Competitive Bidding Proceeding

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 1, 21, 24, 26, 27, 90 and 95

[WT Docket No. 97-82, ET Docket No. 94-32; FCC 97-413]

Competitive Bidding Proceeding

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: In this Third Report and Order, the Commission adopts uniform

competitive bidding rules for all future auctions. The Commission

believes that these rule changes will simplify and streamline its

regulations in order to increase the overall efficiency of the

competitive bidding process. These rule changes are necessary to

further the Commission's goals of simplifying and streamlining its

regulations, and to develop uniform auction rules and procedures for

all future auctions. The intended effect of this action is to adopt

uniform final rules and procedures applicable to the Commission's

spectrum auction program.

EFFECTIVE DATE: March 16, 1998.

FOR FURTHER INFORMATION CONTACT: Josh Roland or Mark Bollinger,

Auctions and Industry Analysis Division, Wireless Telecommunications

Bureau, at (202) 418-0660.

SUPPLEMENTARY INFORMATION: This is a summary of the Third Report and

Order in WT Docket No. 97-82, ET Docket No. 94-32, adopted on December

18, 1997 and released on December 31, 1997. The complete Third Report

and Order is available for inspection and copying during normal

business hours in the FCC Reference Center, Room 239, 1919 M Street,

NW., Washington, DC 20554. The complete text may be purchased from the

Commission's copy contractor, International Transcription Service,

Inc., 1231 20th Street, N.W., Washington, D.C. 20036, (202) 857-3800.

The complete Third Report and Order also is available on the

Commission's Internet home page (http://www.fcc.gov).

SUMMARY OF ACTION:

I. Background

1. On December 18, 1997, the Federal Communications Commission

(Commission) adopted a Third Report and Order making substantive

amendments and modifications to its general competitive bidding rules

for all auctionable services. These changes to the Commission's general

competitive bidding rules are intended to streamline the Commission's

regulations and eliminate unnecessary rules wherever possible, increase

the efficiency of the competitive bidding process, and provide more

specific guidance to auction participants. The changes also advance the

Commission's auction program by reducing the burden on the Commission

and the public of conducting service-by-service auction rule makings.

In the Competitive Bidding Second Report and Order in PP Docket No. 93-

253, the Commission stated that we would ``issue further Reports and

Orders * * * to adopt auction rules for each auctionable service or

class of service,'' and we identified criteria that would govern our

choice of service-specific auction rules and procedures, which may be

found in subpart Q of part 1 of our rules. Implementation of Section

309(j) of the Communications Act--Competitive Bidding, PP Docket No.

93-253, Second Report and Order, 59 FR 22980 (May 4, 1994)

(``Competitive Bidding Second Report and Order''), on recon., Second

Memorandum Opinion and Order, 59 FR 44272 (August 26, 1994)

(``Competitive Bidding Second Memorandum Opinion and Order''). These

rule changes result from the Commission's proposals in Amendment of

Part 1 of the Commission's Rules--Competitive Bidding Proceeding,

Order, Memorandum Opinion and Order, and Notice of Proposed Rule

Making, WT Docket No. 97-82, 62 FR 13570 (March 21, 1997) (``Notice'').

2. The Commission also released a Second Further Notice of Proposed

Rule Making in this Docket, in which it sought comment on additional

changes to its general competitive bidding rules. The Second Further

Notice of Proposed Rule Making was published in the Federal Register on

January 7, 1998. See Amendment of Part 1 of the Commission's Rules--

Competitive Bidding Procedures, Allocation of Spectrum Below 5 GHz

Transferred from Federal Government Use, 4660-4685 MHz, Second Further

Notice of Proposed Rule Making, WT Docket No. 97-82, ET Docket No. 94-

32 (rel. January 7, 1998) (``Second Further Notice of Proposed Rule

Making'').

II. Applicability of General Competitive Bidding Rules

3. With some exceptions, the Commission adopts its proposal in the

Notice to apply the general competitive bidding rules adopted herein to

all future auctions, regardless of whether service-specific auction

rules have previously been adopted. The Part 1 rules will apply to all

auctionable services, unless the Commission determines that with regard

to particular matters the adoption of service-specific rules is

warranted. As the Commission indicated in the Notice, the Commission

has gained significant experience in the course of the 15 auctions

conducted to date. In particular, the Commission has found that much of

the auction process can be standardized and that adopting service-

specific rules for many aspects of the competitive bidding process is

both unnecessary and confusing. The Commission also finds that

conducting separate rule makings for each individual service often

slows the delivery of service to the public because it results in

regulatory delays before the licensing process begins. The majority of

commenters addressing this issue agree, emphasizing that the adoption

of uniform auction procedures will (1) shorten the rule making process

for future auctions by narrowing the issues on which the Commission

must seek comment in service-specific rule makings; (2) decrease

uncertainty for auction participants; (3) benefit small businesses

because uniform rules are more easily understood and complied with,

particularly by those with limited resources and those that participate

in different auctions; and (4) enable the Commission to develop a

consistent body of law and precedent governing the auction process.

4. The Balanced Budget Act of 1997, Pub. L. 105-33, 111 Stat. 251

(1997), to be codified in relevant part at 47 U.S.C. 309(j)(2)(E) and

309(j)(4)(F) (``Balanced Budget Act''), expands the Commission's

auction authority. Section 309(j)(2) formerly stated that mutually

exclusive applications for initial licenses or construction permits

were auctionable if the principal use of the spectrum was for

subscription-based services and competitive bidding would promote the

expressed objectives. As amended, Section 309(j)(2) provides that, in

cases of mutually exclusive applications, all spectrum is auctionable

except licenses or construction permits for (1) public safety services;

(2) digital television service given to existing broadcasters to

replace their analog license; and (3) non-commercial educational or

public broadcast stations. In addition, the Balanced Budget Act

authorizes the Commission to assign pending broadcast license

applications filed before July 1, 1997 by means of competitive bidding

pursuant to Section 309(j). Because these legislative changes

significantly increase the number of services that will be licensed by

competitive bidding, we believe that adopting uniform competitive

bidding

[[Page 2316]]

rules for all auctionable services is even more necessary.

5. With limited exceptions, the rules the Commission adopts today

will not apply to the initial auction of licenses in the paging, 220

MHz, and Local Multipoint Distribution (``LMDS'') services. The

Commission previously adopted service-specific auction rules for the

auction of these services, and believes that this decision is in the

best interest of prospective applicants for these auctions, who may

have relied upon the service-specific rules previously adopted by the

Commission in formulating business plans and making early efforts to

obtain financing. As discussed below, however, the Commission retains

the discretion to use the revised general competitive bidding

procedures adopted in this proceeding for any reauction of licenses in

these services. The Commission also notes that while service-specific

rules exist for the auction of the 220 MHz service, many of these rules

are similar, or refer to the Part 1 rules. To apply the existing rules

for the most part is also strongly supported by those commenters

addressing the issue. For example, AMTA states that the 220 MHz

industry has encountered extraordinary delays in achieving regulatory

certainty, and that amending or altering the auction rules for this

service would create further uncertainty. Consistent with the

Commission's discussion below, the Commission's decision regarding the

establishment of minimum opening bids will apply to the initial auction

of licenses in the paging and 220 MHz services. In addition, the

Commission notes that several petitions for reconsideration are pending

in these proceedings. In resolving these petitions, the Commission will

address installment payment financing for licenses in these services in

a manner consistent with our decision herein to temporarily suspend the

use of installment payments.

6. Many of the commenters who support the Commission's proposal to

adopt general competitive bidding procedures for all auctionable

services argue that the Commission should, in its discretion, adopt or

retain service-specific rules in particular instances. Airadigm argues

that the Commission should use existing service-specific rules where it

would be unfair to allow one group of licensees in the same service to

benefit or be disadvantaged by operating under a different set of rules

than its competitors in the same service (e.g., in the case of a

reauction of licenses following bidder default). Similarly, NextWave

contends that the adoption of service-specific rules may be appropriate

in some circumstances. In a related argument, some commenters believe

that, in certain instances, the rules adopted in this proceeding should

not be applied retroactively to supersede previously adopted service-

specific rules. For example, AirTouch and WWC suggest that when

service-specific rules have been adopted after industry participation

and based upon particular characteristics of a specific industry or

spectrum to be auctioned, those service-specific rules should govern.

7. With regard to the auction of licenses to provide paging

services, AirTouch opposes the Commission's proposal to apply general

auction rules to all future auctions, regardless of whether service

specific rules have been adopted. AirTouch argues in particular that

the Commission should not adopt a general stopping rule for the paging

auction which would be contrary to the comments received in that

proceeding and the stopping rule that the Commission ultimately

adopted. As discussed above, the Commission will use previously-

adopted, service-specific rules for the paging auction.

8. The rule changes the Commission adopts today streamline and

simplify its general competitive bidding procedures. The majority of

the rules the Commission adopts today address aspects of the

Commission's spectrum auction program that affect future auction

applicants only. These rules include application procedures (e.g.,

electronic filing, short-form application amendments, ownership

disclosure requirements), upfront and down payment issues, issues

relating to competitive bidding design, procedure and timing (e.g.,

alternate bidding methodologies, minimum opening bids, and bid

withdrawal), and rules prohibiting collusion during the auction.

However, some of the provisions the Commission adopts today address

aspects of its rules that govern current licensees as well.

Specifically, these minor rule changes affect certain license-related

payment terms (e.g., installment payments, grace periods, and unjust

enrichment).

9. Two commenters, AICC and AAA, argue that the general competitive

bidding procedures adopted in this proceeding would be wholly

inappropriate for auctions of shared frequencies governed by Part 90 of

the Commission's rules. In support of this position, these commenters

argue that: (1) None of the Commission's auctions have involved shared

frequencies; (2) any auction of Part 90 shared spectrum would involve

participants ranging in size from very large corporations to very small

businesses and individual users, which would require a significant

adjustment in the Commission's traditional auction rules; (3) industry

participation would be crucial in crafting appropriate auction and

service rules; and (4) in light of the public safety services provided

using Part 90 spectrum, auctioning such spectrum is not in the public

interest. AICC and AAA further suggest that those commenters who favor

the adoption of general competitive bidding procedures for all spectrum

might not have considered the possibility of auctions for shared

channels, since the Commission is not currently authorized to award

licenses for such spectrum by means of competitive bidding. The

Commission agrees that shared spectrum is, by definition, not

auctionable under Section 309(j) due to the lack of mutual exclusivity.

10. Similarly, Hughes suggests that in the event the Commission

decides to auction satellite services, it should conduct a service-

specific rule making specially tailored to the capital intensive nature

of the satellite industry, instead of employing the general competitive

bidding procedures adopted in this proceeding. Although the Commission

does not decide that issue now, as the Commission suggested in the

Notice, the Commission will continue to adopt service-specific auction

procedures where it finds that its general competitive bidding

procedures are inappropriate.

III. Rules Governing Designated Entities

11. Section 309(j)(4)(D) of the Communications Act of 1934 provides

that in prescribing rules for a competitive bidding system, the

Commission shall ``ensure that small businesses, rural telephone

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

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

based services.'' 47 U.S.C. 309(j)(4)(D). The statute further directs

the Commission to consider the use of tax certificates, bidding

preferences, alternative payment schedules and methods of calculations

and other procedures as means of accomplishing this statutory

objective. See 47 U.S.C. 309(j)(3)(B) and (j)(4)(D).

12. The Commission adopts the rules in this Third Report and Order

in order to facilitate broad-based participation in auctions. The

Commission believes that standardizing the rules regarding definitions

of eligible entities, unjust enrichment and bidding credits will assist

small, minority and women-owned businesses because the rules'

[[Page 2317]]

predictability will facilitate the business planning and capital

fundraising process. While the Commission suspends the use of

installment payments, the Commission seeks comment in the Second

Further Notice of Proposed Rule Making in this docket on whether

installment payments should be adopted in the future.

13. The Commission also notes that pursuant to Section 309(j)'s

obligations to ensure opportunities for participation by small

enterprises, rural telephone companies, and minority- and women-owned

businesses, and Section 257 of the Telecommunications Act, requiring

that the Commission identify and eliminate market entry barriers for

small and entrepreneurial telecommunications businesses, the Commission

has commenced a series of studies, and has other studies in the

planning process, to examine barriers encountered by minorities and

women in the auctions process and the secondary market for licenses.

When those studies are completed, the Commission will examine whether

additional measures are warranted to promote the objectives of giving

small businesses, rural telephone companies, and women- and minority-

owned businesses the chance to provide spectrum-based services, as

required in Section 309(j).

14. Small Business Size Standards. The Commission adopts its

proposal to continue to define small businesses, as it has in the past,

based on the characteristics and capital requirements of the specific

service. The Commission believes that this approach has given it

flexibility that will continue to benefit small businesses in future

auctions. The Commission also notes that this approach is consistent

with the Small Business Administration's practice of approving small

business size standards on a service-by-service basis. Commenters

addressing this issue support this conclusion. For example, AMTA and

NextWave both believe that the determination of appropriate small

business size standards should be made on a case-by-case basis.

15. No commenters addressed the Commission's proposal in the Notice

to create size standards that require small businesses to have gross

revenues ``not to exceed,'' as opposed to ``less than'' a certain

amount. Nevertheless, the Commission believes that adoption of this

proposal is important to further its objective of establishing uniform

definitions relating to small business standards for future auctions.

From this point forward, the Commission's service-specific small

business definitions will be expressed in terms of average gross

revenues over the preceding three years ``not to exceed'' particular

amounts. The Commission also continues to believe that average gross

revenues provide an accurate, equitable, and easily ascertainable

measure of business size. As the Commission has discussed in the past,

a single gross revenues size standard is an established method for

determining size eligibility for various kinds of federal programs that

aid smaller businesses. NextWave, in its comments, agrees, stating that

gross revenues are a generally reliable measure of whether a company is

indeed small. In addition, while the Commission has used a total assets

test in determining eligibility for entrepreneur blocks, see, e.g., 47

CFR 709(a), the Commission has not used such a test for determining

small business eligibility. The Commission also notes that the Small

Business Act's statutory definition of small business does not use a

total assets test. See 15 U.S.C. 632(c). Thus, the Commission declines

to adopt any other measure of business size, such as a total assets

test, at this time.

16. Definition of Gross Revenues. All commenters addressing the

issue support the Commission's proposal in the Notice to adopt a

uniform definition of gross revenues for all auctionable services. The

Commission believes that a uniform definition of gross revenues, as the

essential element of our small business definitions, furthers the

Commission's goal of establishing uniform definitions and is

administratively efficient. Thus, the Commission adopts a uniform

definition of gross revenues in the Part 1 rules.

17. Various commenters addressed specific aspects of the

Commission's proposed definition of gross revenues. CII supports the

Commission's proposal that applicants be permitted to use either fiscal

year or calendar year figures for calculation purposes. No commenters

opposed this proposal. The Commission is persuaded that permitting use

of either of these figures will assist applicants in providing the most

current information available on their applications. The Commission

concludes that its general gross revenue definition should permit

applicants to support their gross revenue calculations using either

fiscal or calendar years.

