$// MO&O, Grant of App, Nationwide Narrowband PCS, DA95-21 //$ $/ 24.430 Oppositions to Applications /$ FCC RECORD ONLY Before the DA 95-21 FEDERAL COMMUNICATIONS COMMISSION Washington, D. C. In re Application of ) ) File No. 28046-CN-P/L-94 Paging Network of Virginia, Inc. ) ) For License for Station KNKV 201 ) for Narrowband Nationwide Personal ) Communications Service on Frequency ) Block N-1 ) MEMORANDUM OPINION AND ORDER Adopted: January 6, 1995; Released: January 9, 1995 By the Chief, Wireless Telecommunications Bureau: I. INTRODUCTION 1. In this Order, we address a petition to deny or designate for hearing, filed September 13, 1994, by Edward Johnson (Johnson) against Paging Network of Virginia, Inc. (PNV) that requests that the Commission deny PNV's application for a license to provide personal communications service (PCS) in Frequency Block No. 1, 940.00-940.05 MHz paired with 901.00-901.05 MHz. For the reasons discussed below, we deny Johnson's petition to deny and grant PNV's application. II. BACKGROUND 2. Between July 25, 1994, and July 29, 1994, the Commission conducted auctions for PCS licenses in the 930.00 MHz to 941.00 MHz bands (narrowband PCS). PNV, a wholly- owned subsidiary of Paging Network, Inc. (PageNet), was the high bidder for three narrowband PCS licenses, Frequency Blocks N-1, N-2 and N-10. PNV's applications for these licenses were accepted for filing on August 17, 1994. On September 13, 1994, Johnson filed a petition to deny (Petition) the license application of PNV for Frequency Block N-1. Johnson filed an addendum and correction to his petition on September 16, 1994 (Petition Addendum). PNV filed an opposition to the Petition on September 28, 1994 (Opposition). Johnson filed a reply and motion to strike on October 5, 1994 (Reply). PNV filed an opposition to the motion to strike on October 19, 1994 (Opposition to Motion). Johnson filed another addendum to his Petition (Second Addendum) and a motion to accept the addendum (Addendum Motion) on November 25, 1994. PNV filed a response to addendum to petition to deny or designate for hearing (Response to Second Addendum) on December 8, 1994. III. PLEADINGS; DISCUSSION A. Procedural Matters 3. Johnson asserts that PNV's opposition was filed late. PNV replies that it timely filed its opposition. Johnson is incorrect. Oppositions were due within 10 days of the filing of a petition to deny. The Petition was officially received by the Commission on September 13, 1994. Because Johnson mailed his petition, PNV had an additional three days, excluding holidays, added to its response time in accordance with the Commission's rules. Therefore, under our computation of time rules, oppositions to the Johnson Petition were due September 28, 1994, and replies were due October 11, 1994. PNV timely filed its opposition on September 28. 4. Johnson's Second Addendum and the accompanying Addendum Motion were not requested or authorized by the Commission and were filed over two months after the Petition was originally filed. Consequently, pursuant to Section 1.45(c) of the Commission's Rules, we dismiss these pleadings, and do not consider PNV's Response to the Second Addendum. B. Auction Rules 1. Positions of the Parties 5. As an initial matter, Johnson asserts that the Commission's licensing process is flawed. Johnson argues that mutual exclusivity was not established by the acceptance for filing of license applications as required by Section 309(j)(1) of the Communications Act of 1934, as amended (Act) and insists that FCC Form 401 should have been received, with applicants submitting FCC Form 175 only after mutual exclusivity is established. Johnson further asserts that the Commission's auction rules violate the Administrative Procedure Act (APA) because the rules permit ``massive'' auction changes by public notice, as opposed to the APA mandated notice and comment procedure. Johnson also contends that the upfront pre-auction payment has the effect of ``snuffing out all minority voices'' under the pretext of assessing financial qualifications. 6. PNV replies that the auction procedures adopted by the Commission, requiring submission of an FCC Form 175 with only the winner at the auction submitting an FCC Form 401, are well within the Commission's discretion. PNV contends that Johnson's premature submission of FCC Form 401 could not serve as the basis for an exclusive grant of the license. Moreover, argues PNV, with the market value of this license established at $80 million, Johnson's pending litigation is a waste of the parties' and the Commission's time and resources unless Johnson can demonstrate that he is currently financially qualified not only to pay the required market price but also to construct a narrowband PCS system. PNV asserts that absent proof of financing to bid on a frequency and complete construction of service facilities pursuant to the Commission's rules, Johnson's objections to the application are moot since granting the relief requested would confer no benefit upon him. 2. Discussion 7. Before we address Johnson's specific allegations against the PNV application, we will discuss the general objections Johnson attempts to raise against the Commission's auction and licensing rules for narrowband PCS. Initially, we observe that Johnson's claims that the Commission's licensing process is flawed are more properly raised in the context of a proceeding in which parties may seek reconsideration of the Commission's PCS auction rules. Nevertheless, we note that the questions Johnson seeks to raise here concerning the appropriateness of the use of public notices in furtherance of the Commission's auctions proceedings and the Commission's need for discretion and flexibility in structuring and conducting auctions, have already been fully addressed by the Commission. 