

because licensees were required to receive individual Commission

approval for each site. We were concerned that site-by-site licensing

procedures also impaired an SMR licensee's ability to respond to

changing market conditions and consumer demand. We concluded that

granting licenses through waivers and other case-by-case mechanisms was

administratively burdensome and had resulted in a licensing regime that

lacked uniformity. Accordingly, we initiated this proceeding to

transition to a geographic area licensing approach for the 800 MHz SMR

service. At the same time, we emphasized the need to consider the

interests of incumbent SMR licensees, many of whom continue to provide

traditional dispatch service and do not seek to develop services

comparable to cellular or PCS.

2. In the 800 MHz Report and Order, the Commission established an

EA-based licensing procedure for the upper 200 channels in the 800 MHz

SMR band. That procedure will enable an EA licensee to, among other

things, construct facilities at any available site within its EA and to

add, remove or relocate sites within the EA without prior Commission

approval. The new rules also give the EA licensee flexibility to

determine the channelization of available spectrum within the

authorized channel block, the right to use any spectrum within its EA

block that is recovered by the Commission from an incumbent licensee

(i.e., the incumbent's license is terminated for some reason), and

establishes a presumption that assignments from incumbents to the

relevant EA licensee are in the public interest. In addition, the 800

MHz Report and Order adopted a 10-year license term, and a five-year

construction period with three-year and five-year coverage requirements

for EA licensees on the upper 200 channels. We also created a mechanism

for relocation of incumbent licensees on the upper 200 channels,

delineated the parameters of unrelocated incumbents' expansion rights,

and reallocated the former General Category channels to the 800 MHz SMR

service. Finally, we established competitive bidding procedures for 525

EA licenses in the upper 200 channel block.

3. In the Second Further Notice of Proposed Rulemaking, in PP

Docket 93-253, 61 FR 6212 (February 16, 1996), we sought comment on

additional service rules for the upper 200 channels, and on instituting

geographic area licensing for the lower 230 800 MHz SMR channels. With

respect to the upper 200 channels, we asked commenters to address

whether EA licensees should be permitted to partition and disaggregate

their spectrum blocks. We also proposed additional procedures and

clarifications regarding mandatory relocation of incumbent licensees

from the upper 200 channels. With respect to the lower 230 channels, we

proposed geographic area licensing procedures and auction rules similar

to those adopted for the upper 200 channels. We declined to propose a

mandatory relocation plan for incumbents on the lower 230 channels,

however, and we proposed to adopt operating parameters for incumbents

that would give them a reasonable opportunity to expand their

businesses. We further proposed to establish competitive bidding rules

for licensing the General Category and lower 80 channels with special

provisions to encourage participation by designated entities in the

auction of that spectrum.

4. Sixty-five parties filed initial comments and fifty-eight

parties filed reply comments in response to the Second Further Notice

of Proposed Rulemaking. Numerous written ex parte presentations also

have supplemented the record. Notably, in reply comments, AMTA, SMR WON

and Nextel offered a proposal (``Industry Proposal'') for licensing the

lower 230 channels through a pre-auction process that would allow

incumbents to obtain rights to unlicensed spectrum through settlement

agreements with one another. The parties submit that the Industry

Proposal represents a consensus of the SMR industry and takes into

account

[[Page 41191]]

the interests of wide-area licensees as well as site-by-site

incumbents.

II. Discussion

A. Service Rules for the Lower 230 Channels

1. Geographic Area Licensing

5. We adopt geographic area licensing for the lower 230 channels.

Geographic area licensing will increase the flexibility afforded to

licensees to manage their spectrum, and will reduce administrative

burdens and operating costs by allowing licensees to modify, move, or

add to their facilities within specified geographic areas without need

for prior Commission approval. Geographic area licensing will also

ensure that licensees on these channels have operational flexibility

similar to that afforded to SMR licensees on the upper 200 channels as

well as to cellular and PCS licensees.

6. We reject the view that the heavy use of the lower 230 channels

by incumbents renders geographic area licensing impractical. To the

contrary, incumbents benefit from geographic area licensing because it

will make it far easier for them to fill in gaps in their current

systems, make modifications to meet shifting market demands, and expand

into unserved areas. Even where a licensee's ability to expand is

limited by the presence of adjacent systems, geographic licensing is

preferable to site-specific licensing because it affords the same

degree of protection from interference but allows licensees greater

flexibility within their existing service areas. We also do not agree

with the view that the prospective relocation of SMR incumbents from

the upper 200 channels to the lower 230 is an obstacle to geographic

licensing. Upon moving to the lower 230 channels, relocated licensees

will be able to take advantage of the flexibility in our rules to the

same extent as other licensees.

7. We also disagree with UTC and other commenters who contend that

geographic area licensing is inappropriate because of the presence of

non-SMRs on the lower 230 channels. While non-SMR operators may not

require geographic licenses to operate systems designed for internal

communications, geographic area licensing remains the most efficient

and logical licensing approach for the majority of licensees in the

band. We are not persuaded that we should forego the benefits of

geographic licensing to accommodate the interests of a small minority

of systems. In any event, systems that are not SMR systems will remain

fully protected under our geographic licensing rules. In addition, non-

SMRs can obtain spectrum to suit their internal communications needs by

forming joint bidding consortia or by entering into partitioning and

disaggregation agreements with EA licensees.

2. Service Areas

8. We adopt EAs as the basis for geographic licensing of the lower

230 channels. EAs are generally recognized by the SMR industry as being

optimally sized for geographic licensing in this band, because EAs

approximate the coverage of most SMR systems except the largest wide-

area operations. As we stated in the 800 MHz Report and Order, EAs will

encourage a diverse group of prospective bidders, because they are

small enough that licensees seeking to serve small markets can bid on

areas they wish to serve, but are large enough that they can also form

the basis for wide-area systems. By encouraging more diverse bidders in

the auction, we believe we will fulfill the mandate of section

309(j)(3)(B) & (4)(C) of the Communications Act to disseminate licenses

among a wide variety of applicants and to ensure economic opportunities

for a wide variety of applicants. In addition, having the same

geographic area licenses for the upper 200 and lower 230 channels makes

it easier for licensees to develop systems that use both upper 200 and

lower 230 channels in a common licensing area.

3. Channel Blocks

a. Lower 80 Channels

9. We adopt our proposal to license the lower 80 channels in five-

channel blocks. The non-contiguous nature of these channels makes it

impractical to impose any other channel plan. This approach will also

provide opportunities for incumbents and applicants that base their

systems on trunking of non-contiguous channels, in keeping with the

mandate of section 309(j)(4)(C) of the Communications Act to make

equitable distribution of licenses and provide economic opportunities

for a wide variety of entities. Furthermore, we find that this will be

the less disruptive method for smaller incumbent licensees since they

have acquired their channels in five channel increments. Therefore, we

will license the lower 80 channels in sixteen five-channel blocks as

set forth in Sec. 90.617(d) of our rules.

b. General Category Channels

10. We understand the needs of those providers who want contiguous

spectrum to implement frequency re-use technology, and those that want

non-contiguous spectrum because the spectrum is highly encumbered, or

because it suits their current technology. If we were to adopt very

large contiguous blocks of spectrum we would preclude smaller entities

from participating in the auction because presumably bigger blocks of

spectrum would require larger bids to acquire than smaller blocks of

spectrum. On the other hand, if we were to auction EAs on a channel-by-

channel basis, as suggested by Fresno, it would be difficult to

accumulate contiguous spectrum and would require all licensees

interested in accumulating spectrum to keep track of 150 auctions at

one time. If one entity wanted to acquire five channel blocks in three

EAs, the licensee would have to potentially keep track of 450

simultaneous auctions.

11. To accommodate licensees who want contiguous as well as those

licensees that want large blocks of spectrum, we will adopt the

Industry Proposal and allot three contiguous 50-channel blocks. We

expect a significant amount of the former General Category channels to

continue to be used for traditional SMR systems and retaining the

contiguity of these channels will permit alternative offerings that may

require multiple, contiguous channels. In addition, we find that

allotting 50 channel blocks will allow bidders to aggregate even larger

contiguous blocks of spectrum. We find that adopting such a channel

plan strikes a balance between licensees with different spectrum

allocation needs and allows licensees with different goals to pursue

spectrum in the General Category. Once again, this fulfills the mandate

of section 309(j)(4)(C) of the Communications Act that we distribute

licenses in such a way so as to ensure economic opportunities for a

wide variety of entities. While we do not adopt Fresno's or Sierra's

proposals, small system licensees will have the opportunity to acquire

smaller amounts of spectrum compatible with their existing technology

through the newly-created disaggregation rules we adopt herein.

Meanwhile licensees seeking to deploy contiguous spectrum technology

will have the opportunity to acquire a 100 or 150 channel block of

contiguous spectrum. Adopting this channel plan addresses the competing

demands of trunked systems and wide-area systems that require

contiguous spectrum.

4. Channel Aggregation Limits

12. We conclude that no aggregation limit is necessary for the

lower 230 channels. In both the CMRS Third Report and Order and the 800

MHz

[[Page 41192]]

Report and Order, we observed that the 800 MHz SMR service is just one

of many competitive services in the CMRS marketplace. If a single

licensee were to acquire all 230 channels in a single market, it would

hold an aggregated 11.5 MHz of spectrum, not all of which would be

contiguous. Even if a single licensee combined this spectrum with

spectrum from the upper 200 channels, it would fall well short of the

45 MHz spectrum cap, and would have less spectrum than PCS and cellular

providers in the same market. The total potential aggregation of

spectrum in the 800 MHz SMR service, combined with the General

Category, is 21.5 MHz of spectrum, not all of which is contiguous. We

do not believe that this level of aggregation would enable an SMR

licensee to have an anticompetitive effect on the CMRS market.

Moreover, we are concerned that limiting the ability of SMR providers

to aggregate spectrum could handicap their efforts to compete with

other services. As a practical matter, the presence of numerous

incumbents on the lower 230 channels reduces the likelihood that

significant aggregation of this spectrum will occur. However, we

conclude that the marketplace, not our rules, should determine whether

these channels will be used on an aggregated or disaggregated basis.

13. We also decline to limit SMR applicants on the lower 230

channels to obtaining one channel block at a time. This is inconsistent

with our approach to licensing of other CMRS, including cellular, PCS,

900 MHz SMR, and the upper 200 channels in the 800 MHz band. In

addition, the use of competitive bidding to resolve mutually exclusive

geographic area licenses on the lower 230 channels provides a strong

incentive for licenses to utilize the channels.

5. Licensing in the Mexican and Canadian Border Areas

14. In the 800 MHz Report and Order, we acknowledged that in the

Canadian and Mexican border areas, some upper 200 channels would not be

available or would be subject to power and height restrictions.

Nevertheless, we did not distinguish between border and non-border

areas for the upper 200 channels in our EA licensing plan, because we

concluded that EA applicants could best determine the effect of such

restrictions on the value of the spectrum. We adopt the same approach

for the lower 230 channels as well. Thus, EA licensees on the lower 230

channels of EAs that are adjacent to Canada or Mexico will be entitled

to use any available channels within their spectrum blocks, except

where use of such channels is restricted by international agreement.

15. In addition, we clarify that SMR and General Category channels

assigned to non-SMR pools in the border areas are not available for use

by EA licensees in those regions. Thus, non-SMR licensees operating on

those channels in border areas may continue to operate and will not be

subject to relocation. Moreover, EA licensees must afford full

interference protection to non-SMR licensees operating on these

channels. We admonish potential applicants for EA licenses to carefully

evaluate these limitations on spectrum availability when determining

their bidding strategies for blocks of spectrum adjacent to the Mexican

and Canadian borders.

16. Finally, we note that there are some non-SMR channels in the

non-border areas that in the Canadian and Mexican border areas are

available soley to SMR eligibles. These channels will be associated

with specific SMR and General Category spectrum blocks in these border

areas. Prospective bidders on EAs near the Canadian and Mexican borders

should be aware that these channels, which are not available to them

anywhere else except in the border regions, will be assigned for their

use in the Canadian and Mexican border regions. EA licensees must also

afford full interference protection to non-SMR licensees operating in

adjacent areas on these channels.

6. Construction and Coverage Requirements for the Lower 230

Channels

a. Requirements for EA Licensees

17. We adopt the construction requirements proposed in the Second

Further Notice of Proposed Rulemaking for the lower 230 channels. We

believe that adoption of such flexible construction requirements will

enhance the rapid deployment of new technologies and services and will

expedite service to rural areas. We disagree with those commenters that

contend that adoption of stricter construction requirements for the

lower 230 channels will better serve the public interest. We find that

more flexible construction requirements will allow EA licensees in the

encumbered lower 230 channels to respond to market demands for service

and thus eliminate the need for an EA licensee to meet construction

requirements based on population alone. We disagree with those

commenters that believe that strict construction requirements are

necessary to deter speculation and warehousing. We believe that, by

participating in the auction, licensees will have shown that they are

genuinely interested in acquiring spectrum to utilize and not

warehouse. At the same time, we continue to believe that licensees

should be held to some type of construction requirement in order to

encourage expedited construction and foster service to rural areas.

Therefore, EA licensees in the lower 230 channel blocks, just as their

counterparts in the upper 200 channels, will be required to provide

coverage to one-third of the population within three years of the

license grant, and to two-thirds of the population within five years of

the license grant. However, in the alternative, EA licensees in the

lower 230 channel block may provide ``substantial service'' to the

geographic license area within five years of license grant.

``Substantial service'' will be defined as service that is sound,

favorable, and substantially above a level of mediocre service, which

would barely warrant renewal. For example, a licensee may demonstrate

that it is providing a technologically innovative service or that it is

providing service to unserved or underserved areas. This flexibility

will allow EA licensees to expedite service to rural areas that may

have a higher service demand than a heavily populated urban area with

less demand. As we proposed in the Second Further Notice of Proposed

Rulemaking, we will not adopt a channel usage requirement for licensees

in the lower 230 channel block. In addition, we decline to adopt PCIA's

proposal to require that construction requirements be met on a ``per-

channel'' basis. We believe EA licensees should have the flexibility to

respond to market-based demands for service and that adopting a ``per-

channel'' construction requirement would greatly interfere with

licensees' ability to respond to such demands.

18. The failure to meet these performance requirements will result

in automatic termination of the geographic area license. This is

consistent with our rules for broadband PCS, 900 MHz SMR services,

Multipoint Distribution Services (MDS), and most recently for paging.

We will individually license any incumbent facilities that were

authorized, constructed, and operating at the time of termination of

the geographic area license.

b. Requirements for Site-Based Licensees

19. As a result of our decision to convert to EA-based licensing of

the lower 230 channels, the only instances in which future site-based

applications will be necessary are those few instances where site

approval continues

[[Page 41193]]

to be required, e.g., for sites at environmentally sensitive locations

that require Commission approval under NEPA. In such instances, we will

require incumbent licensees to construct facilities and commence

service within 12 months in accordance with our proposal. EA licensees

that are required to seek separate approval for environmentally

sensitive locations within their geographic areas will be permitted to

include those sites in their geographic area license and will not be

subject to the 12 month construction deadline.

