Affirming and Dissenting Separate Statement
Chairman Reed E. Hundt
Re: C Block Financing Issues
The C block is the long-desired fifth wireless license: the third so-called PCS license to
be added to the two outstanding cellular licenses. A half-dozen holders of the C block licenses
for about two-thirds of the country by population are in financial distress and apparently unable
to pay monies promised to the government by these licensees in a fair auction of the C block
licenses. The question presented today is what should the FCC do as a creditor and a
policymaker in this situation. For ten months I have been stating that the key policy goal in
wireless is competition, not debt collection. However, it is also true that this Commission, as
a creditor, ought to behave in a commercially reasonable manner. In America debtors who
cannot pay are not thrown into prison, nor ought they be consigned to a Serbonian bog of
Commission deliberation in which armies of lawyers and lobbyists and Commission staff are
sunk. Yet for almost a year my colleagues on this Commission have been unwilling to make a
commercially reasonable restructuring proposal of any kind to any of the financially troubled C
block licensees. Nor have they been willing to promote competition by expediting some
solution to the need to restructure and finance the C block.
Having this fifth license used in the marketplace is a longstanding goal of policy in this
country; allowing it to be unfinanceable due to moralistic arguments against commercially
reasonable structuring of debtridden licensees faced with unsolvable financial problems is
inconsistent with all the wireless competition policies of this Commission and the repeated
public statements by all commissioners for many years. Today the Commission, after ten
months of inaction in response to my repeated urgings, finally decides to take some significant
steps consistent with the reasonable commercial practices of any debt holder and consistent
with our oft-stated commitment to competition.
The Commission has a history dating back to 1993 of seeking to promote small
business entrepreneurial activity in wireless with these C block licenses. This history included
the current Commissioners' decision in 1994 to reallocate the PCS spectrum so as to make sure
the C block licenses were of equal viability to the two other 30 MHz PCS licenses auctioned in
1994. Subsequently, the Commission designated the C block as an entrepreneur's block
expressly to promote participation by small businesses and businesses owned by minorities and
women. After the Supreme Court's Adarand decision, that plan had to be revised to eliminate
provisions for minorities and women but the Commission retained its primary objective of
providing entrepreneurial opportunities for small businesses. All current Commissioners
supported this objective.
After the FCC successfully persuaded the Supreme Court to lift an appellate court stay,
the C block auction began in 1995. To the dismay of many, some of the winners bid at levels
far beyond apparently prudent ranges. Most did not; dozens of financially prudent bidders
won at reasonable prices. But a handful of bidders submitted bids that cannot be explained
other than by assuming they made their decisions according to erroneous market predictions,
bad financial advice or a triumph of hope over thought. Regrettably, these bidders --
irrationally exuberant in hindsight and, according to many, even at the time of bidding -- won
nearly three quarters of the United States market measured by population.
Some of these bidders have subsequently criticized the FCC's auction process and other
FCC actions. None of this criticism has the slightest basis in fact. All amount to unworthy
attempts to shift blame from the bidders to the auction conductor. Nothing about this history
discredits auctions as a means of distributing licenses. Moreover, the installment payment and
bidding credit plan that facilitated entrepreneurial entry into the C block in fact worked very
well with respect to the majority of the licensees. More small business participation in
wireless resulted from prudent bids in the C block than in virtually all other FCC license
distributions in this decade.
However, the current situation, and indeed the situation for almost a year, has been that
a handful of large C block licensees have been unable to attract sufficient financing to create
viable businesses. These are at least Nextwave, Pocket, GWI, ChaseTel and ClearComm.
Unfortunately, all other C block bidders have their business futures occluded by the
financial troubles of these large, financially troubled bidders. That is because Wall Street
financiers are interested in seeing the build out of the entire block with the attendant
possibilities for roaming that would be realized by complete buildout. In other words, the
financial difficulties of the largest troubled bidders are in fact visited on otherwise financeable
C block bidders.
Furthermore, the country's wise policy of encouraging wireless competition is
hampered by the financial troubles of the C block. The sooner this block of licenses can be
financed, the quicker we will see long overdue robust price and quality competition in
In addition, our decision not to adopt a single standard, and to permit competition
among CDMA, TDMA and GSM, is also undercut by a failure to put the C block on
reasonable financial footing. It is simply necessary to have at least three PCS firms operating
in major markets to permit each of these technologies a fair chance to gain adherents.
I was aware last December that the market was unlikely to finance many of the largest
bidders. That is why, in my year end statement entitled,"The Hard Road Ahead,
"I stated that "commercial lenders often reassess the terms of loans to address changes in the
marketplace" and that C block licenses "perhaps ... should be able to request renegotiation of
their financing where it is necessary and appropriate to do so."
I made this suggestion because it is necessary for creditors, such as the United States in
this situation, to act in a commercially reasonable manner. And it is necessary for the
Commission to focus persistently on major policy goals and not to make the blunder of
thinking that Congress has tasked us to attempt to maximize revenue from the C block auction.
Here the goals are, as a matter of statute, not to maximize revenue from the C block, nor to
punish debtors for their unwise bids, but rather we are commanded by Congress to promote
competition, deployment of service and small business entry.