8. Mutual exclusivity for nationwide narrowband PCS licenses was established by the filing of Form 175 by sixty-seven interested parties. The Commission's rules expressly require the filing of a Form 175 to participate in the auction. If more than one such application is filed for each frequency block, then mutual exclusivity is established and the license for such frequency block will be auctioned. Only after a bidder is officially notified that it is the winning bidder is such entity required to file a Form 401. Johnson's Form 175 was found to be incomplete and rejected, as was his requested waiver of the upfront payment requirement. During the pendency of his Form 175 filing, he filed a Form 401, which was also rejected. 9. Finally, with regard to Johnson's claim that the requirement of an upfront payment has the effect of ``snuffing out minority voices,'' again, general objections to this rule should have been raised in the context of a timely petition for reconsideration of the rules. In implementing Sections 1.2108 and 24.405, the Commission provided the requisite notice and comment period and received comments that largely favored the imposition of an upfront payment requirement. Johnson himself indicated support for some sort of fixed upfront payment. C. Petition to Deny 1. Legal Standard 10. Section 309 of the Act requires that the Commission consider allegations raised in a petition to deny an application. Parties filing a petition to deny must satisfy the two-step test established in Sections 309(d)(1) and (2) of the Act. As the D.C. Court of Appeals explained, ``[a]t the threshold, the protesting party must submit a petition containing `specific allegations of fact sufficient to show . . . that a grant of the application would be prima facie inconsistent with the [public interest, convenience, and necessity].''' The Commission is required to make this threshold determination based on an evaluation of the petition and its supporting affidavits. 11. If the Commission determines that the petition to deny satisfies the threshold standard, the Commission performs a second evaluation. Specifically, the Commission examines ``the application, the pleadings filed, or other matters which it may officially notice'' to determine whether ``a substantial and material question of fact is presented.'' If the Commission is faced with a substantial and material question of fact or if the Commission for any reason cannot find that granting the application would be in the public interest, convenience, or necessity, the Commission must designate the application for a hearing. If the Commission determines that there are no substantial and material questions of fact and if a grant of the application would be consistent with the public interest, convenience, and necessity, the Commission then should grant the application, deny the petition, and issue a concise statement of the reasons for denying the petition. Even where there are disputed factual issues, there is no automatic hearing requirement. As the D.C. Circuit has observed, a hearing would not be required ``to resolve issues which the Commission finds are either not `substantial' or `material,' regardless of whether the facts involved are in dispute.'' 2. Qualifications of Applicant (a) Positions of the Parties 12. With regard to the applicant, Johnson asserts that PNV is not legally or financially qualified. Specifically, Johnson argues that PNV added and deleted shareholders after the filing of its Form 175 application in violation of Sections 1.2105(a)(2)(viii) and 24.422(b) of the Commission's Rules. Johnson contends that despite the fact that the Commission relaxed this rule on August 17, 1994, PNV was required to comply with the rules in effect at the time it applied with the Commission, which was July 1, 1994. Johnson further asserts that Standard and Poor's (S&P) recently changed its ratings outlook for PageNet to negative because $500 million of debt is still outstanding for PageNet. Johnson further argues that PageNet suffered a $20 million operating loss last year and continues to lose money, raising questions about the solvency of PageNet. Therefore, asserts Johnson, the Commission must hold a hearing to determine the financial qualifications of PageNet. 13. Responding to Johnson's specific charges, PNV contends that Johnson's attacks are based on hearsay or unidentified sources and do not satisfy the Commission's requirement that a petitioner make allegations sufficient to demonstrate that a grant would be prima facie inconsistent with the public interest. PNV argues that Johnson focuses not on the applicant but on PageNet, its parent. PNV asserts that Johnson does not identify what information in PNV's application became incorrect because of any public trading of PageNet's stock. PNV insists that whatever public trading there was in its parent's stock did not require any amendment to the application filed by PNV, and those changes were not barred by the rules cited by Johnson, which relate to amendments to the application (Section 24.422(b)) or agreements relating to the licenses (Section 1.2105(a)(2)(viii)). Moreover, argues PNV, there is nothing in the Commission's rules or public notices to indicate that the Commission intended that any public trading in a parent entity's stock pending consideration of an application for nationwide PCS service would constitute a violation of its rules. PNV contends that no legitimate public purpose would be served by a rule conforming to Johnson's interpretation since it would effectively preclude all public companies from participating in the auction, which would be arbitrary and capricious on its face. 14. PNV asserts that it is financially qualified to build and operate its proposed system. PNV argues that S&P, upon whose report Johnson relies to question PageNet's financial qualifications, offers investors a rating service in which it evaluates the credit condition of various companies. PNV contends that the Commission has not delegated to S&P the responsibility to assess the financial qualifications of applicants to construct and operate Commission licensed facilities. In any event, argues PNV, S&P did not find PageNet to be either insolvent or lacking in financial qualifications to build and operate a nationwide narrowband PCS system. 