The Local Multipoint Distribution Service (``LMDS'')

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 101

[CC Docket No. 92-297; FCC 97-323]

The Local Multipoint Distribution Service (``LMDS'')

AGENCY: Federal Communications Commission.

ACTION: Final rule; order on reconsideration

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SUMMARY: On September 9, 1997, the Federal Communications Commission

adopted a Second Order on Reconsideration amending certain rules

pertaining to Local Multipoint Distribution Service (``LMDS'')

operations in the 27.5-28.35 GHz, 29.1-29.25 GHz, and 31.0-31.3 GHz

bands. These amendments are being made in response to certain petitions

for reconsideration of the Second Report and Order in this proceeding

which established rules and policies for LMDS. The effect of this

action is to make amendments to the rules regarding favorable small

business provisions available to qualifying applicants for LMDS

licenses.

EFFECTIVE DATE: November 17, 1997.

FOR FURTHER INFORMATION CONTACT: Matthew Moses, Wireless

Telecommunications Bureau, (202) 418-0660.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Second

Order on Reconsideration in CC Docket No. 92-297, FCC 97-323. The

complete Second Order on Reconsideration is available for inspection

and copying during normal business hours in the FCC Reference Center

(Room 239), 1919 M Street, N.W., Washington, D.C., and also may be

purchased from the Commission's copy contractor, International

Transcription Service, Inc., (202) 857-3800, 1231 20th Street, N.W.,

Washington, D.C. 20036. The complete Second Order on Reconsideration is

also available on the Commission's Internet home page (http://

www.fcc.gov).

SUMMARY of THE SECOND ORDER on RECONSIDERATION

1. The Commission has before it several petitions for

reconsideration of the Second Report and Order, Order on

Reconsideration, and Fifth Notice of Proposed Rulemaking in this

proceeding. Rulemaking To Amend Parts 1, 2, 21, and 25 of the

Commission's Rules To Redesignate the 27.5-29.5 GHz Frequency Band, To

Reallocate the 29.5-30.0 GHz Frequency Band, To Establish Rules and

Policies for Local Multipoint Distribution Service and for Fixed

Satellite Services, Petitions for Reconsideration of the Denial of

Applications for Waiver of the Commission's Common Carrier Point-to-

Point Microwave Radio Service Rules, CC Docket No. 92-297, Suite 12

Group Petition for Pioneer Preference, PP-22, Second Report and Order,

Order on Reconsideration, 62 FR 23148 (April 29, 1997), and Fifth

Notice of Proposed Rulemaking, 62 FR 16514 (April 7, 1997) (``LMDS

Second Report and Order'') (``Fifth Notice of Proposed Rulemaking'')

(``Order on Reconsideration''), adopting subpart L of part 101 of the

Commission's rules, 47 CFR 101.1001-1112; appeal pending sub nom.

Melcher v. FCC, Case Nos. 93-1110, et al. (D.C. Cir., filed February 8,

1993) (eligibility restrictions); Errata (released April 7 and May 1,

1997); Order on Reconsideration, 62 FR 28373 (May 23, 1997). The

Commission defers the comments and all matters raised for comment in

the Fifth Notice of Proposed Rulemaking to a separate Report and Order

to be issued in the near future. CellularVision USA, Inc.

(``CellularVision''), WebCel Communications, Inc. (``WebCel''), Cook

Inlet Region, Inc. (``Cook Inlet''), LBC Communications, Inc.

(``LBC''), the Rural Telecommunications Group (``RTG''), the

Independent Alliance, and Sierra Digital Communications, Inc. filed

petitions for reconsideration of the LMDS Second Report and Order. LDH

International, Inc., Celltel Communications Corporation, and CT

Communications Corporation jointly filed a petition for reconsideration

of the Order on Reconsideration, and M3 Illinois Telecommunications

Corporation filed a petition for review of the Order on

Reconsideration. This Second Order on Reconsideration addresses those

portions of the petitions of CellularVision, WebCel, and Cook Inlet

that deal with the participation of small businesses in the upcoming

auction of LMDS licenses.

2. In authorizing the Commission to use competitive bidding,

Congress mandated that the Commission ``ensure that small businesses,

rural telephone

[[Page 48788]]

companies, and businesses owned by members of minority groups and women

are given the opportunity to participate in the provision of spectrum-

based services.'' Section 309(j)(4)(D) of the Communications Act of

1934, as amended (``Communications Act''), 47 U.S.C. 309(j)(4)(D).

These categories are collectively known as ``designated entities.''

Noting the lack of a record to support special provisions for

businesses owned by members of minority groups and women, the

Commission adopted provisions for small businesses in the belief that

they would also assist minority-and women-owned entities, many of which

are small businesses. For the reasons set forth below, the Commission

reconsiders and modifies certain rules affecting small business

participation in the LMDS license auction. Specifically, the

Commission:

Eliminates installment payments for LMDS licensees in

favor of revised, tiered bidding credits for very small, small, and

entrepreneurial businesses participating in this auction;

Denies a request to adopt an ``asset test'' for evaluating

business size; and

Declines to further address the qualifications of

licensees that are delinquent or in default on FCC licenses in other

services for obtaining favorable provisions for this auction.

Those portions of the aforementioned petitions that do not deal with

the small business participation rules will be addressed in a separate

Commission ruling.

3. In the LMDS Second Report and Order, the Commission adopted

service and competitive bidding rules for LMDS which included, inter

alia, provisions designed to assist two distinct sizes of small

businesses and entities. Entities with average gross revenues for the

preceding three years of more than $40 million but not more than $75

million hereinafter are referred to as ``entrepreneurs.'' The

Commission notes that this is the first time in the LMDS proceeding in

which the term ``entrepreneurs'' has been used to refer to entities

with average gross revenues for the preceding three years of more than

$40 million but not more than $75 million. A small business is defined

as ``an entity that, together with its affiliates and controlling

principals, has average gross revenues for the three preceding years of

not more than $40 million.'' For entrepreneurs, the Commission made

available 15 percent bidding credits and installment payments at the

same interest rate as for small businesses. Installment payments for

entrepreneurs consist of both interest and principal amortized over the

ten years of the license term. Small businesses are eligible for 25

percent bidding credits and installment payments, the interest rate for

which is based on the rate for ten-year U.S. Treasury obligations,

fixed at the time of licensing, plus 2.5 percent. Installment payments

for small businesses consist of interest-only payments for the first

two years, and interest and principal amortized over the remaining

eight years of the license term.

4. CellularVision, WebCel, and Cook Inlet request that the

Commission reconsider certain aspects of the small business provisions

established in the LMDS Second Report and Order. These petitioners also

variously seek reconsideration of other aspects of the LMDS rules, but

this proceeding addresses only their designated entity proposals. Zip

Communications Corporation (``Zip''), RTG, and CellularVision filed

oppositions to various portions of these petitions. Bell Atlantic

Corporation also opposes the WebCel Petition, which it characterizes as

an ``effort to suppress bidding competition,'' but does not

specifically address WebCel's arguments regarding designated entity

provisions. WebCel and CellularVision also replied to some of the

oppositions. Finally, the Commission received ex parte communications

from the National Venture Capital Association (``NVCA''), U.S. WaveLink

Telecommunications Group, L.P. (``U.S. WaveLink''), WebCel,

CellularVision, and LBC. Petitions for judicial stay of the LMDS Second

Report and Order have also been filed. Those cases have since been

consolidated in the U.S. Court of Appeals for the District of Columbia

in Melcher v. FCC.