20. We also take this opportunity to clarify two points. First, we

note the applicability of the 12-month construction requirement to

incumbents on the lower 230 channels holding site-based authorizations

with construction periods that have not yet expired. In general, SMR

licensees with site specific authorizations have 12 months from the

grant date to complete construction and commence service, unless the

authorization is part of a system that has received an extended

implementation grant. Pursuant to the new rules we adopt herein,

interior sites added within an incumbent's existing footprint will not

be subject to construction requirements because they do not require

separate authorizations.

c. Transfers and Assignments of Unconstructed Site-Specific Licenses

21. We agree with SMR WON and Digital that temporary waiver of our

restrictions against assignment or transfer of unconstructed site-

specific SMR licenses would facilitate the relocation process and

geographic licensing. We believe that there is good cause to support

waiver of the rule in this case. The special circumstances that exist

with this innovative approach to licensing support temporary waiver of

Sec. 90.609(b) of the rules. That rule was designed to prevent

trafficking in site-specific licenses and spectrum warehousing by

taking back unused spectrum. However, in this proceeding, we seek to

encourage rapid migration of incumbents, preferably through voluntary

negotiations, from the upper 200 channels to lower band 800 MHz

channels. If we were to rigidly apply Sec. 90.609(b) in such

circumstances, licensees holding unconstructed site-specific licenses

on the lower channels would not be able to transfer their

authorizations for relocation purposes unless they had constructed them

first. Therefore, it is more efficient to waive the rule and allow

licensees who have unconstructed lower channels suitable for relocation

of upper channel incumbents to transfer them without prior

construction, so that the relocated licensees can construct facilities

suitable to their needs.

22. In addition, relaxing our transfer restrictions facilitates

geographic licensing of the lower channels themselves. We expect that

in many instances, incumbents on the lower channels will bid for EA

licenses on those channels to consolidate their existing holdings.

However, because we are adopting new channel blocks for geographic

licensing, particularly in the General Category, incumbents may find it

advantageous to their bidding strategy to modify their holdings in

advance of the auction through transfers or channel swaps. In addition,

allowing transfer of unconstructed as well as constructed spectrum

provides an opportunity for new entrants to position themselves for the

auction by acquiring existing licenses in areas where they intend to

bid.

23. Therefore, to facilitate relocation and geographic licensing,

we will temporarily waive the prohibition on assignment or transfer of

unconstructed authorizations on the lower 80 and General Category

channels. Thus, licensees on these channels may apply to transfer or

assign their authorizations regardless of construction. Where

unconstructed spectrum is transferred, the assignee or transferee will

be subject to the same construction deadline as the transferor/

assignor. We will, however, allow licensees with extended

implementation authority to apply their system-wide construction

deadlines to licenses acquired by transfer that are within their pre-

existing footprint. This waiver will remain in effect until six months

after the conclusion of the upper band EA auction. We believe this

period will provide sufficient time for licensees to identify suitable

lower band spectrum for transfer as part of voluntary relocation

agreements, and for potential bidders in the lower band auction to

negotiate transfers as part of their pre-auction strategy.

24. We will extend this waiver to all holders of unconstructed

spectrum on the lower 80 and General Category channels, including both

SMR and non-SMR licensees. We will also allow these licensees to

transfer or assign their authorizations to any eligible entity.

Although Nextel argues that such transfers should be allowed only if

they are between wide-area SMR incumbents and EA licensees, we believe

such restrictions are unnecessary and unduly restrictive. First, we see

no reason to allow only wide-area licensees to transfer unconstructed

spectrum. The purpose of this policy is to facilitate the rapid

assignment of all lower band spectrum--not just spectrum held by wide-

area licensees--to those who are most likely to use it. Similarly, we

will not restrict holders of unconstructed spectrum to dealing with EA

licensees. Although we expect that many transfers will in fact be to EA

licensees, we do not believe that incumbents should be prevented from

negotiating transfers to other parties who value the spectrum. In any

event, such a restriction would prevent incumbents from negotiating

transfers prior to the conclusion of the auction because EA winners

will not be identified until then.

25. We recognize that relaxing transfer restrictions makes it more

difficult to take action against speculators who have not constructed

facilities on their spectrum but instead have sought to warehouse

spectrum for profit. However, we believe that the benefits of this

approach for relocation and future geographic licensing in this service

outweigh the potential cost. First, not all 800 MHz licensees who have

failed to construct are necessarily speculators: our application freeze

and uncertainty caused by the lengthy pendency of this proceeding have

also made it difficult for legitimate licensees to develop their

systems. Moreover, even in the case of licensees who acquired spectrum

through application mills, allowing unconstructed spectrum to be

transferred rapidly and efficiently to those who value it most allows

development of the service to proceed and provides potential benefits

to prospective bidders in the auction. This approach will also not

compromise the objectives of geographic area licensing: because only

currently licensed spectrum can be transferred, there is no impact on

unlicensed spectrum that will be awarded to EA licensees. In addition,

EA licensees are not obliged by this policy to negotiate with

incumbents they believe have no intention of constructing facilities;

if an incumbent fails to construct and commence operations within the

period required by its license, the unused spectrum reverts to the EA

licensee.

B. Rights and Obligations of EA Licensees in the Lower 230 Channels

1. Operational Restrictions

26. Except for using the 18 dBV/m contour to define the

interference protection obligations of EA licensees with respect to

lower 230 incumbents (discussed in Sec. IV-B-3-b, infra.), we will

apply the same operational rules to EA licensees on the lower 230

channels that are applicable to the upper 200 channels. No commenter

has suggested that EA licensees on the lower 230 channels should not

have the right to

[[Page 41194]]

modify their facilities without prior Commission approval, and we see

no reason to treat the lower 230 channels differently in this regard.

We also adopt the same notification requirements applicable to the

upper 200 channels with respect to system additions, deletions, and

modifications.

2. Spectrum Management Rights--Acquisition and Recovery of Channels

Within Spectrum Blocks

27. In light of our decision to extend EA licensing to the lower

230 channels, we adopt the same rules for these channels with respect

to recovery of unused spectrum and transfers and assignments of

spectrum from incumbents to EA licensees. For the same reasons, we

dismiss all wait-listed applications for these channels. Our action

today will not apply to any application that is currently pending that

includes a request for waiver of the processing freeze. We shall

resolve those applications by separate action.

3. Treatment of Incumbents

a. Mandatory Relocation of Lower Channel Incumbents

28. We will not adopt mandatory relocation procedures for either

SMR or non-SMR incumbents on the lower 230 channels. The record

supports our tentative conclusion that requiring incumbents to migrate

off this spectrum would be impractical because there is no identifiable

alternative spectrum to accommodate such migration. In addition, it is

likely that many of the incumbents who will operate on these channels

will have relocated from the upper 200 channels, and we have already

determined that such relocatees should not be required to relocate more

than once. Therefore, EA licensees on the lower 230 channels will not

have the right to move incumbents off of their spectrum blocks unless

the incumbent voluntarily agrees to move.

b. Incumbent Operations

i. Expansion and Flexibility Rights of Lower Channel Incumbents

29. In the Further Notice of Proposed Rulemaking in this

proceeding, we recognized that the geographic licensing scheme we

designed for the upper 200 channels could result in some incumbent

licensees remaining in this channel block, despite our mandatory

relocation provisions. To avoid interference between these incumbent

licensees and the new EA licensees in the upper 200 channel block, we

concluded in our 800 MHz Report and Order that it was necessary to

limit the ability of incumbent licensees to expand their systems after

geographic licensing had occurred. At the same time, we concluded that

incumbents should be afforded operational flexibility to add sites or

make system modifications within those areas already licensed to them.

We concluded that, for the upper 200 channel block, incumbent licensees

would be allowed to make modifications within their current 22

dBV/m interference contour and would be allowed to add new

transmitters in their existing service areas without prior notification

to the Commission. However, incumbents would be required to notify the

Commission of any changes in technical parameters or additional

stations constructed, including agreements with an EA licensee to

expand beyond their signal strength contour, through a minor

modification of their license.

30. In the Second Further Notice of Proposed Rulemaking, we

acknowledged that transitioning to a geographic licensing scheme in the

lower 230 channels raises similar issues with respect to the rights of

incumbents. We proposed to limit expansion rights of incumbent SMR

licensees in the lower 230 channels in the same manner as we did in the

upper 200 channel block. Under our proposal, incumbent licensees on the

lower 230 channels would be allowed to modify or add transmitters in

their existing service area without prior notification to the

Commission, so long as they did not expand their 22 dBV/m

interference contour. We proposed that incumbents would not be allowed

to expand beyond the 22 dBV/m contour and into the geographic

area licensee's territory without obtaining the prior consent of the

geographic area licensee or unless the incumbent is the geographic area

licensee for the relevant channel. We sought comment on this proposal

and asked commenters to discuss whether a basis other than the 22

dBV/m interference contour should be used to determine an

incumbent's service area.

31. We agree with the supporters of the Industry Proposal that the

public interest would be served by giving incumbents on the lower 230

channels some flexibility to expand beyond their 22 dBV/m

contours. However, we decline to adopt the Industry Proposal in its

entirety. The settlement concept would, in essence, allow incumbents to

divide all remaining unlicensed spectrum on the lower 230 channels

among themselves, with no opportunity for new entrants to obtain or

even compete for such spectrum. As set forth below, this raises both

statutory and policy concerns that prevent us from endorsing the

proposal.

32. First, by restricting the settlement process to incumbents, the

Industry Proposal would foreclose new entrants from obtaining spectrum

on any of the lower 230 channels that are subject to a settlement among

incumbents. In any market where all of the channels in an EA were

allocated by such settlements, the result would be that no

opportunities for geographic licensing would be available to new

entrants. The Industry Proposal would also preclude competition in the

licensing process and restrict the number of potential applicants who

can obtain licenses. Thus, it could yield a higher concentration of

licenses than would result if non-incumbents were allowed to compete

for the spectrum at the same time. We conclude that allowing only

incumbent licensees to obtain rights to an entire EA while foreclosing

opportunities for new entrants would be at odds with our goals of

promoting economic competition in the 800 MHz SMR service and avoiding

an undue concentration of licenses. The approach we adopt herein,

unlike the Industry Proposal, would encourage participation of new

entrants, including small businesses, and, therefore, promote vigorous

economic competition and avoid excessive concentration of licenses.

33. Furthermore, the Industry Proposal provides no method for the

Commission to recover a portion of the value of public spectrum

pursuant to section 309(j)(3)(C) of the Communications Act. Instead,

incumbent licensees who negotiate expansion rights among themselves

could obtain a windfall by obtaining rights to an entire EA without

having to pay for such expanded rights. We disagree with commenters who

attempt to justify this potential windfall by arguing that the proposed

settlement procedure complies with the directive in section

309(j)(6)(E) for the Commission to avoid mutual exclusivity through

``engineering solutions, negotiation, threshold qualifications, service

regulations, and other means'' section 309(j)(6)(E) requires us to

adopt such methods where we find them to be ``in the public interest.''

We do not believe it is in the public interest to ``resolve'' the

competing claims of incumbents and non-incumbents for spectrum by

establishing a settlement mechanism that is limited to incumbents and

excluding non-incumbents from the process.

34. The Industry Proposal would also be inconsistent with the

approach we have adopted in other services where we have converted from

site-by-site licensing to geographic area licensing.

[[Page 41195]]

In our 900 MHz SMR proceeding and our recent paging proceeding, for

example, we adopted similar rules for licensing on a geographic basis

while protecting the existing operations of incumbent operators. In

neither instance did we give incumbents the unrestricted right to

obtain available spectrum through a pre-auction settlement process that

excluded non-incumbents. We also rejected this and similar alternatives

for the upper 200 channels of the 800 MHz band. For all of these

reasons, we conclude that the Industry Proposal would not serve the

public interest.

35. While we reject the specific settlement procedure described in

the Industry Proposal, we note that many of the positive aspects of the

proposal can still be accomplished through the auction process we are

establishing for the lower 230 channels. For example, incumbents on

these channels are free to enter into partnerships, joint ventures, or

consortia for purposes of applying for EA licenses on the lower 230

channels in the areas where they currently operate. Incumbents may also

negotiate transfers, swaps, partitioning arrangements, or similar

agreements with respect to spectrum that is currently licensed to them.

In some instances, taking these steps may result in only one entity

applying for a given EA license. Where that occurs, no auction will be

necessary because there will be no mutually exclusive applications to

resolve. At the same time, providing all parties, incumbents and non-

incumbents alike, with the opportunity to compete for EA licenses will

ensure that the spectrum is awarded to the party that values it the

most.

36. We also conclude that while geographic licensing is appropriate

for the lower 230 channels, some additional flexibility is appropriate

for incumbents on these channels to facilitate modifications and

limited expansion of their systems. First, allowing incumbent licensees

on the lower 230 channels such flexibility will facilitate the

relocation of incumbent licensees on the upper 200 channels. Licensees

who are faced with relocation will have a significant incentive to

relocate rapidly and voluntarily if they know they will have greater

flexibility to modify and expand their systems on the channels to which

they are relocating. This will promote our objectives for enabling EA

licensees on the upper 200 channels to make flexible use of their

spectrum, while also protecting the interests of incumbents who

relocate.

37. In addition, affording greater flexibility to lower 230

incumbents is appropriate because these channels are subject to an

application freeze and geographic licensing of these channels will not

occur until after the upper 200 channel auction is concluded and

incumbents have had an opportunity to relocate to the lower channels.

Because the upper 200 channels will be licensed first, EA winners on

these channels will obtain the ability to expand within their

geographic areas earlier than lower channel licensees. Allowing lower

channel incumbents limited flexibility to expand prior to the auction

will help to compensate for the fact that upper 200 licensees will

obtain the benefits of geographic licensing sooner.

38. Therefore, we adopt our proposal to allow incumbents on the

lower 230 channels to make system modifications within their

interference contours without prior Commission approval. Incumbent

licensees who currently utilize the 40 dBu signal strength contour for

their service area contour and 22 dBu signal strength contour for their

interference contour will be permitted to utilize their existing 18 dBu

signal strength contour for their interference contour as long as they

obtain the consent of all affected parties to do so. See Sec. IV-B-4-a.

Thus, an incumbent licensee, with the concurrence of all affected

incumbents, that desires to make modifications to its existing system

will be able to make such modifications such as adding new

transmitters, and altering its coverage area, so long as such incumbent

does not expand the 18 dBu interference contour of its system.

Moreover, licensees who do not receive the consent of all incumbent

affected licensees, will be able to make similar modifications within

their 22 dBu signal strength interference contour. Licensees that do

not desire to make modifications may also continue to operate with

their existing systems. We find that this approach will not only enable

incumbents to fill in ``dead spots'' in coverage or to reconfigure

their systems to increase capacity, but will also allow for some

incremental expansion of their systems.