18. Several commenters responded to the Commission's tentative

conclusion in the Notice to accept the use of unaudited financial

statements where audited financial statements are unavailable, if

prepared in accordance with Generally Accepted Accounting Principles,

for gross revenue calculations by auction applicants seeking to qualify

for small business status. A majority of these commenters supported the

Commission's tentative conclusion that where audited financial

statements are not available, they should not be required. In

particular, these commenters argue that any strict requirement that

financial statements be audited is unduly burdensome for most small

business applicants. In addition, AMTA contends that the certification

requirement already present on the short-form (FCC Form 175)

application is sufficient to ensure that small business applicants

submit only accurate information, both financial and otherwise, as part

of their applications. Only two commenters, ISTA and PageNet advocate

that applicants use audited financial statements in order to qualify

for small business status. After review of the comments on this issue,

the Commission concludes that such a requirement would be onerous to

small business. The Commission also agrees with AMTA's observation that

the certification requirement on the FCC Form 175 acts to ensure that

applicants submit accurate information. Furthermore, as discussed

below, the Commission also will retain the authority to audit

applicants individually if there is any question concerning small

business status. The Commission therefore declines to require all

applicants to use audited financial statements to support their gross

revenue calculations. Audited financial statements, however, are

necessary if they exist. The Commission also notes that, consistent

with the Small Business Act, 15 U.S.C. 632(c)(ii)(II), where an entity

has been in existence for less than three years, the entity's gross

revenues should be averaged for the relevant number of years the

entity, or its predecessor in interest (affiliate), has been in

existence.

19. Accordingly, as proposed in the Notice, and consistent with the

Commission's broadband PCS rules, the Commission will define gross

revenues for all auctionable services as:

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

three (3) most recent 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 (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

[[Page 2318]]

accurate. When an applicant does not have audited financial

statements, its gross revenues must be certified by its chief

financial officer or its equivalent and must be prepared in

accordance with Generally Accepted Accounting Principles.

20. Definition of Affiliate. The Commission adopts its proposal to

adopt a uniform definition of the term ``affiliate'' for all future

auctions. As the Commission discussed in the Notice, the term affiliate

is defined by the Commission's Part 1 rules as an individual or entity

that directly or indirectly controls or has the power to control the

applicant; is directly or indirectly controlled by the applicant; is

directly or indirectly controlled by a third person(s) that also

controls or has the power to control the applicant; or has an

``identity of interest'' with the applicant. The Commission has found

that this definition, which also contains detailed discussion and

examples of relevant terms such as ``control'' and ``identity of

interest,'' has proven workable and is broad enough to address a wide

variety of business structures. In particular, this definition has

helped to ensure that businesses seeking small business status are

truly small. The Commission also believes that this definition, by

focusing on ``indicia of control,'' is consistent with our proposals

regarding attribution of gross revenues of investors and affiliates

discussed in the Second Further Notice of Proposed Rule Making in this

docket.

21. CIRI requests that the Commission include in its general

definition of the term ``affiliate'' an exemption for Indian tribes and

Alaska Regional or Village Corporations, as the Commission did for

broadband PCS, and more recently, for LMDS. The Commission agrees with

CIRI that entities owned and controlled by Indian tribes and Alaska

Regional or Village Corporations should be eligible to bid in future

auctions as small businesses, notwithstanding their affiliation with

other entities owned by tribes or Alaska Native Corporations whose

gross revenues cause the combined average gross revenues of the entity

and its affiliates to exceed the general limits for eligibility for

bidding as such a business. As the Commission stated in support of a

similar exemption from the affiliation rules in LMDS, this exception

will ensure that these entities will have a meaningful opportunity to

participate in spectrum-based services from which they would otherwise

be precluded. Furthermore, the Commission does not believe that this

exemption for the specified entities will entitle them to an unfair

advantage over entities that are otherwise eligible for small business

status.

22. The Commission also takes this opportunity to clarify its Part

1 definition of affiliate. The Commission's Part 1 rules provide that

parties to a joint venture are considered to be affiliated with each

other for purposes of determining the gross revenues of an applicant

seeking to qualify for status as a small business. See 47 CFR

1.2110(b)(4)(x). In the past, however, the term ``consortium'' has been

defined on a service-by-service basis as ``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.'' See, e.g., 47

CFR 101.1112(f) (defining the term ``consortium'' for LMDS). This

results in each member of a consortium being defined as an affiliate of

each other member. The resulting attribution of gross revenues of each

member of the consortium is inconsistent with our intention to permit

small or very small businesses to form consortia as a means of

increasing the capital available to participate in the Commission's

auctions, while still being eligible for status as a small business.

23. The Commission therefore amends Sec. 1.2110(b)(4)(x) to provide

that a ``consortium'' as defined on a service-by-service basis for

purposes of determining status as a designated entity will not be

treated as a ``joint venture'' under our attribution standards. As a

result, when two or more entities form an association that meets the

service-specific definition of a ``consortium,'' the gross revenues of

each entity will not be attributed to each entity in determining

eligibility for designated entity status. The Commission believes that

this clarification to the general definition of the term ``affiliate''

will enhance the ability of small businesses to form associations that

will permit them to bid for licenses that would be too expensive for

them individually. Auction winners have successfully used consortium

structures to acquire licenses and ``spin-off'' licenses post-auction,

and the Commission wishes to continue to make this option available.

24. Definition of Rural Telephone Company. The National Telephone

Cooperative Association (``NTCA'') and the Rural Telecommunications

Group (``RTG''), commented in support of the Commission's proposal in

the Notice to adopt the definition of a rural telephone company

contained in the Telecommunications Act of 1996 as the single

definition of the term to be used in all auctionable services. No

commenters opposed this proposal. As the Commission noted in the

Notice, when the Commission amended the broadband PCS rule, the

Commission stated that using the definition contained in the 1996 Act

would likely expedite the delivery of advanced services to rural areas.

the Commission also noted that adopting the 1996 Act definition would

promote uniformity of regulations and is therefore consistent with the

mandate of that legislation to ease regulatory burdens and eliminate

unnecessary regulation. The Commission believes that the same reasons

for amending this definition in the broadband PCS rules justify

amending the definition in Part 1 for all services subject to

competitive bidding.

25. Thus, the Commission amends Sec. 1.2110(b)(3) to define the

term rural telephone company as a local exchange carrier operating

entity to the extent that such entity--(A) provides common carrier

service to any local exchange carrier study area that does not include

either (i) any incorporated place of 10,000 inhabitants or more, or any

part thereof, based on the most recently available population

statistics of the Bureau of the Census, or (ii) any territory,

incorporated or unincorporated, included in an urbanized area, as

defined by the Bureau of the Census as of August 10, 1993; (B) provides

telephone exchange service, including exchange access, to fewer than

50,000 access lines; (C) provides telephone exchange service to any

local exchange carrier study area with fewer than 100,000 access lines;

or (D) had less than 15 percent of its access lines in communities of

more than 50,000 on the date of enactment of the Telecommunications Act

of 1996.

26. Installment Payments. After careful review of the comments in

this docket, and the Commission's recent decisions in the broadband PCS

C block, LMDS and 800 MHz SMR services, the Commission has determined

that installment payments should not be used in the immediate future as

a means of financing small business participation in the Commission's

auction program. See also ``FCC Announces Spectrum Auction Schedule for

1998,'' Public Notice, DA 97-2497 (rel. November 25, 1997), announcing

the following upcoming auctions: LMDS, 220 MHz, broadband C block

Reauction, 39 GHz, Paging, 800 MHz SMR (Lower 80 and General Category

Channels), Location Monitoring Services (LMS), Public Coast Stations,

Pending Analog Broadcast Licenses for Commercial Radio and Television

Stations, and ``FCC Announces Auction Schedule for the General Wireless

Communications Service,'' Public

[[Page 2319]]

Notice, DA 97-2634 (rel. December 17, 1997). The Commission must

balance competing objectives in Section 309(j) that require, inter

alia, 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. The

Commission notes that its experience has demonstrated that installment

payments may not be necessary to ensure a meaningful opportunity for

small businesses to participate successfully in our auction program.

For example, 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. The Commission also stated that

in assessing the public interest, we must try to ensure that all the

objectives of Section 309(j) are considered. 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.

27. In addition, questions have been raised in bankruptcy

litigation about whether the Commission can quickly reclaim licenses

should a licensee declare bankruptcy (even though licenses are

expressly conditioned upon payment and cancel automatically in the

event of non-payment) resulting in significant delays in the provision

of service to the public. While the Commission is confident of

prevailing in any litigation, until controlling precedent is

established or legislation addressing the conflicting rights is

enacted, such delays may occur. In this regard, the Commission has

strongly urged Congress to adopt legislation that would clarify that

provisions of the Bankruptcy Code (1) are not applicable to any FCC

license for which a payment obligation is owed; (2) do not relieve any

licensee from payment obligations; and (3) do not affect the

Commission's authority to revoke, cancel, transfer or assign such

licenses. The Commission also notes that, in order to balance the

impact on small businesses of its decision to discontinue the use of

installment payments in the near future, the Commission is adopting

higher bidding credits than those proposed in the Notice.

28. Therefore, subject to the Commission's proposals in the Second

Further Notice of Proposed Rule Making, the Commission concludes that

until further notice, installment payments should not be offered in

auctions as a means of financing small businesses and other designated

entities seeking to secure spectrum licenses. Consistent with this

decision, the Commission hereby eliminates installment payments in the

auction of the lower 80 and General Category channels in the 800 MHz

SMR service. Although Merlin submits that the elimination of the

Commission's installment payment provisions in any service would be

contrary to the Commission's conclusions in previous rule makings, the

Commission believes that this decision is consistent with suggestions

of CIRI, as well as the Commission's general experience in examining

the success of the installment payment program to date. As the

Commission recently recognized in eliminating installment payments for

LMDS licensees, 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. The Commission continues to experiment with different means of

achieving its obligations under the statute, and has offered

installment payments to licensees in several auctioned wireless

services. Installment payments are not the only tool available to

assist small businesses. Indeed, the Commission have conducted auctions

without installment payments. Moreover, Section 3007 of the Balanced

Budget Act requires that the Commission conduct certain future auctions

in a manner that ensures that all proceeds from such bidding are

deposited in the U.S. Treasury not later than September 30, 2002.

Although the Commission seeks comment in the Second Further Notice of

Proposed Rule Making on offering installment payment plans in the

future, the Commission believes that Section 3007 may require that

these auctions be conducted without offering long-term installment

payments. See Balanced Budget Act of 1997. 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.

29. In this regard, the Commission agrees with commenters such as

CIRI, that contend that increased bidding credits will allow

responsible small bidders with appropriately tailored business plans to

secure adequate private financing to be successful in future auctions.

Further, as the Commission has already noted, Section 309(j) requires

the Commission to consider alternative methods to allow for

dissemination of licenses among designated entities, including small

businesses. The Commission believes that the rules it adopts below

regarding the use of bidding credits for small business applicants in

future auctions will both fulfill the mandate of Section 309(j) to

provide small businesses with the opportunity to participate in

auctions and ensure that new services are offered to the public without

delay.

30. Merlin contends that while significant bidding credits can be

useful in helping smaller entities win licenses when they bid against

larger companies, bidding credits alone do not help smaller entities

access the capital required to build a spectrum-based service. In

addition, Merlin states that eliminating the installment payment plan

would raise the cost of capital for small businesses which would be

forced to borrow additional funds from commercial lenders at higher

interest rates. Merlin also argues that because many small businesses

have relied on the current installment plan terms in formulating

business plans necessary to bid in upcoming auctions, any decision to

eliminate the installment payment program could effectively preclude

small business participation in future auctions altogether. The

Commission disagrees with Merlin's assertions. As the Commission has

discussed, the Commission believes that the increased bidding credits

it adopts below will help 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 Commisison 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 SMR and LMDS.

31. The Commission recognizes that it previously adopted rules for

both the 220 MHz and paging services that permit eligible small

businesses to pay for their licenses in installments. Several petitions

for reconsideration have been filed in these proceedings that remain

pending before the Commission. The Commission will resolve these

petitions separately in a manner consistent with our decision herein to

suspend the use of installment payment plans at least until our rights

[[Page 2320]]

to recover and reauction licenses in a timely fashion are established.

32. Bidding Credits. Although all commenters addressing the issue

are largely supportive of the use of bidding credits as a means of

ensuring the widest possible participation in future auctions, there is

disagreement among commenters as to whether a standard schedule of

bidding credits for small businesses is desirable. For example, CII

supports our proposal to standardize the sliding scale of bidding

credits that is available to an applicant. Specifically, CII believes

that granting businesses of different sizes different levels of bidding

credits in different services threatens to result in inconsistent

participation by small businesses in spectrum auctions. In contrast,

some commenters oppose any set schedule of bidding credits, and believe

that the Commission should specify appropriate bidding credits for each

auctionable service. Among these, PCIA and AMTA believe that the

Commission should continue to examine what constitutes an effective

bidding credit on a service-by-service basis because the financing

requirements of different spectrum-based services may necessitate use

of different size bidding credits to provide the proper assurances that

small businesses will be able to effectively compete. As the Commission

stated in the Notice, the Commission believes that an approach in which

the Commission provides certainty for future auctions about the size of

available bidding credits will benefit small businesses because

potential bidders will have more information well in advance of the

auction than previously about how such levels will be set. Once a small

business definition is adopted for a particular service, eligible

businesses will benefit they are able to refer to a schedule in our

Part 1 rules to determine the level of bidding credit available to

them. The Commission therefore adopts its proposal to create a standard

schedule of bidding credits.

33. In light of the Commission's decision to suspend installment

payment financing for the near future, the Commission has determined

that higher bidding credits than those proposed in the Notice would

better effectuate our statutory mandate. Airadigm supports larger

bidding credits than those proposed by the Commission. Similarly, CIRI

contends that unless the Commission is prepared to establish the

creditworthiness of installment payment applicants, the Commission

should offer substantial bidding credits to small businesses in lieu of

government financing. The Commission notes that some commenters argue

that, in relation to installment payment provisions, bidding credits

are less effective in allowing designated entities to participate in

the Commission's auction program. For example, Pocket states that

bidders often ``bid through'' bidding credits and that bidding credits

tend to result in higher bids and, in general, higher auction prices.

The Commission believes that without installment payments, bidding

credits, coupled with providing bidders sufficient time to raise

financing, will enable small businesses to successfully compete in

future auctions. Also, tiered bidding credits have proven to work well

and provide for more competition between small business participants of

different sizes. The use of tiered bidding credits 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. Finally, while the Commission recognizes Pocket's concerns

about the possibility that bidders ``bid through'' bidding credits, the

Commission does not believe that this problem is significant where not

all bidders are eligible for bidding credits, and the size of the

bidding credit varies among those who are eligible.