I. Commencement of the Auction

5. Petitions. U.S. WaveLink urges the Commission to announce that

the LMDS auction will begin no later than November, 1997, believing

expedition imperative to ensure sound business planning. U.S. WaveLink

asserts that the LMDS auction is already long overdue, that capital

markets have been poised to invest, and that further delay will dampen

investors' interest, slow the delivery of innovative video programming

and telecommunications services to the public, and irreparably harm

competition in LMDS and in the video programming and telecommunications

markets in which LMDS licensees seek to compete. U.S. WaveLink notes

that it has already been several months since the Commission last

directed the Wireless Telecommunications Bureau to implement procedures

for auctioning LMDS licenses pursuant to the LMDS Second Report and

Order, and that it has been more than four years since the Commission

first proposed to authorize LMDS operation and almost a year since the

Commission designated spectrum for LMDS use. Zip also urges the

Commission to commence the LMDS auction as expeditiously as possible.

6. Discussion. The Commission agrees with U.S. WaveLink and Zip

regarding the need to move expeditiously to auction the LMDS licenses.

The Commission believes that the public will significantly benefit from

the availability of new services via LMDS and from the benefits of

competition between LMDS and established services. The Commission is

concerned that further delay may slow the delivery of new services to

the public and harm the growth of competition. The Commission also

wants to give sufficient time from the date of the release of this

Second Order on Reconsideration for potential bidders to arrange

financing. Therefore, the Commission has recently announced that the

LMDS auction will begin on December 10, 1997. This issue is therefore

moot.

II. Installment Payments

7. Petitions. Cook Inlet urges us to eliminate the installment

payment plans for LMDS licensees. Cook Inlet asserts that installment

payment plans fueled speculation in the broadband Personal

Communications Services (``PCS'') auctions, encouraged expectations of

Commission relief from payment obligations, and saddled the Commission

with difficult credit-related tasks for which it has no experience.

Cook Inlet Petition also notes the Commission's statement in the

current proceeding to modify its general competitive bidding rules:

We note that substituting a system of larger bidding credits

might eliminate the administrative and market concerns associated

with installment payments, while nonetheless ensuring opportunities

for small businesses to participate in auctions.

Amendment of Part 1 of the Commission's Rules--Competitive Bidding

Proceeding, WT Docket No. 97-82, Order, Memorandum Opinion and Order,

and Notice of Proposed Rule Making, 62 FR 13540 (March 21, 1997), at

para. 34 (``Part 1 Order and NPRM''). Cook Inlet further argues that

installment payment programs force the Commission to balance its duty

to regulate the provision of wireless services with its sometimes

conflicting obligation to manage the federal debt responsibly. To

ensure that small businesses have the opportunity to compete for LMDS

licenses, Cook Inlet urges the Commission to offer increased

[[Page 48789]]

bidding credits in place of installment payment plans, which it asserts

will allow responsible small bidders with appropriately tailored

business plans to secure private financing, without sacrificing market

driven bidding discipline.

8. CellularVision, WebCel, Zip and LBC oppose Cook Inlet's proposal

to eliminate installment payment plans for LMDS licensees.

CellularVision and WebCel argue that section 309(j)(4) of the

Communications Act requires the Commission to consider the use of

installment payments as a means of ensuring that licenses are held by a

wide variety of applicants, including small businesses. WebCel further

argues that installment payments were successful in past auctions, and

that in this proceeding the Commission lacks the requisite degree of

justification to eliminate them, citing 47 U.S.C. 309(j)(4)(A) and (D),

the Administrative Procedures Act, generally, and Motor Vehicle

Manufacturers Ass'n v. State Farm Mutual Ins. Co., 463 U.S. 29 (1983)

(``Motor Vehicle Manufacturers''). CellularVision, WebCel and LBC also

express doubts that private financing will be available or sufficient

for participation in the LMDS auction and subsequent build-out,

marketing and operations. Zip agrees with Cook Inlet that its proposal

would curb speculative bidding, but also believes that it would

eliminate any meaningful opportunity for small businesses to

participate in the LMDS auction. If the Commission does eliminate

installment payments for LMDS licensees, CellularVision proposes that

small businesses, as currently defined, receive a 50 percent bidding

credit in order to attract the necessary private financing to compete

in the LMDS auction.

9. Contrary to Cook Inlet's proposal, CellularVision asserts that

an additional, ``deferred incremental repayment'' installment payment

option, that takes into account the special resource-intensive

characteristics of LMDS, is necessary to ensure maximum small business

participation in the LMDS auction. Under CellularVision's proposal,

payments of interest, at a rate equal to a 10-year U.S. Treasury note,

would commence in year six, while payments of principal would commence

in year seven under an incremental structure of five percent in year

seven, 10 percent in years eight and nine, and the remaining 75 percent

in the final year. WebCel, for its part, suggests the creation of two

additional ``very small'' business categories which would include

proportionally favorable installment payment plans. Zip opposes

CellularVision's proposal, asserting that the elimination of any

immediate financial obligation would give bidders an incentive to

engage in speculation, and that it may encourage bidders to drive

prices beyond the range of small businesses, with the expectation that

the Commission will forgive the winners' debt obligations if they later

find that they have overreached. CellularVision asserts in reply that

the auction process itself virtually eliminates the possibility of

speculation.

10. Discussion. The Commission grants Cook Inlet's petition and

eliminates installment payment plans for LMDS licensees.

Notwithstanding the arguments of CellularVision and WebCel, Congress

did not require the use of installment payments in all auctions, but

rather recognized them as one means of promoting the objectives of

section 309(j)(3) of the Communications Act. Section 309(j)(4) of the

Communications Act states that the Commission shall, in prescribing

regulations pursuant to these objectives and others, ``consider

alternative payment schedules and methods of calculation, including

lump sums or guaranteed installment payments, with or without royalty

payments, or other schedules or methods that promote the objectives

described in paragraph (3)(B) * * * .'' 47 U.S.C. 309(j)(4)(A)

(emphasis added). The legislative history of section 309(j) of the

Communications Act indicates that:

While it is clear that, in many instances, the objectives of

section 309(j) will be best served by a traditional, ``cash-on-the-

barrelhead'' auction, it is important that the Commission employ

different methodologies as appropriate. Under this subsection, the

Commission has the flexibility to utilize any combination of

techniques that would serve the public interest.

Omnibus Budget Reconciliation Act of 1993, Report of the Committee on

the Budget, House of Representatives, to Accompany H.R. 2264, A Bill to

Provide for Reconciliation Pursuant to section 7 of the Concurrent

Resolution of the Budget for Fiscal Year 1994, May 25, 1993, at p. 255.

The Commission continues to experiment with different means for

achieving its obligations under the statute, and has offered

installment payments to licensees in several auctioned wireless

services. By no means, however, has Congress dictated that installment

payments are the only tool in assisting small business. Indeed, the

Commission has conducted several auctions without installment payments.

Moreover, in recent legislation, Congress dictated that certain future

auctions effectively be conducted without installment payments. Section

3001 of the Omnibus Consolidated Appropriations Act for 1997, Public

Law 104-208, 110 Stat. 3009 (1996) (``Omnibus Consolidated

Appropriations Act'') is one example. Another example is the Balanced

Budget Act of 1997, Public Law 105-33, 111 Stat. 251 (1997). Section

3007 of the Balanced Budget Act of 1997, which significantly amends

section 309(j) of the Communications Act, requires that:

The Commission shall conduct the competitive bidding required

under this title or the amendments made by this title in a manner

that ensures that all proceeds of such bidding are deposited in

accordance with section 309(j)(8) of the Communications Act of 1934

not later than September 30, 2002.

The Conference Report on the Balanced Budget Act of 1997 indicates that

the deadline set forth in section 3007 ``applies to all competitive

bidding provisions in this title of the conference agreement and any

amendments to other law made in this title.'' Conference Report on H.R.

2015, Balanced Budget Act of 1997, Congressional Record--House, Vol.

143, No. 109--Part II, at H6176. The Commission has carefully

considered the use of installment payment plans for LMDS licensees. The

Commission concludes that it can meet its statutory obligations absent

these provisions.