For the greater part of the last ten months my colleagues and I have disagreed over
these objectives. They have focussed instead on questioning whether the largest licensees were
really financially troubled, or they have evinced disinterest in the significance to consumers of
these licensees' business prospects, or they have dwelled on the disappointment of other C
block bidders who dropped out of the bidding in markets where price levels reached the
heights now universally seen as imprudent and unsustainable. Finally, they have expressed
indifference to the risk of bankruptcy filings by the subject licensees, rather than negotiating
restructuring of their debt according to market-based principles.
With perfect hindsight, had Congress written the law to state with inexorable clarity
that the auctioning of wireless licenses does not suddenly make them property subject to
bankruptcy jurisdiction, this latter point would be moot. Indeed, if tying up licenses in
bankruptcy litigation were foreclosed as an option for a troubled C block licensee, then the
Commission could simply retrieve licenses from defaulters, and reauction them to other small
businesses. This is why I asked Congress this summer to amend the law to make clear that
such action could be taken. No other commissioners joined me at that time. Powerful
lobbying forces defeated my efforts. I am glad that, at least in recent days, all commissioners
have joined this effort. However, responsible leaders in Congress have assured us that no such
legislation is likely this year.
Pocket Communications, one of the largest C block licensees, is already in Chapter 11.
An objective of the Commission therefore ought to be to compromise the Pocket litigation, as
we have been advised by Sidley & Austin, Gordian Group,and many other experts. I had
hoped that today's decision would offer a market-based compromise Pocket would accept. I
have doubts that the decision today will accomplish that result.
Another objective ought to be to reach market-based compromises with the other
troubled C block licensees that would at least roughly approximate results that could be
obtained in bankruptcy settlements -- because that strategy would save the time and money
expended trying to retrieve unused licenses in bankruptcy.
I might be the only FCC commissioner in history who has actually litigated as an
attorney for creditors in bankruptcy court. Normally this would be of small relevance to my
job. However, from personal experience, as well as from the advice of our experts, I am quite
confident that bankruptcy litigation can cause substantial delay even when the creditor's legal
position is impregnable. That is the case here. Some debtor's attorneys have suggested that
such issues as perfection of UCC-1's are a legal problem for the Commission. This is a
frivolous assertion, that underscores the desperate ingenuity of a bankrupt firm's counsel but
plays no role in our thinking or actions. Highly skilled outside counsel, Department of Justice
lawyers, our own General Counsel's office, and my own personal experience all convince me
beyond any doubt that we will prevail in bankruptcy court. But the process of bankruptcy
litigation takes time and money. Meanwhile, the assets in question are, based on all advice,
declining in value while lawyers talk and commissioners deliberate and lobbyists advocate.
The reason is the lead time granted to the other licensees. If we truly want small business
entrepreneurs to make use of the C block spectrum, we simply have to permit them to
restructure their government debt or obtain the debtor's voluntary agreement to return the
licenses quickly for prompt reauction. This is why it is so important for the Commission to
make proposals that might obtain such agreement at least from some of the C block licensees.
This action is overdue, and although the Commission may not have made a perfect decision
today, some decision was better than none.
The test of any work-out plan for the financially-troubled C block licensees appears to
be this: Does the plan avoid protracted bankruptcy, with the attendant costs of debtor and
creditor litigation, while also generally treating fairly the competing interests of the taxpayers,
consumers, non-government creditors, equity holders and other interested parties?
Today we adopt at least one plan that is highly likely to obtain a voluntary and fair
restructuring settlement agreement from several of the troubled bidders. I refer to the
disaggregation plan, which allows licensees to return 15 Mhz of spectrum in return for a
proportionate reduction in the amount of their outstanding debt. This will help small or rural
area licensees who may not need the full 30 Mhz of spectrum to serve their markets. If long
delayed, at least we are at last adopting this change in our rules.
The so called "amnesty" option we adopt today is also a good idea and I would have
been happy to extend it to any licensee at any time. The problem of course is that it does not
provide any incentives to the licensees' non-government creditors to consent to a return of
licenses and therefore is not a workable solution. Congressman Dingell has told us that in his
view "Giving licensees a choice between walking away from investments already made and
facilities already constructed, or taking a chance in bankruptcy court, is tantamount to giving
them no choice whatsoever." Nonetheless, I don't object to our decision to offer this as an
Another plan we considered including in our Order today had real promise for practical
use -- the so-called "full price buy out plan." This plan, proposed originally by the bipartisan
leadership coalition of Congressmen Markey and Tauzin, would have permitted a licensee to
retain as many of its licenses as it could pay for in cash today (at net present value) using the
full amount of funds on deposit plus any additional sums it could immediately raise. Licenses
that could not be paid for in this manner would be returned and reauctioned in exchange for
discharge of the debt obligations associated with these licenses.
Unfortunately, the prepayment plan included in today's Order fails by a number of key
measures to be consistent with the Markey/Tauzin suggestion and with good policy.
I register my strong dissent as to this part of the Order.