39. In the 800 MHz Report and Order, some commenters stated that

smaller SMR entities only need to make smaller incremental changes to

their service areas to better serve their customers. We believe that

adopting the 18 dBu standard will allow such entities to make the

incremental changes they desire. At the same time, we find that the 18

dBu standard is superior to the Industry Proposal because it preserves

opportunities for new entrants in areas that are currently unserved and

that are not reasonably proximate to existing facilities. The 18 dBu

standard is more flexible than the 22 dBu standard and will thereby

increase opportunities for lower 230 incumbents to modify their

existing operations to meet technological changes and market demands

for service. This additional flexibility will also facilitate the

relocation of incumbent SMR licensees from the upper 200 to the lower

230 channels by providing these licensees with more flexibility to

modify their existing systems than they would possess if they remained

on the upper 200 channels.

40. Because our prior rules governing separation of 800 MHz

facilities are based on a 40/22 dBV/m standard, we recognize

that the 18 dBV/m standard adopted here may have little

practical significance in portions of the United States areas where

incumbents are already operating in close proximity to one another,

e.g., most markets east of the Mississippi. Therefore, as discussed in

Sec. IV-B-4-a, we will continue to use the current separation tables

and short-spacing rules based on the 40/22 dBV/m ratio to

define the interference protection rights of incumbents against other

incumbents, except where incumbents consent to the use of a more

relaxed standard. In less densely populated areas, however, we expect

the 18 dBV/m standard to be beneficial to incumbent systems

seeking greater operational flexibility. In addition, as discussed in

Sec. IV-B-4-b, we will use the incumbent's 36 dBV/m as opposed

to 40 dBV/m contour as the basis for protection from

interference by adjacent EA licensees.

ii. Converting Site-Specific Licenses to Geographic Licenses

41. We will allow lower 230 channel incumbents to combine their

site-specific licenses into single geographic licenses as proposed.

This option will provide incumbents with the same flexibility and

reduced administrative burden that geographic licensing affords to EA

licensees, and will simplify the licensing process for the Commission.

Because we have adopted the 18 dBu contour rather than the 22 dBu

contour, where the incumbent licensee has obtained the consent of all

affected parties, as the benchmark for defining an incumbent licensee's

protected service area, we will use the contiguous and overlapping 18

dbu contours of the incumbent's previously authorized sites to define

the scope of the incumbent's geographic license. Therefore, after the

auction of the lower 230 channels has been completed, incumbents in the

lower 230 channels may convert their current multiple site licenses to

a single

[[Page 41196]]

license. Incumbents seeking such reissued licenses must make a one-time

filing of specific information for each of their external base station

sites to update our database. Such filings should be made on FCC Form

600 and should include a detailed map of the area the system will

cover. We also will require evidence that such facilities are

constructed and placed in operation. Once the geographic license has

been issued, facilities that are later added or modified that do not

extend the licensees' 18 dBu interference contour will not require

prior approval or subsequent notification under this procedure. Such

facilities should not receive interference because they will be

protected by the presence of the licensee's external co-channel

stations. Licensees who do not receive the consent of all affected

parties may also follow the same process utilizing their 22 dBu signal

strength interference contour, rather than the 18 dBu contour.

4. Co-Channel Interference Protection

a. Incumbent SMR Systems

42. Our interference protection proposals in the Second Further

Notice of Proposed Rulemaking assumed that we would use the 22

dBV/m contour as the basis for determining the area in which

lower 230 incumbents could operate. As noted in Sec. IV-B-3-b, supra,

we have decided instead to allow all incumbents on the lower 230

channels to use the 18 dBV/m contour as the basis for

modifying and expanding their systems, provided that they obtain the

consent of all co-channel incumbents potentially affected by the use of

this standard. Because the 18 dBV/m standard gives incumbents

greater flexibility to expand, we must apply stricter interference

protection criteria to EA licensees to ensure that they do not

interfere with incumbent operations. Specifically, we will require EA

licensees either: (1) to locate their stations at least 173 km (107

miles) from the licensed coordinates of any incumbent, or (2) to comply

with co-channel separation standards based on a 36/18 dBV/m

standard rather than the previously applicable 40/22 dBV/m

standard. The 36 dBV/m desired signal strength contour is

determined from the R-6602, F(50,50) curves for Channels 7-13 in

Sec. 73.699 of the Commission's rules (Figure 10), with a 9 dB

correction factor for antenna height differential. The 18 dBV/

m undesired signal strength contour is calculated using the R-6602,

F(50,10) curves for Channels 7-13 found in Sec. 73.699 of the

Commission's rules (Figure 10a), with a 9 dB correction factor for

antenna height differential. In PR Docket No. 93-60, the Commission

determined that a protection ratio of 18 dB would result in co-channel

station spacings that provide reasonable protection from co-channel

interference and, at the same time, provide for efficient reuse of

valuable spectrum. Thus, EA licensees are required to ensure that the

18 dBV/m undesired signal strength contour of a proposed

station does not encroach upon the 36 dBV/m desired signal

strength contour of an existing incumbent station. Furthermore, in the

opposite situation, EA licensees will have their 36 dBV/m

desired signal strength contour protected with an 18 dB ratio, since

the undesired signal strength contour limit for incumbents that have

reached consent of all other affected parties shall be 18 dBV/

m.

43. We emphasize that this revised interference standard protects

incumbents only against EA licensees, not against other incumbents. As

noted above, incumbents who seek to use the 18 dBV/m standard

must obtain the consent of other affected incumbents to do so. In the

absence of such consent, the protection that one incumbent must afford

another continues to be governed by Sec. 90.621(b) of the Commission's

rules, i.e., incumbents must locate their stations at least 113 km (70

miles) from the facilities of any other incumbent or comply with the

co-channel separation standards based on the 40/22 dBV/m

standard set forth in our prior short-spacing rules.

b. Adjacent EA Licensees

44. We adopt the same interference protection standards for the

lower 230 channels that we previously adopted for the upper 200

channels. Thus, EA licensees on the lower 230 channels must limit their

signal strength at their EA borders to 40 dBV/m, unless

affected adjacent EA licensees agree to higher signal strength. We

emphasize that this rule applies only to resolving interference issues

between EA licensees. Thus, an EA licensee who complies with this rule

may nevertheless be required to limit its operations further in order

to comply with the rules governing protection of incumbents (see

Sec. IV-B-4-a, infra).

c. Emission Masks

45. In response to a request for reconsideration from Ericcson,

again supported by Motorola, we are further modifying our emission mask

rule for the upper 200 channels in the accompanying Memorandum Opinion

and Order. We conclude that this rule, as modified, should also be

applied to the lower 230 channels. Use of a common emission standard

throughout the 800 MHz SMR band will facilitate use of common equipment

and make it easier for licensees to combine upper 200 and lower 230

channels in their systems. As in the case of the upper 200 channels,

application of the emission mask rule to the lower 230 channels will

apply only to ``outer'' channels used by the licensee, i.e., to

channels that are creating out-of-band emissions that affect another

licensee. Thus, the emission mask rules do not apply to ``interior''

channels in a spectrum block that do not create out-of-band emissions

outside that block or on channels in the block that are used by

incumbents.

5. Regulatory Classification of EA Licensees on the Lower 230 Channels

46. We adopt our proposal with respect to SMR applicants who obtain

EA licensees on the lower 230 channels, but modify it with respect to

non-SMR applicants for EA licenses. We anticipate that most applicants

for EA licenses on these channels will be SMR applicants who seek to

provide interconnected service, thus meeting the statutory definition

of CMRS. Therefore, we will presumptively classify SMR winners of EA

licenses as CMRS providers. However, we will allow SMR applicants and

licensees to overcome this presumption by demonstrating that their

service does not meet the CMRS definition. This is consistent with our

approach to broadband PCS and other services. We reject Genesee's

contention that we have illegitimately used CMRS classification as a

basis for auctioning the lower 230 channels. In fact, the issue of

regulatory classification under section 332 of the Act is irrelevant to

the issue of auctionability, which turns on the factors enumberated in

section 309(j) of the Act. We address the issue of auctionability

elsewhere in this order and decline to revisit it here.

47. In the Memorandum Opinion and Order adopted today, we determine

that non-SMRs as well as SMRs will be eligible to obtain EA licenses on

the 150 General Category channels. While we expect most EA licenses to

be sought by SMR providers, we agree with E.F. Johnson that where an EA

license is obtained by a non-SMR operator, the CMRS presumption is

inapplicable. Thus, in the event that EA licenses are awarded to Public

Safety, Industrial/Land Transportation, or Business licensees, such

licensees will be classified as PMRS providers. Although Business Radio

licensees below 800 MHz may be classified as CMRS, Business Radio

licensees above 800 MHz are precluded from providing for-

[[Page 41197]]

profit service, and therefore are classified as PMRS.

C. Relocation of Incumbents From the Upper 200 Channels

1. Comparable Facilities

48. We adopt our proposed definition of ``comparable'' facilities,

with certain clarifications discussed below. In general, we define

comparable facilities as facilities that will provide the same level of

service as the incumbent's existing facilities. We also agree with

commenters that being provided with comparable facilities requires that

the change be transparent to the end user to the fullest extent

possible. However, our definition does not require an EA licensee to

upgrade the incumbent's facilities. As we proposed, EA licensees will

not be required to replace existing analog equipment with digital

equipment when there is an acceptable analog alternative that satisfies

the comparable facilities definition. Thus, under these circumstances

the cost obligation of the EA licensee will be the minimum cost the

incumbent would incur if it sought to replace, but not upgrade, its

system.

49. We agree with many of commenters' suggestions for further

refining the factors that are used to define comparable facilities. We

conclude that the determination of whether facilities are comparable

should be made from the perspective of the end user. To this end, we

identify four factors--system, capacity, quality of service, and

operating costs--that are relevant to this determination. We emphasize

that these factors are only relevant to determining what facilities the

EA licensee must provide to meet the requirements for mandatory

relocation; we reiterate that incumbents and EA licensees are free to

negotiate any mutually agreeable alternative arrangement.

a. System

50. To meet the comparable facilities requirement, an EA licensee

must provide the relocated incumbent with a comparable system. We

believe the term ``system'' should be defined functionally from the end

user's point of view, i.e., a system is comprised of base station

facilities that operate on an integrated basis to provide service to a

common end user, and all mobile units associated with those base

stations. System comparability includes stations licensed on a

secondary, non-protected basis. An incumbent that is licensed on a

secondary basis at the time of notification must receive at least the

equivalent type of license. We agree with SMR WON that this definition

can include multiple-licensed facilities that share a common switch or

are otherwise operated as a unitary system, provided that an end user

has the ability to access all such facilities. However, our definition

does not extend to facilities that are operationally separate. For

example, if a subscriber on one system has the ability to roam on a

neighboring system, we would not define the two facilities as part of a

common ``system.'' In addition, our definition does not include managed

systems that are comprised of individual licenses. We also agree with

SMR WON and AMTA that a ``system'' may cover more than one EA if its

existing geographic coverage extends beyond the EA borders. We reject

Nextel and Pittencrief's suggestions that we define ``system'' more

narrowly. In our view, a narrower definition would impair the

flexibility of incumbents to continue meeting their customer's needs.

b. Capacity

51. To meet the comparable facilities requirement, an EA licensee

must relocate the incumbent to facilities that provide equivalent

channel capacity. We define channel capacity as the same number of

channels with the same bandwidth that is currently available to the end

user. For example, if an incumbent's system consists of five 50 kHz

(two 25 kHz paired frequencies) channels, the replacement system must

also have five 50 kHz channels. If a different channel configuration is

used, it must have the same overall capacity as the original

configuration. We agree with commenters that comparable channel

capacity requires equivalent signaling capability, baud rate, and

access time. In addition, the geographic coverage of the channels must

be coextensive with that of the original system.

c. Quality of Service

52. Comparable facilities must provide the same quality of service

as the facilities being replaced. We define quality of service to mean

that the end user enjoys the same level of interference protection on

the new system as on the old system. In addition, where voice service

is provided, the voice quality on the new system must be equal to the

current system. Finally, we consider reliability of service to be

integral to defining quality of service. We measure reliability as the

degree to which information is transferred accurately within the

system. Reliability is a function of equipment failures (e.g.

transmitters, feed lines, antennas, receivers, battery back-up power,

etc.) and the availability of the frequency channel due to propagation

characteristics (e.g. frequency, terrain, atmospheric conditions,

radio-frequency noise, etc.) For digital data systems, this will be

measured by the percent of time the bit error rate exceeds the desired

value. For analog or digital voice transmissions, we will measure the

percent of time that audio signal quality meets an established

threshold. If analog voice system is replaced with a digital voice

system the resulting frequency response, harmonic distortion, signal-

to-noise ratio, and reliability will be considered.

d. Operating Costs

53. Another factor in determining whether facilities are comparable

is operating costs. We define operating costs as costs that affect the

delivery of services to the end user. If the EA licensee provides

facilities that entail higher operating cost than the incumbent's

previous system, and the cost increase is a direct result of the

relocation, the EA licensee must compensate the incumbent for the

difference. We anticipate that costs associated with the relocation

process will fall into several categories. First, the incumbent must be

compensated for any increased recurring costs associated with the

replacement facilitates (e.g. additional rental payments, increased

utility fees). Second, increased maintenance costs must be taken into

consideration when determining whether operating costs are comparable.

For example, maintenance costs associated with analog systems may be

higher than the costs of digital equipment because manufacturers are

producing mostly digital equipment and analog replacement parts can be

difficult to find.

54. While we conclude that EA licensees should be responsible for

increased operating costs caused by relocation, we note that

identifying whether increased costs are attributable to relocation

becomes more difficult over time. Therefore, we will not impose this

obligation indefinitely, but will end the EA licensee's obligation to

pay increased costs five years after relocation has occurred. We

believe this appropriately balances the interests of EA licensees and

relocated incumbents.

2. Cost-Sharing

a. Sharing Relocation Costs on a Pro Rata Basis

55. We adopt an approach that is similar to our PCS microwave

relocation rules. We conclude that, absent an

[[Page 41198]]

agreement among EA licensees who are prepared to relocate the

incumbent, all EA licensees who benefit from the relocation of the

incumbent must share the relocation costs on a pro rata basis. Although

several commenters believe that the Commission should adopt detailed

rules for sharing relocation costs among multiple EA licensees, we do

not believe that detailed rules are necessary since all EA licensees

will be licensed at approximately the same time. However, we do not

believe that all EA licensees will notify incumbents of their intention

to relocate within 90 days of the release of the Public Notice

announcing the commencement of the voluntary negotiation period because

they may not be ready or capable of relocating an incumbent and,

therefore will not participate in the relocation process. Those non-

notifying EA licensees, however may subsequently determine that those

channels relocated out of their EA by other EA licensees are necessary

for their use. Therefore, EA licensees who relocate the incumbent will

obtain a right to reimbursement from non-notifying EA licensees who

want to benefit from the relocation. We believe that allowing all EA

licensees who relocate the incumbent a right to reimbursement is

necessary to avoid a ``free-rider'' problem by those EA licensees who

did not provide notification, but subsequently benefit from the

relocation. We also believe that reimbursement rights will ensure that

the incumbent is relocated as a whole and not on a piece-meal basis.