11. The Commission must balance competing objectives in section

309(j) that require that it promote the development and rapid

deployment of new spectrum-based services and ensure that designated

entities are given the opportunity to participate in the provision of

such services. In assessing the public interest, the Commission must

try to ensure that all the objectives of section 309(j) are considered.

While the Commission disagrees with Cook Inlet's contention that

installment payments necessarily encourage speculation, the

Commission's experience with the installment payment program leads it

to conclude that installment payments may not always serve the public

interest. The Commission has found, for example, that obligating

licensees to pay for their licenses as a condition of receipt requires

greater financial accountability from applicants. Amendment of Part 90

of the Commission's Rules to Facilitate Future Development of SMR

Systems in the 800 MHz Frequency Band, PR Docket No. 93-144, RM-8117,

RM-8030, RM-8029, Implementation of Section 3(n) and 322 of the

Communications Act--Regulatory Treatment of Mobile Services, GN Docket

No. 93-252, Implementation of

[[Page 48790]]

Section 309(j) of the Communications Act--Competitive Bidding, PP

Docket No. 93-253, Memorandum Opinion and Order, 62 FR 41225 (July 31,

1997) (``800 MHz MO&O'') at para. 130. The Commission is presently

examining issues relating to its administration of installment

payments, including those raised by Cook Inlet, in several other

proceedings. Because of the importance of these issues, the Commission

plans to incorporate its decisions regarding installment payments for

the broadband PCS C and F Blocks and other financial issues into its

part 1 rulemaking. Nevertheless, the Commission agrees with U.S.

WaveLink and Zip about the need to move expeditiously to auction the

LMDS licenses. The Commission believes that the public interest is best

served by going forward with the LMDS auction without extending

installment payments to LMDS licensees. In place of installment

payments, the Commission establishes other changes that will provide

for the interests of new entrants.

12. The Commission disagrees with the contentions of WebCel, LBC,

and Zip that installment payments are necessary to ensure a meaningful

opportunity for small businesses to participate in LMDS. In other

auctions in which installment payments were not available, small

businesses were the high bidders on a significant number of licenses.

In the Wireless Communications Service (``WCS'') auction, which had

bidding credits of 25 percent for small businesses and 35 percent for

very small businesses and no installment payments, 25 percent of the

licenses went to small or very small businesses. In the cellular

auction of licenses for unserved areas, which had no special bidding

provisions, 36 percent of the licenses went to small or very small

businesses. CellularVision, although expressing some doubts regarding

the ability of small businesses to attract private financing, suggests

that a large enough bidding credit would enable small businesses to do

so, while Cook Inlet contends that increased bidding credits will allow

responsible small bidders with appropriately tailored business plans to

secure private financing. WebCel, Cook Inlet, and NVCA also point out,

as discussed below, that LMDS may be built out incrementally, which may

allow for lower levels of front-end system financing than other

services. Further, as the Commission has already noted, section 309(j)

requires it to consider alternative methods to allow for dissemination

of licenses among designated entities, including small businesses. The

Commission believes that the methods discussed below will both fulfill

the mandate of section 309(j) to provide small business with the

opportunity to participate in auctions and ensure that new services are

offered to the public without delay.

13. Since the Commission has decided not to offer installment

payments, it rejects as moot both CellularVision's proposed deferred

incremental repayment and WebCel's suggestion of a favorable interest

rate for very small businesses. The Commission further disagrees with

WebCel that it lacks adequate justification to eliminate installment

payment plans for LMDS licensees under the Administrative Procedures

Act and Motor Vehicle Manufacturers. Section 706(2)(A) of the

Administrative Procedures Act states that agency actions, findings, and

conclusions shall be held unlawful and set aside if they are found to

be ``arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law * * *.'' Motor Vehicle Manufacturers held that this

standard is applicable to rescission or modification of rules. Under

Motor Vehicle Manufacturers and other cases, an agency acts arbitrarily

or capriciously if it fails to examine the relevant data and articulate

a satisfactory explanation for its action including a ``rational

connection between the facts found and the choices made.'' Motor

Vehicle Manufacturers, 463 U.S. at 43, citing Burlington Truck Lines v.

United States, 371 U.S. 156 (1962). Motor Vehicle Manufacturers also

acknowledged that `` `regulatory agencies do not establish rules of

conduct to last forever,' * * * and that an agency must be given ample

latitude to `adapt their rules and policies to the demands of changing

circumstances.' '' Motor Vehicle Manufacturers, 463 U.S. at 42

(citations omitted). The Commission has fully considered the issue

based on its experience with installment payment plans and the record

before it in this proceeding.

III. Very Small Business Category

14. Petitions. In place of the current installment payment plan,

Cook Inlet requests the institution of a ``very small business''

category, featuring a 35 percent bidding credit, for entities that,

together with affiliates and controlling principals, have average gross

revenues for the preceding three years of not more than $15 million.

Cook Inlet opines that while substantial capital will be necessary to

acquire and construct LMDS systems, LMDS may provide better

opportunities for smaller entities than did broadband PCS because LMDS

operators will be able to build out systems incrementally without

compromising their provision of service to end users. Cook Inlet notes

the examples of wireless local loop or video offerings, in which it

asserts that ``a smaller system may stand on its own on a more

localized basis without the need for immediate `total area' coverage or

even national systems support.''

15. NVCA and WebCel also advocate very small business categories,

although not in place of installment payments, arguing that the fixed

nature of LMDS service allows cell sites and network infrastructure to

be deployed incrementally to match revenue generation. Therefore, the

initial capital-raising requirements for one or a few markets are not

as formidable as services that require extensive buildout before they

are put into service. NVCA also asserts that because the fixed nature

of LMDS obviates the need for nationwide roaming and national branding,

very small businesses can be successful with only one or a few

licenses. NVCA characterizes LMDS as potentially ``one of the best new

venture opportunities for locally-owned small businesses and

entrepreneurial start-ups to enter the telecommunications industry.''

Both NVCA and WebCel express concern that without a very small business

category, entrepreneurial entities with differentiated business plans

and adequate venture financing, who would otherwise succeed in building

local LMDS businesses, will be outbid by much larger entities that

currently qualify for the same provisions. WebCel consequently requests

the adoption of a very small business category for entities with

average gross revenues for the three preceding years of not more than

$15 million, and an additional very small business category for

entities with average gross revenues for the three preceding years of

not more than $3 million, and seeks advantageous installment payment

rates and bidding credits for these categories. RTG concurs with

parties advocating inclusion of a very small business category in the

LMDS auction, asserting that LMDS is capital-intensive and that small

businesses will not be able to afford licenses or effectively deploy

their systems without additional incentives.

16. CellularVision opposes implementation of WebCel's plan if it

would reduce current incentives for small businesses or entrepreneurs,

believing that any incentives granted for very small businesses must be

in addition to the current bidding credits and installment payment

plans for those entities. Zip also opposes WebCel's

[[Page 48791]]

proposal for a very small business category, without elaboration.

17. Discussion. The Commission will create an additional category

to benefit ``very small'' businesses bidding for LMDS licenses, along

the lines suggested by Cook Inlet, NVCA, WebCel, and RTG. The

Commission agrees that a unique category for very small businesses will

serve as an effective method of leveling the competitive imbalance

between very small businesses and other entrepreneurial entities. The

Commission will define ``very small'' businesses as entities that,

together with controlling principals and affiliates, have average gross

revenues for the three preceding years of not more than $15 million.

The Commission will also re-define ``small'' businesses as entities

that, together with controlling principals and affiliates, have average

gross revenues for the three preceding years of more than $15 million

but not more than $40 million. These categories are identical to those

adopted for the broadband PCS F Block auction, as petitioners argue.

