When the fanfare dies down, winners face the same challenge as with any new start-up but may enjoy more options than incumbent licensees.
The Federal Communications Commission's auctions of spectrum should concern two types of energy utilities: those who participate in the auctions and those who don't.
Initially, these auctions were viewed as a spectacular new regulatory tool (em able to raise billions of dollars for the public, without troubling the overburdened taxpayer. As of late, however, a dark side has emerged. Bidders have cried fraud. Companies unable to pay up on overly aggressive bids have left the FCC holding the bag. The irrational exuberance that greeted the initial spectrum auctions appears to have rightly faded.
Before it was granted auction authority, the FCC had often used lotteries to award licenses when applicants filed more than one application to serve the same area. Applicants with the good fortune to win licenses, most notably in cellular telephone lotteries, often became millionaires. Licensees selected at lottery often had no intention of operating a communication service. News of the fortunes to be made in FCC licensing soon reached the scam artists, who charged exorbitant fees to process applications. Fraud had become a huge problem. Congress favored auctions as a way to generate funds and alleviate administrative burdens at the FCC that had delayed the process and denied new services to the public.
Overall, auctions should spur investments in new radio-based technologies and create growth markets for all kinds of new services. For energy utilities, spectrum capacity could fuel services like real-time pricing and meter reading, as well as wireless communications. Auctions hold the key. Utilities that have spectrum (as most do), or need spectrum (as most do), or invest in spectrum (as many have done) should pay close attention as the drama unfolds.
In fact, spectrum auctions may offer bargains. So may the resale market. Nevertheless, even the most sophisticated utilities could fall prey to a bidding frenzy that drives prices into the stratosphere. Those who choose not to bid should prepare for the new environment (em one with little or no chance to obtain additional spectrum at zero cost.
What the FCC Learned: A Market Glut?
To help carry out the new idea, the FCC has relied heavily on geographic area licensing. Applicants buy rights to a segment of spectrum in a particular area. Further, the FCC has divided the country into different-sized markets. Some auctions have been for spectrum in the 51 large, "major trading areas," or for the 493 smaller "basic trading areas." %n1%n
Having completed a number of auctions, the FCC points to many public benefits from the new system: 1) Rapid delivery of spectrum to firms that value it most, 2) faster licensing and 3) less incentive for speculative filings, reducing paperwork. When the FCC was conducting lotteries for cellular licenses, for example, it received more than 400,000 applications. %n2%n The FCC also notes that auctions have made it easier to the aggregate spectrum, allowing more uses for the spectrum and enhancing competition.
Nevertheless, while the FCC can point to numerous public benefits from its auctions, these accomplishments have not come without significant difficulties. Analysis of three auctions shows the evolution of the auction process and the changing nature of problems encountered by participants and the FCC.
IVDS (em Interactive or Inactive? The auction for Interactive Video and Data Service (see sidebar), with bidding conducted in July 1994, was one of the first at the FCC. The commission had described the services as one that would allow consumers to "choose the camera angle during a sporting event, pay bills, shop until they drop at malls, choose endings to TV shows, check college catalogs, play video games, choose movies on demand and/or order a pizza with or without the toppings."
For about $214 million, 178 bidders won IVDS licenses. Upon completion of the auction, however, licensees found an uncertain market and no equipment to support the service. Two years later there is not one paying customer receiving IVDS. %n3%n The service that the FCC had once called "the access ramp to the information superhighway" is now used only on a limited basis. %n4%n
PCS (em More Like IOU. If IVDS bidders proved too optimistic about opportunities on the information superhighway, their experience pales in comparison to that of the C-block "entrepreneurs auction" for PCS. The C-block auction sold 30-MHZ blocks of spectrum. The auction was designed for "entrepreneurs," or those with less than $125 million in gross revenue and less than $500 million total assets. Those with less than $40 million gross revenues were entitled to bidding credits and installment payments. Many bidders qualified for a 25-percent bidding credit and an installment payment plan under which licensees only had to pay the FCC interest for the first six years. By completion of the auctions, winning bidders had pledged more than $10 billion. The auctions were a huge financial success for the U.S. Treasury. They also represented an excellent opportunity to promote competition.
The huge payments required from auction winners, combined with the reduced revenues resulting from competition for PCS, have created substantial problems for C-block auction winners. Winning bidders paid as much as four times more per potential subscriber than had earlier auction winners. Pocket Communications Inc., the second highest bidder in the auctions, has already filed for bankruptcy. %n5%n Early in July, several C-block auction winners requested that the FCC grant relief from installment payments due on their licenses. These entrepreneurs now claim that they are unable to get financing to construct their systems and are faced with the possibility of bankruptcy.
