March 24, 1998
|Re:||Amendment of the Commission's Rules Regarding Installment Payment Financing
For Personal Communications Services (PCS) Licensees (WT Docket No. 97-82)
On a fateful day in March of 1997, the Commission's Wireless Telecommunications Bureau -- at the urging of certain C-block auction winners and with all good intentions -- suspended installment payments for C-block licensees. This action set forth in motion, in my observation, a calamity of sorts that now culminates in yet another round (hopefully the last) of "March Madness." We are asked to reconsider the prior Commission's decision from last September which offered measured relief to the successful C-block auction participants, primarily out of some concern that licenses might get tied up in bankruptcy court should many of these companies default. I support that prior decision and its rationale.
As I explain more fully below, I also endorse our decision to keep the basic framework established in our prior order and to reject proposals to radically change the rules of the game. Though I support most of the modest measures we take here, I believe that more substantial modifications to help a small subset of C-block companies that find themselves unable to meet the original terms and conditions of the auction would do more harm than good. Specifically, I believe that to do so would severely compromise the prospects for both existing and future small businesses and other designated entities to raise sufficient capital to compete effectively in the marketplace.
The C-block was established out of a recognition that small businesses and entrepreneurs, including minorities and women, faced particularly difficult challenges in raising sufficient capital to compete at auction for spectrum and for financing their eventual build-outs. The rules were designed to ensure a fair opportunity to obtain spectrum (by segregating a block and holding it out exclusively for these interests) and to provide more lenient, below-market payment terms to ease the burden of raising capital to bid for spectrum and to finance build-out. In hindsight, one might question the financing terms in light of their unintended consequences, but they were nonetheless the rules of the game established for all to abide by.
Rules, by their very nature, will always be both over-inclusive and under-inclusive. That is, they benefit some they really should not, and they will disadvantage others that should benefit. The virtue of any rule, however, is that it provides a degree of certainty and clarity. Rules should allow all players to understand the terms and conditions of the contest and to reliably predict the results of complying or failing to comply with them. In the context of an auction, relying on the established rules allows participants to evaluate the consequences of their bids -- bid too high and fail to make a payment and you will forfeit your (or your investors') money and lose your license, bid to low and you risk losing the opportunity to hold a lucrative license. In the C-block auction, all participants made these difficult decisions all along the way -- some dropped out, some stayed in. The risk assessments and decisions that each participant made were anchored in the terms and conditions of the auction as well as their vision of the future market. As long as the rules were clearly established, the participants could make their own judgments about their risk tolerance, then knowingly face the consequences of their judgments and be held responsible in the event of market failures.
When the referee (in this case, the Commission) starts tinkering with the rules during the game, or worse after the buzzer has sounded, it does two very unfortunate things: First, it undermines the fairness of the contest. This we know from the earliest age and the principle is echoed on ball fields and gymnasium floors, in olympic arenas, during board games, and even in politics. The cardinal principle is that whether the rule is good or bad it must apply equally to all players or the game is patently arbitrary and unfair and the outcome invalid. There assuredly are always those that support the referee's intervention, because the resulting changes put them on top, or keep them in the lead. However, there are others that sit back in the locker room stunned and dismayed that the rules, advertised as conditions for victory, were changed to accommodate certain players. Second, and most importantly in my mind, is that by telegraphing to the world that the game is subject to unpredictable changes in the rules based on the subjective decisions of the tournament organizers, you discourage people from playing the game at all.
If we constantly adjust our rules to "help" certain players, no matter how sympathetic their plight, we run the very severe risk of foreclosing future opportunities for this very class of players to enter, and compete effectively, in future games. Most telecommunications contests require money to enter and more money to win. It is difficult enough for small, often unproven, companies to raise funds because of the risk associated with their ventures. The Commission should not, by waxing and waning on the regulatory structure, make it more difficult by adding to the uncertainty. If we demonstrate that we are an unreliable referee, capital markets will be unwilling to take the additional risks associated with the regulatory uncertainty that befalls a process by which the rules can be altered at any time based on the sympathies that happen to win the day .
There are acute risks associated with the type of ventures C-block was designed to help, over which regulators have no control, but which are key risk factors for potential investors. This heightens my fear of tipping the risk scale against these companies. It should be remembered that to investors, the entities now seeking our help are inherently risky ventures to begin with. Often their management is less proven, their business plans are untested and less complete, and their optimism is sometimes overstated. This is before consideration of the stiff competition such entities will face in the marketplace if they do win a license in an auction. The additional risk we introduce by demonstrating that our rules are not truly reliable may be more than investors can bear. I sincerely question whether the events of the past and even the little bit we offer to parties in financial distress today is worth the further damage we may do to the risk calculations of investors tomorrow. The sad result being that the very class of people we hope to help now will be left short later.
This Order provides a number of measures I fully support, for they should provide each C-block licensee slightly more flexibility and, consequently, a fighting chance to attract financing, build-out and compete. Most of them clean up imperfections in the original order without doing damage to the underlying principles. In particular, with the added flexibility of the MTA-by-MTA choice of options, we have taken away the artificial and unnecessary nationalization of the C-block "relief" plan. Instead, business plans and investment pitches can continue despite the circumstances facing these licensees. I must depart from the majority on one point, however: allowing participants to use certain down-payment "credits" and continue paying installments.
The prior decision in September made the appropriate cut to allow licensees that have received a payment respite to spread their payment of accrued interest over two years. This provided a reasonable deferral of the payments that could be absorbed into a workable business plan. However, the majority is allowing a portion of the down payments from returned licenses to be used to pay down what is rightfully owed to the government under binding promissory notes and license conditions. While I do not oppose the use of "credits" to encourage licensees to prepay their debt and get the FCC out of the banking business, I object to the idea that such credits can be used to give a boost to certain players with substantial amounts of accumulated interest. In turn, there will be absolutely no realizable benefit to the American tax payers. From a lender's point of view (which we unfortunately have to take on behalf of the United States), I do not believe that this is "commercially reasonable:" it will more likely just delay the inevitable for some licensees, provide free pocket money for key investors and principals, and not have any guaranteed positive affect on build-out investment. If credits are available to licensees that disaggregate, I would prefer that such credits be limited to prepayment of principal instead of this temporary, partial reprieve that really will not help as much in the short term as it will hurt in the long term.
Some believe that efficient spectrum management counsels that it is better to keep as many of the present winners moving forward, rather than incur the additional administrative expense and risk of reclaiming licenses and re-auctioning them. Perhaps, but that is not what we advertised to the original bidders, many of whom dropped out of the auction confident they would get a second bite at the apple if and when the high bidders failed. Furthermore, it seems to me that this belief as applied precipitously devalues auction integrity and its impact on future auctions, and has no principled limits to constrain our subjective benevolence.
I should make one final point. Last summer, it is my understanding that many parties invoked the fear of bankruptcy in developing options and arguments, but in reaching today's decision I heard very little discussion whatsoever about more impending bankruptcies. I did not hear anyone argue that the changes we make today would truly lessen that troubling possibility for the bulk of the licensees. And, I heard very little compelling evidence that the threat, whatever it may have been, is any more likely today than it was in September when the Commission first offered a number of options. Let me be clear that I too am anxious to see the C-block winners survive and provide an important source of competition, but not in a manner that will foreclose real opportunity for such groups in the future. Indeed, I expect to continue to hear about more C-block success stories than failures.
At least, however, the regulatory game is over. The buzzer has sounded. The time has come to compete in the marketplace, not the bureaucracy. There can be no more regulatory meddling, or horse trading. We must provide certainty, now, lest we win the battle only to lose the war.