34. Consistent with this reasoning, the Commission adopts the

following schedule of bidding credits for use in future auctions in

which provisions for designated entities are offered:

------------------------------------------------------------------------

Bidding

Average annual gross revenues credits

(percent)

------------------------------------------------------------------------

Not to exceed $3 million..................................... 35

Not to exceed $15 million.................................... 25

Not to exceed $40 million.................................... 15

------------------------------------------------------------------------

The Commission recognizes that these credits are higher than some

previously adopted for specific services. Based on the Commission's

past auction experience and the suspension of installment payments,

however, the Commission believes that the approach taken here will

provide adequate opportunities for small businesses of varying sizes to

participate in spectrum auctions.

35. The Commission recognizes that Merlin recommends providing

higher bidding credits than those which the Commission adopts.

Specifically, Merlin suggests that (1) businesses with average gross

revenues for the preceding three years not exceeding $3 million be

eligible for bidding credits of 40 percent; (2) businesses with average

gross revenues for the preceding three years not exceeding $15 million

be eligible for bidding credits of 35 percent; and (3) businesses with

average gross revenues for the preceding three years not exceeding $40

million be eligible for bidding credits of 25 percent. As discussed

above, the Commission believes that higher bidding credits than those

proposed in the Notice are necessary now that our installment payment

program is suspended. The Commission believes that the schedule of

bidding credits it adopts is reasonable in light of our decision to

suspend installment payments for services auctioned in the immediate

future, and expect that it will prove sufficient to enable small

businesses to obtain spectrum licenses through our auction program.

Thus, the Commission declines to adopt Merlin's proposal. The

Commission also notes that it seeks comment in the Second Further

Notice of Proposed Rule Making on means other than bidding credits and

installment payments by which the Commission might facilitate the

participation of small businesses in our spectrum auction program.

36. Unjust Enrichment. The Commission adopts its proposal to

conform the Part 1 unjust enrichment rules to the broadband PCS rules.

The Commission believes that effective unjust enrichment rules are

necessary to ensure that meaningful small business participation in

spectrum-based services is not thwarted by transfers of licenses to

non-designated entities. As the Commission stated in the Notice, the

broadband PCS unjust enrichment rules are preferable to our current

general unjust enrichment rules because they provide greater

specificity about funds due at the time of transfer or assignment and

specifically address changes in ownership that would result in loss of

eligibility for installment payments, which the current general rules

do not address. The broadband PCS rules also address assignments and

transfers between entities qualifying for different tiers of

installment payments or bidding credits, thus supplying clearer

guidance for auctions in which tiered installment payment plans or

bidding credits are provided. Commenters addressing this issue largely

support this decision. For example, Pocket and Ericsson both argue that

modified unjust enrichment rules would still deter transfers designed

to subvert the Commission's rules, but would provide businesses with

more flexibility in situations of financial distress and permit the

transfer

[[Page 2321]]

of individual licenses that no longer comport with their business

plans.

37. Current as well as future licensees will be governed by the

rules the Commission adopts providing for unjust enrichment payments

upon assignment, transfer, partitioning and disaggregation. While the

Commission did not receive significant comment on this issue, the

Commission notes that in awarding licenses in the past, the Commission

has emphasized that the terms associated with the continued grant of a

license will be governed by current Commission rules and regulations.

For example, in awarding licenses to C block licensees paying for their

licenses in installments, the Commission indicated in the associated

``Note'' and ``Security Agreement'' that the terms of the installment

plan would be governed by and construed in accordance with then-

applicable Commission orders and regulations, as amended. Therefore,

the Commission concludes that the unjust enrichment rules it adopts

apply to existing licensees, and supersede service-specific rules where

applicable. Specifically, these rules will supersede existing unjust

enrichment provisions in the narrowband and broadband PCS, WCS, 900

MHz, and IVDS services. See 47 CFR 24.309(f) (narrowband PCS), 24.711

(C block), 24.716(d) (F block), 27.209(d)(1), (2) (WCS), 90.812(b) (900

MHz), 95.816(e) (IVDS). As discussed above, the Commission suspends the

use of installment payments for the immediate future as a means of

financing small business participation in the Commission's auction

program. As a result, the Commission's decision with regard to unjust

enrichment payments as they relate to licensees paying for their

licenses in installment payments will apply only to existing licensees,

their transferees and assignees (until the Commission reinstates

installment payments).

Unjust Enrichment and Installment Payments

38. For existing licensees who make use of Commission installment

payment financing, the Commission amends Sec. 1.2111(c) to conform to

the Commission's broadband PCS rules. Specifically, if a licensee seeks

to assign or transfer control of its license to an entity not meeting

the eligibility standards for installment payments, the licensee must

make full payment of the remaining unpaid principal and any unpaid

interest accrued through the date of the assignment or transfer as a

condition of Commission approval. Similarly, if the licensee seeks to

make any change in ownership structure that would result in the

licensee losing eligibility for installment payments, the licensee must

first seek Commission approval and must make full payment of the

remaining unpaid principal and any unpaid interest accrued through the

date of such change as a condition of approval. If a licensee seeks to

make any change in ownership that would result in the licensee

qualifying for a less favorable installment plan, the licensee must

seek Commission approval and must adjust its payment plan to reflect

its new eligibility status.

Unjust Enrichment and Bidding Credits

39. For existing and future licensees who qualified or qualify in

the future for a bidding credit in paying for their winning bid, the

Commission also amends Sec. 1.2111(c) to provide for unjust enrichment

payments similar to those contained in the Commission's broadband PCS

rules. Specifically, during the term of the initial license grant, if a

licensee seeks to assign or transfer control of its license to an

entity not meeting the eligibility standards for bidding credits, or

seeks to make any other change in ownership that would result in the

licensee no longer qualifying for a bidding credit, the licensee must

seek Commission approval and must reimburse the government for the

amount of the bidding credit, plus interest based on the rate for U.S.

Treasury obligations applicable on the date the license is granted, as

a condition of the approval of such assignment, transfer or other

ownership change. Similarly, if the licensee seeks to assign or

transfer control of its license to an entity meeting the eligibility

standards for lower bidding credits, or seeks to make any other change

in ownership that would result in the licensee qualifying for a lower

bidding credit under this section, the licensee must seek Commission

approval and must pay to the United States Treasury the difference

between the amount of the bidding credit obtained by the licensee and

the bidding credit for which the assignee, transferee or licensee is

eligible as a condition of the approval of such assignment, transfer or

other ownership change. These provisions also will apply to licensees

who partition or disaggregate their licenses.

40. The Commission also adopts its proposal in the Notice to

provide for decreasing unjust enrichment payments for licensees that

utilized a bidding credit when paying for their licenses and that make

transfers and assignments occurring later in the license term. This

decision also is supported by the commenters. In amending the rule in

this manner, the Commission ensures that its general rule resembles

those rules the Commission has adopted in specific services (e.g., MDS,

narrowband PCS, and 900 MHz SMR ) that reduce the amount of unjust

enrichment payments due on transfer based upon the amount of time the

initial license has been held. Consistent with the rules that exist in

these services, 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 (or, in the case of very small businesses transferring to small

businesses, 100 percent of the difference between the bidding credit

received by the former and the bidding credit for which the latter is

eligible); 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, transfer, or ownership change.

All current and future licensees, with the exception of entrepreneur

block licensees subject to restrictions on assignments and transfers of

licenses, will be governed by this modification to our general rules.

The Commission believes that our decision to maintain the original

transfer restrictions for such licensees is proper in light of the

special provisions which were made available for licensees in the

Commission's entrepreneur blocks.

Unjust Enrichment and Partitioning and Disaggregation

41. Also as proposed in the Notice, the Commission will adopt a

general rule modeled on the Commission's broadband PCS rules to

determine the amount of unjust enrichment payments assessed for all

current and future licensees. Thus, the Commission adopts a general

unjust enrichment rule that treats partitioning and disaggregation by

licensees in the same manner as the broadband PCS rule. Specifically,

if the licensee seeks to partition any portion of its geographic

service area, the amount of the unjust enrichment payment discussed

above will be calculated based upon the ratio of population in the

partitioned area to the overall population of the licensed area.

Similarly, if a licensee seeks to disaggregate spectrum, the amount of

the unjust enrichment payment will be determined based upon the ratio

of the amount of spectrum disaggregated to the amount of spectrum held

by the disaggregating licensee.

[[Page 2322]]

IV. Application Issues

42. Electronic Filing. The Commission believes that electronic

filing of all short-form and long-form applications for auctionable

services is in the best interest of auction participants, as well as

members of the public monitoring Commission auctions. Therefore, the

Commission amends Secs. 1.2105(a) and 1.2107(c) of its rules to require

electronic filing of all short-form and long-form applications,

beginning January 1, 1999, unless it is not operationally feasible.

Although in the Notice the Commission proposed to require electronic

filing commencing January 1, 1998, the Commission believes that this

additional phase-in period before the requirement becomes effective

will benefit potential bidders. The majority of the comments addressing

the issue support the decision to require electronic filing. For

example, PageNet contends that electronic filing promotes access to

applications by competing bidders, as well as the general public, by

making it possible to review and download applications without

traveling to FCC headquarters or contracting for photocopying of paper

applications. To facilitate public access, the Commission has developed

user-friendly electronic filing software and Internet World Wide Web

forms to give auction applicants the ability to conveniently file and

review applications. This software helps applicants ensure the accuracy

of their applications as they are filling them out, and enables them to

correct errors and omissions prior to submitting their applications. To

assist the public, the Commission provides technical support personnel

to answer questions and work with callers using the electronic auction

system. In addition, the Commission has demonstrated its auction

software at conferences organized by potential bidders and members of

the industry in order to familiarize interested parties with our recent

software enhancements.

43. AT&T is generally supportive of electronic filing, but proposes

that the Commission create a waiver process whereby an applicant that

has missed a filing deadline due to technical problems can obtain a

waiver quickly or be permitted to submit a paper original of the

application by hand or mail the same day. In addition, AT&T requests

that a Commission staff member be provided with the authority to grant

such a waiver in the event of electronic filing difficulties. The

Commission does not believe that a specific waiver provision is

necessary. The Commission's existing waiver provisions, which specify

the showing required for the grant of a waiver, provide adequate

assurance that requests for waiver relating to the electronic filing of

applications will receive proper consideration. In addition, the

Commission emphasizes that it has typically responded rapidly to time-

sensitive waiver requests filed by auction applicants, and intends to

continue to do so in the future.

44. Only one commenter, Airadigm, opposes an electronic filing

requirement. Airadigm states that the Commission experienced

difficulties in processing electronic filings during the IVDS auction

and argues that removing the option of manual filing could result in

similar problems in future auctions. The Commission believes that the

system enhancements discussed above, most of which were not in place

during the IVDS auction, adequately respond to Airadigm's concerns. The

Commission also notes that its experiences from recent auctions

demonstrate that the electronic bidding system is reliable. For

example, in the broadband PCS D, E, and F block auction, 94 percent of

the qualified bidders filed their short-form applications

electronically. In the recently completed 800 MHz SMR auction, 93

percent of the qualified bidders filed their short-form applications

electronically. The Commission did not experience problems with its

electronic filing procedures.

45. Finally, as the Commission stated in the Notice, the Commission

recognizes that there is a need for a period of time before a

comprehensive electronic filing requirement becomes effective in order

for bidders to prepare and be completely comfortable with this process.

The effective date of January 1, 1999, will provide potential bidders

with adequate time in which to adapt to electronic filing requirements.

Finally, although the Commission concludes that electronic filing is

the preferred filing method, the Commission nevertheless reserves the

right to provide for manual filing in the event of technical failure or

other difficulties.

46. Short-form Application Amendments. The majority of commenters

support the Commission's proposal in the Notice to create a uniform

definition of major and minor amendments to applicants' short-form (FCC

Form 175) applications for all future auctions. However, commenters'

opinions differ on what types of amendments the Commission should

categorize as major or minor. For example, AT&T and ISTA argue that

major amendments should include all changes in ownership that

constitute a change in control, as well as all changes in size that

would affect an applicant's eligibility for designated entity

provisions. In contrast, Metrocall contends that all changes in

ownership incidental to mergers and acquisitions, non-substantial pro

forma changes, and involuntary changes in ownership should be

categorized as minor. Metrocall also states that an applicant should

not be permitted to upgrade its designated entity status after the

short form filing deadline (i.e., go from a ``small'' to ``very small''

business), but should be permitted to lose its designated entity status

as a result of a minor change in control (i.e., exceed the threshold

for eligibility as a small business).

47. After careful consideration of the comments addressing the

issue, the Commission concludes that a definition of major and minor

amendments similar to that provided in the Commission's PCS rules, 47

CFR 24.822, is appropriate. After the short-form filing deadline,

applicants will be permitted to make minor amendments to their short-

form applications both prior to and during the auction. However,

applicants will not be permitted to make major amendments or

modifications to their applications after the short-form filing

deadline. Major amendments will include, but will not be limited to,

changes in license areas designated on the short-form application,

changes in ownership of the applicant which would constitute a change

in control, and the addition of other applicants to any bidding

consortia. Consistent with the weight of the comments addressing the

issue, major amendments will also include any change in an applicant's

size which would affect an applicant's eligibility for designated

entity provisions. For example, if Company A, an applicant that

qualified for special provisions as a small business, merges with

Company B during the course of an auction, and if, as a result of this

merger, the merged company would not qualify as a small business, the

amendment reflecting the change in ownership of Company A would be

considered a major amendment. Otherwise, the new entity could receive

small business bidding credits and installment payments when it does

not qualify for them. As is the case in the Commission's PCS rules,

however, applicants will be permitted to amend their short-form

applications to reflect the formation of bidding consortia or changes

in ownership that do not result in a change in control of the

applicant, provided that the parties forming consortia or entering into

ownership agreements have not applied for licenses

[[Page 2323]]

in any of the same geographic license areas. In contrast, minor

amendments will include, but will not be limited to, the correction of

typographical errors and other minor defects, and any amendment not

identified as major.

48. As noted above, the Commission has generally refused to grant

requests to add or delete markets on an applicant's short-form

application in order to prevent collusive conduct or gaming that would

reduce the competitiveness of the auction. While the Commission

recognizes that there may be some circumstances in which the

competitiveness of the auction might be enhanced by allowing applicants

to add markets to their short-form applications, the Commission

concludes that the risks of encouraging or facilitating conduct that

negatively affects the competitiveness of the auction and the post-

auction market structure outweigh the benefits of categorizing such

amendments as minor. Several commenters support this conclusion that

the addition or deletion of markets on the short-form application

should always be deemed a ``major'' amendment. Specifically, PageNet

states that because the only new information that an applicant could be

deemed to possess at this stage would be licenses on which other

applicants intend to bid, amendment of the short-form application in

this regard could only lead to auction abuses. Those commenters

supporting defining the addition or deletion of markets after the

short-form filing deadline as a minor amendment argue that such an

amendment should only be permitted prior to the upfront payment

deadline or the release of the Public Notice announcing qualified

bidders. After this point, the overall competitiveness of the auction

may be threatened.