56. The pro rata formula will be based on the number of channels

being relocated out of each EA. Several commenters support this

proposal, because the relocation process is likely to involve multiple

EA licensees and one incumbent. The pro rata formula requires those EA

licensees who participate in the relocation process to share the costs

for relocating those channels that are located in a non-notifying

licensee's EA. Therefore, the cost-sharing formula will determine the

costs for relocating the incumbent's system out of each EA. We believe

that determining the relocation costs for each EA will allow those EA

licensees who participate in the relocation process to easily determine

their cost obligation and their reimbursement share from later entrant

EA licensees who did not participate. We believe that such a formula

will negate the need for a complicated plan. The new formula is:

[GRAPHIC] [TIFF OMITTED] TR31JY97.000

Ci equals the amount of reimbursement

Tc equals the actual cost of relocating the incumbent

TCh equals the total number of channels that are being relocated

Chj equals the number of channels that each respective EA licensee

will benefit from

57. We believe the formula provides an effective and

straightforward means of determining a participating EA licensee's cost

obligation and the reimbursement shares for later entrant EA licensees.

This formula is essential to make cost-sharing administratively

feasible and fair for those EA licensees who participate in the

relocation process and those who choose not to.

58. The formula is similar to the formula adopted for sharing the

relocation costs of microwave incumbents, but it does not take into

account depreciation for the costs of reimbursing EA licensees who

participated in the relocated process. Instead, non-notifying EA

licensees who subsequently decide to use the channels or area of their

EA that an incumbent was relocated out of must fully reimburse those

participating EA licensees prior to testing. Similar to our decision in

the microwave relocation proceeding, EA licensees who relocate channels

that benefit other EA licensees and are fully outside of their market,

should be entitled to full reimbursement of compensable costs for

relocating that portion of the incumbent that are either fully outside

their market area or licensed EA. However, because we realize that a

non-notifying EA licensee may not decide to use those channels or serve

the area of their EA that was once occupied by an incumbent, we

conclude that ten years from the date of the Public Notice commencing

the voluntary negotiation period, reimbursement rights will sunset.

59. The following is an example of how the formula will work: In

October 1997, EA licensees A, B, and C each notify the incumbent in a

timely manner that they are prepared to relocate the incumbent. EA

licensee D does not provide notification to the incumbent. The

incumbent decides to compel simultaneous negotiations among EA

licensees A, B, and C. As a result, EA licensees A, B, and C fully

relocate the incumbent. The total costs for relocating the incumbent is

$100,000. There were 60 channels that EA licensees A, B, C, and D can

use as a result of the relocation. The channels located in each EA are

as follows: EA A has 25 channels; EA B has 15 channels; EA C has 10

channels; and EA D has 10 channels. For this example, we will calculate

the formula for determining the costs share of EA licensee B. As a

result, Chj=25, because that is the number of channels that EA licensee

B will benefit from. The total number of channels that were relocated

is 60 and, therefore TCh=60. In addition, Tc equals $100,000, because

that is the total costs of relocating the incumbent. The calculation of

licensee B's reimbursement payment is as follows:

[GRAPHIC] [TIFF OMITTED] TR31JY97.001

Thus, licensee B pays $25,000. Licensee A would pay $41,666.66,

licensee C would pay $16,666.66 and licensee D would pay $16,666.66.

Therefore, licensee D will be obligated to reimburse licensees A, B,

and C $16,666.66 if licensee D subsequently decides to use the channels

in EA D. This amount must be equally divided among EA licensees A, B,

and C. All three licensees will trigger a right to reimbursement from

licensee D and will have the right to collect their share of the costs

prior to licensee D commencing with testing.

60. We decline to adopt the proposals of commenters that would

allow EA licensees who relocate the incumbent to step into the shoes of

the incumbent. We realize that not all EA licensees will provide

notice, even though there are sufficient incentives to do so. However,

we do not believe it would be appropriate to allow an EA licensee who

is prepared to relocate the incumbent to succeed to all of the rights

and obligations of that incumbent. In essence, succeeding to the rights

and obligations of the incumbent would allow EA licensees to attain a

de facto license for parts of an EA that they were not the high bidder

for at auction. Therefore, we believe that all EA licensees who benefit

initially or subsequently from the relocation of an incumbent should

share the costs of the relocation on a pro rata basis. To accomplish

this, EA licensees who relocate the incumbent will obtain a right to

reimbursement from non-notifying EA licensees who subsequently decide

to use the channels that were relocated. Therefore, we have designed a

two-step process that will allow a participating EA licensee to obtain

a reimbursement right and collect the initial costs for relocating

channels outside of their EA.

b. Triggering a Reimbursement Right

61. Commenters, although supportive of the Commission's proposal to

allow EA licensees who negotiate a relocation

[[Page 41199]]

agreement the right to reimbursement from EA licensees who benefitted,

did not specifically address how such right should be created. We

believe that a right to reimbursement can easily be triggered by the

procedures we adopted in the First Report and Order.

62. In the First Report and Order, we developed a notification

procedure that requires an EA licensee to file a copy of the relocation

notice and proof of the incumbent's receipt of the notice to the

Commission within ten days of receipt. Because notification affects an

EA licensee's right to relocate an incumbent, we believe that such

notification should also be the first step in triggering an EA

licensee's reimbursement right. We believe the second step of

triggering a reimbursement right is signing a relocation agreement with

the incumbent. Thus, if an EA licensee timely notifies an incumbent of

its intention to relocate, and subsequently negotiates and signs a

relocation agreement with the incumbent, the EA licensee will have

triggered its right to reimbursement from EA licensees who benefitted.

63. In addition, because notification is the first step in

establishing a reimbursement right for an EA licensee, we believe that

such notification should also establish an obligation for those EA

licensees who benefited from the relocation. We believe that an EA

licensee who is sincere about using the channels in its EA will provide

notice to the incumbent of its intention to relocate the incumbent. We

agree with AMTA that EA licensees who do not participate in the

relocation process should be prohibited from invoking mandatory

negotiations or any of the provisions of the Commission's mandatory

relocation guidelines.

64. Therefore, if an EA licensee timely notifies an incumbent of

its intention to relocate, but during the voluntary negotiation period

decides not to participate in the relocation process, such EA licensee

will be obligated to reimburse those EA licensees who have triggered a

reimbursement right. EA licensees who do not provide notice to the

incumbent, but subsequently decide to use the channels in the EA will

be required to reimburse, outside of the Commission's mandatory

relocation guidelines, those EA licensees who have established a

reimbursement right. We believe that this procedure strikes a fair

balance between EA licensees who relocate incumbents and those EA

licensees who decide not to relocate incumbents.

c. Compensable Costs

65. We agree with those commenters who believe that premium

payments should not be reimbursable and therefore adopt our proposal

that reimbursable costs will be limited to the actual costs of

relocating the incumbent. We believe that EA licensees who have an

incentive to be first to market will have a need to accelerate the

relocation process. We agree with those commenters that believe other

EA licensees will not receive the same advantage and therefore should

not be required to contribute to premium payments. Therefore, we

conclude that reimbursement rights will only apply to actual relocation

costs.

66. In the Second Further Notice of Proposed Rulemaking, we

tentatively concluded that actual relocation costs will include, but

not be limited to: SMR equipment; towers and/or modifications; back-up

power equipment; engineering costs; installation; system testing; FCC

filing costs; site acquisition and civil works; zoning costs; training;

disposal of old equipment; test equipment; spare equipment; project

management; and site lease negotiation. Commenters generally supported

the list proposed, but were concerned that the list did not address

other cost factors related to relocation. We agree with those

commenters who argue that there are other factors related to the

relocation process and therefore conclude that this list should be

illustrative, and not exhaustive. However, because we want to encourage

a fast relocation process free of disputes, we believe that the bulk of

compensable costs should be tied as closely as possible to actual

equipment costs. Based on this goal, we believe that subsequent EA

licensees should only be required to reimburse EA relocators for

incumbent transaction expenses that are directly attributable to the

relocation, subject to a cap of two percent of the ``hard costs''

involved. Hard costs are defined as the actual costs associated with

providing a replacement system, such as equipment and engineering

expenses. This restriction on the reimbursement of transaction fees

corresponds to the restriction we adopted with respect to PCS

reimbursement of incumbent transaction expenses for cost-sharing during

any time period--voluntary, mandatory, or involuntary. Therefore, we

adopt the same restriction for purposes of this cost-sharing plan.

However, EA licensees are not required to pay for transaction costs

incurred by EA licensees during the voluntary or mandatory periods once

the involuntary period is initiated, or for fees that cannot be

legitimately tied to the provision of comparable facilities.

67. In addition, we believe that actual costs should also include

costs directly related to a seamless transition. In the First Report

and Order, we concluded that during the involuntary negotiation period,

the EA licensee must conduct the relocation in such a fashion that

there is a ``seamless'' transition from the incumbents ``old''

frequency to its ``new'' frequency. We agree with ITA and SMR Systems

that it may be necessary to operate the old system and the new system

simultaneously to ensure a seamless transition. We want to encourage EA

licensees and incumbents to exercise flexibility when negotiating a

relocation agreement, but we also want to ensure that the incumbent is

made whole, and is relocated without a substantial disruption in

service. We also recognize that alternative means may be agreed upon to

avoid a substantial disruption in service. Therefore, we will require

that any costs directly associated with a seamless transition will be

considered actual costs and, therefore reimbursable.

d. Payment Issues

68. We partially agree with Genessee and conclude that

reimbursement payments should be due when the frequencies of the

incumbent have been cleared. We also agree with Fresno that an EA

licensee may choose not to use the frequencies in a particular EA.

Therefore, it is the EA licensee who must, within 90 days of the

release of the Public Notice announcing the commencement of the

voluntary negotiation period, decide whether they intend to participate

in the mandatory relocation process.

69. We believe that an EA licensee who provides notification is

sincere of its intention to use the frequencies in the EA and

therefore, concluded supra, that once an EA licensee notifies an

incumbent of its intention to relocate the incumbent, the EA licensee

will be obligated to pay its share of reimbursement. However, EA

licensees who have triggered an obligation should not be required to

submit payment until the channels they have been licensed for are

available for use. Therefore, we conclude that payments will not be due

until the incumbent has been fully relocated and the frequencies are

free and clear. We believe this procedure strikes a clear balance

between those EA licensees who negotiate a relocation agreement and

those EA licensees who want the use of the frequencies, but decide not

to negotiate a relocation agreement.

[[Page 41200]]

70. Because non-notifying EA licensees will not receive the benefit

of the Commission's relocation guidelines, they will be required to

reimburse those EA licensees who have triggered a reimbursement right.

Therefore, we conclude that non-notifying EA licensees who subsequently

decide to use the channels, should be required to submit payment to

those EA licensees who have triggered a reimbursement right prior to

commencing testing of their system. We believe this strikes a fair

balance between the EA licensee who has benefited a non-notifying EA

licensee and the non-notifying EA licensees right to use those channels

within its licensed EA. In addition, we believe that this will create

an incentive for both parties to expedite negotiations among

themselves.

3. Resolution of Disputes that Arise During Relocation

71. Commenters strongly support the Commission's proposal to use

ADR procedures when disputes arise as to the amount of reimbursement

required and the relocation negotiations (including disputes over

comparability of facilities and the requirement to negotiate in good

faith). We agree with those commenters who believe that the use of ADR

procedures will help resolve disputes in a timely fashion, while

conserving Commission resources. In addition, we believe that the rapid

resolution of disputes will speed the development of wide-area systems,

and therefore will ultimately benefit the public. Therefore, to the

extent that disputes cannot be resolved among the parties, we strongly

encourage parties to use expedited ADR procedures. ADR procedures

provide several alternative methods such as binding arbitration,

mediation, or other ADR techniques. Because we are encouraging parties

to use ADR procedures, we do not need to designate an arbiter to

resolve the disputes as some commenters suggest. As several commenters

pointed out, the choice of arbiter should be a decision left to the

parties.

72. We encourage parties to use ADR procedures prior to seeking

Commission involvement and caution that entire resolution of disputes

by the Commission will be time consuming and costly to the parties. In

addition, we emphasize that parties who neglect their obligation to

satisfy a reimbursement right will be subject to the full realm of

Commission enforcement mechanisms.

4. Administration of the Cost-Sharing Plan

73. We believe that the cost-sharing plan we have adopted for 800

MHz SMR does not require us to designate an administrator. We believe

that an administrator was necessary to administer the cost-sharing plan

under the microwave relocation procedures because of the complexity of

the plan. We do not believe that the cost-sharing plan we have adopted

for 800 MHz SMR is as complex and therefore decline to designate a

clearinghouse to administer the cost-sharing plan. However, we will not

prohibit an industry supported, not-for-profit clearinghouse from being

established for purposes of administering the cost-sharing plan under

the 800 MHz relocation procedures.

D. BETRS Eligibility on the Upper 200 Channels

74. As we did in our Paging Second Report and Order, 62 FR 11616

(March 12, 1997), we do not believe it is necessary to continue

separate primary licensing of BETRS facilities on 800 MHz SMR

frequencies. Under the rules adopted in our CMRS Flex Report and Order,

61 FR 45336 (August 29, 1996), all CMRS providers, including SMRs, may

provide fixed services of the type provided by BETRS licensees. In

addition, entities seeking to offer BETRS on 800 MHz SMR frequencies

will be able to obtain spectrum through geographic area licensing. We

see no basis for distinguishing BETRS from other services that use 800

MHz SMR spectrum to provide commercial communications service to

subscribers.

75. As we noted in our Paging Second Report and Order, we recognize

that BETRS primarily serves rural, mountainous, and sparsely populated

areas that might not otherwise receive basic telephone service.

However, according to our records, there are few BETRS facilities

licensed on 800 MHz SMR frequencies. According to our licensing

records, as of November 13, 1996, there were only eleven BETRS

authorizations in the 800 MHz service, and all of them were located in

the State of Alaska. Furthermore, our records show no BETRS facilities

licensed in Puerto Rico. Therefore, we disagree with PRTC that

eliminating separate primary licensing of BETRS facilities on 800 MHz

SMR frequencies will negatively affect phone penetration in Puerto

Rico. More importantly, concerns about the delivery of service to rural

and other high cost areas are currently being addressed in our ongoing

rulemaking proceeding examining universal service issues. We also note

that BETRS has other frequencies available to it under part 22. In

light of the limited demand for these channels by BETRS licensees, and

the alternatives available for providing telecommunications service in

sparsely populated areas, we conclude that continued licensing of 800

MHz channels to BETRS on a co-primary basis is not necessary.

76. We will, however, allow BETRS licensees to obtain new sites and

channels in the 800 MHz band on a secondary basis. If any EA licensee

subsequently notifies the BETRS licensee that a secondary facility must

be shut down because it may cause interference to the EA licensee's

existing or planned facilities, the BETRS licensee must discontinue use

of the particular channel at that site no later than six months after

such notice.

