To the Editor:
As someone who represents many conscientious people dedicated to wireless competition, I would like to comment on the subject of auction integrity in the context of the Federal Communications Commission’s upcoming reconsideration of its C-block decision.
Many participants in this past summer’s debate, including the C-block companies themselves, all believe in the importance of auction integrity. In fact, these small businesses raised $1 billion, now paid in to the federal government, as their commitment to the process. No licensee is currently in default.
But two critical points must be made concerning the auction integrity question. First, when Congress enacted auction authority, auctions were intended as a spectrum assignment tool, and they were not intended to override the commission’s fundamental legal obligation to promote the public interest. The public interest is best served when consumers have a variety of quality and affordable services, and this is best achieved by competition-precisely the objective that the C-block licensees have vigorously pursued. Furthermore, the 1993 legislation that granted the commission its auction authority specifically refers to the public interest. Section 309 states, in pertinent part, that the FCC shall “… promote economic opportunity and competition … by disseminating licenses among a wide variety of applicants, including small businesses, rural telephone companies and businesses owned by members of minority groups and women …”.
Second, even under classic game/auction theory, there are occasions when an auctioneer must intervene to amend auction results: specifically, when the auction process itself is flawed. This is what occurred with the C block. While the mechanics of the C-block auction itself ran smoothly, a tribute to many dedicated commission employees, pre- and post-auction, the C-block licensees have experienced unprecedented financial and regulatory events, several of which were at the hands of the government auctioneer:
The start of the C-block auction was delayed five times with rules of engagement changing throughout.
A- and B-block licenses were granted six weeks after petitions to deny were received by the commission even though constitutional issues were raised. The C-block process dragged on so that final licensing occurred almost a year later in a vastly different market than that which prevailed during the bidding.
Congress mandated the WCS auction, bypassing normal FCC spectrum management administrative processes, in the fall of 1996, months after the close of the C-block auction, which significantly undermined spectrum values. The auction eventually raised only $13.6 million, far less than the $1.8 billion projected by Congress.
While prior to 1996 other auction winners with installment payments were not required to sign notes formally subordinating other financial interests to the government debt, such notes were submitted to the C-block bidders as a requirement of licensing after the auction, without prior notice and with no opportunity to negotiate the critical terms. This substantially undercut equipment vendor finance efforts.
In response to commission-prompted requests for annualization of the installment payments, the FCC deferred on an open-ended basis the payment of interest. Left without a roadmap for several months, all financing for C-block effectively stopped.
After launch of the restructuring proceeding, the majority of C-block bidders requested interest deferral, which was fully consistent with FCC Rule 1.2110(e)(4)(ii) and which would not have rewritten the economic results of the auction. Instead, the commission, now reluctant to continue in its banker role, itself began to promote a bankruptcy model reauction. This bankruptcy perception became a self-fulfilling prophecy on Wall Street and among many strategic investors.
The C block is not the morality play that you might think it to be if you believed all the rhetoric you heard at the commission open meeting last summer. It is, instead, a story of good intentions and enlightened risk taking in the tradition of American entrepreneurship, confronted by a market soured by many factors, including unmitigated regulatory risk.
It is the story of a Federal Communications Commission that has learned through trial and error of the difficulties of balancing its fundamental regulatory role with its brand new role as a banker and as an auctioneer.
Fortunately, the commission has learned through this recent history, and in its Part 1 proceeding has sought to stabilize its rules and circumscribe its banker role. On reconsideration, the commissioners can move forward in a way that preserves auction integrity at the same time that the public interest in competition and the interests of many small business licensees are all aligned. This is not a zero sum game; it is, in fact, an opportunity, totally consistent with the commission’s public interest mandate.
Janice Obuchowski
Vice Chairman and Executive Vice President
NextWave Telecom Inc.