49. AT&T proposes that the deletion of markets to avoid specifying

markets that overlap with another auction applicant (and thus

preventing discussion on potentially non-auction-related matters such

as interconnection, resale, and equipment orders that do not affect

bids or bidding strategies) be deemed a minor amendment. The Commission

notes that in previous auctions some applicants have inadvertently

placed themselves at risk of violating the Commission's anti-collusion

rule by choosing to specify ``all markets'' on their short-form

applications when they intended to bid only on a particular license or

group of licenses. As a general matter, the anti-collusion rule does

not prohibit non-auction-related business negotiations between auction

applicants that have applied for the same geographic service areas.

AT&T argues that the aspect of the rule prohibiting the addition or

deletion of markets often has had the unfortunate result of

discouraging non-auction, business-related discussions between auction

applicants who are not actually bidding for licenses in the same

geographic license areas. Because of the potential anti-competitive

results of allowing bidders to delete markets after the short-form

filing deadline, however, the Commission believes that this type of

error can be more effectively addressed by other means, including

increased awareness on the part of prospective auction applicants of

the consequences of choosing ``all markets,'' as well as software

enhancements that make specifying particular markets on the FCC Form

175 less burdensome.

50. The Commission also emphasizes that, pursuant to Sec. 1.65 of

the Commission's rules, each auction applicant is required to assure

the continuing accuracy and completeness of information furnished in a

pending application. See 47 CFR 1.65. Each applicant is therefore under

a continuing obligation to update its short-form and long-form

applications as appropriate to reflect any changes that would make a

pending application inaccurate or incomplete, or that are necessary to

determine that an applicant is in compliance with our rules. As in all

prior auctions, an application that is amended by a major amendment

will be considered newly filed, and therefore will not be accepted

after the short-form filing deadline. The Commission further notes that

it has waived its ex parte rules as they apply to the submission of

amended short-form applications to maximize applicants' opportunities

to seek the advice of Commission staff when making amendments at any

time after the short-form filing deadline.

51. Finally, the Commission notes that in the context of cellular

unserved area licensing, WWC contends that the rules adopted in this

proceeding addressing major and minor amendments to short-form

applications should not apply to cellular unserved area applications

filed in 1994 as these applications were to be governed by a ``letter-

perfect'' standard and applicants were given no opportunity to cure

minor defects. While the Commission has considered WWC's argument, the

Commission believes that it is inapplicable. WWC addresses the initial

application procedures for cellular unserved area licenses, while the

Part 1 rules, in contrast, address application procedures for

participation in an auction once a finding of mutual exclusivity has

been made.

52. Ownership Disclosure Requirements. As the Commission indicated

in the Notice, the Commission continues to believe that detailed

ownership information is necessary to ensure that applicants claiming

small business status qualify for such status, and to ensure compliance

by all applicants with spectrum caps and other ownership limits.

Disclosure of ownership information also aids bidders by providing them

with information about their auction competitors and alerting them to

entities subject to our anti-collusion rules. Therefore, the Commission

adopts standard ownership disclosure requirements for all auctionable

services that will avoid the variations found in the Commission's

current service-specific ownership disclosure requirements.

53. This decision is widely supported by the majority of comments

in this proceeding. Most commenters addressing the issue of ownership

disclosure support requiring some level of ownership information at the

short-form application stage. For example, PCIA believes that full

disclosure of bidder ownership information is necessary if competing

bidders are to accurately assess the legitimacy of their auction

opponents and their respective bids. PCIA contends that there can be no

valid reason for legitimate bidders to hide their ownership. Such

information, according to PCIA, is crucial for purposes of the

Commission's anti-collusion rules, spectrum caps, and other ownership

limits. Similarly, PageNet contends that full ownership disclosure is

important to aid bidders in compiling information about their auction

competitors and, most importantly, to alert them to any conduct that

might be a violation of the Commission's anti-collusion rules. In the

satellite context, Hughes argues that the submission of detailed

ownership information is essential because of the extreme costs

associated with the build-out of a satellite system. In contrast, only

CII argues that the Commission's objectives with regard to the rules

governing designated entity status, spectrum caps, and other ownership

limitations would be fully satisfied by deferring the filing of

comprehensive ownership information until the long-form application

stage.

54. For all future auctions, therefore, the Commission will model

our reporting requirements on the general application requirements

contained in our broadband PCS rules. Under this standard, all auction

applicants will be required to disclose the real party or parties in

interest by including as an exhibit to their short-form applications

[[Page 2324]]

detailed ownership information. Although the Commission's current Part

1 rules require auction applicants to list all owners of a five percent

or greater interest in the applicant, the Commission agrees with

commenters such as CII that argue that applicants should not be

required to list all holders of this small an interest in the

applicant, unless they are in a position of control by virtue of other

factors (i.e., voting agreements, management structure), or hold a

significant passive ownership interest (i.e., 20 percent). Thus, the

Commission amends its rules to require that applicants list controlling

interests as well as all parties holding a 10 percent or greater

interest in the applicant and any affiliates of these interest holders.

See 47 CFR 1.2110(b)(4). A 10 percent or greater interest reporting

requirement is consistent with the revised definition of the term

``applicant'' we adopt for purposes of the anti-collusion rule. The

Commission notes that PageNet contends that the Commission should

require disclosure of entities and individuals that own more than five

percent of the applicant or who have provided more than five percent of

the applicant's equity. However, as suggested above, the Commission

believes that the detailed reporting requirement we create today, in

combination with our comprehensive affiliation rules, permits us to

determine the ``real party or parties in interest'' when parties apply

to participate in an auction.

55. Specifically, all auction applicants will be required to

disclose: (1) A list of any FCC-regulated business, 10 percent or more

of whose stock, warrants, options or debt securities are owned by the

applicant; (2) a list of any party holding a 10 percent or greater

interest in the applicant, including the specific amount of the

interest; (3) a list of any party holding a 10 percent or greater

interest in any entity holding or applying for any FCC-regulated

business in which a 10 percent or greater interest is held by another

party which holds a 10 percent or greater interest in the applicant

(e.g., if company A owns 10% of company B (the applicant) and 10% of

company C, a company holding or applying for an FCC-regulated business,

the companies A and C must be listed in company B's application); (4)

the name, address and citizenship of any party holding 10 percent or

more of each class of stock, warrants, options or debt securities,

together with the amount and percentage held; (5) the name, address and

citizenship of all controlling interests of the applicants, as this

term is defined in Sec. 1.2110 of our rules; (6) if the applicant is a

general partnership, the name, address and citizenship of each partner,

and the share or interest participation in the partnership; (7) if the

applicant is a limited partnership, the name, address and citizenship

of each general partner and each limited partner whose interest in the

applicant is equal to or greater than 10 percent (as calculated

according to the percentage of equity paid in and the percentage of

distribution of profits and losses); (8) if the applicant is a limited

liability corporation, the name, address and citizenship of each of its

members; and (9) a list of all parties holding indirect ownership

interests in the applicant, as determined by successive multiplication

of the ownership percentages for each link in the vertical ownership

chain, that equal 10 percent or more of the applicant, except that if

the ownership percentage for an interest in any link in the chain

exceeds 50 percent or represents actual control, it shall be treated

and reported as if it were a 100 percent interest. See, e.g., 47 CFR

20.6(d)(8).

56. In addition, consistent with the reporting requirements set

forth in the 900 MHz SMR rules, the Commission will require that

applicants claiming small business status disclose on their short-form

applications the names of each controlling interest and affiliate, as

these terms are defined in this proceeding, and to provide gross

revenues calculations for each. On their long-form applications, such

applicants will be required to disclose any additional gross revenues

calculations, any agreements that support small business status, and

any investor protection agreements. The Commission believes that these

reporting requirements will help to assure that only qualifying

applicants obtain the benefits of our small business provisions,

without being unduly burdensome.

57. Finally, in a related proposal, PageNet states that Commission

should expressly prohibit ``blind bidding'' (i.e., bidding in which

auction participants do not know the identities or ownership

information of the other bidders in the auction) in any pending and

future auction because it (1) is unfair to auction participants; (2)

encourages auction abuses; and (3) encourages speculation. PageNet

contends that these factors can have a significant impact upon the

competitiveness of the auction and the post-auction marketplace. In

situations in which an incumbent has already met the Commission's

build-out requirements and must still bid in an auction in which blind

bidding is used, PageNet contends that a competitor is often able to

bid up the price of a license that it never intends to win in order to

force the incumbent to buy the license at a higher price. PageNet

further contends that this higher price is then reflected in higher

rates for services, which in turn affect the incumbent's ability to

compete. As discussed above, the Commission agrees that it is important

that auction applicants disclose certain ownership information prior to

the start of an auction. At the same time, however, the Commission

believes that in certain circumstances, the competitiveness of an

auction may be increased if less bidder information is made available.

In the Competitive Bidding Second Memorandum Opinion and Order, the

Commission retained the flexibility to conceal bidder identities if

further experience showed that it would be desirable to do so. More

recently, in the auction rules for geographic area paging licenses, the

Commission concluded that the advantages of limiting information

disclosed to bidders outweigh the disadvantages of this approach, and

reserved the discretion to announce by Public Notice prior to the

auction the precise information to be revealed to bidders during that

auction. The Commission believes that the uniform rules adopted today

provide the Commission with the necessary flexibility to tailor the

amount of bidder information made available to applicants to ensure the

competitiveness of each auction. The Commission therefore declines to

adopt a provision prohibiting non-disclosure of bidder identities in

all future auctions.

58. Ownership Disclosure Filings. The Commission believes that

permitting applicants to file ownership information when they apply for

their first auction, which would then be stored in a central database

and updated each time the information changes during or after the first

auction and when applicants participate in a subsequent auction, will

streamline our application processes and minimize the burden on auction

applicants. This concept is supported by the record. For example, CII

and Airadigm argue that this approach will benefit auction applicants

by reducing the time spent preparing auction applications, and will

benefit the Commission by eliminating the need to review and analyze

duplicative filings. The Commission believes that by requiring

ownership disclosure filings, we ensure that we receive all the

information necessary to evaluate an applicant's qualifications. As the

[[Page 2325]]

Commission indicated in the Notice, however, these requirements could

result in duplicative filings. For example, where licenses for a

service are offered in a series of blocks, as in the case of broadband

PCS, an entity may wish to participate in several auctions, and would

be required to disclose the same information a number of times. Under

the system the Commission envisions, when applying to participate in

subsequent auctions, applicants will be permitted to update the

database or certify that there have been no changes in ownership and

that the information contained in the database remains correct. The

Commission will look to implement this process in the near future as

part of our Universal Licensing System.

59. Audits. The only commenters to address this proposal, PageNet

and Airadigm, support this proposal. Airadigm requests that applicants

and licensees subject to audit be afforded sufficient time to provide

information to the Commission and that the Commission issue written

findings following its examination. The Commission therefore adopts its

proposal, and will modify our rules governing status as a designated

entity to expressly provide that applicants and licensees claiming

eligibility for special provisions shall be subject to audits by the

Commission. Such audits will be governed by the standards set forth in

Sections 403 and 308(b) of the Communications Act. 47 U.S.C. 403,

308(b). The Commission believes that these provisions, as well as the

general provisions of the Administrative Procedure Act, will adequately

address Airadigm's concerns, and the Commission therefore declines at

this time to adopt specific rules to govern audits of applicants and

licensees conducted in the future.

V. Payment Issues

60. Determination of Upfront Payment Amount. In the Competitive

Bidding Second Report and Order, the Commission indicated that the

upfront payment should be set using a formula based upon the amount of

spectrum and population (or ``pops'') covered by the license or

licenses for which parties intend to bid. The Commission reasoned that

this method of determining the required upfront payment would enable

prospective bidders to tailor their upfront payment to their bidding

strategies. At the same time, however, the Commission noted that

determining an appropriate upfront payment involved balancing the goal

of encouraging bidders to submit serious, qualified bids with the

desire to simplify the bidding process and minimize implementation

costs imposed on bidders. The Commission concluded that the best

approach would be to maintain the flexibility to determine the amount

of the upfront payment on an auction-by-auction basis, because this

balancing may yield different results depending upon the particular

licenses being auctioned.

61. Many commenters make specific proposals regarding the proper

size and terms for assessing upfront payments in future auctions. For

example, PageNet and CII suggest that the Commission adopt a standard

upfront payment rule requiring separate upfront payments for each

license identified in an applicant's short-form application. CII

contends that this would reduce the number of ``phantom'' mutual

exclusivities (i.e., theoretical frequency conflicts caused by the fact

that the current auction rules create no financial disincentive to list

licenses in an application on which the applicant has no bona fide

intention to bid). In contrast, Airadigm and NPCS argue that the

Commission should not require a separate upfront payment for each

license on which an entity elects to bid, as this would limit bidders'

flexibility to change strategy and force them to reveal their bidding

strategy prior to the start of the auction. In an alternate proposal,

AirTouch and CII suggest that the Commission require applicants to

increase their upfront payments as an auction progresses to equal a

percentage of their total bids. AirTouch argues that this requirement

would reduce the risk of defaults and discourage parties from

submitting ``jump bids'' where they have no intention of actually

winning a particular license. Similarly, to reduce the risk of default,

CII recommends that when an applicant's upfront payment drops below a

specific percentage of its high bid amount, the Commission allow the

applicant to increase its deposit to a certain percentage of its high

bid total within ten business days. In contrast to these two proposals,

Airadigm opposes increasing the upfront payment requirement once a

bidder's bid amount exceeds a certain multiple of the original upfront

payment amount because this would create a significant barrier to small

businesses.

62. The Commission agrees with Airadigm and NPCS that it is

unnecessary to adopt additional rules governing the amount of the

upfront payment and the terms under which it is assessed. The

Commission believes its reasoning in the Competitive Bidding Second

Report and Order remains valid, and that the required upfront payment

should be tailored to the particular auction design and to the

characteristics of the licenses being auctioned. This determination can

be made in a variety of ways and using a variety of techniques to

estimate the value of the spectrum being auctioned; however, as a

general rule we have required an upfront payment equal to $0.02 per pop

per megahertz. As discussed infra, under the current competitive

bidding rules the Commission maintains the discretion to alter the

amount of the required upfront payment or to modify the terms under

which the upfront payment is assessed. The Commission believes that

retaining this discretion provides the Commission with the greatest

level of flexibility to determine the appropriate upfront payment

amount on an auction-by-auction basis.