E. Partitioning and Disaggregation for 800 MHz and 900 MHz Licensees

1. Partitioning

a. Eligibility

77. We adopt our tentative conclusion and further extend

partitioning to all incumbent licensees and eligible SMR licensees on

all SMR channel blocks. We agree with commenters that partitioning will

provide SMR licensees with increased flexibility and result in more

efficient spectrum management. In the broadband PCS proceeding, we

eliminated the existing restriction that limited partitioning of

broadband PCS licenses to only rural telcos. We concluded that allowing

more entities to acquire partitioned broadband PCS licenses would:

``(1) Remove potential barriers to entry thereby increasing competition

in the PCS marketplace; (2) encourage parties to use PCS spectrum more

efficiently; and (3) speed service to unserved and underserved areas.''

We conclude that the very same important goals will be met by allowing

more open partitioning in the SMR service. Eliminating the existing

rural telco restriction on SMR partitioning will: (1) Allow new

entities, such as small businesses, to acquire SMR licenses and thus

increase competition and foster the development of new technologies and

services; (2) encourage existing SMR licensees to use their spectrum

more efficiently; and (3) ensure the faster delivery of SMR service to

rural areas. We also believe that allowing more flexible partitioning

will provide an alternative to the relocation of incumbent licensees.

78. Under our rules, SMR licensees are required to meet performance

requirements based on substantial service, which may be fulfilled by

providing population-based coverage. As some of the 900 MHz commenters

noted, these requirements encourage SMR licensees to initially focus

their attention on the more populated, urban

[[Page 41201]]

portions of their markets, in order to meet the construction

requirements, while leaving the less-populated, rural areas unserved.

With the present rural telco restriction in place, SMR licensees are

not permitted to partition the more rural portions of the their markets

to another entity, unless that entity is a qualified rural telco. In

those cases where no rural telco is present in the market or where the

rural telco does not desire to provide SMR service, there may be a

delay in the delivery of service to the rural portions of the MTA.

Allowing SMR licensees to partition portions of their markets to other

entities more interested in providing service to those niche areas not

only allows those other entities an opportunity to enter the SMR

marketplace but also increases the odds that the less populated, rural

portions of markets receive higher quality SMR service. Therefore, we

are eliminating the existing rural telco restriction on both 800 MHz

and 900 MHz SMR partitioning.

79. We do not find that retaining the rural telco restriction will

result in higher quality service to rural areas. We find that allowing

more open partitioning in the 900 MHz SMR service will mean that

additional, highly qualified wireless operators, including incumbent

SMR operators, will be permitted to provide 900 MHz SMR service which

may result in better service and increased competition which may result

in lower prices for service. We also do not find that allowing more

open partitioning of 900 MHz SMR licenses is inconsistent with the

mandate of section 309(j)(3)(B) of the Communications Act to ensure

that licenses are disseminated among a wide variety of applicants

including rural telcos. RTG argues that partitioning is the only

preference that has been devised to ensure that rural telcos are

afforded economic opportunities to participate in the provision of new

and innovative services. We disagree. Rural telcos are able to take

advantage of the special provisions for small businesses adopted for

the 900 MHz SMR auction. Furthermore, sections 309(j)(3) (A), (B), and

(D) of the Communications Act direct the Commission to further the

rapid deployment of new technologies for the benefit of the public

including those residing in rural areas, to promote economic

opportunity and competition, and to ensure the efficient use of

spectrum. While encouraging rural telco participation in 900 MHz SMR

service offerings is an important element in meeting these goals,

Congress did not dictate that this should be the sole method of

ensuring the rapid deployment of service in rural areas. Allowing more

open partitioning will further the goals of section 309(j)(3) by

allowing 900 MHz SMR licensees to partition their licenses to multiple

entities rather than to a limited number of rural telcos. In addition,

we find that, because they possess the existing infrastructure and

local marketing knowledge in rural areas, rural telcos will be able to

compete with other parties to obtain partitioned 900 MHz SMR licenses.

80. We decline to adopt SMR WON's proposal to restrict non-

incumbent 800 MHz SMR licensees from partitioning until they have

relocated all incumbent licensees from their band. We agree with those

800 MHz commenters that believe that the auctions process obviates the

need for restricting partitioning. While we acknowledge SMR WON's

concerns that partitioning could be used as a method for avoiding

responsibility for relocation of incumbents, we believe that such a

restriction would unfairly discourage partitioning without any

corresponding public interest benefit. We note that partitionees will

be permitted to acquire partitioned license areas from EA licensees but

will not be permitted to operate on channels that were previously

cleared by other EA licensees until they have satisfied the relocation

reimbursement requirements under our rules. EA licensees and

partitionees are free to negotiate among themselves as to who will be

responsible for paying the reimbursement costs, and we will require

that parties seeking approval for a partitioning arrangement in the 800

MHz SMR service certify which party will be responsible for such

reimbursement. We believe that such a certification is a more flexible

approach to ensuring that partitioning is not used as a means to

circumvent our reimbursement requirements.

b. Available License Area

81. In the broadband PCS and WCS proceedings, we allowed

partitioning along any service area defined by the partitioner and

partitionee. We found that, by providing such flexibility to licensees

for determining partitioned broadband PCS license areas, we would

permit the market to decide the most suitable services areas. We find

that the same rationale holds true in the SMR service. Restricting the

partitioning of SMR licenses to geopolitical boundaries, as originally

proposed in the Second Further Notice of Proposed Rulemaking and by

AMTA, may inhibit partitioning and may not allow licensees to respond

to market demands for service. We find that allowing unrestricted

partitioning of SMR licenses is preferable, as long as the parties

submit information in their partial assignment applications that

describes the partitioned license area.

82. We will require that applications seeking approval to partition

an SMR license will be required to submit, as separate attachments to

the partial assignment application, a description of the partitioned

service area and, where applicable, a calculation of the population of

the partitioned service area and licensed market. The partitioned

service area must be defined by coordinate points at every 3 degrees

along the partitioned service area agreed to by both parties, unless

either (1) an FCC-recognized service area is utilized (i.e., Major

Trading Area, Basic Trading Area, Metropolitan Statistical Area, Rural

Service or Economic Area) or (2) county lines are followed. Applicants

need only define that portion of the partitioned service area that is

not encompassed by an FCC-recognized service area or county line. For

example, if the partitioned service area consisted of five counties and

three additional townships, the applicant must only define that portion

of the partitioned service area comprised of the additional townships.

These geographical coordinates must be specified in degrees, minutes

and seconds to the nearest second of latitude and longitude, and must

be based upon the 1927 North American Datum (NAD27). Applicants may

also supply geographical coordinates based on 1983 North American Datum

(NAD83) in addition to those required based on NAD27. This coordinate

data should be supplied as an attachment to the partial assignment

application, and maps need not be supplied. In cases where an FCC

recognized service area or county lines are being utilized, applicants

need only list the specific area(s) (through use of FCC designations)

or counties that make up the newly partitioned area. For example, if a

licensee desires to partition its license only for the service area

needed by a rural telco, it will simply provide coordinate data points

at each 3 degree data point extending from the center of the service

area (i.e, at the 3 degree, 6 degree, 9 degree, 12 degree, etc. azimuth

points with respect to true north).

83. We note that this rule will also apply to incumbent 800 MHz SMR

licensees seeking partial assignments of license. Incumbent licensees

are currently licensed on a site-by-site basis and currently must seek

a partial assignment of license under our existing rules if they desire

to assign a portion of their licensed transmitter sites to

[[Page 41202]]

another entity. Under our new rules, incumbent 800 MHz SMR licensees

must follow the same procedures as all other licensees and must include

the necessary description of the ``partitioned license area.'' For

incumbent 800 MHz SMR licensees, the ``partitioned license area'' will

mean that area encompassed by the protected service contours of all of

the transmitter sites being assigned.

2. Disaggregation

a. Eligibility

84. We conclude that all SMR licensees should be allowed to

disaggregate portions of their spectrum to any party that is qualified

for the spectrum's underlying channel block. We find that

disaggregation will provide SMR licensees greater flexibility to manage

their spectrum more efficiently and, in the 800 MHz band, will

facilitate the coexistence of geographic area licensees and incumbents

by allowing geographic licensees to subdivide their spectrum holdings

and assign or transfer parts of their spectrum to other eligible

entities or incumbents. We further find that disaggregation will

increase competition by encouraging a broader range of SMR

participants; foster a broader range of services offered by those

participants as they seek niche markets and services; expedite the

provision of SMR service to areas that may not otherwise receive CMRS

service; and, allow the marketplace to determine who and by whom the

spectrum will be used. Moreover, allowing SMR disaggregation will help

establish regulatory symmetry with similar services, such as PCS, as

mandated by the 1993 Budget Act. Once again, we find that allowing

disaggregation will provide a less disruptive alternative for the

relocation of incumbent licensees.

85. As we did with partitioning, we decline to adopt SMR WON's

proposal to restrict non-incumbent 800 MHz SMR licensees' ability to

disaggregate. We agree with commenters that conclude that the market

should determine when and how much spectrum to disaggregate.

b. Amount of Spectrum to Disaggregate

86. We agree with commenters that we should not limit the amount of

SMR spectrum that can be disaggregated. We find that the marketplace

should decide the amount of SMR spectrum to be disaggregated and that

there is no need to set a minimum disaggregation amount. As we did for

broadband PCS and WCS, we seek to provide flexibility to the parties to

decide the amount of spectrum they need. This will permit more

efficient use of spectrum and deployment of a wider range of service

offerings. Requiring a minimum disaggregation amount for SMR may

interfere with parties intend use of spectrum and may foreclose some

parties from using disaggregation as a means of obtaining SMR spectrum

to provide their unique service offerings. We note that parties

acquiring disaggregated SMR spectrum will continue to be subject to all

of our technical and operating requirements.

1. Construction, Coverage and Channel Usage Requirements

87. We agree that SMR licensees should not be able to use

partitioning and disaggregation as a means of circumventing our

performance requirements and that some version of these requirements

should apply to parties obtaining licenses through these means. By

adopting such requirements we seek to ensure that spectrum is used to

the same degree that it would have been used had the partitioning or

disaggregation transaction not taken place.

88. Therefore, we will adopt flexible coverage and channel usage

requirements for partitioning and disaggregation in the 800 MHz and 900

MHz SMR services that are consistent with the underlying requirements

in those services. We find that granting the parties flexibility to

devise a scheme for meeting these requirements will increase the

viability and value of partitioned licenses and disaggregated spectrum

and will facilitate partitioning and disaggregation for the SMR

service.

89. With respect to incumbent licensees, we believe that it would

be inappropriate to subject entities that obtain partitioned licenses

or disaggregated spectrum from incumbent SMR licensees to additional

performance requirements when no such requirements currently exist for

these licensees. However, to prevent incumbent licensees from using

partitioning or disaggregation as a means of circumventing our one-year

construction requirement, we will hold partitionees and disaggregatees

to the original construction deadline(s) for each of the partitioned

facilities they acquire. These deadlines may vary depending on when the

facility was originally licensed. In any case, a partitionee or

disaggregatee that obtains a portion of an incumbent SMR licensees'

facilities or spectrum with only a few months remaining before the

expiration of the construction deadline, will be required to have these

facilities constructed and providing ``service to subscribers'' by each

individual construction deadline. Failure to meet the individual

construction deadline for a specific facility will result in automatic

termination of that facility's authorization. We believe that such a

requirement is a fair balance between allowing incumbent SMR licensees

the opportunity to utilize the helpful spectrum management tools of

partitioning and disaggregation while ensuring continued compliance

with our performance requirements.

90. Geographic Area Licensees--Partitioning. Because the coverage

requirements differ for licensees in the 800 MHz and 900 MHz bands, we

will adopt coverage requirements that are consistent with the

licensees' underlying requirements. In the 900 MHz band and in the

lower 230 channels of the 800 MHz band, licensees are required to

provide ``substantial service'' to their markets within five years of

the grant of their initial licensees. As such, we will permit parties

seeking to partition licenses in those bands to meet one of the

following performance requirements. Under the first option, the

partitioner and partitionee can each agree to meet the ``substantial

service'' requirement for their respective portions of the market. If a

partitionee fails to meet the ``substantial service'' requirement for

its portion of the market, the license for the partitioned area will

automatically cancel without further Commission action. Under the

second option, if the original geographic area licensee certifies that

it has already met or will meet the ``substantial service'' requirement

for the entire market by providing coverage to at least one-third of

the population of the entire (pre-partitioned) market within three

years of the grant of its license and at least two-thirds of the market

population within five years, then the partitionee not be subject to

performance requirements except for those necessary to obtain renewal.

91. In the upper 200 channels of the 800 MHz band, licensees must

meet specific coverage benchmarks by providing coverage to at least

one-third of the population of their market within three years of the

grant of their initial license and coverage to at least two-thirds of

the population within five years. For licensees in the upper 200

channels of the 800 MHz band, we will adopt flexible coverage

requirements similar to those we adopted in the broadband PCS

proceeding. Under the first option, we will require that the

partitionee certify that it will meet the same coverage requirement as

the original licensee for its partitioned

[[Page 41203]]

market. If the partitionee fails to meet its coverage requirement, the

license for the partitioned area will automatically cancel without

further Commission action. Under the second option, the original

licensee certifies that it has already met or will meet its three-year

coverage requirement and that it will meet the five-year construction

requirement for the entire geographic area market. In that case, the

partitionee will not be subject to performance requirements except for

those necessary to obtain renewal.

92. Geographic Area Licensees--Disaggregation. Licensees in the

upper 200 channels of the 800 MHz band are required to meet a channel

usage requirement. Consistent with that rule, we will require that

disaggregatees in the upper 200 channels of the 800 MHz band meet a

channel usage requirement for the spectrum they acquire. However,

consistent with our approach for partitioning and to provide

flexibility to the parties to facilitate disaggregation in the upper

200 channels, we will permit the parties to negotiate among themselves

the responsibility for meeting the channel usage requirement. Each

party may agree to separately meet its channel usage requirement for

its portion of the disaggregated spectrum or the original licensee may

certify that is has or will meet the channel usage requirement for the

entire spectrum block. Similar to our approach for partitioning, one

party's failure to meet its agreed-to channel usage requirement shall

result in that party's license automatically reverting to the

Commission and shall not affect the other party's license.

93. There are no channel usage requirements in the 900 MHz SMR band

or in the lower 230 channels of the 800 MHz band. We believe it would

be inconsistent with our existing construction requirements to impose

separate performance requirements on both the disaggregator and

disaggregatee in those bands. However, we wish to ensure that parties

do not use disaggregation to circumvent our underlying performance

requirements. Therefore, we will adopt an approach similar to the one

adopted for partitioning: we will retain the underlying ``substantial

service'' requirement for the spectrum as a whole but allow either

party to meet the requirements on its disaggregated portion. Therefore,

a licensee in either the 900 MHz band or the lower 230 channels of the

800 MHz band that disaggregates a portion of its spectrum may elect to

retain responsibility for meeting the ``substantial service''

requirement, or it may negotiate a transfer of this obligation to the

disaggregatee. In either case, the rules ensure that the spectrum will

be developed to at least the same degree that was required prior to

disaggregation.