The Commission will apply to the very small business category the same

attribution, control, consortia, upfront payment, and unjust enrichment

rules that it adopted for its small business and entrepreneur

categories.

18. The Commission declines to adopt WebCel's suggestion of another

category for entities that, together with controlling principals and

affiliates, have average gross revenues for the three preceding years

of not more than $3 million. Under the revised ``tiered'' approach, the

Commission will have three categories of bidders: ``entrepreneurs,''

``small businesses,'' and ``very small businesses.'' Creating an

additional category (i.e., ``very, very small'' businesses) adds

another layer of complexity with little countervailing benefit to

bidders. The Commission believes that the three categories will

adequately serve to diversify opportunity in its LMDS auction.

IV. Bidding Credits

19. Petitions. As previously described, Cook Inlet supports

heightened bidding credits in lieu of installment payment plans for

LMDS licenses. Specifically, Cook Inlet suggests the establishment of

the aforementioned very small business category with a 35 percent

bidding credit, and the retention of a 25 percent bidding credit for

small businesses and a 15 percent bidding credit for entrepreneurs.

Cook Inlet asserts that ``increased bidding credits such as these'' are

appropriate in the absence of installment payment plans. To the extent

that installment payments are no longer available for LMDS licensees,

CellularVision proposes a 50 percent bidding credit for small

businesses, as currently defined, in order to attract the necessary

private financing to compete in the LMDS auction. WebCel requests that

the Commission offer either a bidding credit of 35 percent for its two

very small business categories, or adopt the tiered scheme employed for

the broadband PCS F Block auction--a 25 percent bidding credit for very

small businesses, a 15 percent bidding credit for small businesses, and

no bidding credit for entrepreneurs.

20. Discussion. The Commission will offer higher bidding credits

than those adopted in the LMDS Second Report and Order for small

businesses and entrepreneurs. The Commission agrees with Cook Inlet and

CellularVision that heightened bidding credits are appropriate in the

absence of installment payment plans. Also, contrary to WebCel's

assertions, the Commission believes that heightened bidding credits

will fulfill the mandate of section 309(j)(4)(D) of the Communications

Act to provide small businesses with the opportunity to participate in

spectrum-based services. As noted above, this approach was successful

in enabling small businesses to participate in the WCS auction, in

which the Commission was unable to employ installment payments because

of the statutory deadline for depositing auction revenues in the U.S.

Treasury. The Commission also recently used this approach in

establishing rules for the auction of licenses for 800 MHz Specialized

Mobile Radio (``SMR''). However, the Commission does not agree with the

bidding credit levels suggested by the petitioners. Except for entities

that would qualify as very small businesses, Cook Inlet's proposed

levels would not account for the loss of installment payment plans.

WebCel's alternative suggestion of conforming the LMDS bidding credit

levels to those employed in the broadband PCS F Block auction would

entail reducing the bidding credits available to small businesses and

entrepreneurs at the same time that the Commission is eliminating

installment payments. CellularVision has not provided any support for

its assertion that small businesses will require a 50 percent bidding

credit to attract private financing.

21. The Commission will raise the bidding credit available to small

businesses (entities with average gross revenues for the three

preceding years of more than $15 million but not more than $40 million)

to 35 percent and the bidding credit available to entrepreneurs

(entities with average gross revenues for the preceding three years of

more than $40 million but not more than $75 million) to 25 percent.

These levels reflect the thresholds adopted in the LMDS Second Report

and Order, with a reasonable adjustment of ten percent for the

unavailability of installment payment plans for LMDS licensees. In

addition, the Commission will adopt a 45 percent bidding credit for

very small businesses (entities with average gross revenues for the

three preceding years of not more than $15 million) in the LMDS

auction. This level reflects the 35 percent threshold requested by

WebCel, plus a reasonable adjustment for the lack of bidding credits.

The Commission notes that it is difficult to accurately calculate the

net present value of an installment payment plan (which value would

depend on several variables, including future commercial interest

rates), and the Commission does not in any event commit to an exact

accommodation or reimbursement of the value of installment payments.

Nor does the Commission intend to exactly match its small business

provisions for LMDS to those employed in other services such as WCS or

800 MHz SMR. The Commission's small business provisions for LMDS have

historically deviated from those adopted for other services, and the

Commission believes that an effort to conform them to the provisions

adopted for other types of wireless services would be pointless.

V. Asset Test

22. Petitions. WebCel, Zip, and NVCA suggest the institution of an

asset test in the Commission's small business size standards to

differentiate start-ups from larger entities. WebCel's suggested asset

test would consist of a ``financial eligibility threshold'' excluding

firms with total assets in excess of $500 million, the measure of which

would include the value of other licenses held. Zip suggests financial

eligibility thresholds of $250 million for small businesses, and $500

million for entrepreneurs. Zip theorizes that the lack of discussion in

the LMDS Second Report and Order of the Commission's decision not to

adopt an asset threshold test, as well as the requirement in

Sec. 101.1109(c) of the Commission's rules that winning bidders'

records include asset information, indicates that the absence of an

asset test may have been an oversight. NVCA would have us apply the

$500 million threshold employed in other auctions.

23. Discussion. The Commission will not adopt an asset test for the

LMDS

[[Page 48792]]

auction. Although the Commission has adopted an asset test for

eligibility for particular blocks of licenses in broadband PCS

auctions, the Commission has never before employed an asset test for

eligibility for small business size standards. The Commission also

notes that the Small Business Administration, the rules of which have

formed the basis for much of its own consideration of small business

provisions, presently does not employ asset tests in its business size

standards except in the context of banks. Assets, being potentially

fluid and subject to inconsistent valuation (e.g., intangibles) are

generally much less ascertainable than gross revenues or numbers of

employees. The Commission further notes that it has never counted

licenses won in other auctions as assets for purposes of calculating

total assets, as requested by WebCel, and there would appear to be

significant questions of proper valuation (e.g., amortization

schedules) in doing so. Given the complexity and significance of the

issues associated with asset tests and the importance of proceeding

with the LMDS auction without further delay, the Commission do not feel

that it has enough data at this time to do adopt an asset test for

LMDS. However, the Commission will consider adopting an asset test in

future auctions in its part 1 rulemaking.

VI. Exclusion of Delinquent and Defaulted Debtors

24. Petitions. Cook Inlet suggests that licensees that are

delinquent or in default on their installment payment obligations in

other services should be ineligible for special bidding provisions in

LMDS. Cook Inlet's limitation would also apply to the delinquent and/or

defaulting licensees' affiliates and attributable investors. Cook Inlet

considers this particularly appropriate if installment payment plans

are not offered, believing that a bidder that is prepared to pay in

full should be required to dedicate those funds to the satisfaction of

an existing Commission obligation before acquiring new licenses. Cook

Inlet asserts that ``bidders should not expect that delinquency or

default exists as a money management system in one auction without

consequence in another.'' Cook Inlet accordingly suggests that the

Commission require entities that are seeking favorable provisions in

the LMDS auction to certify on their short-form applications (FCC Form

175) that neither they nor their affiliates or attributable investors

are delinquent or in default on any Commission competitive bidding

installment payment obligation.

25. Discussion. The Commission declines to further address the

qualifications of licensees that are delinquent or in default on other

FCC licenses for obtaining favorable provisions for the LMDS auction.

The Commission agrees with Cook Inlet that, as a matter of policy, it

may be desirable to exclude licensees that have defaulted on existing

obligations from further favorable small business provisions. However,

the Commission has already amended Sec. 1.2105(a) of its part 1 rules

to indicate that ``an applicant's signature on FCC Form 175 or its

electronic submission of this form will serve to certify that the

applicant is not in default on any payment for Commission licenses

(including down payments) and that it is not delinquent on any non-tax

debt owed to any federal agency.'' Moreover, Sec. 1.2105(a)(2)(v) of

the Commission's part 1 rules requires a certification that the

applicant is legally, technically, financially and otherwise qualified

to bid. The Commission therefore believes that its existing rules

address this issue.