63. Refund of Upfront Payments. After considering the issue in

light of Congress's 1996 amendment to Section 309(j)(8)(C) and the

comments received in this proceeding, the Commission will continue our

current practice of returning the upfront payments of bidders who have

completely withdrawn from an auction prior to the conclusion of

competitive bidding. As the Commission suggested in the Notice, it is

unclear whether Congress intended, in amending Section 309(j)(8)(C), to

require the Commission to change its practice of refunding upfront

payments to bidders who withdraw during the course of an auction. The

Commission continues to believe, however, that the prompt return of

upfront payments is in the public interest, because it prevents

unnecessary encumbrances on the funds of auction bidders, many of whom

may be small businesses, after they have withdrawn from the auction. In

addition, we believe that this practice minimizes the financial burdens

of participating in an auction, because auction participants earn no

interest on upfront payment funds on deposit with the Commission.

Moreover, all commenters addressing the issue support our proposal to

continue this practice. AirTouch proposes that the Commission retain an

administrative fee based upon the number of rounds an applicant has

remained in the auction when it refunds upfront payments to bidders who

have withdrawn. Airadigm and AT&T state that not returning upfront

payments in a prompt manner in circumstances where a bidder has

withdrawn is akin to a ``fee'' that Congress did not intend to

authorize, and that may work to discourage participation in the

Commission's auction program. The Commission agrees with Airadigm and

AT&T, and conclude that such a fee is

[[Page 2326]]

inappropriate, and therefore, rejects AirTouch's proposal.

64. Down Payment and Full Payment for Licenses

Level of Down Payments

65. The Commission created the down payment requirement in the

Competitive Bidding Second Report and Order, in which the Commission

concluded that at the conclusion of the auction, a bidder must tender a

significant and non-refundable down payment to the Commission over and

above its upfront payment in order to provide further assurance that

the winning bidder will be able to pay the full amount of its winning

bid. The Commission believes that a substantial down payment is

required to ensure that licensees have the financial capability to

attract the capital necessary to deploy and operate their systems, and

to protect against default. Because it is due soon after the close of

the auction, the down payment is a valuable indicator of a license

applicant's financial viability. In addition, the Commission believes

that it is important it learns early on in the licensing process when

an applicant might be unable to finance its winning bid or bids.

66. Several commenters oppose any increase in the down payment

beyond 20 percent of the high bid amount. Airadigm opposes granting the

Bureau the discretion to establish a down payment amount because it

believes that the Bureau could unfairly disadvantage small businesses

by requiring disproportionately large down payments for auctions of

particularly capital-intensive services. In addition, Airadigm states

that granting the Bureau this discretion could complicate applicants'

financing arrangements because down payment amounts could vary with

each auction. After consideration of these comments, the Commission

concludes that a standard down payment amount of 20 percent is

appropriate. Finally, if unusual circumstances present themselves in

the context of a particular service, the Commission reserves the right

to adopt a different amount by rule in that service.

Untimely Second Down Payments and Full Payments

67. The Commission will amend sections 1.2109(a) and 1.2110(e) of

its rules to permit auction winners to make their second down payments

or final payments within ten business days after the applicable

deadline, provided that they also pay an appropriate late fee, without

being considered in default. As the Commission recognizes in the

Notice, in past auctions there have been cases where a winning bidder

missed the applicable second down payment deadline but subsequently

made its down payment and filed a request seeking a waiver of the

deadline. In some of these cases, the Bureau granted the waivers,

subject to payment of a five percent late fee. In granting the waivers,

the Bureau recognized the licensee's good faith and ability to pay as

evidenced by its timely remittance of all earlier payments and prompt

action to cure the delinquency.

68. The Commission recognizes that applicants may encounter

unexpected or unforeseeable difficulties when trying to arrange

financing and make substantial payments under strict deadlines. In

circumstances that may warrant favorable consideration of a waiver

request or an extension of the payment date, the Commission must also

evaluate the fairness to other licensees who made their payments in a

timely fashion. Two commenters, Mountain Solutions, Ltd. (``Mountain

Solutions'') and AirTouch, the only commenters to address this issue in

detail, support our proposal to permit late payment subject to a

standard late fee for any licensee not able to make a timely payment.

The Commission agrees, and amends Sec. 1.2109(a) to permit winning

bidders who are required to make final payment on their licenses within

a certain period of time as announced by public notice, to submit their

payment 10 business days after the payment deadline, provided that they

also pay a late fee equal to five percent of the amount due. Although

the Commission suspends the use of installment payments for the

immediate future, in the event the Commission once again offers

installment payments, the Commission will also amend Sec. 1.2110(e) to

permit auction winners paying for the licenses in installments to

submit their second down payment 10 business days after the payment

deadline, provided they also pay a late fee equal to five percent of

the amount due.

69. As discussed above, the Commission's rules provide that winning

bidders have ten business days to make timely payment following

notification that their licenses are ready to be granted. The

Commission believes that in establishing this additional ten business

day period, during which winning bidders will not be considered in

default, the Commission will provide an adequate amount of time to

permit winning bidders to adjust for any last-minute problems. The

Commission declines to provide for a lengthier late payment period

because we believe that extensive relief from initial payment

obligations could threaten the integrity, fairness, and efficiency of

the auction process. As observed in the Notice, a late fee of five

percent is consistent with general commercial practice and provides

some recompense to the federal government for the delay and

administrative or other costs incurred. In addition, we believe that a

five percent fee is large enough to deter winning bidders from making

late payments and yet small enough so as not to be punitive. Therefore,

applicants who do not submit the required final payment and five

percent late fee within the 10-day late payment period will be declared

in default, and will be subject to the default payment specified in

Sec. 1.2104(g) of our rules. 47 CFR 1.2104(g).

70. Finally, the Commission emphasizes that its decision to permit

late payments is limited to payments owed by winning bidders who have

submitted timely initial down payments. The Commission continues to

believe that the strict enforcement of payment deadlines enhances the

integrity of the auction and licensing process by ensuring that

applicants have the necessary financial qualifications. In this

connection, the Commission believes that the bona fide ability to pay

demonstrated by a timely initial down payment is essential to a fair

and efficient auction process. Thus, the Commission has not proposed to

modify its approach of requiring timely submission of initial down

payments that immediately follow the close of an auction. The

Commission did not propose to adopt a late payment period for down

payments that are due soon after the close of the auction as the

Commission believes it is reasonable to expect that winning bidders

timely remit their down payments, given that it is their first

opportunity to demonstrate to the Commission their ability to make

payments toward their licenses. Further, if a winning bidder defaults

on its down payment on a license, the Commission can take action under

Sec. 1.2109(b) relatively soon after the auction has closed, by, for

example, re-auctioning the license or offering it to the other highest

bidders (in descending order) at their final bids. Similarly, the

Commission will not allow for any late submission of upfront payments,

as to do so would slow down the licensing process by delaying the start

of an auction.

Full Payment and Petitions To Deny

71. The Commission will suspend the use of installment payments as

a means

[[Page 2327]]

of financing small business participation in our auction program for

the immediate future. As a result, all auction winners, including small

businesses, will be required to submit the full payment owed on their

winning bids shortly after a license is ready to be granted. The

Commission will recognize that in the past the filing of petitions to

deny against a winning bidder's application(s) has often had the effect

of significantly delaying the grant of the applicant's license(s), and

as a result, the deadline for that applicant to submit the balance of

its winning bid. However, in the Balanced Budget Act Congress granted

the Commission the authority to shorten the petition to deny period,

and as a result, to grant licenses much more rapidly. Balanced Budget

Act, Sec. 3008. As an initial matter, consistent with this legislation,

the Commission amends Secs. 1.2108(b) and (c) of its rules to provide

that the Commission shall not grant a license earlier than seven days

following issuance of a public notice by the Commission that long-form

applications have been accepted for filing. 47 CFR 1.2108(b), (c). Also

consistent with the Balanced Budget Act, the Commission amends this

section to provide that in all cases the period for filing petitions to

deny shall be no shorter than five days. In this regard, the Commission

seeks comment in the Second Further Notice of Proposed Rule Making on

whether there are instances in which the Commission should provide for

a longer period for the filing of petitions to deny or for the grant of

initial licenses in auctionable services.

72. In light of this change in our rules, the Commission believes

that the concerns discussed in the Notice regarding delays in the

granting of licenses and, as a result, in the deadline for full payment

are substantially reduced. While applications that are the subject of

petitions to deny ordinarily take longer to resolve than uncontested

applications, the Commission believes these changes in procedure will

reduce the risk of frivolous petitions being filed solely for purposes

of delay, and will enhance our ability to resolve petitions

expeditiously. Finally, the Commission believes that concerns regarding

delayed payment are outweighed by the risk and uncertainty that would

be imposed on an applicant if it were required to make its full auction

payment while a petition against its application was still pending and

could potentially result in denial of the application. As a result, the

Commission declines to amend its rules to require all winning bidders

to make their full payments at the same time, regardless of whether

petitions to deny their applications have been filed.

73. Default Payments. The Commission adopts its proposal to delete

the words ``simultaneous multiple-round'' from Sec. 1.2104(g), and will

apply the default/withdrawal payment procedure to all auction designs.

Several commenters support this decision, maintaining that rigorous

enforcement of the Commission's payment deadlines is critical to

preserving the integrity of the auction and licensing process by

ensuring that applicants possess the necessary financial

qualifications. These commenters also suggest that default payments are

an effective and necessary method of discouraging defaults and

encouraging private market solutions to licensee financing

difficulties. The Commission believes that this modification to our

general rules governing bidder default will help to maintain the

integrity of the auction process by discouraging defaults on the part

of bidders, encouraging bidders to make secondary or back-up financial

arrangements, and ensuring that default payments are made in a timely

manner. The Commission also believes this modification will help to

discourage insincere bidding and ensure that licenses end up in the

hands of those parties that value them the most and have the financial

qualifications necessary to construct operational systems and provide

service. See 47 U.S.C. 309(j)(5).

74. Our rules provide that where a winning bidder defaults on a

license, the bidder becomes subject to a default payment equal to the

difference between the amount bid and the winning bid the next time the

license is offered by the Commission, plus a payment equal to three

percent of the subsequent winning bid or the amount bid, whichever is

lower. See 47 CFR 1.2104(g)(2). In the Competitive Bidding Fifth Report

and Order, the Commission stated that where the default payment cannot

be determined, the Commission may assess an initial default payment

``of up to 20 percent'' of the defaulting bidder's winning bid. We

adopt our proposal in the Notice to employ this practice for all

auctionable services. No commenter addressed this issue. Although the

Commission provided that this deposit amount will be up to 20 percent

of the defaulted bid amount, we note that if a license is reauctioned

for an amount greater than the defaulted bid for the license, the

default payment due will be only three percent of the defaulted bid. 47

CFR 24.704(a)(2). See also 47 CFR 1.2104(g). Thus, in the future we

will assess an initial default deposit of between three percent (3%)

and twenty percent (20%) of the defaulted bid amount where a winning

bidder or licensee defaults and the defaulted license has yet to be

reauctioned. Once the license has been reauctioned by the Commission

and the total default payment can be determined, the Commission will

either assess the balance of the appropriate default payment, or refund

any amounts due, as necessary.

75. Installment Payments

Late Payments

76. In order to add certainty to the installment payment process,

the Commission adopts its proposals from the Notice to modify its grace

period provisions. As discussed above, the Commission declines to use

installment payments for the immediate future as a means of financing

small business participation in our auction program. As a result, the

Commission's decision with regard to late payment fees for installment

payments effectively will apply only to existing licensees who are

currently paying for their licenses in installments. From this point

forward, instead of considering individual grace period requests, the

following system will apply: A licensee who does not make payment on an

installment obligation will automatically have an additional 90 days in

which to submit its required payment without being considered

delinquent, but will be assessed a five percent late payment fee as

discussed above. If the licensee fails to make the required payment at

the close of this first 90-day non-delinquency period, the licensee

will automatically be provided a subsequent 90-day grace period, this

time subject to a second, additional late fee equal to ten percent of

the initial required payment.

77. As proposed in the Notice, under this system, licensees will

not be required to submit a filing to take advantage of these

provisions. During this 90-to-180-day period, the Commission or its

designated collection agent will continue to pursue collection of past-

due installments and fees. Also during this time, the licensee will

have the opportunity to raise necessary capital, continue service and

construction efforts, or seek a buyer for its license(s) that will

resume payments. These late payment provisions will apply independently

to all installment payments. Therefore, the late payment provisions and

accompanying late fees will not affect the payment schedule for future

payments. Thus, even if a licensee elects to take advantage of the late

payment provisions, the licensee

[[Page 2328]]

will still be responsible for remitting all future installment payments

in a timely manner, unless the licensee elects to take advantage of the

late payment provisions for any future installment payment. The

following example illustrates how this system will operate:

ABC Corp. has a $100,000 installment interest payment due on

March 1. If ABC Corp. is able to make its payment on March 1, then

it must remit $100,000 to the Commission. If ABC Corp. makes its

payment anytime from March 2 until May 30 (the end of the non-

delinquency period), then ABC Corp. must remit $105,000 to the

Commission to be considered current on its March 1 installment

payment. If ABC Corp. does not make its March 1 payment by May 30,

then it must remit $115,000 on or before August 28. If ABC Corp.

does not remit the required $115,000 by August 29 (the end of the

90-day grace period), then it will be considered in default and its

license will automatically cancel on August 30 without further

action by the Commission. See 47 CFR 1.2110(e)(4)(iii).

ABC Company's June 1 installment payment of $100,000 remains due on

June 1 regardless of the payment status of the March 1 payment. The

late payment terms apply to June installment payment independently of

the March payment. Thus, if ABC Company does not make its March 1

payment until June 1, the total amount due to the Commission on June 1

is $215,000 which consists of the March payment, the March 5% non-

delinquency late fee, the March 10% grace period late fee and the June

payment. Assuming the licensee remits the March 1 payment and

accompanying March late fees of $115,000 to the Commission by August

29, then the total amount due to the Commission on September 1 will be

$215,000 which consists of the June installment payment of $100,000,

the June 5% non-delinquency late fee, the June 10% grace period late

fee and September installment payment of $100,000.

ABC Company may elect to make late payments and pay the

accompanying late fees on the March and June payments. However, ABC

Company must remit $115,00 representing the required March payment and

accompanying March late fees by August 29 (the end of March's 90-day

grace period) or it will be considered in default and its license will

automatically cancel on August 30 without further action by the

Commission. Furthermore, ABC Company must remit and additional $115,000

representing the required June payment and accompanying June late fees

by November 29 (the end of June's 90-day grace period) or it will be

considered in default and its license will automatically cancel on

November 30 without further action by the Commission.

As proposed in the Notice, the late fees the Commission adopts will

accrue on the next business day following the payment due date and will

be payable with the next quarterly installment payment obligation. The

Commission emphasizes that at the close of non-delinquency or grace

period, a licensee must submit the required late fee(s), all interest

accrued during the non-delinquency period, and the appropriate

scheduled payment with the first payment made following the conclusion

of the non-delinquency period or grace period. Payments made at the

close of any grace period will first be applied to satisfy any lender

advances as required under each licensee's ``Note and Security

Agreement.'' Afterwards, payments will be applied in the following

order: late charges, interest charges, principal payments. As part of

the Commission's spectrum management responsibilities, the Commission

wishes to ensure that spectrum is put to use as soon as possible. The

Commission also believes that licensees should be working to obtain the

funds necessary to meet their payment obligations before they are due

and, accordingly, that the non-delinquency and grace periods the

Commission adopts should be used only in extraordinary circumstances.