94. To ensure compliance with our rules, we will require that

parties seeking Commission approval of disaggregation agreement in the

900 MHz band or the lower 230 channels of the 800 MHz band include a

certification as to which party will be responsible for meeting the

applicable ``substantial service'' requirements. Parties may also

propose to share the responsibility for meeting the requirement. As

part of our public interest review under section 310(d), we will review

each transaction to ensure that the party designated as responsible for

meeting the performance requirements is bona fide and has the ability

to meet these requirements. In the event that only one party agrees to

take responsibility for meeting the performance requirement and later

fails to do so, that party's license will be subject to forfeiture, but

the other party's license will not be affected. Should both parties

agree to share the responsibility for meeting the performance

requirements and either party later fail to do so, both parties'

licenses will be subject to forfeiture.

95. We note also that disaggregatees that already hold an SMR

license or other CMRS license in the same geographic market will be

subject to the same performance requirements as disaggregatees who do

not hold other licenses for disaggregated spectrum. In addition, as we

noted above, we will require that parties to partitioning and

disaggregation agreements involving 800 MHz licensees certify in their

applications which party will be responsible for relocating incumbent

licensees located in the partitioned license area or the disaggregated

spectrum block. The parties are free to negotiate among themselves

which party will be responsible for incumbent relocation.

2. Matters Related to Designated Entity Licensees

96. Geographic area licensees in both the 800 MHz and 900 MHz bands

that qualify as a ``small business'' (otherwise referred to generally

as ``designated entity'' licensees) may receive a bidding credit to

reduce the amount of their winning auction bid. Entities with average

gross revenues of not more than $3 million for the preceding three

years may receive a 35 percent bidding credit. Entities with average

gross revenues of not more than $15 million for the preceding three

years may receive a 25 percent bidding credit. While 900 MHz licensees

may repay their winning auction bid pursuant to installment payments,

pursuant to our Memorandum Opinion and Order released today,

installment payments for 800 MHz licensees in the upper 200 channels

have been eliminated and we decline to adopt such a provision for the

lower 230 channels. There are two levels of installment payments

available to small business EA licensees in the upper 200 channels

while only one level of installment payments is available to small

business EA licensees in the lower 230 channels. Therefore, we must

only concern ourselves with the question of installment payments with

respect to 900 MHz licensees.

97. Whenever an geographic area 800 MHz or 900 MHz SMR licensee,

that received a bidding credit at auction, transfers its entire license

to an entity that would not have qualified for such a bidding credit or

would have qualified for a lower bidding credit, the geographic area

licensee is required to repay some or all of its bidding credit. If the

transfer occurs in the first two years, 100 percent of the bidding

credit must be repaid; if it occurs in year three, 75 percent; in year

four, 50 percent; and in year five, 25 percent. After the fifth year,

no unjust enrichment penalty is imposed.

98. Similarly, if a 900 MHz geographic area licensee, that is

paying its winning bid through installment payments, transfers its

license to entire an entity that would not have qualified for such

installment payments or, in the case of the upper 200 channels, for a

less favorable installment payment plan, the geographic area licensee

must make full payment of the remaining unpaid principal and interest

accrued through the date of assignment or transfer. A similar rule has

been adopted for the lower 230 channels, however, only one level of

installment payments in available to EA licensees in the lower 230

channels.

99. We conclude that the above-outlined unjust enrichment

requirements shall apply if licensee, that received one of these

special small business benefits, partitions or disaggregates to an

entity that would not qualify for the benefit. We will follow the

approach adopted in both the broadband PCS and WCS proceedings and

apply all such unjust enrichment requirements on a pro rata basis using

population to calculate the relative value of the partitioned area and

amount of spectrum disaggregated to calculate the relative value of the

disaggregated spectrum. We disagree

[[Page 41204]]

with PCIA that these measures will slow the assignment process or

encourage the filing of frivolous petitions to deny. We find that such

measures will provide an objective method for calculating the relative

values of partitioned areas and disaggregated spectrum. We note that

population will be calculated based upon the latest census data.

Parties may use the latest census data when it is available.

100. With respect to installment payments, we will follow the

procedures established in the broadband PCS proceeding and require that

a 900 MHz SMR geographic area licensee, making installment payments,

and seeking to partition or disaggregate to an entity that does not

meet the applicable installment payment eligibility standards, make a

payment of principal and interest calculated on a proportional basis as

set forth above. If a geographic area licensee making installment

payments, partitions or disaggregates to an entity that would qualify

for less favorable installment payments, we will require the licensee

to reimburse the government for the difference between the installment

payment paid by the licensee and the installment payments for which the

partitionee or disaggregatee is eligible calculated on a proportional

basis as set forth above.

101. We will separate the payment obligations using the same

procedures adopted for broadband PCS. When a 900 MHz SMR geographic

area licensee with installment payments partitions or disaggregates to

a party that would not qualify for installment payments under our rules

or to an entity that does not desire to pay for its share of the

license with installment payments, we will require, as a condition of

grant of the partial assignment application, that the partitionee/

disaggregatee pay its entire pro rata amount within 30 days of Public

Notice conditionally granting the partial assignment application. The

partitioner or disaggregator will receive new financing documents

(promissory note and security agreement) with a revised payment

obligation, based on the remaining amount of time on the original

installment payment schedule. A default on an obligation will only

affect that portion of the market area held by the defaulting party.

102. Where both parties to the 900 MHz SMR partitioning or

disaggregation arrangement qualify for installment payments under our

rules, we will again follow the procedures established in the broadband

PCS proceeding and permit the partitionee/disaggregatee to make

installment payments on its portion of the remaining government

obligation. Partitionees/disaggregatees are free, however, to make a

lump sum payment of all or some of their pro rata portion of the

remaining government obligation within 30 days of the Public Notice

conditionally granting the partial assignment application. Should a

partitionee/disaggregatee choose to make installment payments, we will

require, as a condition to approval of the partial assignment

application, that both parties execute financing documents (promissory

note and security agreement) agreeing to pay the U.S. Treasury their

pro rata portion of the balance due (including accrued and unpaid

interest on the date the partial assignment application is filed) based

upon the installment payment terms for which they would qualify. Each

party will receive a license for its portion of the market area and

each party's financing documents will provide that a default on its

obligation would only affect their portion of the market area. These

payments to the U.S. Treasury are required notwithstanding any

additional terms and conditions agreed to between or among the parties.

3. Related Matters

103. We asked commenters in the Second Further Notice of Proposed

Rulemaking to discuss the conditions by which partitioning and

disaggregation should be allowed for 800 MHz licensees. In addition,

AMTA raised related matters in its Petition. We adopt the following

rules with respect to the above-outlined matters similar to those we

have adopted for the broadband PCS service.

a. Combined Partitioning and Disaggregation

104. In the broadband PCS proceeding, we found that allowing

entities to propose combined partitioning and disaggregation

transactions would provide added flexibility and would facilitate such

arrangements. We believe the same rationale would apply to partitioning

and disaggregation in the SMR service. Therefore, we will allow

licensees to propose combined partitioning and disaggregation

transactions. We believe that the goals of providing competitive serve

offering, encouraging new market entrants, and ensuring quality service

to the public will be advanced by allowing such combined transactions.

We further conclude that in the event that there is a conflict in the

application of the partitioning and disaggregation rules, the

partitioning rules should prevail. For the purpose of applying our

unjust enrichment requirements and/or for calculating obligations under

installment payment plans, when a combined 900 MHz SMR partitioning and

disaggregation is proposed, we will use a combination of both

population of the partitioned area and amount of spectrum disaggregated

to make these pro rata calculations.

b. License Term and Renewal Expectancy

105. In the broadband PCS proceeding, we concluded that entities

acquiring a license through partitioning and disaggregation should hold

their license for the remainder of the original licensee's license

term. We found that this approach was consistent with the approach we

had adopted for the Multipoint Distribution Service and was the easiest

to administer. We found that allowing licensees to ``re-start'' the

license term from the date of the grant of the partial assignment of

license application could invite parties to circumvent our license term

rules and unnecessarily delay service to the affected areas.

106. We find the same to be true with respect to the SMR service.

Limiting partitionees and disaggregatees in the SMR service to the

remainder of the original licensee's license term (whether it be five

years for incumbent licensees or ten years for geographic area

licensees) will ensure that there will be the maximum incentive for

parties to pursue available spectrum as quickly as practicable, thus

expediting delivery of service to the public.

107. We will also adopt renewal expectancy provisions for SMR

partitionees and disaggregatees that obtain their licenses from

geographic area licensees similar to those adopted in the broadband PCS

proceeding. Partitionees and disaggregatees obtaining license areas or

spectrum from geographic area licensees may earn a renewal expectancy

on the same basis as other geographic area licensees.

c. Licensing

108. In order to provide added flexibility, we will not adopt the

procedures set forth in the Second Further Notice of Proposed

Rulemaking and, instead, adopt procedures similar to those proposed by

AMTA and those devised for broadband PCS partitioning and

disaggregation. We will require that parties seeking approval for an

SMR partitioning or disaggregation transaction follow the existing

partial assignment procedures for the SMR service. Such applications

will be placed on Public Notice and will be subject to petitions to

deny. The licensee will be required to file an FCC Form 490 that is

signed by both the

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licensee and the qualifying entity. The qualifying entity will also be

required to file an FCC Form 430 unless a current FCC Form 430 is

already on file with the Commission. An FCC Form 600 must be filed by

the qualifying entity to receive authorization to operate in the market

area being partitioned or for the disaggregate spectrum and to modify

the existing license of the qualifying entity to include the new/

additional market area being partitioned or the spectrum being

disaggregated. Any requests for a partitioned license or disaggregated

spectrum must contain the FCC Forms 490, 430, and 600 and be filed as

one package under cover of the FCC Form 490. We note that the 45 MHz

CMRS spectrum cap contained in Sec. 20.6 of the rules applies to

partitioned license areas and disaggregated spectrum in the SMR

service. In the context of partitioning, we will determine compliance

with the spectrum cap based on the post-partitioning populations of

each licensees' partitioned market. This means that neither the

partitioner nor the partitionee may count the population in the other's

party's portion of the market in determining its own compliance with

the spectrum cap. Furthermore, by signing FCC Forms 490 and 600, the

parties will certify that grant of the partial assignment application

would not cause either party to be in violation of the spectrum

aggregation limit contained in Sec. 20.6 of the rules.

F. Competitive Bidding Issues of Lower 80 and General Category Channels

1. Auction of Lower 80 and General Category Channels

109. In previous proceedings, we concluded generally that we should

use ``competitive bidding procedures to select from among mutually

exclusive CMRS applications where we have the authority to do so and

where we find such processing to be in the public interest.'' Upon

consideration of the record in this proceeding, we conclude that

auctioning the Lower 80 channels and the General Category channels

meets the criteria set forth in section 309(j) of the Communications

Act and will further the public interest. Nextel, AMTA, and SMR Won

generally support competitive bidding for these channels.

110. Southern and ITA argue that the Commission lacks the authority

to auction this spectrum on the ground that under section 309(j) the

Commission is obligated to use existing means (i.e. engineering

solutions, negotiations, threshold qualifications) to avoid mutual

exclusivity in application and license proceedings. We note as an

initial matter that the Communications Act only requires the Commission

to use other such existing means when it is in the public interest.

After careful analysis of this spectrum, we conclude that the

likelihood of mutually exclusive applications in the 800 MHz SMR band

is considerable and that not all potential conflicts will be eliminated

through negotiations or other existing means. We therefore conclude

that the public interest will be served by using competitive bidding to

license these channels.

111. Some commenters contend that the General Category and Lower 80

are not auctionable because the channels are heavily licensed leaving

few or no channels or space available for new licensing. Further, these

commenters contend that those channels that are open will be used for

mandatory relocation of incumbents from the upper 10 MHz channels.

These commenters also contend that there is little to be gained by

adopting geographic licensing because geographic areas that already

have any value are licensed and there will be no increase in spectrum

efficiency. Further, commenters argue that because there is little open

space and no mandatory relocation proposal from the Lower 80 or General

Category channels, EA licensees will not be able to expand and these

licensees could be further frustrated by relocatees from the upper 200

channels.

112. We reject those arguments for several reasons. We do not

believe the purported dearth of channels in some areas or the potential

risk of relocatees from the upper 200 channels render the competitive

bidding process inapplicable. In this Order, we include provisions for

licensees to aggregate licenses within a geographic area, which will

enable them to expand the geographic coverage of their systems and

potentially enhance the commercial viability of these licenses, as well

as use this spectrum efficiently. As noted above, there is a high

likelihood that mutually exclusive applications will be filed for these

channels. The resolution of these applications by comparative hearings

or other means will unnecessarily delay the processing of these

applications, contrary to the public interest and to the Congressional

objectives under section 309(j)(3). Under the licensing scheme for

these channels, i.e., on a geographic area basis (as with the upper 200

channels, EAs will be used for the lower 80 channels), there will be

competitive opportunities to provide SMR service in this frequency band

and the application process for these channels will be open to any

qualified applicant. Furthermore, the use of competitive bidding to

select among these applicants will ensure that the qualified applicants

who place the highest value on the available spectrum will prevail in

the selection process. Additionally, as we concluded in the First

Report and Order, by using the same service area definition for the

lower 80 and General Category channels as we used for the upper 200

channels, we will realize greater administrative efficiency in the

licensing of these channels.

113. A few commenters contend that they cannot afford to

participate in the auction. Some commenters believe that the auction

procedure heavily favors large entities over smaller ones, that these

larger entities will hurt competition and delay provision of services

while the auction takes place. As noted below, to ensure small business

participation in the Lower 80 and General Category channel auctions,

the Commission has adopted bidding credits. Furthermore, contrary to

claims that auctions will delay the deployment of services, we believe

that the use of competitive bidding will enhance competition and serve

to streamline the administrative process, thereby allowing licenses to

provide service more quickly than alternative licensing procedures.

114. Several commenters argue that the government should be

concerned with the safety and welfare of citizens even when such

concerns prevent it from raising revenues. Some commenters believe that

this spectrum should be reserved for public safety entities and that

PMRS licensees need access to additional spectrum. Motorola believes

that PMRS providers play an important role in public safety and private

industry and that PMRS's concerns should be taken into account. We

addressed these concerns fully in the Second Further Notice of Proposed

Rulemaking. We stated that existing licensees will not be required to

relocate their public safety radio systems and geographic licensees

will be required to provide protection to all co-channel systems that

are constructed and operating within their service area. In addition,

an advisory committee has been established to address the concerns of

public safety users. Therefore, the Commission's rules will allow both

the efficient use of the spectrum and the preservation of public

safety.

