Report No. DC-2575 ACTION IN DOCKET CASE March 8, 1994 FCC ADOPTS RULES TO IMPLEMENT COMPETITIVE BIDDING TO AWARD SPECTRUM LICENSES (PP DOCKET No. 93-253 ) Today the Commission adopted a Second Report and Order prescribing general rules to implement its new authority to use competitive bidding to award licenses for use of the radio spectrum. The recently-enacted Section 309(j) of the Communications Act for the first time gave the Commission explicit authority to utilize competitive bidding to choose from among two or more mutually exclusive applications for initial licenses. Eligibility for Auctions The Commission will use competitive bidding to award licenses only when the statutory criteria for auctionability are met. First, there must be mutually exclusive applications for an initial license or construction permit. Second, the service applied for must principally involve the transmission or reception of communications services to subscribers for compensation. Applying these criteria, the Commission determined that both broadband and narrowband PCS services, in addition to other services regulated by the Private Radio and Common Carrier Bureaus, would qualify for competitive bidding. Based on the "subscribers for compensation" criterion, the Commission excluded most mass media services from the competitive bidding process. The Commission also declined to adopt its proposal to auction "intermediate links," (i.e., those radio licenses used as one intermediate link for end-to-end communications service). (over) Auction Design Compared to licensing mechanisms previously employed, the Commission believes that competitive bidding will increase competition for spectrum-based services by bringing about the rapid deployment of new technologies and services and by encouraging efficient use of the radio spectrum. The Commission also seeks to ensure that its auction design system will enhance access by providing opportunities for broad participation in the provision of services, avoid unnecessary and costly after-market transactions, minimize the potential for unjust enrichment, and ensure that an appropriate share of the value of the licenses is returned to the U.S. Treasury. In order to provide the maximum flexibility and address the Congressional mandate to "design and test multiple alternative methodologies under appropriate circumstances," the Commission established a broad menu of competitive bidding methods that it can employ to auction licenses with different characteristics. Given the diverse characteristics of the various services that may be subject to auctions, the Commission will select the specific competitive bidding methods to be used for individual services on a service by service basis in future Reports and Orders. The two primary characteristics that will determine the choice of auction design are: (1) the degree to which licenses are interdependent, and (2) whether the expected license values are high or low. Because the Commission expects most licenses to be of high value and interdependent, it found that simultaneous multiple round auctions will best achieve the Commission's goals and therefore should be the Commission's preferred auction design. The Commission concluded that compared with other bidding mechanisms, simultaneous multiple round bidding generates the most information about license values during the course of the auction and provides bidders with the most flexibility to pursue back- up strategies. Because of the superior information and flexibility provided by simultaneous multiple round auctions, this method will facilitate efficient aggregation across spectrum bands, thereby resulting in vigorous competition among several strong competitors. The Commission recognized, however, that simultaneous multiple round auctions may involve increased administrative costs and may be more operationally complex than other auction design methods. To the extent that simultaneous auctions are more costly and complex to run, the Commission may decide to choose a sequential auction design. Alternatively, the Commission may elect to group highly interdependent licenses together and conduct a sequence of simultaneous auctions. When the values of particular licenses to be auctioned are "low," the Commission will consider auction designs that are relatively simple. Bidding Procedures To ensure ultimate Commission control over the duration of simultaneous multiple round auctions and to provide bidders with maximum flexibility to pursue back up strategies, the Commission indicated a preference for a simultaneous stopping rule, pursuant to which bidding would remain open on all licenses until bidding stops on every license. In such auctions, the Commission indicated that it intends to impose an activity rule to prevent bidders from waiting until the end of the auction before participating. In order to prevent strategic delay of auctions, the Commission also retained the discretion to declare at any point in a multiple round auction that the auction will end after a set number of rounds. In either sequential or simultaneous auction designs, a bidder may decide that it has bid too high for a specific license and may wish to withdraw its bid. The Commission concluded that allowing bidders to withdraw bids without penalty would encourage insincere bidding so it has adopted bid withdrawal penalties. Where the high bid is withdrawn (or the bidder is disqualified) during the course of the auction, the bidder will be required to pay the difference between the amount bid and the amount the government actually receives for the license, unless the amount received for the license is greater than the amount of the withdrawn bid. If a bid is withdrawn (or the bidder is disqualified) after