The months-long debate at the Federal Communications Commission over C-block personal communications services debt restructuring, culminating in last month’s factious decision to offer limited relief to floundering auction winners, saw the unprecedented clashing of conflicting legal doctrines and policy objectives and the tragic collapse of leadership.
Bankruptcy law bumped up against communications law and wireless competition wrestled with regulatory process.
Advice and blame came from all quarters: Wall Street, Congress, financial gurus, telecom consultants, bankruptcy lawyers. In fact, the FCC spent nearly $700,000 on outside experts to sort out the C-block mess that remains a mess today.
The bottom line is that $5 billion to $7 billion of the $10.2 billion pledged by bidders to the U.S. Treasury in the C-block auction last year is gone. History. So, the next question is, how many PCS firms will tank as a result of the FCC ruling?
There is a familiar ring to all of this. The young and tortured history of PCS auction licensing has been one of trial and error, litigation, countless starts and stops, half-steps, alleged corruption and sometimes compromises that lacked boldness, conviction and wisdom.
Indeed conventional wisdom about pure marketplace forces has been put on trial. Do auctions really put licenses in the hands of people who value them most and put them to the highest and best use. Or, to paraphrase one prominent wireless lawyer, do auction licenses simply go to those who overvalue them the most.
If you want a really good deal at an auction, better be part of a Baby Bell cartel. Or just be AT&T Corp. or Sprint Corp.
Are there holes in economic game theory or is it just a matter of crafting an auction the right way?
FCC Chairman Reed Hundt entered the FCC in late 1993 with a major challenge: to revamp and improve the original PCS licensing plan. That he did. Auctions began, and then took off in spectacular meteoric fashion, raising billions and billions of dollars.
It was never about money, Hundt insisted. But the TV in the FCC lobby, broke out auction dollars for each U.S. household in addition to all the FCC press hype and fanfare. And all those pictures on FCC walls of Hundt, President Clinton and Vice President Gore with that oversized $7.7 billion auction check. It was about money alright: the big money. Congress understood this quite well.
Now, four years later, as he readies to leave the FCC, Hundt is still struggling with PCS licensing. His beloved auction program has veered off course and gone down in flames. But Hundt is no better than his critics and cheerleaders.
Today, critics bemoan the glut of spectrum in the market. Why wasn’t it a glut when the FCC released 2 GHz spectrum to market four years ago. A lot of second guessing. House Democrats who’ve come to Hundt’s aid rejected GOP auction proposals throughout the 1980s and only came on board when a Democratic president advocated competitive bidding. They became believers when the big money flowed in. Their heart-felt concerns about deep-pocket domination in auctions vanished.
While the FCC’s Sept. 25 ruling is past for outgoing Chairman Hundt and Commissioners James Quello and Rachelle Chong, the controversial C-block debt issue is prologue for the new FCC: Chairman William Kennard and Commissioners Harold Furchtgott-Roth, Michael Powell, Gloria Tristani and Susan Ness.
A central question of the debate evolved into how to restructure debt of startup PCS firms unable to pay the federal government for scores of licenses won in the C-block auction last year. The auction was originally tailored to women, minorities, small business and rural telephone companies in keeping with a 1993 congressional mandate.
The Supreme Court’s 1995 Adarand ruling to curb federal affirmative action programs forced the FCC to scale back the C-block auction to small businesses.
To help those entities, the FCC made available bidding discounts and the option of paying for licenses in installment payments. In other words, the U.S. government would loan the bulk of the money for licenses. The FCC thereupon became a creditor for the first time in history.
But perhaps a more fundamental question that nagged at C-block negotiations during the past 10 months was this: Why a debate at all? Maybe this mess was much more simple than federal regulators let on.
NextWave Telecom Inc., Pocket Communications Inc., General Wireless Inc. and other high-rolling bidders were simply made road kill by free market forces on the acceleration lane of the information highway. Tragic, but pretty simple stuff, right?
When, after missing two self-imposed deadlines, the FCC still could not reach unanimity on the issue, Congress weighed in last month.
