September 25, 1997
Commissioner Susan Ness
Re: Amendment of the Commission's Rules Regarding Installment Payment Financing for C Block Personal Communications Service (PCS) Licensees, WT Docket No. 97-82
A little over a year ago, we conducted an auction for the "C block" PCS licenses. Like our
other auctions, this auction was carefully conceived to operate on market-based principles,
allowing licenses to be obtained by those who valued them most at prices to be set by free
market mechanisms. Unlike prior auctions, this one was also crafted to fulfill a Congressional
mandate to bring "designated entities" -- especially small businesses, often owned by women
and minorities -- into the marketplace. And it did.
I supported our commitment to market-driven auctions and to designated entities. I reaffirm
that commitment today.
The rules of the C block auction were clear for all. Everyone was subject to the same rules.
Indeed, it is noteworthy that throughout this proceeding there have been few complaints about
the conduct of the auction or the clarity of the rules. It is also noteworthy that the majority of
C block licensees were content to live up to their agreements, and did not seek any special
A handful of the largest bidders sought more favorable terms than the ones they bargained for
when they bid barely 16 months ago. Inevitably, other bidders echoed the cry, reflecting a
natural desire to pay less -- if they can. This chorus has now transcended the C block and is
now affecting other radio services.
I remain unpersuaded that the FCC should provide vastly more favorable terms to the C block
bidders than those to which they previously agreed.
Our auction was conducted properly, our rules were clear, and numerous licensees stand ready
to meet their payment obligations fully and on time. And it is clearly not our responsibility to
prevent any licensee from failing in the marketplace, or from going into bankruptcy. Our
primary responsibility is to preserve the integrity and fairness of our spectrum auctions.
To grant overly generous accommodations, after the auction, to any C block licensee would be
unfair to those C-block licensees that counted on us to enforce our rules, unfair to disappointed
C-block bidders who dropped out of the auction when the licenses they desired became too
expensive, unfair to licensees in other spectrum blocks who are offering competing services,
and unfair to the U.S. taxpayer.
We cannot, however, overlook certain countervailing considerations. I recognize that financial
markets have become unsettled subsequent to our suspension of C block installment payments,
which could impair future investment. The C block bidders who have not run into trouble are
facing unnecessary questions and undue uncertainties about their wherewithal and business
plans. It has grown increasingly apparent that the Commission must take action to get the
entire C block of licensees back to business. While there have been a wide range of proposals
offered and considered, the one thing that all parties have agreed upon is that final resolution is
needed immediately to remove the cloud of uncertainty.
Therefore, I am willing to support offering licensees certain options. The package of options
we adopt in this Report and Order will help licensees while avoiding excesses that would
jeopardize the principles of integrity and fairness that are essential to market-driven auctions.
In developing these options, we have discarded proposals that would have fundamentally
changed auction outcomes or created incentives for licensees to alter business plans which they
possess the financial capability to maintain. In addition, we have endeavored to avoid giving
anyone a "thumb on the scales" in a subsequent auction.
Reasonable people can differ on the merits of the particular package of options we have agreed
upon, but I believe our approach will help C block licensees recover their momentum without
subverting the auction process. While it is not without some hesitation that I support this
relief, the over-arching public interest is in resolving these issues now, sooner rather than
later, to enable rapid build-out and foster competition.
Specifically, we are continuing the deferral of installment payments until March 31, making
the total suspension period a full year. This resumption date ensures that all C block licensees
will have sufficient time to return to the marketplace with certainty restored. They also may
benefit from access to foreign equity that will be permitted under the recent WTO Agreement.
In addition to the deferral of installment payments, which applies to all C block licensees, each
successful bidder will be able to choose one of four additional options.
First, they can resume payments under their existing agreements. I hope and expect that the
vast majority of successful bidders will proceed in this fashion.
Second, under the amnesty option, licensees may forfeit all their licenses and their
downpayments. In return, the Commission will (in coordination with the Department of
Justice) approve forgiveness of their outstanding debt and cancellation of the additional
penalties that otherwise would be due. The licenses will then be re-auctioned in a timely,
efficient, and fair manner.
Under our third option, disaggregation, we are permitting licensees to return half of their
spectrum in a given market in exchange for a corresponding reduction of debt. This is
consistent with our existing disaggregation rules and will permit new opportunities for
spectrum-based competition in the marketplace. We will re-auction licenses for any 15-megahertz spectrum blocks that are returned under the same designated entity terms as apply to
all other C-Block licenses. I expect that this option will enable certain licensees to make more
efficient use of their spectrum, and to generate a cash flow that will better service their
significantly reduced debt.
Fourth, we are making available a "full-price, buy-out" option under which licensees can apply
70 percent of all of their downpayments -- and any new funds they may be able to generate --
to pay for as many licenses as they can manage at the agreed auction price. This last option is
structured as a buy-out, not as a bail-out. Again, returned spectrum will be re-auctioned.
The FCC's primary responsibilities are to: write fair rules, run fair auctions, and issue
licenses to successful bidders. We functioned not as a lender in the traditional sense. The
payment terms were available to all. We made no assessment of credit-worthiness; we did not
evaluate the soundness of any bidder's business plans. Rather, we acted as a licensing
agency, and, as our rules clearly specify, the licensee won only a conditional interest. Each
license is conditioned upon payments and automatically cancels if promised payments are not
made. The conditional nature of the interest granted is clear throughout relevant Commission
rules and orders. In publicly filed SEC documents, bidders have expressly acknowledged the
conditional interest granted to them, and the penalties associated with default.
We have an obligation of fairness and impartiality to those who bid but chose not to overbid or
overleverage. And we owe it to the C-block licensees who seek no special treatment but just
want to get about their business to avoid changing the rules in any fundamental way that is
detrimental to their business plans.
Our dissenting colleague prefers to offer a more lenient approach to the full-price buy-out.
One can speculate whether such an approach would increase, marginally, the likelihood that
this option would be attractive to one or more of the C block licensees. It would also, by a
corresponding margin, decrease the fairness of our decision to disappointed bidders, successful
bidders who seek no special relief, and to the American taxpayer. The prospect of windfalls
would increase, and the integrity of auctions would be reduced.
I fundamentally disagree with the Chairman's assertion that the buy-out should be at a
discounted price rather than the full bid amount (net of bidding credits). The price bid is the
price bid. The favorable financing terms offered by the Government were designed, in part, to
create an inducement for licensees to hold their licenses for a full 10 years. This was
consistent with Congress's stated goals to bring small business, including women and
minorities, into the market -- on a sustained basis. To discount the price based on a "net
present value" basis would be like paying off the face amount of a zero coupon bond nine years
before it matures.
I also disagree with the Chairman that the C block licensees should be permitted to "spend"
100 percent of their deposits, from licenses they no longer want, to pay for licenses they do
want. It is important to respect the fact that these down payments belong to the Government,
to the American people, not to the bidders -- and can be redeployed only by the grace of the
Commission. The approach we are using is based on the 3 percent bidding penalty that is
already in our rules (30 percent of the 10 percent deposit represents 3 percent of the bid
amount). And our difference with the Chairman on this score, in total, come to a three percent
difference in the amounts the C block licensees will have available to buy out the licenses they
want -- a difference that for the largest bidders is undoubtedly less than the fees they will pay
to their investment bankers.
I believe the approach we adopt today fairly balances the competing interests. Restoring
regulatory certainty to the marketplace promotes investment, competition, and service to the
American public. Even though the approach we adopt today is the product of negotiation and
compromise, and does not reflect the first-choice preferences of any individual Commissioner,
I am satisfied that under present circumstances adoption of this order is the course of action
that best serves the public interest.