Thus, as the Commission emphasized in the Notice, a licensee who fails

to make payment within 180 days sufficient to pay the late fees,

interest, and principal, will be deemed to have failed to make full

payment on its obligation and will be subject to license cancellation

pursuant to Sec. 1.2104(g)(2) of the Commission's rules.

78. Several commenters support the Commission's efforts to provide

licensees with predetermined non-delinquency periods without requiring

the submission of a formal grace period request. In addition, many of

the commenters addressing this issue, including AMTA, Hughes, AirTouch,

Mountain Solutions and CII support the imposition of a late payment fee

similar to that imposed in the broadband F block auction, in order to

create a significant incentive for timely payment of installment

obligations. CII believes that modifying our current grace period

procedures will provide licensees with knowledge in advance of the

extent of any relief that will be forthcoming from the Commission to a

licensee who misses an installment payment. AirTouch believes that any

licensee who fails to make payment within 180 days should face the

automatic cancellation of its license. AirTouch contends that once a

certain number of installment payments have been submitted late, the

Commission should declare the licensee in default and subject to the

default payments proposed in the Notice. In contrast, only CIRI opposes

this liberalization of the current grace period rules, requesting

instead that grace period relief be made available only when a licensee

can demonstrate that such relief is warranted and the public debt will

ultimately be satisfied. Although Hughes recommends the imposition of a

``significant'' late fee to the extent that an applicant misses a

payment deadline, Hughes believes that a five to ten percent late fee

is large enough to discourage late payments and to ensure that the

government is compensated for its administrative expenses in recouping

the payment. As an alternative to our proposal in the Notice, GWI

proposes that any such late payment fee should be pro-rated over the

90-day payment period instead of accruing all at once regardless of

when the late payment is made, in order to provide an economic

incentive for licensees who are overdue in their payment obligations to

retire the payment quickly instead of waiting until the end of the

payment period. In addition, GWI suggests that such a pro-rated payment

is fairer to licensees who inadvertently miss a required payment

through administrative error or other unavoidable, unforeseen

circumstances.

79. As an alternative to the Commission's proposals in the Notice,

Airadigm contends that following the first 90-day non-delinquency

period, licensees should be given a second 90-day period with a five

percent late fee, followed by a third 90-day grace period with a 10

percent late fee. ISTA believes that a rule whereby any license is

cancelled at the close of the second 90-day grace period is draconian,

and that such a ``hard-and-fast'' automatic cancellation rule would

doom many small businesses. GWI opposes the imposition of an additional

10 percent late payment fee where licensees require an additional 90-

day late payment period. The Commission declines to adopt these

alternate proposals. As the Commission indicated in the Notice, the

grant of a grace period is an extraordinary remedy and we wish to

encourage licensees to seek private market solutions to their capital

problems before the payment due date. In this regard, the Commission

notes that it has an obligation under the Debt Collection Improvement

Act to enforce payment obligations owed to the federal

[[Page 2329]]

government. See Debt Collection Improvement Act, Pub. L. 104-134,

Sec. 3100(j)(i), 110 Stat. 1321 (1996), codified at 31 U.S.C. 3711(a)

(``DCIA'').

80. The Commission believes that the automatic grace period

provisions we adopt today provide licensees with adequate financial

incentives to make installment payments on time, while at the same time

creating increased certainty that will help licensees pursue private

market solutions to their financing difficulties. These provisions also

will discourage licensees from attempting to maximize their cash flow

at the government's expense by submitting a required installment

payment after it is due. Several commenters agree with this assessment.

At the same time, these provisions will eliminate uncertainty for many

licensees who are seeking to restructure other debt contingent upon the

results of the Commission's installment payment provisions. In

addition, this system will ease the burden on the Commission of

considering individual grace period requests where Commission or its

designee may not have the necessary resources to evaluate a licensee's

financial condition, business plans, and capital structure proposals.

The Commission recognizes that some commenters oppose the imposition of

a late fee on overdue installment payment, and in particular on the 90-

day non-delinquency period. However, this approach is consistent with

the standard commercial practice of establishing late payment fees and

developing financial incentives for licensees to resolve capital issues

before payment due dates. This approach also is consistent with the

provisions of the DCIA, which requires that the Commission notify the

Secretary of the Treasury and commence debt collection procedures where

a party is more than 180 days past due on any outstanding debt owed to

a federal agency. See 31 CFR 3711(g)(1).

81. The Commission recognizes that a number of commenters oppose

the application of these provisions to current licensees. In

particular, GWI and IVDS Enterprises argue that to the extent the

Commission adopts a late payment fee, it should limit the imposition of

such a fee to licenses issued in future auctions. However, the

Commission's recent experience with the installment payment program has

shown the importance of ensuring that all licensees, including current

licensees, have adequate financial incentives to make installment

payments on time. The Commission notes that in awarding licenses in the

past to entities choosing to pay in installments, the Commission has

emphasized that the terms of the installment payment program will be

governed by current Commission rules and regulations, as amended. For

example, in awarding licenses to C block licensees paying for their

licenses in installments, the Commission indicated in the associated

``Note and Security Agreement'' that the terms of the installment plan

would be governed by and construed in accordance with then-applicable

Commission orders and regulations, as amended. The Commission also

believes that these licensees should obtain the benefit of increased

certainty that provisions for automatic grace periods provide. This

decision is supported by Mountain Solutions, who requests that current

licensees obtain the benefits of any loosening of the late payment fee

and grace period rules.

82. As provided in the Second Report and Order and Further Notice

of Proposed Rule Making in this docket, installment payments for C and

F block licensees will resume effective March 31, 1998. See Amendment

of the Commission's Rules Regarding Installment Payment Financing for

Personal Communications Services (PCS) Licensees, Second Report and

Order and Further Notice of Proposed Rule Making, WT Docket No. 97-82

62 FR 55348 (October 24, 1997) (``Second Report and Order and Further

Notice of Proposed Rule Making''). Under the Commission's decision to

reinstate installment payments for these licensees, the Commission

provided them with one automatic 60-day non-delinquency period

following the March 31, 1998, deadline, during which time they will not

be considered delinquent in their payment obligations. As the

Commission indicated in the Second Report and Order and Further Notice

of Proposed Rule Making, the Commission will not entertain any requests

for extension of the March 31, 1998 deadline beyond an automatic 60-day

non-delinquency period, so that for C and F block licensees all

required payments must be submitted no later than May 30, 1998. Only

those licensees making a timely payment of all amounts due, as set

forth in the Second Report and Order will be permitted to take

advantage of the late payment provisions the Commission adopts today.

See 47 CFR 1.2110.

83. In commenting on these modifications to the grace period

provisions, CIRI also proposes that the Commission make public the

terms of any workouts or debt relief provided to licensees. CIRI notes

that parties may request confidential treatment of sensitive financial

information pursuant to Sec. 0.459 of the Commission's rules, and that

such confidential treatment should be sufficient to safeguard the

privacy interests of licensees, while still making the terms of any

workout available for public scrutiny. As an initial matter, because

the Commission adopts its proposals providing for automatic grace

periods, the Commission does not envision licensees filing grace period

requests under normal circumstances from this point forward. As a

result, the Commission believes that CIRI's concerns about the

Commission making public a licensee's request for grace period relief

are moot. Moreover, because from this point forward a licensee's taking

advantage of our late payment provisions will be an administrative

matter processed by the Commission's loan servicer, and not a formal

waiver request, aside from instances where a licensee is declared in

default, there will be no public notice of a licensee's payment status.

The license is cancelled automatically under such circumstances. In

contrast, for licensees who have previously filed grace period requests

consistent with the Commission's current rules and procedures, the

Commission will continue its current practice of making the request

public when a decision is released granting or denying the request,

except to the extent that any request by the licensee for confidential

treatment is granted pursuant to Sec. 0.459 of the Commission's rules.

See 47 CFR 0.459. The Commission further clarifies that such licensees

are not deemed to be in default on these licenses until such time as

the Bureau issues a decision on these grace period requests. Licensees

whose requests for a grace period are denied will have ten (10)

business days to make the required payment or be considered in default.

Defaults on Installment Payments

84. The Commission will not adopt its tentative conclusion to apply

the default provisions of Sec. 1.2104(g) to licensees who default on an

installment payment. Most commenters addressing the issue oppose this

proposal. For example, Pocket submits that default payments assessed

later in the license term become highly arbitrary and unduly

burdensome. Pocket also contends that such payments are greater than

those traditionally required for secured creditors and create

substantial disincentives for investors and creditors who might

otherwise be interested in providing financing for licensees. Pocket

also notes that any default payment assessed disadvantages a licensee's

other creditors, which also makes it more difficult for licensees to

[[Page 2330]]

raise capital. Finally, Pocket states that default payments assessed

later in the license term have no deterrent effect as there is no basis

to believe that licensees that have paid substantial sums to the

Treasury will willingly default. In contrast, AirTouch supports our

tentative conclusion that licensees that ultimately fail to fulfill

their installment payment obligations despite the availability of a 90-

day non-delinquency period and a subsequent, automatic 90-day grace

period, should be declared in default, and in turn be made subject to

the default payments proposed in the Notice.

85. The Commission has considered the comments of those who oppose

the proposed assessment, and find that an additional payment

requirement for licensees defaulting on installments is not necessary

to achieve our stated objectives. The Commission's current rules and

installment payment terms are adequate to discourage defaults and

encourage licensees to find private market solutions when they face

financial difficulties. The Commission also believes that the rules it

adopts providing for a 90-day non-delinquency period followed by a

subsequent, automatic 90-day grace period, subject to appropriate late

fees of five percent for the 90-day non-delinquency period and 10% for

automatic 90-day grace period, payable at the conclusion of these

periods serve these goals without substantially risking delays or

disruption in service to the public. In particular, the Commission

believes that this certainty regarding the Commission's treatment of

licensees needing extra time to make their installment payments will

increase the likelihood that licensees and potential investors will

find solutions to capital problems before a default occurs. The risk of

losing its license should provide a licensee a strong incentive to

avoid default. If, however, a default does occur, the conditions on the

face of each license and the terms of the notes and security agreements

executed by licensees provide the Commission appropriate remedies that

will ensure that defaulted licenses are returned to the Commission for

reauction and that all outstanding debts, as well as the Commission's

costs, are recoverable.

Cross Default in the Context of Installment Payments

86. After consideration of the comments in this proceeding, The

Commission concludes that it will not pursue a policy of cross default

(either within or across services) where licensees default on an

installment payment. Because the Commission will eliminate the use of

installment payments as a means of financing small business

participation in its auction program for the foreseeable future, the

Commission notes that in practice this decision will apply only to

existing licensees who are currently paying for their licenses in

installments.

87. The Commission's decision not to pursue cross default remedies

against current licensees who default on an installment payment is

supported by the majority of commenters. For example, Airadigm contends

that it is unfair to jeopardize an entire business because of a default

on one license. Similarly, ISTA argues for separate treatment of

separate services, regardless of ownership, lest a failure in one

business cause failure in unrelated businesses. IVDS Enterprises

proposes that licensees be able to discontinue installment payments on

a particular license and allow that license to be cancelled or revoked.

IVDS Enterprises believes that such a decision should not affect the

licensee's other licenses, whether in the same or other services, where

the licensee has made timely installment payments. Alternatively,

Pocket believes that the Commission should reserve the authority to

impose cross defaults on a case-by-case basis only for licensees that

have demonstrated bad faith.

88. The Commission recognizes that some commenters strongly

advocate a policy of cross defaults in this context. These commenters

suggest that such a policy (1) prevents speculation during the auction

and cherry-picking (e.g., selectively defaulting on some licenses while

keeping others) after the auction concludes, (2) encourages auction

participants to find private market solutions to financial shortfalls,

and (3) is consistent with commercial lending policies. The Commission

believes, however, that the default provisions contained in

Sec. 1.2104(g)(2) serve as an adequate incentive to discourage

speculation and encourage licensees to pursue non-default solutions to

financial difficulties. The Commission also emphasizes that our

decision on this matter only addresses default in the context of

installment payments, and does not affect our policy with regard to

defaults on down payments. In addition, by making licensees who default

on an installment payment subject to the default payment set forth in

Sec. 1.2104(g)(2), the Commission created an additional deterrent to

licensees considering default as a solution to financing shortfalls.

The Commission believes that this policy will promote the goals of

section 309(j) by not punishing otherwise successful licensees for

failures in one market, and will strike an appropriate balance between

our conflicting roles as both ``lender'' and ``regulator.''

Accordingly, upon default on an installment payment, a license will

automatically cancel without further action by the Commission, the

licensee will become subject to the default payment set forth in

Sec. 1.2104(g) of our rules, and the Commission will initiate debt

collection procedures against the licensee and accountable affiliates.

47 CFR 1.2104(g), 1.2110(e)(4)(iii). See also 31 U.S.C. Chapter 37; 4

CFR Parts 101-105; 47 CFR Part 1, Subpart O.

VI. Competitive Bidding Design, Procedure, and Timing Issues

89. Balanced Budget Act of 1997 Notice and Comment Procedures. The

Commission believes that in the past our service-specific rule making

process has served the purpose of adequately ensuring that interested

parties have sufficient time to familiarize themselves with the rules

and procedures to be employed in an auction prior to the application

deadlines and start date of that auction. The Commission nevertheless

believes that this legislation requires that the Commission provide an

additional opportunity for input from potential bidders prior to the

issuance of detailed auction-specific information by the Bureau. To

date, the Bureau has served as the primary point of contact with

potential bidders and other parties interested in issues relating to

each upcoming auction, and this has worked well. In light of the

typically time-sensitive nature of most issues arising in the weeks

prior to the start of an auction, the Bureau has been equipped to make

determinations and respond rapidly to potential bidders' concerns.

Consistent with the provisions of the Balanced Budget Act, and to

ensure that potential bidders have adequate time to familiarize

themselves with the specific provisions that will govern the day-to-day

conduct of an auction, the Commission directs the Bureau, under its

existing delegated authority, see 47 CFR 0.131(c), 0.331, 0.332, to

seek comment on a variety of auction-specific issues prior to the start

of each auction.

