WASHINGTON-Paperwork filed at the Federal Communications Commission April 1 by NextWave Telecom Inc. has the country’s largest C-block personal communications services winner stating once again that the FCC is all wrong regarding its debt instruments and that even if NextWave hadn’t participated in the auction at all, at least two bidders still would not have won markets.
NextWave pulled in its own set of heavy hitters to rebut an application for review filed recently by Antigone Communications L.P. and PCS Devco Inc. that charged the “carrier’s carrier” with carrying too much foreign equity and by skewing the auction results by overbidding on licenses.
NextWave recruited a former Internal Revenue Service commissioner, Mortimer Caplin, and a former IRS special counsel, Charles Plambeck, to analyze the instruments characterized by NextWave as debt but found by the Wireless Telecommunications Bureau to be equity. The former IRS officials submitted an affidavit stating that the instruments “would be characterized as debt for tax purposes” because “the instruments include an unconditional promise to pay a sum certain on demand or on an ascertainable maturity date; they provide for determinable, adequate and unconditional interest payments; and they give the holder the absolute right to enforce payment of principal and interest.”
NextWave’s instruments, which “convey a future interest in the issuer,” are debt, Caplin and Plambeck found, because “options, forward contracts and similar future equity interests, whether standing alone or as part of a hybrid instrument, are not considered under tax law to create present equity interests until exercised because they do not confer the benefits or attributes of current stock ownership or equity risk.”
In addition, they wrote, “Financial innovation poses a profound challenge to tax laws.” Regarding the traditional definitions of “debt” and “equity,” and the line drawn between them, the two added, “Financial innovation in general, and the availability of derivatives specifically, renders such distinctions meaningless. Virtually any of the idealized attributes of equity may be stripped and embedded in a debt instrument and vice versa. The debt-equity cubbyhole system is outmoded, and the high costs of its shortcomings are facts well-known by the Treasury, the IRS, Congress and the courts.”
As far as whether NextWave’s participation in the auction limited the success of others was debated by game theorists Dr. R. Preston McAfee, co-editor of the American Economic Review and Dr. John McMillan, editor of the Journal of Economic Literature, both of whom have been active in auction theory and consultation, including the design of the FCC’s auction structure. The two have concluded that, based on their analysis, “Antigone or Devco would not have won any licenses even in the absence of NextWave … During the C-block bidding, in every market, firms other than NextWave revealed they valued the licenses more than Antigone or Devco.”
McAfee and McMillan pointed out that neither Antigone nor Devco were second behind NextWave in any of the markets NextWave won, and that either petitioner could have picked up desirable markets in the subsequent D-, E- and F-block auction, but only Devco was successful in two markets. Antigone and Devco did not devote the dollar amounts needed to win, they wrote, choosing to drop out of the bidding before it was even half over.
The game theorists also noted many licenses would have been within Antigone and Devco’s reach if they had followed the demand curve formulated in petitioner’s filing by their own auction expert, Dr. Peter Cramton.
A final filing from Antigone and Devco is due late next week, at which time the commission will review the entire record.