the auction has closed, an additional penalty equal to 3 percent of the amount the government receives for the license will be added to the foregoing penalty. Payment Requirements The Commission concluded that, in order to realize the Act's goals of ensuring prompt delivery of service and promoting rapid deployment of new technology, it should adopt procedures that limit bidding to serious, qualified bidders and minimize the probability that, after an auction is completed and participants have dispersed, the Commission finds that it cannot award a license to the auction winner. The Commission therefore provided that to participate in an auction, bidders would be required to tender in advance to the Commission a substantial upfront payment. In some services a lower requirement may be established for designated entities. The minimum upfront payment will be $2,500, although this amount can be modified on a service specific basis and will be specified in the Public Notice announcing the auction. The Commission may also establish a cap on the amount of the upfront payment required where it can be assured that an absolute dollar amount will provide sufficient deterrence against frivolous or strategic bidding. (over) In addition, in order to provide further assurance that the winning bidder will pay the full amount of the winning bid and complete timely construction of the system, the Commission required that winning bidders, except for certain designated criteria, supplement their upfront payments five days after the close of the auction with a down payment sufficient to bring their total deposit(s) up to at least 20 percent of their winning bid(s). All auction winners, except for certain designated entity bidders, will be required to make full payment of the remaining 80 percent of their winning bids within five business days following award of the license. Participation by Small Businesses, Rural Telephone Companies, and Businesses Owned by Women and Minorities In order to enhance access by increasing the availability of the spectrum resource to groups which have historically been under-represented in the management and control of telecommunications services, the Commission adopted a broad range of preferences from which it can choose that will be available to satisfy the statutory requirement that small businesses, rural telephone companies, and businesses owned by women and minorities are given an opportunity to participate in the competitive bidding process and in the provision of spectrum- based services. Specifically, the preferences will allow designated entities to overcome barriers that have impeded these groups' participation in the telecommunications arena. In this regard, the Commission indicated that all small businesses will be afforded the opportunity to pay for certain appropriately sized licenses in installments over the term of the license. The Commission also determined that it may employ spectrum set-asides to ensure that some or all designated entities are given an opportunity to participate in the provision of spectrum-based services. The Commission further determined that it may institute a system of bidding credits for designated entities, including rural telephone companies bidding on licenses in their rural service areas. The specific preferences to be used for individual services will be adopted on a service specific basis in future Reports and Orders. For purposes of determining eligibility for preferences the Commission adopted strict definitions for each of the designated entities designed to prevent abuse of the preference system. In this regard, the Commission adopted the Small Business Administration's standard definition for small businesses, which includes all independently-owned businesses with a net worth not exceeding $6 million and an average net income after Federal income taxes for the two preceding years not in excess of $2 million. The small business definition may be modified, however, if the SBA changes its definition or the Commission deems that an alternative definition is appropriate for particular capital intensive services. -5- The Commission determined that in order to be eligible for preferences businesses owned by women or minorities will be required to have at least 50.1% equity ownership and a 50.1% controlling interest owned by women or minorities. Minority and female owned businesses may also be required to demonstrate that de facto control resides with minority or female owners. Rural Telephone Companies will eligible for preferences if they are independently owned, have 50,000 access lines or less and serve communities with no more than 10,000 inhabitants. To prevent unjust enrichment by auction winners and deter participation by speculators who do not intend to provide service to the public, the Commission established transfer disclosure requirements that will enable it to monitor the profits of all auction winners who transfer their licenses. The Commission also adopted specific provisions designed to prevent unjust enrichment by designated entities who have obtained licenses at less than full market value as a result of preferences provided by the government. The unjust enrichment provisions applicable to designated entities will vary according to the particular preference used, and may be modified for individual services. Action by the Commission March 8, 1994, by Second Report and Order (FCC 94-61). Chairman Hundt, Commissioners Quello and Barrett. - FCC - News Media Contact: Susan Lewis Sallet (202) 632-5050 Office of Plans and Policy Contact: Evan Kwerel, (202) 653-5940. Kent Nakamura, (202) 653-5940 For questions regarding designated entities contact Office of General Counsel: William Kennard at (202) 632-7020.