WCS (em The Who Cares Spectrum. Most recently, the FCC concluded new WCS auctions. These auctions came with few spectrum use restrictions. Even with the flexibility of this spectrum, however, little interest was generated. Congress anticipated earning almost $2 billion from these auctions. Instead, high bids totaled less than $14 million. In some cases, participants won the spectrum merely for the payment required to participate in the auction. One bidder won four licenses for $1 each.
What Congress Wants: More Revenue
These experiences demonstrate the opportunities and risks of participation in auctions. The unexpected results of the WCS spectrum auctions are frequently attributed to the haste with which Congress forced the FCC to conduct the auctions. %n6%n Some potential bidders were unaware of the auctions; others were unable to determine uses for the spectrum or to organize financing for their participation in the auction. It is clear that, although there are some bargains, auctions also pose significant risks.
Despite what may be diminishing returns, however, Congress intends to proceed with additional auctions. In fact, the FCC recently released rules for upcoming auctions of 800-MHZ spectrum (em spectrum previously used primarily for radio dispatch service and essential to the communication systems of many utilities.
The 800-MHZ auctions will award licenses for 175 "economic areas," which are based on the outlines of major commercial corridors. %n7%n The FCC has also announced rules for the auction of local multipoint distribution service, which it hopes will provide competition for cable and local exchange carrier service, and is considering auctions for paging and 220-MHZ service.
While it will have to take steps to prevent the low bidding that characterized the WCS auctions, Congress continues to demand auction revenue. Congress had recently instructed the FCC to find spectrum for auction and plans additional future auctions of some of the 60 MHZ of TV spectrum now used for TV channels 60 through 69. Congress includes anticipated revenues from auctions in budget planning. %n8%n Although it originally expected billions more, Congress anticipates receiving (and spending) more than $21 billion from future auctions. %n9%n
Perhaps the most important lesson learned from these auctions is that the FCC's relationship to licensees has changed. Businesses that have paid good money for spectrum, demand more flexibility and speed of licensing from the FCC. It appears the FCC frequently finds their arguments compelling.
Bidder's Rights: All to the Victor?
The relationship between the FCC and auction winner is complex. As explained above, one primary reason for auctions is the promotion of competition. Auction winners hold the rights to huge blocks of spectrum, and when they are in trouble, as with the C-block auction winners, the FCC faces a dilemma.
If it attempts to cancel auction winners' licenses, then the FCC likely would face legal challenges that could tie up spectrum and prevent competition for years. If it attempts to reach some accord, then it may face legal challenges from auction losers. If it does nothing, then the FCC may face bankrupt licensees and accompanying legal delays. Each option has implications for licensees, investors, the Treasury and consumers. It is therefore understandable that the FCC often sees an auction winner's interests and the public interest as inextricably linked, if not one and the same.
Because the FCC is seeking to protect the investment of auction winners and maintain value of spectrum for any additional auctions, it frequently appears to have reduced regulatory flexibility for non-auction winner licensees.
With the auction winner looking over its shoulder, the FCC may look less favorably on any requests by incumbents that could cause delay. Those who participate in auctions generally gain rights to all available spectrum in the block they have purchased in their geographic area. The auction winners generally have a great deal of flexibility in using the spectrum. This is an advantage over the old regulatory approach.
Now, new technologies using radio spectrum bought through auction, such as Internet services, home security services, meter-reading technologies, automatic highway toll booths and new data services, can go to market more quickly.
Winners (em Patched Right Through. Besides gaining the rights to available spectrum, one of the greatest benefits of winning geographic-area auctions is that it provides the auction winner great flexibility in deciding when, where, what and how to build. Whereas non-auction authorizations generally require construction at a specific site by a specific time, construction for auction winners is generally much more flexible.
Auction winners are generally required to provide coverage to a certain percentage of the population within a few years of being granted their licenses. But they get to decide when and where to build their systems, and often, what kind of services to provide. Because they are not required to construct their systems right away, auction winners have the flexibility to develop their systems in response to the evolving demands and offerings of the marketplace. In some cases, this may mean not constructing for a couple of years as technology develops new uses for spectrum. The FCC invested in the success of auction winners, and therefore is receptive to their proposals.
Prior Licensees (em Put on Hold? For incumbent FCC licensees who don't participate in auctions, there are two compelling questions. First, what do you do with the spectrum you have? Second, what do you do if you need more?