VII. Supplemental Final Regulatory Flexibility Analysis

26. As required by the Regulatory Flexibility Act, 5 U.S.C. 603

(``RFA''), a Final Regulatory Flexibility Analysis (``FRFA'') was

incorporated in Appendix D of the LMDS Second Report and Order in this

proceeding. The Commission's Supplemental Final Regulatory Flexibility

Analysis (``SFRFA'') in this Second Order on Reconsideration reflects

revised or additional information to that contained in the FRFA, and

incorporates the FRFA by reference. The SFRFA is thus limited to

matters raised in petitions for reconsideration of the LMDS Second

Report and Order and addressed in the Second Order on Reconsideration.

This SFRFA conforms to the RFA, as amended by the Contract with America

Advancement Act of 1996 (``CWAAA''), Public Law 104-121, 110 Stat. 846

(1996). Title II of the CWAAA is the ``Small Business Regulatory

Enforcement Fairness Act of 1996,'' codified at 5 U.S.C. 601 et seq.

A. Need For, and Objectives of, the Second Order on Reconsideration

27. This Second Order on Reconsideration is issued in response to

certain petitions for reconsideration of the LMDS Second Report and

Order. The revisions in the Commission's rules made in the Second Order

on Reconsideration are intended to address concerns raised in the

record concerning the competitive bidding rules for LMDS, while

otherwise reaffirming the Commission's commitment to the rapid

implementation of LMDS throughout the United States.

B. Summary of Significant Issues Raised by the Public Comments in

Response to the Final Regulatory Flexibility Statement

28. No comments were received in direct response to the FRFA, but

the Second Order on Reconsideration addresses three petitions for

reconsideration of the LMDS Second Report and Order that raise issues

affecting small businesses. One petitioner asks that the Commission

reconsider its rules making installment payments available to small

business LMDS licensees and replace the installment payment plans with

heightened bidding credits. Contrary to that request, another

petitioner requests that the Commission augment its LMDS installment

payment plan with an additional ``deferred incremental repayment''

installment payment option delaying payment of principal until late in

the license term. One petitioner supporting retention of installment

payments alternatively suggests that the Commission adopt higher

bidding credits if installment payments are eliminated. Two petitioners

ask that the Commission reconsider its rules defining small business

size categories and that it consider establishing additional categories

for very small businesses, with heightened bidding credits and/or more

favorable installment payment terms. One of those petitioners also

requests that the Commission adopt an asset test to distinguish between

the various existing and proposed small business size categories.

Finally, one petitioner asks that the Commission hold licensees that

are delinquent or in default on their installment payment obligations

in other services ineligible for special bidding preferences in LMDS.

Oppositions, replies to oppositions, and ex parte comments were filed

in response to the petitions and were considered before a decision was

reached.

C. Description and Estimate of the Number of Small Entities to Which

Rules Will Apply

29. As in the FRFA, the service regulations the Commission adopts

to implement LMDS would apply to all entities seeking an LMDS license.

As discussed in the FRFA, using the Small Business Administration

(``SBA'') definitions applicable to radiotelephone

[[Page 48793]]

companies and to cable and pay television services, the majority of

LMDS entities to provide video distribution and telecommunications

services may be small businesses. See FRFA at 8-10.

30. The commission had not developed a more refined definition of

small entities applicable to LMDS prior to the LMDS Second Report and

Order because LMDS is a new service. The RFA amendments were not in

effect until shortly before the Fourth NPRM in this proceeding was

released. Rulemaking to Amend Parts 1, 2, 21, and 25 of the

Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to

Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and

Policies for Local Multipoint Distribution Service and for Fixed

Satellite Services, CC Docket No. 92-297, First Report and Order and

Fourth Notice of Proposed Rulemaking, 61 FR 39425 (July 29, 1996). No

data has been received establishing the number of small businesses

associated with LMDS. However, in the Third NPRM in this proceeding,

the Commission proposed to auction the spectrum for assignment and

requested information regarding the potential number of small

businesses interested in obtaining LMDS spectrum, in order to determine

their eligibility for special provisions such as bidding credits and

installment payments to facilitate participation of small entities in

the auction process. Rulemaking to Amend Parts 1, 2, 21, and 25 of the

Commission's Rules to Redesignate the 27.5-29.5 GHz Frequency Band, to

Reallocate the 29.5-30.0 GHz Frequency Band, to Establish Rules and

Policies for Local Multipoint Distribution Service and for Fixed

Satellite Services, CC Docket No. 92-297, and Suite 12 Petition for

Pioneer's Preference, PP-22, Third Notice of Proposed Rulemaking and

Supplemental Tentative Decision, 60 FR 43740 (August 23, 1995) (``Third

NPRM''). In the LMDS Second Report and Order the Commission adopted

criteria for defining small businesses for purposes of determining such

eligibility. The Commission will use this definition for estimating the

potential number of entities applying for auctionable spectrum that are

small businesses.

31. In Section II.D.2.e. of the LMDS Second Report and Order the

Commission adopted criteria for defining small businesses and other

eligible entities for purposes of defining eligibility for bidding

credits and installment payments. The Commission defined a small

business as an entity that, together with affiliates and controlling

principals, has average gross revenues not exceeding $40 million for

the three preceding years. Additionally, bidding credits and

installment payments were made available to applicants that, together

with affiliates and controlling principals, have average gross revenues

for the three preceding years of more than $40 million but not more

than $75 million (``entrepreneurs''). In the Second Order on

Reconsideration the Commission adopts a ``very small business''

category. A very small business is defined as an entity that, together

with controlling principals and affiliates, has average annual gross

revenues for the three preceding years of not more than $15 million.

These entities were previously included within the small business

definition. The SBA has not yet approved these definitions in the

context of LMDS. The definitions have received SBA approval in the

context of broadband Personal Communications Services (``PCS'').

32. No parties submitting or commenting on the petitions giving

rise to the Second Order on Reconsideration commented on the potential

number of entities that would be very small businesses, and the

Commission is unable to predict accurately the number of applicants for

LMDS that would fit the definition of a small business or very small

business for competitive bidding purposes. However, in the FRFA, the

Commission estimated the number of applicants that are small businesses

based on the rules for the Multipoint Distribution Service (``MDS''),

which use the same size standard as was adopted for LMDS. In MDS, a

small business is ``an entity that together with its affiliates has

average annual gross revenues that are not more than $40 million for

the preceding three years.'' Amendment of Parts 21 and 74 of the

Commission's Rules With Regard to Filing Procedures in the Multipoint

Distribution Service and in the Instructional Fixed Television Service,

MM Docket No. 94-131, Implementation of Section 309(j) of the

Communications Act--Competitive Bidding, PP Docket No. 93-253, Report

and Order, 60 FR 36524 (July 17, 1995), adopting 47 CFR

Sec. 21.961(b)(1). A total of 154 applications were received in the MDS

auction, of which 141, or 92 percent, qualified as small businesses.

MDS rules did not provide a very small business definition. The

Commission notes, however, that in the broadband PCS F Block rules, it

adopted a very small business definition like the one adopted for LMDS.

Amendment of Parts 20 and 24 of the Commission's Rules--Broadband PCS

Competitive Bidding and the Commercial Mobile Radio Service Spectrum

Cap, WT Docket No. 96-59, Amendment of the Commission's Cellular/PCS

Cross-Ownership Rule, GN Docket No. 90-314, Report and Order, 61 FR

33859 (July 1, 1996), adopting 47 CFR Sec. 24.720(b)(2). In the

broadband PCS F Block auction, 53.9 percent of the applicants were very

small businesses. Specifically, 82 of 152 applicants in the broadband

PCS F Block auction, and 70 of the 125 winners (56 percent), were very

small businesses.