90. The Commission directs the Bureau to seek comment on specific

mechanisms relating to day-to-day auction conduct including, for

example, the structure of bidding rounds and stages, establishment of

minimum opening bids or reserve prices, minimum acceptable bids,

initial maximum eligibility for each bidder, activity requirements for

each stage of the auction, activity rule waivers, criteria for

determining reductions in

[[Page 2331]]

eligibility, information regarding bid withdrawal and bid removal,

stopping rules, and information relating to auction delay, suspension,

or cancellation. The Commission directs the Bureau to afford interested

parties a reasonable time, in light of the start date of each auction

and relevant pre-auction filing deadlines, to comment on auction-

specific issues. In this regard, the Commission notes that it has been

the Bureau's practice to release the public notice providing details

concerning each upcoming auction sufficiently in advance of the short-

form filing deadline (e.g., 30 days prior to the deadline) to provide

interested parties with an opportunity to develop business plans,

assess market conditions and evaluate the availability of equipment.

Also consistent with previous practice, the Commission recognizes that

the Bureau needs the flexibility to announce, at any time in the weeks

leading up to the start date of each auction, any minor, non-

substantive amendments or clarifications to the specific mechanisms set

forth in auction-related public notices or the Bidder Information

Package. The Commission believes that this process is consistent with

the requirements of section 3002(a)(1)(B)(iv) of the Balanced Budget

Act, and will afford potential bidders adequate notice, as well as an

opportunity to comment on the Bureau's intentions regarding issues

relating to the day-to-day conduct of each auction.

91. ``Real time'' Bidding. The Commission will adopt its proposal

in the Notice to allow for ``real time'' bidding as an alternate design

methodology in our rules. After careful consideration of the comments

received in this proceeding, as well as its experience in conducting 15

auctions to date, the Commission concludes that ``real time'' bidding

will allow auctions to proceed more rapidly because it will allow

bidders immediate feedback on new high bids. The Commission also notes

that in an effort to simplify the auction process and prevent

``gaming'' of bids, the Commission has recently modified its electronic

bidding process by implementing ``click-box bidding.'' This feature,

which replaces the field where bidders previously typed their dollar

bid amount with a ``click on check box to bid'' field (where the only

bid amount allowed is at the minimum acceptable bid) no longer allows

bidders to type a bid amount on the Bid Submission screen. As such,

``click-box bidding'' can work well in a ``real-time'' bidding context

because bidders can more rapidly respond to the bids of other bidders,

permitting an auction to progress more rapidly and efficiently. The

Commission has successfully employed click box bidding in the recently

completed 800 MHz SMR auction, and plans to employ it in the

forthcoming LMDS auction.

92. The Commission delegates to the Bureau the authority to

determine whether the public interest will be served by ``real time''

bidding in a particular auction. Most commenters oppose the use of

``real time'' bidding, arguing it may be difficult for bidders to react

quickly enough to ensure that in each bidding round they make new high

bids on the necessary percentage of their bidding eligibility to meet

their activity requirement. These commenters also believe that the

somewhat accelerated pace of ``real time'' bidding may leave less time

to craft informed bidding strategies during the auction.

93. As mentioned above, the ``click-box bidding'' format should

significantly improve a bidder's ability to react quickly. Further,

should the Commission determine to employ ``real-time'' bidding in the

future, the Commission believes that the issues involving meeting

activity requirements will be alleviated by our proposal in the Notice

to open a discrete closed bidding period after each fixed period of

``real time'' bidding (when only standing high bids from the previous

round and new high bids from the current round count in determining the

bidder's activity level). During this closed bidding period, bidders

will be able to submit valid bids (bids that meet or exceed the minimum

accepted bid) to ensure that they have the opportunity to meet their

activity requirements for the round. Following the discrete closed

bidding period, the Commission will post the final round results for

the period and make all bids available to the public. This discrete

period should help to eliminate any risks of not meeting eligibility

requirements or having time to formulate bidding strategies which

commenters suggest may be associated with ``real time'' electronic

bidding. In particular, this period will help to provide bidders

sufficient time to meet eligibility requirements and will minimize the

risks, suggested by some commenters, of the submission of erroneous

bids.

94. One of the greatest advantages to ``real time'' bidding is that

it allows bidders to obtain immediate feedback on new high bids,

withdrawn high bids and minimum accepted bids, and thereby provides

them with the opportunity to immediately respond to this information

and move licenses toward their final valuations more quickly. The

Commission believes that, particularly in the case of complex auctions

of multiple licenses, it is one means of helping auctions to progress

more efficiently. Under the current simultaneous multiple-round auction

rules, each round of bidding contains a discrete bidding period during

which bidders cannot see the actions of other bidders. Bidders must

wait until the end of each round to see the bids placed by other

bidders and determine their status as high bidder. In contrast, an

open, continuous bidding round--in which bidders know when their bid

has been exceeded and are free to bid again--can be used to reduce the

delay inherent in the current design where a bidder must wait until the

next discrete round to react to the actions of other bidders.

95. The Commission notes that some commenters express concern that

the widespread use of ``real time'' bidding would increase the

administrative costs of participating in the auction due to the

incentive to stay on-line during the continuous bidding period and

thereby work to exclude smaller entities that may lack the resources to

devote to a concentrated bidding period or to stay on-line during the

entire bidding period. The Commission agrees with commenters that under

some circumstances the costs of participating in an auction in which

bidders are required to be ``on-line'' may discourage the participation

of small businesses. The Commission therefore concludes that the per

minute charge for bidding ``on-line'' should be reexamined, and

delegate to the Bureau that authority to implement such a reduced fee

in the future, if appropriate.

96. No commenters addressed the Commission's tentative conclusion

in that Notice that because ``real time'' auctions are a variation of

the simultaneous multiple-round auction design established in our

rules, many of the same procedures (i.e., upfront payments to determine

eligibility, activity requirements that apply to each round, minimum

bid increments, and a stopping rule) should apply. These procedures

have proven workable and easily understood by bidders in the context of

our simultaneous multiple-round auction design, but some modifications

to these procedures may be necessary if the Commission employs ``real

time'' bidding. The Commission concludes that the Bureau should

undertake this task.

97. Consistent with section 3002 of the Balanced Budget Act, the

Commission directs the Bureau to seek comment from the public on

auction-specific issues (i.e., duration of bidding rounds and activity

requirements) prior to the start of each auction. The

[[Page 2332]]

Commission believes that this practice of seeking comment on such

issues prior to the start of each auction will adequately address any

additional concerns associated with the use of ``real time'' bidding.

The Commission also notes that it seeks, on an ongoing basis, to

enhance and improve our bidding processes. The Commission believes that

the Bureau should explore ``real time'' bidding consistent with the

requirement under section 309(j) that the Commission experiment with

different bidding methodologies. See 47 U.S.C. 309(j)(3).

98. Combinatorial Bidding. The Commission did not specifically seek

comment in the Notice on the use of combinatorial bidding as an auction

design methodology. The Commission's current Part 1 rules already

provide for the use of combinatorial bidding as one of our competitive

bidding design options. See 47 CFR 1.2103(b). In addition, the

Commission was directed by Congress in the Balanced Budget Act of 1997

to consider the use of combinatorial bidding as an alternative auction

design that could be used, in certain instances, as a means of speeding

the auction process. Specifically, the Balanced Budget Act requires the

Commission, for testing purposes, to design and conduct an auction in

which a system of combinatorial bidding is used. Balanced Budget Act;

47 U.S.C. 309(j)(3)(i).

99. The Commission has insufficient information to determine how

this relatively new bidding methodology might be used to improve our

spectrum auction program. The Commission will seek comment on a number

of issues relating to combinatorial bidding, and will more thoroughly

address this issue once the record is complete. The Commission has also

awarded a research and development contract to a private sector

consultant to examine theoretical and applied combinatorial bidding

approaches where licenses exhibit strong synergies and bidders have

overlapping preferences (i.e., prefer different packages of licenses).

The contractor will also evaluate the most appropriate of the

theoretical and applied approaches to combinatorial bidding for

spectrum auctions and address a number of concerns raised by the

Commission and other interested parties. The Commission's goal in

awarding the contract is to allow private sector and government auction

experts to address these concerns and investigate the possible effects

of the use of combinatorial bidding on the auction process, including

the Commission's fulfillment of the objectives of Section 309(j) of the

Communications Act.

100. Minimum Opening Bids and Reserve Prices. Several commenters

oppose the use of minimum opening bids. However, the Balanced Budget

Act establishes a presumption in favor of a required minimum opening

bid or reserve price. Balanced Budget Act, section 3002(a)(1)(C)(iii).

The Commission therefore adopts its proposal in the Notice to delete

the term ``suggested'' from Sec. 1.2104(d). The Commission also

clarifies that the Bureau has the authority to seek comment on minimum

opening bids and reserve prices and to establish such mechanisms for

each auction, consistent with its role in managing the auction process

and setting valuations for other purposes (e.g., setting upfront

payment amounts). The Bureau shall establish a minimum opening bid and/

or reserve price for each auction, unless, after comment is sought

prior to a particular auction, it is determined that a minimum opening

bid or reserve price would not be in the public interest.

101. The terms ``minimum opening bid'' and ``reserve price'' are

traditionally different, and are employed for different purposes. A

reserve price is defined as an absolute minimum price below which an

auctioneer will not sell an object being auctioned. It may be disclosed

to bidders before an auction or during an auction, or it may be kept

secret, so that a ``winning'' bidder does not actually find out if the

object has been won until after the auction has closed. Auctioneers

generally employ reserve prices to order to maximize the revenue earned

from an auction. A minimum bid is a minimum value below which bids will

not be accepted in the first round of an auction. The level of a

minimum opening bid is not unchangeable like a reserve price, but may

be reduced at the discretion of the auctioneer if no bids are made at

the existing level. The primary purpose of a minimum opening bid is to

speed up the course of an auction. However, a minimum bid also can

serve as a revenue-enhancing function like a reserve price, because if

bids will not be accepted below a certain level, they will also not be

sold below that level. That is, a minimum opening bid effectively

functions as a reserve price unless or until it is reduced. Regarding

the level of reserves or minimum bids, the Commission does not believe

that the Balanced Budget Act provision means that it should now be

attempting to maximize the revenue earned in all future spectrum

license auctions. The other auction goals in the Act, such as ensuring

the deployment and rapid deployment of new technologies and services

and promoting economic opportunity and competition (see 47 U.S.C.

309(j)(3)) have not been eliminated, and the Commission must continue

to balance and pursue them all. Therefore, the Commission concludes

that the new provision does not call for traditional reserve prices.

Rather, it calls for an added protection that licenses will not be

assigned at unacceptably low prices.

102. The Commission believes that the Bureau should have the

discretion to employ either or both of these mechanisms for future

auctions. The Commission directs the Bureau to seek comment on the use

of a minimum opening bid and/or reserve price, as it will do for a

variety of auction-specific issues, prior to each auction. In addition,

the Bureau should seek comment on the methodology to be employed in

establishing each of these mechanisms. Among other factors, the Bureau

should consider the amount of spectrum being auctioned, levels of

incumbency, the availability of technology to provide service, the size

of the geographic service areas, issues of interference with other

spectrum bands, and any other relevant factors that could reasonably

have an impact on valuation of the spectrum being auctioned.

103. Maximum Bid Increments. Several commenters suggest that jump

bidding is not a problem of serious concern. Some theoretical

literature, however, suggests that bidders could use jump bidding to

manipulate the auction process and potentially reduce efficiency of the

auction. For example, a general principle of auction theory is that the

auction mechanisms that perform the best are those which are able to

induce bidders to reveal the most information. To the extent that jump

bids enable bidders to conceal information, the phenomenon moves us

away from the informational advantages of an ascending bid (multiple

round) auction in the direction of a first-price sealed bid (single

round) auction. As ISTA recognizes, jump bidding can complicate bidding

strategy and deny bidders information about the number of bidders who

would be willing to pay prices between the minimum acceptable bid and

the jump bid. In the absence of information about the bidders who would

be willing to participate at intermediate bids, other bidders may feel

compelled to shade their bids more than they would otherwise. This

behavior is an attempt to avoid the ``winner's curse,'' that is, the

tendency for the winner to be the bidder who most overestimates the

value of the item being auctioned.

[[Page 2333]]

104. As an initial matter, the Commission notes that recent changes

designed to improve the Commission's electronic auction bidding process

eliminate the dangers that a maximum bid increment is designed to avoid

(e.g., jump bidding). In an effort to speed the auction process and

eliminate unwarranted ``gaming'' of our processes, the Commission has

simplified the electronic auction bidding process by implementing

``click-box bidding.'' As discussed above, this feature permits bidders

to enter a bid only at the maximum bid increment as determined by the

Commission, and thus makes bidding tactics such as jump bidding

impossible. Nevertheless, the Commission will reserve the discretion to

employ a maximum bid increment should it return to an auction format in

which jump bidding can in any way decrease the competitiveness of an

auction. In this regard, the Commission disagrees with NextWave's

suggestion that by disallowing jump bids as one method by which bidders

may obtain information about each other the Commission risks prolonging

an auction. On the contrary, the Commission has alternate methods

(e.g., ``click-box bidding,'' employing minimum bid increments and

activity rules and increasing the number of rounds per day) to ensure

that auctions close within a reasonable time.

105. Bid Withdrawal Payments. As discussed above, the Commission

recently implemented ``click-box bidding'' in an effort to improve the

auction process and eliminate erroneous bids. The Commission also

recently modified the electronic bidding format to limit withdrawals.

As a result of such changes, the types of erroneous bids discussed in

the Notice cannot occur under our new bidding format. The Commission

therefore concludes that its proposal regarding decreased bid

withdrawal payments in cases of erroneous bids is moot.

106. Misuse of Bid Withdrawals. Several commenters oppose the

Commission's proposal to place limits on bid withdrawals in certain

circumstances as a means of avoiding strategic withdrawals that are

intended for anti-competitive purposes. Both AT&T and Merlin argue that

the ability to withdraw bids is critical to a bidder's auction

strategy. While they recognize the difficulty in determining the true

intent behind a withdrawn bid, these commenters suggest that the

Commission continue to monitor each auction carefully, and address

abusive behavior on a case-by-case basis. Similarly, PageNet states

that the Commission should not limit bid withdrawals as they are

critical to providing applicants with the flexibility to correct bids

that are placed in error and to quickly change bidding strategy.

PageNet contends that concerns about strategic withdrawals intended to

produce anti-competitive results are not sufficient to eliminate the

bidding flexibility that bid withdrawals provide. Finally, AirTouch

suggests that the Commission permit bid withdrawals at any time,

subject to certain conditions. In particular, AirTouch recommends that:

(1) All bid withdrawals should be subject to applicable bid withdrawal

payments; (2) a bidder withdrawing a bid should not be permitted to

regain eligibility on any bidding units lost as a result of the

withdrawal; and (3) the high bidder in the round prior to the withdrawn

bid should be permitted to bid again on the license, and to reacquire

eligibility for bidding units necessary to resubmit the new bid.