2. Competitive Bidding Design

a. Bidding Methodology

115. Based on the record in this proceeding and our successful

experience conducting simultaneous

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multiple round auctions for other services, we believe a simultaneous

multiple round auction design is the preferred competitive bidding

design for these channels. Commenters generally support the use of this

methodology, on the grounds that there is interdependency among the

licenses. No commenter advocated the use of sequential multiple round

auctions. We also note, as discussed below, that we will adopt regional

groupings for the Lower 80 and General Category EA licenses. The

aggregation of licenses into these regional groupings creates stronger

interdependencies between the licenses, further warranting the use of

this auction methodology.

b. License Grouping

116. To expedite the process of auctioning the Lower 80 and General

Category EA licenses, we will auction these licenses using the five

regional groups that were used for the regional narrowband PCS auction:

Northeast, South, Midwest, Central, and West. We believe that by

grouping the licenses and auctioning them regionally, we reduce the

burden on small businesses which choose to participate in the auction

process. Each entity will need to participate only in those regional

auctions in which it is interested in winning licenses. Additionally,

by holding regional auctions and thereby limiting the number of

licenses available, we will decrease the administrative burden of the

auction on the participants, and further enable the auction to conclude

at an earlier time. Finally, we believe that this grouping will make it

easier for incumbents to secure spectrum that complements the licenses

they currently hold while allowing them to expand their systems.

c. Bidding Procedures

i. Bid Increments

117. We will adopt our minimum bid increment proposal, but delegate

authority to the Bureau to vary the minimum bid increment. While we

believe our proposal is appropriate, our experience with other auctions

indicates that flexibility is necessary to set appropriate bidding

levels to account for the pace of the auction, the needs of the

bidders, and the value of the spectrum. Commenters generally support a

minimum bid increment based upon a percentage of the bid from the

previous round. E.F. Johnson, on the other hand, argues that minimum

bid increments should be reduced or eliminated to facilitate small

business participation in the auction. There is no evidence that a

minimum bid increment will deter small business participation in the

auction. Rather, as we previously noted, an appropriate minimum bid

increment is important to the functioning of the auction as it speeds

the process of the auction and helps to ensure that it comes to closure

within a reasonable period of time. Moreover, as noted below, we have

adopted provisions to encourage small business participation. We will

follow the practice that we have used for other auctions and,

consistent with Sec. 1.2104 of the Commission's Rules, announce by

Public Notice prior to the auction the general guidelines for bid

increments.

ii. Stopping Rules

118. In view of our decision to aggregate licenses on a regional

basis, we believe that a simultaneous stopping rule is appropriate for

both the Lower 80 and the General Category licenses. Thus, bidding will

remain open on all licenses in an auction until bidding stops on every

license. Based on the success of our prior broadband PCS and 900 MHz

SMR auctions, Nextel agrees that there should be a simultaneous

stopping rule. AMTA and Nextel also claim that this rule is appropriate

because of the interdependencies between the markets. SMR Won supports

the market-by-market stopping rule, suggesting that it will deter

speculators and reduce artificial inflation of auction prices. We

conclude that bidding should remain open on all licenses in an auction

until bidding stops on every license. We believe that allowing

simultaneous closing for all licenses will afford bidders the

flexibility to pursue back-up strategies without the risk that bidders

will refrain from bidding until the final rounds. In any event, we will

retain the discretion to change the stopping rules during the course of

the auction, and delegate authority to the Bureau to exercise that

discretion.

iii. Activity Rules

119. In accordance with Sec. 1.2104 of the Commission's Rules and

the guidelines we adopted in the Competitive Bidding Second Report and

Order, we will employ the Milgrom-Wilson activity rule for both the

Lower 80 and General Category auctions. As we noted in the Competitive

Bidding Second Report and Order, the Milgrom-Wilson activity rule is

the preferred activity rule where a simultaneous stopping rule is used.

We believe that the Milgrom-Wilson approach best achieves the

Commission's goal 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. Specifically, under

the Milgrom-Wilson rules, the auction is divided into three stages and

the minimum required activity level, measured as a fraction of the

bidder's eligibility in the current round, will increase during the

course of the auction. For purposes of this auction, we will adopt the

minimum required activity levels at each stage that recently were

adopted for the D, E, and F Broadband PCS auction.

120. As in previous auctions, we reserve the discretion to set and,

by announcement before or during the auction, vary the level of the

requisite minimum activity levels (and associated eligibility

calculations) for each auction stage. We believe that retaining this

flexibility will improve the Commission's ability to control the pace

of the auction and help ensure that the auction is completed within a

reasonable period of time. We delegate to the Bureau the authority to

set or vary the minimum activity levels if circumstances warrant a

modification. The Bureau will announce any such modification by Public

Notice. For the purposes of this auction, we also will use the general

transition guidelines that were used for the D, E, and F Broadband PCS

auctions. The auction will start in Stage One and move to Stage Two

when the auction activity level is below ten percent for three

consecutive rounds in Stage One. The auction will move from Stage Two

to Stage Three when the auction activity level is below ten percent for

three consecutive rounds in Stage Two. Under no circumstances can the

auction revert to an earlier stage. However, the Bureau will retain the

discretion to determine and announce during the course of an auction

when, and if, to move from one auction stage to the next.

121. To avoid the consequences of clerical errors and to compensate

for unusual circumstances that might delay a bidder's bid preparation

or submission in a particular round, we will provide bidders with five

activity rule waivers that may be used in any round during the course

of the auction. The Bureau will retain the discretion to issue

additional waivers during the course of an auction for circumstances

beyond a bidder's control, and also retain the flexibility to adjust,

by Public Notice prior to an auction, the number of waivers permitted,

or to institute a rule that allows one waiver during a specified number

of bidding rounds or during specified stages of the auction.

iv. Duration of Bidding Rounds

122. We will retain the discretion to vary the duration of bidding

rounds and

[[Page 41207]]

the intervals at which bids are accepted. In simultaneous multiple

round auctions, bidders may need a significant amount of time to

evaluate back-up strategies. AMTA requests that we allow only one round

of an auction per day because many of its members who will participate

in the auction do not have sufficient staff to monitor the auction if

there is more than one round per day. Genesee requests that for the

first five rounds of the auction only one round of bids per day be

allowed. Genesee does not provide any rationale for its proposal. We do

not believe these proposed limitations are necessary. We note that we

have adopted regional license groupings that are intended to minimize

for small entity participants these burdens in participating and

monitoring the auctions. Therefore, we delegate authority to the Bureau

to vary the bidding rounds or the interval at which bids are accepted

in order to move the auction toward closure more quickly or as

circumstances warrant. The Bureau will announce any changes to the

duration of and intervals between bidding rounds, whether by Public

Notice prior to the auction or by announcement during the auction.

d. Rules Prohibiting Collusion

123. We adopt the rules prohibiting collusive conduct for use in

the Lower 80 and General Category auctions. These requirements, as set

forth in Secs. 1.2105 and 1.2107 of our Rules, operate along with

existing antitrust laws as a safeguard to prevent collusion in the

competitive bidding process. In addition, where specific instances of

collusion in the competitive bidding process are alleged during the

petition to deny process, we may conduct an investigation or refer such

complaints to the U.S. Department of Justice for investigation. Bidders

who are found to have violated the antitrust laws or the Commission's

rules in connection with their participation in the auction process may

be subject to a variety of sanctions, including the forfeiture of their

down payment or their full bid amount, revocation of their licenses,

and possible prohibition from participation in the auctions. Genesee

supports our proposal on the grounds that these same rules were

effective in the 900 MHz SMR auctions. Coral Gables, in contrast,

requests that public safety radio service providers under part 90, or

those proposing to provide such services, should be exempt from the

collusion rules when they are negotiating with other public safety

service providers. We reject Coral Gable's position. First, the

specific needs of public safety entities are the subject of, and will

be addressed in, a separate Commission proceeding. In addition, we

believe that continued negotiation past the short-form filing date by

any segment of bidders may impact the valuation of the licenses and

jeopardize the integrity of the auction process. We note that prior to

the short-form filing date, public safety radio service providers, like

other auction participants, are free to negotiate with each other to

the extent permitted by the antitrust laws.

e. Procedural and Payment Issues

i. Pre-Auction Application Procedures

124. We will generally use the applications and payment procedures

set forth in part 1 of our rules, with certain modifications for the

800 MHz SMR service. A Public Notice announcing the auction will

specify the licenses to be auctioned and the time and place of the

auction in the event that mutually exclusive applications are filed.

The Public Notice will also specify the method of competitive bidding

to be used, applicable bid submission procedures, stopping rules,

activity rules, the short-form filing deadline, and the upfront payment

amounts.

125. Prior to the auction, the Wireless Telecommunications Bureau

will also provide information about incumbent licensees for applicants

planning to participate in the auction. We encourage all potential

bidders to examine these records carefully and do their own independent

investigation regarding existing licensees' operations in each license

area on which they intend to bid in order to maximize their success in

the auction.

126. 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.'' We adopt our proposal to

require all applicants for 800 MHz SMR licenses to submit FCC Form 175

in order to participate in the auction. As we indicated in the

Competitive Bidding Second Report and Order, if we receive only one

application that is acceptable for filing for a particular license, and

thus there is no mutual exclusivity, we will issue a Public Notice

canceling the auction for that license and establish a date for the

filing of a long-form application.

ii. Amendments and Modifications

127. We will apply the provisions set forth in part 1 of our rules

governing amendments to and modifications of short-form application to

the 800 MHz SMR service. The only commenter on this issue, Genesee,

supports the Commission's proposal. Upon reviewing the short-form

applications, we will issue a Public Notice listing all defective

applications. Applicants with minor defects in their applications will

be given an opportunity to cure them and resubmit a corrected version.

iii. Upfront Payments

128. We will adopt our upfront payment proposal, particularly

because the majority of commenters support it. Fresno states that the

upfront payment should be high enough to discourage frivolous bidders

but flexible enough to reflect the lower value of the channels. As we

previously noted, a substantial upfront payment requirement is

necessary to ensure that only serious qualified bidders participate in

auctions, thereby ensuring that sufficient funds are available to

satisfy any bid withdrawal or default payments that may be incurred. We

thus reject Coral Gables' claim that bidders that provide public safety

radio services under part 90 of the Commission's Rules should not be

required to make an upfront payment or, alternatively, that they should

have a reduced upfront payment. We believe that making these exceptions

to the upfront payment requirement would jeopardize the integrity of

the auction process. As Fresno suggests, we recognize the standard

upfront payment formula may yield too high a payment as compared to the

value of these licenses. Accordingly, we delegate authority to the

Bureau to vary the minimum upfront payment when it determines the

general formula of $0.02 per MHz-pop is an unreasonably high upfront

payment. The Bureau will announce any such modification by Public

Notice.

iv. Down Payment and Full Payment

129. We conclude that we should require all winning bidders to

supplement their upfront payments with down payments sufficient to

bring their total deposits up to 20 percent of the winning bid(s).

Genesee, the sole commenter to address this issue, supports our

proposal. If the upfront payment already tendered by a winning bidder,

after deducting any bid withdrawal and default payments due, amounts to

20 percent 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

payments due, the additional monies will be refunded.

[[Page 41208]]

130. We will require winning bidders to submit the required down

payment to our lock-box bank within ten business days following release

of a Public Notice announcing the close of bidding. All auction winners

will be required to make full payment of the balance of their winning

bids within ten business days following Public Notice that the

Commission is prepared to award the license. The Commission generally

will grant uncontested licenses within ten business days after

receiving full payment.

131. We believe that small businesses should also be subject to a

20 percent down payment requirement. We believe that such a requirement

is consistent with ensuring that winning bidders have the financial

capability of building out their systems and will provide us a strong

assurance against default. Increasing the amount of the bidder's funds

at risk in the event of default discourages insincere bidding and

therefore increases the likelihood that licenses are awarded to parties

who are best able to serve the public. We also believe that a 20

percent down payment should cover the required payments in the unlikely

event of default. In view of our decision to defer the issue of

installment payments to the part 1 proceeding, we will also defer our

decision as to when small businesses must make their down payment to

the part 1 proceeding.

v. Bid Withdrawal, Default, and Disqualification

132. To prevent insincere bidding we will apply our general bid

withdrawal, default, and disqualification rules, as set forth in

Sec. 1.2104(g) of the Commission's Rules, to the Lower 80 and General

Category auctions. Genesee, the sole commenter to address these issues,

supports this proposal. Any bidder that withdraws a high bid 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. If a bidder has withdrawn a bid or defaulted, but the amount of

the withdrawal or default payment cannot yet be determined, the bidder

will be required to make a deposit of up to 20 percent on the amount

bid on such licenses. When it becomes possible to calculate and assess

the payment, any excess deposit will be refunded.

133. In the event an auction winner defaults on its initial down

payment, the Commission must exercise our discretion to decide whether

to hold a new auction or offer the licenses to the second highest

bidder. In exercising our discretion, the Commission will evaluate the

particular facts and circumstances of the specific case. In the

unlikely event that there is more than one bid withdrawal on the same

licenses, we will hold each withdrawing bidder responsible for the

difference between its withdrawn bid and the amount of the winning bid

the next time the license is offered by the Commission.

vi. Long-Form Applications and Petitions to Deny

134. In the Second Further Notice of Proposed Rulemaking we

proposed to adopt the general procedures for filing long-form

applications to the 800 MHz SMR auctions. In addition, we proposed that

the petition to deny procedures that were adopted in the CMRS Third

Report and Order should apply to the processing of applications for the

800 MHz SMR service. Genesee, the sole commenter on this issue,

supports our proposal. Therefore, we adopt our proposals regarding

petitions to deny. A party filing a petition to deny against an 800 MHz

SMR license application will be required to demonstrate standing and

meet all other applicable filing requirements. The restrictions in

Sec. 90.162 were established to prevent the filing of speculative

applications and pleadings (or threats of the same) designed to extract

money from 800 MHz license applicants. Thus, we will limit the

consideration that a winning bidder or an individual or entity filing a

petition to deny 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. We note also that

we recently amended Sec. 90.162 to reflect the fact that discussions

regarding withdrawal of short-form applications are subject to

Sec. 1.2105(c) of our Rules.

vii. Transfer Disclosure Requirements

135. In section 309(j) of the Communications Act, 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.'' Therefore, we imposed a transfer disclosure

requirement on licenses obtained through the competitive bidding

process, whether by designated entity or not. We tentatively concluded

in the Second Further Notice of Proposed Rulemaking that the transfer

disclosure requirements should apply to all 800 MHz SMR licenses

obtained through the competitive bidding process. Genesee, again the

sole commenter on this issue, supports the Commission's tentative

conclusion. We will adopt the transfer disclosure requirements

contained in Sec. 1.2111(a) of our rules to auctions for the Lower 80

and General Category. 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, so that we may determine if any

unforeseen problems relating to unjust enrichment outside the

designated entity context have arisen. These particular transfer

disclosure requirements are in addition to the unjust enrichment

provisions discussed infra.

3. Treatment of Designated Entities

a. Overview and Objectives

136. In authorizing the Commission to use competitive bidding,

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.'' The statute required the

Commission to ``consider the use of tax certificates, bidding

preferences and other procedures'' in order to achieve this

congressional goal. In addition, section 309(j)(3)(B) provided that in

establishing eligibility criteria and bidding methodologies the

Commission shall promote ``economic opportunity and competition * * *

by avoiding excessive concentration of licenses and by disseminating

licenses among a wide variety of applicants, including small

businesses, rural telephone companies, and businesses owned by members

of minority groups and women.'' Section 309(j)(4)(A) provides that to

promote these objectives, the Commission shall consider alternative

payment schedules, including installment payments.