But what the FCC found was a house divided: Congress was no more unified than the commission on the issue
Hundt, relying on advice from Wall Street, bankruptcy and financial experts and finally Congress, favored liberal economic incentives to steer NextWave and other large bidders away from bankruptcy, had the ear of the House.
Reps. Thomas Bliley (R-Va.), Billy Tauzin (R-La.), John Dingell (D-Mich.) and Edward Markey (D-Mass.), heavyweights in telecom lawmaking that had not seen eye-to-eye with Hundt in recent years agreed on this: that it was essential to keep C-block licenses from being snarled in years of bankruptcy proceedings and to get new wireless competitors licensed as quickly as possible.
There was little mystery about the House position: NextWave and its legal team have brilliant political connections to powerful telecom lawmakers in that chamber. Former House Commerce Committee GOP counsel Mike Regan is employed by NextWave. David Leach, a former Democratic committee staffer who teamed with Regan to draft the 1996 telecom act, was retained by NextWave to help the cause. And NextWave executive Janice Obuchowski is the consummate Washington insider.
That Dingell, who bullied American Personal Communications, Omnipoint Corp. and Cox Communications Inc., into paying $7.7 billion for PCS pioneer preference licenses that were promised to them for free, would now champion a lavish bailout for a handful of companies, seemed incongruous.
For sure, Hundt wasn’t doing this for NextWave or any other financially troubled C-block winners. Those companies embarrassed Hundt and the agency to no end. Perhaps Hundt was doing this for Hundt. Perhaps he did it because it was the smart thing to do.
Ness, Quello and Chong took a harder line, overruling Hundt and rejecting most of the recommendations of Jon Garcia’s FCC task force on C-block restructuring. The three regulators clung to a moral policy stand, claiming that to do things Hundt’s way would result in a windfall for NextWave and other tapped-out bidders to the disadvantage of smaller bidders who played by the rules (both those who won licenses and those who checked out early when bidding got privy.)
For that, Ness, Quello and Chong were castigated by House telecom lawmakers.
Senate Commerce Committee Chairman John McCain (R-Ariz.) and Ernest Hollings (D-S.C.), ranking minority member of the panel, offered modest political cover for the FCC majority.
Hollings, according to an aide, still had a bad taste in his mouth for NextWave as a result of the controversy over whether the firm exceed the 25 percent foreign ownership cap. He believed NextWave shouldn’t have received PCS licenses in the first place.
But looking back, it now might be argued that characterizations of Hundt’s stance and that of the FCC majority were backwards.
Hundt’s position to keep the cash-strapped firms out of bankruptcy so that they might be viable wireless competitors certainly appeared unseemly.
But the magnitude of the mess, with all its implications, was unprecedented. Still, you had to hold your nose to accept anything that smelled of a bailout. Yet, the motives and goals of Hundt’s position were cl
ear and realistic.
The FCC majority’s limited relief, which Wall Street predicts is doomed to failure, cannot make the same claim. If the three commissioners felt so strongly that “rules are rules,” they should not have decided to do nothing and let the chips fall as they may. That would have been intellectually honest at least.
The answer is that Ness and the others were moved by arguments that smaller bidders without financial woes were being hurt on Wall Street and Main Street by the travails of the big spenders. And so limited relief was offered and the integrity of regulatory process was kept intact, they believed.
But is the C-block debt different? Did it beg an unconventional solution as opposed to a going-by-the-book answer.
The confusion and absurdity of the C-block debate has reached such heights that could it not now be suggested that rescuing NextWave, Pocket, GWI and others is the best thing the FCC could have done for smaller bidders, despite the fact many of them wanted to see the big spenders burn in bankruptcy hell?
Do not small PCS firms and the hated NextWaves of the world share the same common destiny and fate as Johnny Come Latelys to the mobile phone business?
Were there not then only two choices: do nothing or do something fast that works.
Reed Hundt may have had the headier solution to the C-block debt crisis, but he could do nothing about the crisis of confidence he created during his four-year reign at the FCC. Deep-seated feelings and resentment that other commissioners and staffers felt for Hundt was not conducive to an atmosphere of concession and compromise. Hundt didn’t lose his last big vote on policy. He lost it for lack of leadership.