107. In contrast, NextWave supports a limitation on bid

withdrawals. NextWave states that bid withdrawals are a necessary tool,

but in some instances, bid withdrawals are used for insincere bidding

designed to ``game'' the auction. To protect against such misuse,

NextWave proposes, for example, that the Commission create a fourth

stage of the auction, during which a bidder who has withdrawn from a

particular market would be prohibited from re-bidding in the same

market. In the past, the Commission has recognized that allowing bid

withdrawals facilitates efficient aggregation of licenses and pursuit

of efficient backup strategies as information becomes available during

the course of an auction. Nevertheless, the Commission also has

recognized that bidders may, in some instances, seek to remove bids for

improper purposes, such as to delay the close of the auction for

strategic purposes. For this reason, the Bureau has traditionally

retained the discretion to limit withdrawals as part of the management

of an auction. To prevent strategic delays to the close of the auction,

or other abuses, the Bureau should exercise its discretion assertively.

In addition, the Bureau should consider limiting the number of rounds

in which bidders may withdraw bids, and to prevent bidders from bidding

on a particular market if the Bureau finds that a bidder is abusing the

Commission's bid withdrawal procedures. These are among the types of

issues on which the Bureau will seek comment prior to the start of each

future auction.

108. Reauction Versus Offering to Second Highest Bidder. The

Commission will modify Sec. 1.2109(b) to reserve the discretion to

either reauction a defaulted license or offer it to the other highest

bidders (in descending order) at their final bids. 47 CFR 1.2109(b).

Several commenters support the reauction of defaulted licenses because

it helps to ensure that the price paid for a license is the current

price, rather than the price that was applicable at the time the

original auction occurred. Only two commenters oppose reauction in all

circumstances. Airadigm and AMTA oppose providing the Commission with

the discretion to reauction defaulted licenses because they believe

that awarding licenses to the next highest bidder will be faster than

reauctioning. However, as the Commission stated in the Notice, the

Commission has developed a computerized auction system and conducted

numerous auctions and now believes that the costs of a reauction, even

for a small number of relatively low value licenses, is generally

minimal. The Commission also believes that the planned use of regularly

scheduled quarterly auctions will ensure rapid reauction.

109. Further, the Commission notes that re-offering a defaulted

license to the next highest bidder (in descending order) at their final

bids may not ensure that the license will be awarded to the bidder who

values it the most highly. In particular, as the license is offered to

bidders at the next highest bids, other parties can argue that they

would pay more for the license if given the opportunity. In addition,

when more than one license is being auctioned, aggregation strategies

may shift during the course of the auction, affecting the value placed

on any individual license by a particular bidder. As the Commission

discussed in the Notice, when it first adopted rules governing the

licensing of defaulted licenses, the Commission stated that ``[i]n the

event that a winning bidder in a simultaneous multiple-round auction

defaults on its down payment obligations, the Commission will generally

reauction the license either to existing or new applicants.'' Noting

that in some circumstances the costs of conducting a reauction may not

always be justified, the Commission reserved the discretion in cases in

which the winning bidder defaults on its down payment obligation to

offer a defaulted license to the highest losing bidders (in descending

order of their bids) at their final bids if ``only a small number of

relatively low value licenses are to be reauctioned * * *.''

110. Nextel and others suggest that the Commission should retain

the discretion to award defaulted licenses to

[[Page 2334]]

the next highest bidder only when the default occurs soon after the

close of the auction and there has been no opportunity for parties to

file petitions to deny. Nextel suggests that in such an instance, there

is little risk of a significant change in market price, and no risk of

encouraging frivolous petitions to deny. The Commission is aware of the

dangers of adopting a rule which could have the unfortunate consequence

of encouraging the filing of frivolous petitions to deny. Nevertheless,

the Commission believes that by reserving the discretion to either

reauction defaulted licenses or award them to the next highest bidder,

the Commission will be in the best possible position to determine which

option serves the public interest in each particular situation.

VII. Anti-Collusion Rules

111. The Commission has taken this opportunity in revisiting our

general competitive bidding procedures to examine the effectiveness of

the anti-collusion rule in the 15 auctions the Commission has conducted

to date. The Commission continues to believe that its anti-collusion

rules are necessary to deter bidders from engaging in anti-competitive

behavior. Nevertheless, after careful review of the comments received

in this proceeding, the Commission has determined that some

modifications to Sec. 1.2105(c) can be made which will benefit bidders

in several respects, without jeopardizing the competitiveness and

overall integrity of our auction program.

112. In the Collusion MO&O, the Commission revisited the anti-

collusion rules prior to the start of the PCS auctions, and concluded

that allowing holders of non-controlling attributable interests in an

applicant greater flexibility to form agreements with other applicants

would help applicants to acquire the additional capital necessary to

bid successfully for licenses. See Implementation of Section 309(j) of

the Communications Act--Competitive Bidding, WT Docket No. 93-253,

Memorandum Opinion and Order, 59 FR 64159 (December 13, 1994)

(``Collusion MO&O''). The Commission therefore created an exception to

the general rule contained in Sec. 1.2105 to permit a holder of a non-

controlling attributable interest in one applicant for a particular

license or licenses to obtain ownership interests in or enter into

consortium arrangements with a second applicant for a license in the

same geographic service area. See 47 CFR 1.2105(c)(4). The attributable

interest holder must certify to the Commission that it has observed and

will observe certain restrictions on communication concerning the

applicants in which it holds an attributable interest or with which it

has entered into a bidding arrangement.

113. After considering the comments filed in response to our

proposals in the Notice, the Commission has decided to adopt a second

exception to our general rules prohibiting collusion. See 47 CFR

1.2105(c). Specifically, the Commission will permit a holder of a non-

controlling attributable interest in an applicant to obtain an

ownership interest in or enter into a consortium arrangement with

another applicant for a license in the same geographic area provided

that the original applicant has withdrawn from the auction, is no

longer placing bids, and has no further eligibility. To meet the

requirements of this exception, the attributable interest holder will

be required to certify to the Commission that it did not communicate

with the new applicant prior to the date the original applicant

withdrew from the auction, and that it will not convey bidding

information, or otherwise serve as a nexus between the previous

applicant and the new applicant. As stated in the Notice, this

additional exception will further facilitate the flow of capital to

auction applicants by encouraging, and providing the flexibility

necessary for, non-controlling investors to invest in other auction

applicants if their original applicant fails to complete the auction.

The majority of commenters addressing this proposal agree that it will

encourage investment in auction applicants without threatening the

overall competitiveness of the auction process.

114. Only Nextel and PageNet oppose this exception, citing the

potential for collusive activity when an investor in an applicant that

has chosen to withdraw from the auction explores possible investments

in other applicants, thus learning bidding strategies of multiple

auction participants. In addition, PageNet contends that this exception

could encourage speculation which would threaten the integrity of the

auction process and ultimately result in lower prices paid for the

spectrum. However, after balancing these factors, the Commission

believes that the benefits of this certification requirement, in

particular the likelihood that auction applicants will be able to

attract increased investment, exceed any possible disadvantages. The

Commission requires that auction applicants certify to the truthfulness

and accuracy of a number of issues on their Form 175 applications, and

to make minor amendments when necessary. The Commission believes that

applicants are no more likely to make false certifications about the

exception which the Commission adopts today than about other

information on the form. As discussed infra, the Commission also

reminds prospective applicants that the Commission will conduct a

detailed investigation in the event it becomes aware of a possible

violation of the anti-collusion rule, and that violations may result in

the loss of the down payment or full bid amount, the cancellation of

licenses, and preclusion from participation in future auctions.

115. Commenters in both the Paging proceeding and in this

proceeding support the creation of a safe harbor for discussions of

certain non-auction related business matters between applicants for the

same license areas. In general, these commenters argue that (1) the

Commission's anti-collusion rules cause unnecessary confusion in their

current form, (2) the purposes of the anti-collusion rules would not be

threatened by such a safe harbor, and (3) existing antitrust laws and

policies will adequately accomplish the goal of protecting the

competitiveness of the bidding process. As the auction program has

evolved, the Commission has continued to refine and clarify for bidders

the operation and impact of the anti-collusion rule upon bidder conduct

during the course of an auction. Prior to the start of the broadband

PCS D, E and F block auction, the Bureau received numerous inquiries

concerning the impact of these rules upon business contacts between

current broadband PCS licensees and auction winners and eligible

participants in the ongoing broadband PCS D, E and F Block auction. In

response to these inquiries, the Bureau released a Public Notice

providing guidance on these business negotiations in the context of our

anti-collusion rules. The Bureau emphasized that Sec. 1.2105(c) may

affect the way in which auction applicants conduct their routine

business during an auction by placing significant limitations upon

their ability to pursue business opportunities involving services in

the geographic areas for which they have applied to bid for licenses.

These interpretations have provided sufficient guidance concerning the

types of non-auction related communications which are permitted under

Sec. 1.2105(c), and the Commission therefore declines to create such a

safe harbor.

16. The Commission affirms the Bureau's interpretation of this

aspect of the anti-collusion rule. As a general matter, the anti-

collusion rule does not prohibit non auction-related business

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negotiations between auction applicants who have applied for the same

geographic service areas. The Commission cautions auction applicants,

however, that discussions concerning, but not limited to, issues such

as management, resale, roaming, interconnection, partitioning and

disaggregation may all raise impermissible subject matter for

discussion because they may convey pricing information and bidding

strategy. Because auction applicants should avoid all discussions with

each other that will likely affect bids or bidding strategies, the

Commission believes that individual applicants, and not the Commission,

are in the best position to determine in the first instance which

communications are permissible and which are not.

117. As discussed above, the Notice also invited comment on any

other changes to our rules prohibiting collusion that commenters

believe are warranted. Section 1.2105(c)(6)(i) of the Commission's

rules provide that, for purposes of the anti-collusion rule, an

applicant is defined as an entity submitting a short-form application,

as well as all holders of partnership, ownership, and any stock

interest amounting to five percent or more of the entity. 47 CFR

1.2105(c)(6)(i). One commenter, the Coalition of Institutional

Investors (``CII''), states that defining any holder of five percent or

more of an auction applicant as part of the applicant for purposes of

the Commission's anti-collusion rules unnecessarily restricts

applicants' abilities to obtain financing from a variety of sources.

After careful consideration of the issue, the Commission agrees with

CII. Therefore, the Commission will increase the attribution standard

contained in Sec. 1.2105(c)(6)(i) to 10 percent, or any holder of a

controlling interest in the applicant.

118. A higher attribution standard will facilitate the flow of

capital to applicants by enabling parties to make investments in

multiple applicants, including applicants for licenses in the same

geographic areas. The Commission's decision to use an attribution

threshold of 10 percent is consistent with the change the Commission

makes to the general reporting requirement. The Commission recognizes

that some potential for collusion exists whenever an entity is

permitted to hold an interest in more than one applicant for licenses

in the same geographic service area. However, the Commission

reemphasizes that auction applicants and their owners continue to be

subject to existing antitrust laws, and that conduct that is

permissible under the Commission's rules may be prohibited by the

antitrust statute. In addition, the Commission reminds prospective

auction participants it will continue to scrutinize carefully any

instances in which bidding patterns suggest that collusion may be

occurring.

119. Finally, the Commission reemphasizes that the Commission will

aggressively investigate any allegations that an auction participant

has violated Sec. 1.2105(c). Bidders who are found to have violated the

Commission's anti-collusion rules may, among other sanctions, be

subject to the loss of their down payment or their full bid amount,

face the cancellation of their licenses, and may be prohibited from

participating in future auctions. In addition, where allegations appear

to give rise to violations of the federal antitrust laws, the

Commission may investigate and/or refer such cases to the United States

Department of Justice for investigation.

VIII. Pre-grant Construction

120. The Commission will adopt its proposal in the Notice to permit

applicants for all licenses awarded by competitive bidding to begin

construction of facilities prior to the grant of their applications.

All commenters addressing the issue support our proposal to permit

license applicants to begin construction of their facilities, at their

own risk, upon release of a public notice announcing the acceptance for

filing of post-auction long-form applications. These commenters agree

that allowing pre-grant construction furthers the statutory objective

of rapidly deploying new technologies, products, and services for the

benefit of the public. 47 U.S.C. 309(j)(3)(A).

121. Commenters also support our proposal to permit license

applicants with petitions to deny filed against their long-form

applications to begin construction of their facilities at the same time

as license applicants whose licenses are not the subject of pending

petitions to deny. While the Commission's current service-specific

rules require as a condition for pre-grant construction no pending

petitions to deny, the Commission concludes that the merits of

petitions to deny may be judged by an applicant and factored into its

assessment of the risk of proceeding with construction before license

grant. The Commission therefore adopts a pre-grant construction rule

for all services subject to competitive bidding that permits

construction by applicants that are subject to petitions to deny. Of

course, pre-grant construction will be subject to any service-related

restrictions, including but not limited to antenna restrictions,

environmental requirements, and international coordination. Any

applicant engaging in pre-grant construction activity does so entirely

at its own risk, and the Commission will not take such activity into

account in ruling on any petition to deny. Finally, the Commission

notes that it expects its licensing process to be more rapid generally

in light of the shortened petition to deny period permitted by the

Balanced Budget Act. Balanced Budget Act, section 3008.

IX. Conclusion

122. Based on the experience the Commission has gained from its 15

completed auctions, as well as the feedback it has received from

bidders, the Commission believes the time has come to streamline its

competitive bidding rules in order to make our licensing process more

efficient. In the past, the Commission has adjusted its auction

procedures for different services and has gained experience with the

process, resulting in the adoption of different procedures for

different auctionable services. This Third Report and Order amends

subpart Q of part 1 of the Commission's rules to reflect substantive

amendments and modifications intended to simplify these regulations,

supersede unnecessary rules wherever possible, and eliminate the need

to conduct separate, comprehensive rule making proceedings prior to

each auction. The Commission believes that the rules it adopts today

will benefit bidders and the auction process generally. The Commission

also believes these rules will help to provide more specific guidance

and flexibility on a number of issues that will increase the overall

effectiveness of our auctions.

X. Final Regulatory Flexibility Analysis

123. As required by the Regulatory Flexibility Act (RFA), 5 U.S.C.

603, the Commission has prepared a Final Regulatory Flexibility

Analysis (FRFA) of the expected impact on small entities of the rules

adopted in the Third Report and Order. The Commission will send a copy

of the Third Report and Order, including this FRFA, to the Chief

Counsel for Advocacy of the Small Business Administration. (In

addition, the Third Report and Order and FRFA (or summaries thereof)

will be published in the Federal Register.) As required by the

Regulatory Flexibility Act (RFA), an Initial Regulatory Flexibility

Analysis (IRFA) was incorporated in the Notice of Proposed Rulemaking

in WT Docket No. 97-82.

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See 5 U.S.C. 604. The RFA is codified at 5 U.S.C. 601 et seq. See also,

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 Rulemaking, 62 FR 13570 (March 21, 1997). The

Commission sought written public comment on the proposals in the Notice

of Proposed Rulemaking, including comment on the IRFA. This Final

Regulatory Flexibility Analysis (FRFA) in this Third Report and Order

(Order) conforms to the RFA, as amended by the Contract With America

Advancement Act

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