33. The Commission plans to issue two licenses for each of the 492

BTAs, excluding New York, that are the geographic basis for licensing

LMDS. Thus, 984 licenses will be made available for authorization in

the LMDS auction. Inasmuch as 92 percent of the applications received

in the MDS auction were from entities qualifying as small businesses,

the Commission anticipates receiving at least the same proportion of

applications from small business entities seeking LMDS licenses.

Further, as many as 53.9 percent of these entities could be very small

businesses.

D. Description of Projected Reporting, Recordkeeping, and Other

Compliance Requirements

34. These descriptions will remain unchanged, for purposes of this

Second Order on Reconsideration, from those in the FRFA.

E. Steps Taken to Minimize Significant Economic Impact on Small

Entities, and Significant Alternatives Considered

35. While installment payment plans for small entities in LMDS are

eliminated in the Second Order on Reconsideration, the Commission found

that better alternatives to assist small businesses, as well as ensure

provision of new services to the public, are to raise bidding credits

for existing categories of small entities and adopt an additional

category for very small businesses. The Commission agrees with the

suggestions of two petitioners that bidding credits of sufficient size

will enable small businesses to secure private financing. This

suggestion is consistent with the Commission's experience in other

auctions in which installment payments were not offered and small

entities nevertheless have been successful. The Commission notes, for

example, the auction of Wireless Communications Service licenses, for

which bidding credits were heightened to accommodate the lack of

installment payments. Amendment of the Commission's Rules to Establish

Part 27, the Wireless Communications Service (``WCS''), GN Docket No.

96-228, Report and Order, 62 FR 9636 (March 3, 1997).

[[Page 48794]]

Prior to the Second Order on Reconsideration, bidding credits of 15

percent were offered to entrepreneurs, and 25 percent to small

businesses. The Commission now offers bidding credits of 25 percent for

entrepreneurs, 35 percent for small businesses, and 45 percent for very

small businesses. As noted in the Second Order on Reconsideration, it

is difficult to calculate accurately the net present value of an

installment payment plan (which value would depend on several

variables, including future commercial interest rates), and the

Commission does not in any event commit to an exact accommodation or

reimbursement of the value of installment payments. Additionally, the

adoption of a category for very small businesses, featuring a bidding

credit higher than those offered to small businesses and entrepreneurs,

will serve as an effective method of leveling the competitive imbalance

between those entities, as well as allowing very small businesses to

compete more effectively with large entities. Since the Commission

decided not to offer installment payments in LMDS, it rejected as moot

both the suggestion of a deferred incremental repayment option and the

suggestion of a favorable interest rate for very small businesses.

36. The Commission disagreed with the assertion that small

businesses would require a 50 percent bidding credit to attract private

financing in the absence of installment payments. This assertion is

unsupported and is at odds with the levels suggested by another

petitioner as being sufficient to attract private financing without

installment payments. The levels of bidding credits adopted offer a

reasonable accommodation for the elimination of installment payments

and constitute a reasonable compromise between the levels suggested in

lieu thereof. Also, although adopting the suggestion of an additional

category for very small businesses, the Commission rejected the

suggestion of a second additional category for entities that, together

with controlling principals and affiliates, have average annual gross

revenues for the three preceding years of not more than $3 million.

This suggestion, which was part of an ex parte comment and not

significantly elucidated, would create, in essence, a ``very, very

small business'' category that would add another layer of complexity

with little apparent countervailing benefit to bidders.

37. The Commission also declined to adopt an asset test to

distinguish between the small business size categories. Assets, being

potentially fluid and subject to inconsistent valuation, are generally

less ascertainable than gross revenues or numbers of employees.

Although the Commission has adopted an asset test for eligibility for

particular blocks of licenses in broadband PCS auctions, it has never

employed an asset test in its small business size standards. Nor does

the SBA employ an asset test in its business size standards, except in

the context of national and commercial banks, savings institutions, and

credit unions (for which asset reporting obligations exist for other

regulatory purposes). 13 CFR Sec. 121.201, Standard Industrial

Classifications 6021-6082 and n.7.

38. Finally, the Commission declined to further address the

qualifications of licensees that are delinquent or in default on FCC

licenses in other services for obtaining favorable provisions for the

LMDS auction. While the Commission agrees that, as a matter of policy,

it may be desirable to exclude licensees that have defaulted on

existing obligations from further small business provisions, its

existing rules already address this issue. An applicant's signature on

FCC Form 175 or its electronic submission of that form serves to

certify that the applicant is not in default on any payment for

Commission licenses (including down payments), that it is not

delinquent on any non-tax debt owed to any federal agency, and that it

is legally, technically, financially and otherwise qualified to bid. 47

CFR 1.2105(a)(2)(x) and (v).

VIII. Report to Congress

39. The Commission will enclose a copy of the Second Order on

Reconsideration, including this SFRFA, in a report to be sent to

Congress pursuant to the Small Business Regulatory Enforcement Fairness

Act. 5 U.S.C. 801(a)(1)(A). A copy of the Second Order on

Reconsideration and this SFRFA (or summary thereof) will also be

published in the Federal Register and will be sent to the Chief Counsel

for Advocacy of the SBA. 5 U.S.C. 604(b).

IX. Ordering Clauses

40. Accordingly, it is ordered that the Petition for Partial

Reconsideration filed by WebCel Communications, Inc., is granted in

part and denied in part; the Petition for Reconsideration filed by Cook

Inlet Region, Inc., is granted in part and denied in part; and the

Petition for Partial Reconsideration filed by CellularVision USA, Inc.,

is granted in part and denied in part.

41. It is further ordered that part 101 of the Commission's Rules

is amended as set forth below.

42. It is further ordered that the rule changes made herein will

become effective November 17, 1997. This action is taken pursuant to

Section 4(i), 303(r) and 309(j) of the Communications Act of 1934, as

amended, 47 U.S.C. 154(i), 303(r) and 309(j).

43. It is further ordered that the Commission shall send a copy of

this Second Order on Reconsideration, including the Supplemental Final

Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of

the Small Business Administration.

List of Subjects in 47 CFR Part 101

Fixed microwave service.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

Rule Changes

Part 101 of title 47 of the Code of Federal Regulations is amended

as follows:

PART 101--FIXED MICROWAVE SERVICE

1. The authority citation continues to read as follows:

Authority: 47 U.S.C. Sections 154, 303.

2. Section 101.1105 is revised to read as follows:

Sec. 101.1105 Submission of payments.

(a) Each applicant to participate in an LMDS auction will be

required to submit an upfront payment in accordance with Sec. 1.2106 of

this chapter as announced by the Wireless Telecommunications Bureau by

Public Notice.

(b) Winning bidders in LMDS auctions must submit a down payment to

the Commission in an amount sufficient to bring their total deposits up

to 20 percent of their winning bids within ten business days following

the release of a Public Notice announcing the close of the auction.

Winning bidders must pay the full balance of their winning bids within

ten business days following the release of a Public Notice that the

Commission is prepared to award the licenses.

3. Section 101.1107 is revised to read as follows:

Sec. 101.1107 Bidding credits for very small businesses, small

businesses and entrepreneurs; unjust enrichment.

(a) A winning bidder that qualifies as a very small business or a

consortium of very small businesses pursuant to Sec. 101.1112 may use a

bidding credit of

[[Page 48795]]

45 percent to lower the cost of its winning bid.

(b) A winning bidder that qualifies as a small business or a

consortium of small businesses pursuant to Sec. 101.1112 may use a

bidding credit of 35 percent to lower the cost of its winning bid.

(c) A winning bidder that qualifies as an entrepreneur or a

consortium of entrepreneurs pursuant to Sec. 101.1112 may use a bidding

credit of 25 percent to lower the cost of its winning bid.