First, it is questionable why a majority of Commissioners departs from the bipartisan
consensus in Congress on this issue. Just two weeks ago, Senator Domenici wrote the
Commission urging that we adopt a "comprehensive solution ... [that would] put into
productive use the spectrum." He also advised against pursuing "options that forestall the
commercial application of Block C spectrum because of time-consuming and costly litigation
resulting ... from extended bankruptcy proceedings." This sentiment is also reflected in
letters from Senator McCain received over the past six weeks. Likewise, Senators Inhofe,
Nickles and Burns expressed their view in early August that "debt restructuring of the PCS
licensees may be necessary to address the concerns that have been raised by the interested
parties." Congressmen Markey, Tauzin and Dingell have each supported the full price buy out
plan described above.
This correspondence makes plain Congress' direction that we adopt a workable,
comprehensive plan for the C block.
That is consistent with the statute. The Congressional
mandate has not been adequately met by the Order we adopt today.
The Order requires licensees to forfeit 30% of their deposits if they elect the "buy-out"
option, even though this money has already been paid and would be used to purchase licenses
at the price bid in the original C Block auction. That penalty is more than 50 times higher than
any previous penalty in FCC history. The bipartisan view from Congress is that no such
forfeiture should be imposed -- a difference which potentially represents hundreds of millions
of dollars lost by incumbent licensees for reasons that bear no relation to the policy goals
included in Section 309(j) of the Communications Act which granted the Commission's
original auction authority. Today's Order also ignores the bipartisan conclusion of Congress
that prepayment prices should be set based on "the net present value of the ... prices for such
licenses". Instead, the prepayment alternative ignores the time value of money and extracts an
additional penalty from licensees on the order of several hundred million more dollars.
Second, the prepayment option we adopt today stands fundamentally at odds with basic
principles of commercial reasonableness. By requiring licensees that elect the option to prepay
their licenses at the "nominal" bid price, the plan ignores the time value of money and inflates
the effective price paid by the licensees that it purportedly seeks to assist. Put simply, the
value of a bid paid out over ten years is significantly less --around 40% less -- than that same
bid paid in cash. The consequence of this oversight is a massive penalty for any licensee that
might otherwise elect this alternative. The prepayment option layers on an additional penalty
by requiring licensees to forfeit 30% of their deposit. Note that this forfeiture of deposited
monies is ordered even though the licensees would use their deposits to prepay licenses at
effective prices higher than the amount that they bid. At base, the plan ignores fundamental
principles of finance and, as a result, cannot reasonably be expected to appeal to licensees or
Third, the prepayment plan adopted today has too much risk of not being helpful to the
financing of the licenses held by the very large bidders that constitute the vast majority of the
C block licensed POPs in the United States. The acid test of any work out plan is whether the
deal is accepted by the debtor; if not, the plan is not a work-out but rather only works us
deeper into the toils of a drawn out bankruptcy litigation. In this case, the prepayment plan
extracts the two extraordinary penalties described above and offers little in the way of
incentives for licensees to accept it. According to the Congressional Budget Office Report,
bankruptcies could cost consumers in excess of $5.5 in lost benefits. Taxpayers lose because
the re-auction of licenses is conducted in a piecemeal fashion at the end of lengthy bankruptcy
litigations, ensuring smaller proceeds as the value of the licenses deteriorates from delay.
Such are the costs of the Commission majority's sanctimonious rigidity.
The majority's unwillingness to adopt a comprehensive plan for addressing the financial
situation of the C block is inexcusable and inexplicable. The legacy of that decision is a
substantial risk of bankruptcies that Congress and any commercially reasonable enterprise
would have us eliminate. By focussing on punishment and ignoring the need to make the
work-out "workable", the majority sacrifices consumer and taxpayer interests. This approach
is fundamentally misdirected and contrary to our statutory directives. In short, today's
decision will delay more competition for most Americans. Competition delayed is competition
Finally, it is not clear to me that the parameters of our Order today and the
accompanying Notice treat fairly those C block companies -- such as Omnipoint, Cook Inlet
and Airadigm -- that have accepted our challenge to bring service to market and who, as result,
have invested heavily in build out. These licensees have operating businesses that are tied to
specific C block licenses. Consequently, they do not have the same flexibility as other
licensees to disaggregate or participate in a "full price buy out", which would require a
dramatic reduction in the size of their existing service footprints. This concern with fairness is
more than a metaphysics. These licensees must compete for capital in the public markets with
other C block licensees, including winners of the subsequent re-auction. To the extent that
such a re-auction of spectrum returned under any of the options in our Order today "resets" the
market price for spectrum, it could impair access to capital for those licenses that are
significantly built out but which carry artificially higher prices per pop.
The concerns I have identified do not subtract from the following facts:
- After many months of discussion the Commission has finally recognized the need to restructure certain debt in the C block.
- Today's decision will permit us to obtain some licenses for reauction and will permit
some licensees to get financing, based on all available information.
- And we have, at the very least, not simply extended the payment dates on the existing
notes by the many years sought by some licensees.
This proposal was unfair to the
taxpayer and an unnecessary windfall to most C block licensees.
Therefore, I affirm in part and dissent with respect to the so-called "full price buy-out" plan.