Overall, incumbents who acquired their licenses by a process other than at auction may discover that they have less regulatory flexibility than auction winners. It is as if the FCC is telling incumbents: "We are currently unable to take your call."
By contrast, in some cases, auctions winners have a reversionary interest in any spectrum that incumbents currently may be using. Consequently, and frequently with FCC support, auction winners assume a policing role over non-auction winning licensees, ensuring that they have constructed their stations as authorized and that they are operating within FCC regulations. Because they have an economic interest and often greater resources than the FCC, auction winners are likely to actively clean up the spectrum, updating FCC records, and policing compliance among licensees within their geographic area.
Prospects: All Over the Spectrum
By delivering spectrum to those who value it most, and giving auction winners flexibility to determine how best to maximize the value of this asset, the auctions, with all their flaws, represent an endorsement of the free market. Many believe that the results for consumers and smart investors will far overshadow the $23 billion admission fee.
For the first time, communications companies are more in control of their own destinies. They face continuing pressure to use their spectrum more efficiently (em both to maximize its utility and to stay ahead of the competition. They are already starting. Many new companies are building out their infrastructure to provide home security and data services.
PCS companies are setting their sights on local service. The recent court of appeals decision striking down much of the FCC's local competition regulations enacted under the 1996 Telecom Act could quicken the development of PCS. Competition is growing between PCS and cellular services.
Some disappointments are likely, however. Wireless telecommunications companies, though launched with fanfare, will face the usual start-up difficulties after auctions. As C-block winners will attest, there may be little relationship between the price companies pay for spectrum and the revenue that spectrum will generate. New entrants that paid as little as 7 cents per MHZ per potential subscriber, as well as those that paid $3.46, will face delays, leery lenders, and well-established competitors as they move into these markets.
Nevertheless, few doubt that there is a tremendous market for new services. Following a period of massive investment and efforts to establish a customer base, it appears that telecommunications interests may be rebounding. Between the middle of April and the end of June, the Radio Communications Report index of more than 80 "key telecom stocks" has increased its value 15 percent. %n10%n
It is worth noting, however, that telecommunications companies face increasing competition in the years ahead. The FCC notes that "a recent report identifies over 40 markets that now have three wireless competitors and 10 markets with four competitors." %n11%n Monopolists' profits, so long a feature of telecommunications, will not last long in this evolving market where spectrum can be quickly put to the highest valued use.
Many utilities currently have large spectrum assets that are primarily used to provide company-wide communications. Companies must be aware of the changing regulatory environment and particularly of the diminishing flexibility on which they have grown to rely. For existing systems, companies must be aware of the potential for relocation and of limitations on modifications for their stations that will accompany commercial auction within their spectrum band. Public utilities must develop meticulous management of their spectrum assets. Utilities should also be aware that in its pursuit of revenue, the FCC may consider user fees for private radio spectrum not subject to auction.
Energy utilities will find that free spectrum will be monitored ever more vigilantly. Those who don't participate in auctions can shop in the spectrum market, buying a disaggregated piece of spectrum here and a partitioned geographic area there. All will have increasing options in new technology (em from wireless meter reading to digital private radio services. t
Shirley S. Fujimoto, Esq. and Christine M. Gill, Esq. are partners with McDermott, Will & Emery in Washington, D.C.
The Bidding Record
Since 1994, the FCC has held 14 spectrum auctions, raising more than $23 billion and awarding more than 4,300 licenses. Congress authorized the FCC authority to auction spectrum in the Omnibus Budget Reconciliation Act of 1993, which modified the Communications Act of 1934 [47 U.S.C. §§ 151-713, is codified as 47 U.S.C. § 309(j)].