(d) The bidding credits referenced in paragraphs (a), (b) and (c)

of this section are not cumulative.

(e) Unjust enrichment.

(1) A licensee that utilizes a bidding credit, and that during the

initial license term seeks to assign or transfer control of a license

to an entity that does not meet the eligibility criteria for a bidding

credit, will be required to reimburse the U.S. Government for the

amount of the bidding credit, plus interest based on the rate for ten

year U.S. Treasury obligations applicable on the date the license is

granted, as a condition of Commission approval of the assignment or

transfer. If, within the initial term of the license, a licensee that

utilizes a bidding credit seeks to assign or transfer control of a

license to an entity that is eligible for a lower bidding credit, the

difference between the bidding credit obtained by the assigning party

and the bidding credit for which the acquiring party would qualify,

plus interest based on the rate for ten year U.S. Treasury obligations

applicable on the date the license is granted, must be paid to the U.S.

Government as a condition of Commission approval of the assignment or

transfer. If, within the initial license term, a licensee that utilizes

a bidding credit seeks to make any ownership change that would result

in the licensee losing eligibility for a bidding credit (or qualifying

for a lower bidding credit), the amount of the bidding credit (or the

difference between the bidding credit originally obtained and the

bidding credit for which the restructured licensee would qualify), plus

interest based on the rate for ten year U.S. Treasury obligations

applicable on the date the license is granted, must be paid to the U.S.

Government as a condition of Commission approval of the ownership

change.

(2) The amount of payments made pursuant to paragraph (e)(1) of

this section will be reduced over time as follows:

(i) 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 (or the difference between the bidding credit obtained by the

original licensee and the bidding credit for which the post-transfer

licensee is eligible);

(ii) In year three of the license term the payment will be 75

percent;

(iii) In year four of the license term the payment will be 50

percent; and

(iv) In year five of the license term the payment will be 25

percent, after which there will be no required payment.

Sec. 101.1108 [Removed and reserved]

4. Section 101.1108 is removed and reserved.

5. Section 101.1109 is revised to read as follows:

Sec. 101.1109 Certifications, disclosures, records maintenance and

audits.

(a) Short-form applications: certifications and disclosure. In

addition to certifications and disclosures required in part 1, subpart

Q, of this chapter, each applicant for an LMDS license which qualifies

as a very small business, small business or entrepreneurs pursuant to

Sec. 101.1112 shall append the following information as an exhibit to

its short-form applications (FCC Form 175):

(1) The identities of the applicant's affiliates and controlling

principals; and

(2) The applicant's gross revenues, computed in accordance with

Sec. 101.1112.

(b) Long-form applications: certifications and disclosure. In

addition to the requirements in Sec. 1.2107 of this chapter, each

applicant submitting a long-form application for an LMDS license and

qualifying as a very small business, small business or entrepreneur

pursuant to Sec. 101.1112 shall, in an exhibit to its long-form

application:

(1) Disclose separately and in the aggregate the gross revenues,

computed in accordance with Sec. 101.1112, for each of the following:

the applicant, the applicant's affiliates, the applicant's controlling

principals, and, if a consortium of very small businesses, small

businesses or entrepreneurs, the members of the consortium;

(2) List and summarize all agreements or other instruments (with

appropriate references to specific provisions in the text of such

agreements and instruments) that support the applicant's eligibility as

a very small business, small business or entrepreneur, including the

establishment of de facto and de jure control; such agreements and

instruments include, but are not limited to, articles of incorporation

and bylaws, shareholder agreements, voting or other trust agreements,

franchise agreements, and any other relevant agreements including

letters of intent, oral or written; and

(3) List and summarize any investor protection agreements,

including rights of first refusal, supermajority clauses, options, veto

rights, and rights to hire and fire employees and to appoint members to

boards of directors or management committees.

(c) Records maintenance. All winning bidders qualifying as very

small businesses, small businesses or entrepreneurs shall maintain at

their principal place of business an updated file of ownership,

revenue, and asset information, including any document necessary to

establish eligibility as a very small business, small business or

entrepreneur. Licensees (and their successors-in-interest) shall

maintain such files for the term of the license. Applicants that do not

obtain the license(s) for which they applied shall maintain such files

until the grant of such license(s) is final, or one year from the date

of the filing of their short-form application (FCC Form 175), whichever

is earlier.

(d) Audits.

(1) Applicants and licensees claiming eligibility as a very small

business, small business or entrepreneur pursuant to Sec. 101.1112

shall be subject to audits by the Commission. Selection for audit may

be random, on information, or on the basis of other factors.

(2) Consent to such audits is part of the certification included in

the short-form application (FCC Form 175). Such consent shall include

consent to the audit of the applicant's or licensee's books, documents

and other material (including accounting procedures and practices)

regardless of form or type, sufficient to confirm that such applicant's

or licensee's representations are, and remain, accurate. Such consent

shall include inspection at all reasonable times of the facilities, or

parts thereof, engaged in providing and transacting business, or

keeping records regarding licensed LMDS service, and shall also include

consent to the interview of principals, employees, customers and

suppliers of the applicant or licensee.

6. Section 101.1112 is revised to read as follows:

Sec. 101.1112 Definitions.

(a) Scope. The definitions in this section apply to Secs. 101.1101

through 101.1112, unless otherwise specified in those sections.

(b) Very small business. A very small business is an entity that,

together with its affiliates and controlling principals, has average

gross revenues for the three preceding years of not more than $15

million.

[[Page 48796]]

(c) Small business. A small business is an entity that, together

with its affiliates and controlling principals, has average gross

revenues for the three preceding years of more than $15 million but not

more than $40 million.

(d) Entrepreneur. An entrepreneur is an entity that, together with

its affiliates and controlling principals, has average gross revenues

for the three preceding years of more than $40 million but not more

than $75 million.

(e) For purposes of determining whether an entity meets the

definition of very small business, small business or entrepreneur, the

gross revenues of the applicant, its affiliates and controlling

principals shall be considered on a cumulative basis and aggregated.

(f) Consortium. A consortium of very small businesses, small

businesses or entrepreneurs is a conglomerate organization formed as a

joint venture between or among mutually independent business firms,

each of which individually satisfies the definition of a very small

business, small business or entrepreneur. Each individual member must

establish its eligibility as a very small business, small business or

entrepreneur. Where an applicant (or licensee) is a consortium of very

small businesses, small businesses or entrepreneurs, the gross revenues

of each business shall not be aggregated.

(g) Gross revenues. Gross revenues shall mean all income received

by an entity, whether earned or passive, before any deductions are made

for costs of doing business (e.g., cost of goods sold), as evidenced by

audited financial statements for the relevant number of most recently

completed calendar years, or, if audited financial statements were not

prepared on a calendar-year basis, for the most recently completed

fiscal years preceding the filing of the applicant's short-form

application (FCC Form 175). If an entity was not in existence for all

or part of the relevant period, gross revenues shall be evidenced by

the audited financial statements of the entity's predecessor-in-

interest or, if there is no identifiable predecessor-in-interest,

unaudited financial statements certified by the applicant as accurate.

When an applicant does not otherwise use audited financial statements,

its gross revenues may be certified by its chief financial officer or

its equivalent.

(h) Affiliate.

(1) Basis for affiliation. An individual or entity is an affiliate

of an applicant if such individual or entity:

(i) Directly or indirectly controls or has the power to control the

applicant;

(ii) Is directly or indirectly controlled by the applicant;

(iii) Is directly or indirectly controlled by a third party or

parties who also control or have the power to control the applicant; or

(iv) Has an ``identity of interest'' with the applicant.

(2) Nature of control in determining affiliation.

(i) Every business concern is considered to have one or more

parties who directly or indirectly control or have the power to control

it. Control may be affirmative or negative and it is immaterial whether

it is exercised so long as the power to control exists.