137. We have employed a wide range of special provisions and

eligibility criteria designed to meet the statutory objectives of

providing opportunities to designated entities in other spectrum-based

services. The measures considered for each service were established

after closely examining the specific characteristics of the service and

determining whether any particular barriers to accessing capital stood

in the way of designated entity opportunities. For example, in

narrowband PCS we

[[Page 41209]]

provided installment payments for small businesses and bidding credits

for minority-owned and women-owned businesses. In 900 MHz SMR, we

adopted bidding credits and installment payment plans for small

businesses.

138. In the Second Further Notice of Proposed Rulemaking, we sought

comment on the type of designated entity provisions that should be

incorporated into our competitive bidding procedures for the Lower 80

and General Category channels. We requested comment on the possibility

that, in addition to small business provisions, separate provisions for

women- and minority-owned entities should be adopted for the Lower 80

and General Category channels. We requested commenters to discuss

whether the capital requirements of the 800 MHz SMR service pose a

barrier to entry by minorities and women and whether overcoming such a

barrier, if it exists, would constitute a compelling governmental

interest. In particular, we sought comment on the actual costs

associated with the acquisition, construction, and operation of an 800

MHz SMR system with a service area based on a pre-defined geographic

area as well as the proportion of existing 800 MHz SMR businesses that

are owned by women and minorities. We also urged the parties to submit

evidence about patterns or actual cases of discrimination in the 800

MHz SMR industry or in related communications services.

b. Eligibility for Designated Entity Provisions

139. At this time, we have not developed a record sufficient to

sustain race-based measures in the Lower 80 and General Category

licenses based on the standard established by the Adarand decision. In

addition, we believe that the record is insufficient to support any

gender-based provisions under the intermediate scrutiny standard

established in the VMI decision. Fresno urges the Commission to design

a regulatory scheme that will provide opportunities for businesses

owned by women and minorities to comply with the congressional mandate

set out in section 309(j). Fresno, however, does not provide any

evidence of past discrimination. Conversely, Nextel states that there

is no evidence that minorities and women have been historically

discriminated against in the SMR industry. Based upon the record in

this proceeding, we will adopt bidding credits solely for applicants

qualifying as small businesses. We believe these provisions will

provide small businesses with a meaningful opportunity to obtain

licenses for the Lower 80 and General Category channels. Moreover, many

women- and minority-owned entities are small businesses and will

therefore qualify for these provisions. As such, these provisions will

meet Congress' goal of promoting wide dissemination of licenses in this

spectrum. We have determined that no special provisions for rural

telephone companies are warranted but we note that rural telephone

companies may take advantage of the geographic partitioning and

disaggregation provisions and, to the extent that they fall within the

definition of small businesses, they can take advantage of the

designated entity provisions too.

i. Small Businesses Definition

140. Based upon the record in this proceeding, we conclude that

special provisions for small businesses are appropriate for 800 MHz SMR

services. We will adopt a two-tiered definition of small business. We

will define a small business as an entity that, together with its

affiliates and controlling principals, has average gross revenues for

the three preceding years that do not exceed $15 million; we will

define a very small business as an entity that, together with

affiliates and controlling principals, has average gross revenues for

the preceding three years of that do not exceed $3 million. Bidding

credits will be determined, as discussed infra, based upon this two-

tiered approach.

141. In determining whether an applicant qualifies as a small

business at any level, we will consider the gross revenues of the small

business applicant and its affiliates. Specifically, for purposes of

determining small business status, we will follow the procedure

recently adopted for auctions involving other services and will

attribute the gross revenues of affiliates of the applicant. We thus

choose not to impose specific equity requirements on the controlling

principals that meet our small business definition, as suggested by SMR

WON and Genesee. We will still require, however, that in order for an

applicant to qualify as a small business, qualifying small business

principals must maintain ``control'' of the applicant. The term

``control'' would include both de facto and de jure control of the

applicant. For this purpose, we will borrow from certain SBA rules that

are used to determine when a firm should be deemed an affiliate of a

small business. Typically, de jure control is evidenced by ownership of

50.1 percent of an entity's voting stock. De facto control is

determined on a case-by-case basis. An entity must demonstrate at least

the following indicia of control to establish that it retains de facto

control of the applicant: (1) The entity constitutes or appoints more

than 50 percent of the board of directors or partnership management

committee; (2) the entity has authority to appoint, promote, demote and

fire senior executives that control the day-to-day activities of the

licensees; and (3) the entity plays an integral role in all major

management decisions. While we are not imposing specific equity

requirements on the small business principals, the absence of

significant equity could raise questions about whether the applicant

qualifies as a bona fide small business.

ii. Bidding Credits

142. We believe that bidding credits are appropriate as a special

provision for designated entities in the Lower 80 and General Category

licenses. While bidding credits do not guarantee the success of small

businesses, we believe that they at least provide such bidders with an

opportunity to successfully compete against larger, well-financed

bidders. We also conclude that it is appropriate to adopt tiered

bidding credits for 800 MHz SMR auction participants based on the size

of the small businesses. Such an approach, we believe, furthers our

mandate under section 309(j) of the Communications Act to disseminate

licenses to a variety of applicants. Consistent with the tiered small

business definition that we adopt today, we will give small businesses

that, together with affiliates and controlling principals, have average

gross revenues for the preceding three years that do not exceed $3

million, a 35 percent bidding credit. We will give small businesses

that, together with affiliates and controlling principals, have average

gross revenues for the preceding three years that do not exceed $15

million, a 25 percent bidding credit. Consistent with our approach in

the upper 200 channels, we believe that these tiered bidding credits

take into account the difficulties smaller businesses have in accessing

capital and their differing business strategies.

iii. Installment Payments

143. We will defer the decision regarding whether to adopt

installment payments in the lower 80 and General Category channels to

our part 1 proceeding. We do not disagree with the contention of

Genesee and AMTA that small businesses benefit from the ability to pay

for their licenses in installments. Nonetheless, in the part 1

proceeding, we sought comment on whether there are better alternatives

to help small

[[Page 41210]]

businesses, such as offering higher bidding credits in lieu of

installment payments for qualified winning bidders.

144. Finally, we do not see a reason to adopt an alternative

payment plan for public safety auction winners, as suggested by Coral

Gables. Coral Gables argues that there is a greater public interest

value to use these channels for public safety purposes and that special

installment payment provisions should be made in the auction rules for

public safety auction winners. We decline to provide this benefit for

several reasons. First, Coral Gables will not be forced to relocate to

other channels and will not be required to participate in the auction

to retain the spectrum for which it is currently licensed. Second, we

are granting Coral Gables' request to allow disaggregation of channels

by geographic area license winners which should enable public safety

entities to secure more frequencies from auction winners. Also, as

noted above, the Commission is engaged in a separate proceeding

dedicated to the issue of spectrum allocation for public safety

entities.

iv. Reduced Upfront Payment

145. In view of the favorable bidding credits adopted herein, we do

not see a need to adopt reduced upfront payments in order to ensure

small business participation in the auction, as advocated by Genesee.

Rather, we believe that the standard upfront payment is appropriate for

all participants and will help guard against defaults. In addition,

reduced upfront payments impose heavy administrative burdens on the

Commission and are more confusing to auction participants. We do note

that the standard upfront payment amount of $.02/MHz-pop will be

discounted on a uniform basis by the Bureau to account for incumbency

on this spectrum. The Bureau will announce by Public Notice the amount

of this discount.

v. Set-Aside Spectrum

146. We will not adopt an entrepreneurs' block for the Lower 80 and

General Category channels for several reasons. First, contrary to the

contention of some commenters that an entrepreneurs' block is required

to ensure small businesses will be able to obtain licenses, we believe

that small businesses will have significant opportunity to compete for

licenses given the bidding credits we adopt herein. Second, as noted by

at least two commenters, the establishment of an entrepreneurs' block

could unfairly exclude some incumbent operators from participation in

the auction because some incumbents on these channels are larger

companies. Finally, we agree with the argument of one commenter that

adoption of an entrepreneurs' block for these channels would contravene

the goal of regulatory parity since there is no set-aside in the

cellular service and only one-third of the broadband PCS spectrum was

set aside for small businesses.

vi. Unjust Enrichment Provisions

147. To ensure that large businesses do not become the unintended

beneficiaries of measures meant for smaller firms, we adopt unjust

enrichment provisions similar to those adopted for narrowband PCS and

900 MHz SMR services. No comments were received on this issue.

Licensees seeking to transfer their licenses to entities which do not

qualify as small businesses, as a condition to approval of the

transfer, must remit to the government a payment equal to a portion of

the total value of the benefit conferred by the government. The amount

of this payment will be reduced over time as follows: a transfer in the

first two years of the license term will result in a forfeiture of 100

percent of the value of the bidding credit; in year three of the

license term the payment will be 75 percent; in year four the payment

will be 50 percent and in year five the payment will be 25 percent,

after which there will be no payment. These assessments will have to be

paid to the U.S. Treasury as a condition of approval of the assignment

or transfer. Thus, a small business that received bidding credits

seeking transfer or assignment of a license to an entity that does not

qualify as a small business will be required to reimburse the

government for the amount of the bidding credit before the transfer

will be permitted.

148. Also, if an investor subsequently purchases an interest in a

small business licensee and, as a result, the gross revenues of the

business exceed the applicable financial caps, the unjust enrichment

provision will apply. We will apply these payment requirements for the

entire license term to ensure that small businesses will look first to

other small businesses when deciding to transfer their licenses. While

small business licensees must abide by these unjust enrichment

provisions when transferring their licenses to entities that would not

qualify under our small business definitions, we will not impose a

holding period or other transfer restrictions on small businesses.

III. Conclusion

149. We believe that the service and auction rules we adopted

herein in this Second Report and Order are necessary to continue our

implementation of a new licensing scheme for the 800 MHz and 900 MHz

SMR services. We further believe that the rules will facilitate the

rapid implementation of wide-area licensing in the SMR service, thus

advancing the public interest by fostering economic growth of

competitive new services via efficient spectrum use. The rules also

will allow the public to recover a portion of the value of the public

spectrum and promote expeditious access to 800 MHz SMR services by

consumers, and rapid deployment of 800 MHz SMR by existing licensees

and potential new entrants. We also believe that the technical rules

proposed and adopted herein strike the proper balance between the

rights of incumbent licensees in the 800 MHz SMR spectrum and new EA

licensees.

IV. Procedural Matters

A. Regulatory Flexibility Act: (Second Report and Order and Memorandum

Opinion and Order on Reconsideration)

150. As required by the Regulatory Flexibility Act, 5 U.S.C. 603

(RFA), an Initial Regulatory Flexibility Analysis (IRFA) was

incorporated in the Second Further Notice of Proposed Rulemaking in PR

Docket No. 93-144. The Commission sought written public comment on the

proposals in the Second Further Notice of Proposed Rulemaking,

including the IRFA. This Final Regulatory Flexibility Analysis to

accompany final rules in both the Second Report and Order and the

accompanying Memorandum Opinion and Order on Reconsideration conforms

to the RFA, amended by the Contract With America Advancement Act of

1996.

151. Need for and Purpose of this Action: In this Second Report and

Order, the Commission establishes a flexible regulatory scheme for the

800 MHz Specialized Mobile Radio (SMR) service to promote efficient

licensing and enhance the service's competitive potential in the

commercial mobile radio marketplace. The rules adopted in the Second

Report and Order also implement Congress's goal of regulatory symmetry

in the regulation of competing commercial mobile radio services as

described in sections 3(n) and 332 of the Communications Act of 1934,

as amended, 47 U.S.C. 153(n), 332 (Communications Act), as amended by

Title VI of the Omnibus Budget Reconciliation Act of 1993 (Budget Act).

[[Page 41211]]

The Commission also adopts rules regarding competitive bidding for the

remaining 800 MHz SMR spectrum based on section 309(j) of the

Communications Act, 47 U.S.C. 309(j), which delegates authority to the

Commission to use auctions to select among mutually exclusive initial

applications in certain services, including 800 MHz SMR.

152. Summary of Issues Raised in Response to the Initial Regulatory

Flexibility Analysis: No comments were submitted in response to the

IRFA. However, there were several comments concerning the potential

impact of some of the Commission's proposals on small entities,

especially on certain incumbent 800 MHz SMR licensees.

153. The Commission adopted geographic area licensing for the lower

230 800 MHz SMR channels in order to facilitate the evolution of larger

800 MHz SMR systems covering wider areas and offering commercial

services to rival other wireless telephony services. Some licensees

that were not SMR licensees opposed this plan arguing that it was

unsuitable to the needs of smaller, private systems, which do not seek

to cover large geographic areas in the manner of commercial service

providers.

154. The Commission adopted a portion of a proposal set forth by a

number of incumbent 800 MHz SMR licensees (``Industry Proposal'') and

allotted three contiguous 50-channel blocks from the former General

Category block of channels. Some commenters argued that allotting such

large contiguous blocks would not suit the needs of smaller SMR

systems, which typically trunk smaller numbers of non-contiguous

channels. These commenters argued that large blocks of contiguous

channels could be prohibitively expensive to bid for at auction,

thereby limiting the opportunities for smaller operators to take

advantage of geographic area licensing.

155. The Commission adopted a proposal to allow incumbent licensees

in the lower 230 channels to make system modifications within their

interference contours without prior Commission approval, so long as

they do not expand the 18 dBV/m interference contour of their

systems. Proponents of the Industry Proposal argued for an alternative

plan to limit incumbent expansion rights on the lower 230 channels. The

Industry Proposal called for the Commission to permit incumbent

licensees in the lower 230 channels to negotiate expansion rights

within each EA through a settlement process. The proposed settlement

process would occur on a channel-by-channel basis prior to the auction

of the lower 230 channels, but after incumbents on the upper 200

channels had an opportunity to relocate or retune to the lower 230

channels. For each channel, incumbents licensed on the channel within

the EA would negotiate among themselves to allocate rights to the

channel within the EA. If all incumbents on the single channel

negotiated an agreement for use of that channel within the EA (e.g., by

forming a partnership, joint venture, or consortium), they would then

receive an EA license for that channel. If only one incumbent operated

on the channel within an EA, it would receive an EA license for that

channel automatically. If incumbents on a channel were unable to reach

a settlement, the channel would be included in the auction of the lower

230 channels. The Industry Proposal called for non-settling channels in

the lower 80 channels to be auctioned in five-channel blocks and the

150 General Category channels to be auctioned in three 50-channel

blocks.

156. Commenters argued, inter alia, that the Industry Proposal

would provide significant opportunities for small businesses. Although

commenters acknowledged that auctions are a fast and generally

efficient means of licensing new spectrum, they argued that small

businesses will ``have no chance of succeeding in gaining the spectrum

they need for future growth if they must compete against larger

entities with deeper pockets.'' The commenters contended that, in the

case of non-SMR licensees, the provision of communications services is

not their primary business and they will not be in the position to

compete with commercial operators at auction.

157. The Commission adopted rules allowing all 800 MHz SMR

licensees to partition their market areas and to disaggregate their

spectrum. Commenters generally supported these new rules arguing that

partitioning and disaggregation will result in more participation in

the marketplace by small entities and allow coalitions of smaller

entities to bid at auction.

158. The Commission adopted a proposal to auction the

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