Auctions held to date:
• Nationwide Narrowband PCS. Personal communications service; 10 nationwide licenses, 1 license by pioneer's preference (Net bids = $617 million, $33 million for pioneer preference, conducted July 1994);
• Regional Narrowband PCS. 30 regional licenses (Net bids = $392.7 million, withdrawal payments = $2.1 million, October-November 1994);
• Broadband PCS. Blocks A&B, 99 licenses (Net bids = $7 billion, withdrawals = $.7 million, December 1994 - March 1995);
• Broadband PCS. Blocks D-F; 1479 licenses (Net bids = $2.5 billion, withdrawals = $5.9 million, August 1996 - January 1997);
• IVDS. Interactive video and data services; 594 licenses (Total bids = $213.9 million, July 1994);
• MDS. Multichannel/multipoint distribution services, known as "wireless cable"; 493 licenses (Net bids = $216.2, withdrawals = $157,000, November 1995 - March 1996);
• 900 MHz SMR. Specialized mobile radio service; 1020 licenses, blocks A-T, (Net bids = $204.2 million, withdrawals = $132,000, December 1995 - April 1996);
• DBS-110. Direct broadcast satellite; 110 degrees, 1 nationwide license (Net revenues = $682.5 million, January 1996);
• DBS-148. 1 partial nationwide license (Net revenues = $52.3, January 1996);
• DARS. Digital audio radio service; 2 nationwide licenses (Net bids = $173.2 million, April 1-2, 1997); and
• WCS. Wireless communication services; 128 licenses, blocks A-D (Net bids = $13.6 million, April 15-25 1997).
Scheduled and proposed:
• 800-MHz SMR. Specialized mobile radio service (bidding starts Oct. 28, 1997);
• LMDS. Local multipoint distribution service (starts Dec. 10, 1997);
• CCP/PCP. Common-carrier and private-carrier paging services (starts 1998);
• 220-MHz. Private or commercial voice or data communications, as per FCC Order 97-57, Feb. 19, 1997 (starts in 1998); and
• Other Services. General wireless communications services, narrowband PCS, location monitoring service/AVM and 37039 Ghz (proposed, no dates schedules).
(Source: Internet, auction home page, FCC Wireless Telecommunications Bureau: http://www.fcc.gov/wtb/auctions/summary/aucsch.html.)
Reporting to Congress. By Sept. 30, the FCC was to report to Congress on its experience to date in using competitive bidding to award telecommunications licenses. Mandated by law, the report was to include such information as:
• Revenues. A statement of revenues collected, plus projections;
• Methods. A description of bidding methods employed, comparing advantages and disadvantages;
• Cost-Benefit Analysis. An evaluation of whether competitive bidding has improved efficiency in granting radio spectrum licenses, encouraged new technologies or new entrants, served needs of rural spectrum users, or has boosted participation in the bidding process by certain target groups, including a) small business, b) rural telephone companies and c) businesses owned by women and minorities.
Feedback from Bidders. In July, to gather information for its report, the FCC had sought comments from bidders on the costs they incurred and how bidding methods have affected FCC policies on service-area size and geographic partitioning. It also sought comments on the effects of multiple-round auctions, which the FCC has employed in an effort to faciliatate "efficient aggregation" of licenses that are interdependent or complementary. (See, Competitive Bidding, WT Docket No. 97-150, FCC 97-232, July 2, 1997, 62 Fed.Reg. 36752, July 9, 1997.)
New Procedures. Earlier, in March, the FCC had sought comment on possible changes to its auction procedures, including whether to: 1) modify its installment payment rule, 2) boost the interest rate on installment sales, 3) tighten rules on late payments, default payments and grace periods, 4) modify practice on refunding upfront payments between multiple rounds in multiple-round auctions, for those bidders who can no longer continue, or 5) allow investors to switch their support to second bidder and after the first bidder in which they have invested has withdrawn from the auction. (See, Competitive Bidding Procedures, WT Docket No. 97-82, Feb. 20, 1997, released Feb. 28, 1997, 62 Fed.Reg. 13570-01, March 21, 1997.)
1Rand McNally Commercial Atlas and Marketing Guide, 123rd Ed., 1992.
2Commission Opens Inquiry on Competitive Bidding Process for Report to Congress, FCC 97-232 Public Notice, July 2, 1997.
3The Washington Post, February 17, 1997. "Interactive TV Dream Fades for Licensee, Some Say FCC Hyped Unproven Technology."
5"Cell Phone Licensees Seek Bailout," Washington Post, July 20, 1997.
6The Omnibus Consolidated Appropriations Act, 1997, P.L. 104-208, 110 Stat 3009 (1996) directed the Commission to reallocate the spectrum and commence auctions by April 15, 1997.
7See "Final Redefinition of the BEA Economic Areas," 60 Fed. Reg. 31,114 (Mar. 19, 1995).
8Washington Telecom Week, Vol. 6, No. 25, June 20, 1997.
9CQ Monitor, "Budget Negotiators Gear Up for a Crucial Week," Vol. 33, No. 117, p. 7, July 21, 1997.
10Radio Communications Report, "Wireless Stocks Start to Climb Charts," June 30, 1997.
11Inquiry on Competitive Bidding.
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