Example for paragraph (h)(2)(i). An applicant owning 50 percent

of the voting stock of another concern would have negative power to

control such concern since such party can block any action of the

other stockholders. Also, the bylaws of a corporation may permit a

stockholder with less than 50 percent of the voting stock to block

any actions taken by the other stockholders in the other entity.

Affiliation exists when the applicant has the power to control a

concern while at the same time another person, or persons, are in

control of the concern at the will of the party or parties with the

power of control.

(ii) Control can arise through stock ownership; occupancy of

director, officer, or key employee positions; contractual or other

business relations; or combinations of these and other factors. A key

employee is an employee who, because of her position in the concern,

has a critical influence in or substantive control over the operations

or management of the concern.

(iii) Control can arise through management positions if the voting

stock is so widely distributed that no effective control can be

established.

Example for paragraph (h)(2)(iii). In a corporation where the

officers and directors own various size blocks of stock totaling 40

percent of the corporation's voting stock, but no officer or

director has a block sufficient to give him control or the power to

control and the remaining 60 percent is widely distributed with no

individual stockholder having a stock interest greater than 10

percent, management has the power to control. If persons with such

management control of the other entity are controlling principals of

the applicant, the other entity will be deemed an affiliate of the

applicant.

(3) Identity of interest between and among persons. Affiliation can

arise between or among two or more persons with an identity of

interest, such as members of the same family or persons with common

investments. In determining if the applicant controls or is controlled

by a concern, persons with an identity of interest will be treated as

though they were one person.

(i) Spousal affiliation. Both spouses are deemed to own or control

or have the power to control interests owned or controlled by either of

them, unless they are subject to a legal separation recognized by a

court of competent jurisdiction in the United States.

(ii) Kinship affiliation. Immediate family members will be presumed

to own or control or have the power to control interests owned or

controlled by other immediate family members. In this context

``immediate family member'' means father, mother, husband, wife, son,

daughter, brother, sister, father-or mother-in-law, son-or daughter-in-

law, brother-or sister-in-law, step-father or -mother, step-brother or

-sister, step-son or -daughter, and half-brother or -sister. This

presumption may be rebutted by showing that:

(A) The family members are estranged;

(B) The family ties are remote; or

(C) The family members are not closely involved with each other in

business matters.

Example for paragraph (h)(3)(ii). A owns a controlling interest

in Corporation X. A's sister-in-law, B, has a controlling interest

in an LMDS license application. Because A and B have a presumptive

kinship affiliation, A's interest in Corporation X is attributable

to B, and thus to the applicant, unless B rebuts the presumption

with the necessary showing.

(4) Affiliation through stock ownership.

(i) An applicant is presumed to control or have the power to

control a concern if she owns or controls or has the power to control

50 percent or more of its voting stock.

(ii) An applicant is presumed to control or have the power to

control a concern even though he owns, controls, or has the power to

control less than 50 percent of the concern's voting stock, if the

block of stock she owns, controls, or has the power to control is large

as compared with any other outstanding block of stock.

(iii) If two or more persons each owns, controls or has the power

to control less than 50 percent of the voting stock of a concern, such

minority holdings are equal or approximately equal in size, and the

aggregate of these minority holdings is large as compared with any

other stock holding, the presumption arises that each one of these

persons individually controls or has the power to control the concern;

however, such presumption may be rebutted by a showing that such

control or power to control, in fact, does not exist.

(5) Affiliation arising under stock options, convertible

debentures, and agreements to merge. Stock options, convertible

debentures, and agreements

[[Page 48797]]

to merge (including agreements in principle) are generally considered

to have a present effect on the power to control the concern.

Therefore, in making a size determination, such options, debentures,

and agreements will generally be treated as though the rights held

thereunder had been exercised. However, neither an affiliate nor an

applicant can use such options and debentures to appear to terminate

its control over another concern before it actually does so.

Example 1 for paragraph (h)(5). If company B holds an option to

purchase a controlling interest in company A, which holds a

controlling interest in an LMDS applicant, the situation is treated

as though company B had exercised its rights and had become owner of

a controlling interest in company A. The gross revenues of company B

must be taken into account in determining the size of the applicant.

Example 2 for paragraph (h)(5). If a large company, BigCo, holds

70 percent (70 of 100 outstanding shares) of the voting stock of

company A, who holds a controlling interest in an LMDS license

applicant, and gives a third party, SmallCo, an option to purchase

50 of the 70 shares owned by BigCo, BigCo will be deemed to be an

affiliate of company A, and thus the applicant, until SmallCo

actually exercises its options to purchase such shares. In order to

prevent BigCo from circumventing the intent of the rule, which

requires such options to be considered on a fully diluted basis, the

option is not considered to have present effect in this case.

Example 3 for paragraph (h)(5). If company A has entered into an

agreement to merge with company B in the future, the situation is

treated as though the merger has taken place.

(6) Affiliation under voting trusts.

(i) Stock interests held in trust shall be deemed controlled by any

person who holds or shares the power to vote such stock, to any person

who has the sole power to sell such stock, and to any person who has

the right to revoke the trust at will or to replace the trustee at

will.

(ii) If a trustee has a familial, personal or extra-trust business

relationship to the grantor or the beneficiary, the stock interests

held in trust will be deemed controlled by the grantor or beneficiary,

as appropriate.

(iii) If the primary purpose of a voting trust, or similar

agreement, is to separate voting power from beneficial ownership of

voting stock for the purpose of shifting control of or the power to

control a concern in order that such concern or another concern may

meet the Commission's size standards, such voting trust shall not be

considered valid for this purpose regardless of whether it is or is not

recognized within the appropriate jurisdiction.

(7) Affiliation through common management. Affiliation generally

arises where officers, directors, or key employees serve as the

majority or otherwise as the controlling element of the board of

directors or the management (or both) of another entity.

(8) Affiliation through common facilities. Affiliation generally

arises where one concern shares office space, employees, or other

facilities (or any combination of the foregoing) with another concern,

particularly where such concerns are in the same or related industry or

field of operations, or where such concerns were formerly affiliated,

and through these sharing arrangements one concern has control, or

potential control, of the other concern.

(9) Affiliation through contractual relationships. Affiliation

generally arises where one concern is dependent upon another concern

for contracts and business to such a degree that one concern has

control, or potential control.

(10) Affiliation under joint venture arrangements. A joint venture

for size determination purposes is an association of concerns or

individuals (or both), with interests in any degree or proportion,

formed by contract, express or implied, to engage in and carry out a

single, specific business venture for joint profit for which purpose

they combine their efforts, property, money, skill and knowledge, but

not on a continuing or permanent basis for conducting business

generally. The determination whether an entity is a joint venture is

based upon the facts of the business operation, regardless of how the

business operation may be designated by the parties involved. An

agreement to share profits/losses proportionate to each party's

contribution to the business operation is a significant factor in

determining whether the business operation is a joint venture.

(11) Exclusion from affiliation coverage. For purposes of this

section, Indian tribes or Alaska Regional or Village Corporations

organized pursuant to the Alaska Native Claims Settlement Act (43

U.S.C. 1601 et seq.), or entities owned and controlled by such tribes

or corporations, are not considered affiliates of an applicant (or

licensee) that is owned and controlled by such tribes, corporations or

entities, and that otherwise complies with the requirements of this

section, except that gross revenues derived from gaming activities

conducted by affiliated entities pursuant to the Indian Gaming

Regulatory Act (25 U.S.C. 2701 et seq.) will be counted in determining

such applicant's (or licensee's) compliance with the financial

requirements of this section, unless such applicant establishes that it

will not receive a substantial unfair competitive advantage because

significant legal constraints restrict the applicant's ability to

access such gross revenues.

[FR Doc. 97-24789 Filed 9-16-97; 8:45 am]

BILLING CODE 6712-01-P