15. With respect to the alleged losses experienced by PageNet, PNV replies that PageNet has operated at a loss for accounting purposes almost since its inception, largely because of the heavy expenditures associated with the rapid growth of its operations, which have added almost 1 million subscribers in the last year. As for cash flow, PNV contends that the S&P report cited by Johnson indicated that in 1992, while PageNet had a loss of $6.8 million, it reportedly had a positive cash flow of $51 million. PNV notes that in PageNet's Form 10-Q filed with the Securities and Exchange Commission in August 1994, PageNet reported a net operating loss for the quarter ending June 30, 1994, of $5.468 million, but the company's cash flow was $33 million for that period, an increase of 43.6 percent over the corresponding period in 1993. PNV further asserts that in the 10-Q filing PageNet also reported that it had available approximately $148 million from the sale of notes early in 1994 and that approximately $184 million was available under its credit agreement. PNV contends that these funds coupled with the company's cash flow would be more than sufficient to cover the auction payment and the phased construction of the proposed nationwide system even without recourse to the financial markets. 16. Johnson replies that PNV is incorrect to assert that the Commission does not have an interest in basic qualification findings and argues that PNV's application is incomplete because it does not purport to include such information. Johnson also asserts that its finances are not at issue and argues that while the Commission has not delegated to S&P the responsibility to assess the financial qualifications of PCS applicants, PNV has not proven that it is financially qualified to build and operate a PCS system. Johnson argues that notwithstanding PNV's contention to the contrary, in its 1993 Annual Report PageNet admitted that it has outstanding debt securities. Specifically, Johnson alleges that PageNet's Annual Report indicates that 19 lenders hold a security interest in substantially all of the company's assets and the capital stock of the subsidiaries of the company. Johnson argues that the Commission must hold a hearing to determine the identities of the debt security holders since these entities could have a 5 percent interest in the company. 17. PNV responds that Johnson distorts the facts in several significant respects. First, argues PNV, in discussing the financing of PNV through its parent, Johnson offsets current liabilities against PageNet's cash, rather than against all current assets. PNV questions why no explanation is given for this unusual accounting procedure. Further, PNV contends that the waivers required under its credit agreement have been granted and the necessary funds are available. PNV also asserts that while Johnson claims that the company has insufficient cash flow, he ignores the fact that the financial statement to which he refers, as well as PageNet's Form 10-Q quarterly report submitted to the Securities and Exchange Commission, both indicate that PageNet's cash flow from operations during the first six months of 1994 exceeded $58 million. PNV claims that there is nothing in Johnson's Reply that casts doubt on the ability of PNV to construct PCS facilities. (b) Discussion 18. Johnson has not established a prima facie case since his allegations, even if ultimately proven correct, would not constitute a violation of the Commission's rules and would not render the grant of PNV's application contrary to the public interest. Most of the issues raised in the Petition purporting to address the applicant's legal and financial qualifications actually concern PageNet, the parent of PNV, the applicant. With regard to the adding and deleting of shareholders by PageNet after PNV filed its Form 175, Johnson does not identify what information in PNV's application became incorrect as a result of this activity. Moreover, Johnson makes no allegation that the stock of PNV (the applicant) was traded. During the pendency of PNV's Form 175, Section 24.422(b) read as follows: In the Narrowband PCS, the only amendments to FCC Form 175 which will be permitted are minor amendments to correct minor errors or defects such as typographical errors. All other amendments to FCC Form 175, such as ownership changes or changes in the identification of parties to bidding consortia, will be considered to be major amendments. . . . Johnson claims that trading of PageNet's stock during the pendency of PNV's FCC Form 175 violated this rule. In support of his claim, Johnson cites a Public Notice issued in response to questions raised in a PCS bidders seminar. At no time, however, did PNV seek to amend its Form 175. Furthermore, nothing in the Commission's rules is intended to prohibit an applicant, or, as here, the parent of an applicant, that happens to be a publicly traded corporation from continuing to have its stock traded while awaiting a determination as to whether the applicant will be permitted to participate in the auction. Rather, the rule targets those situations involving a change in control. Because Johnson did not establish a prima facie case, we need not address the second prong of the test set forth in Section 309(d)(2) of the Act. 19. Under the Commission's rules, PCS license applicants must establish that they are qualified to build and operate the systems for which they bid. As part of this process, narrowband PCS applicants first file FCC Form 175, along with an upfront payment, to participate in an auction. Winning bidders are then required to submit a down payment on their winning bids and to file FCC Form 401 within ten business days after being notified that they are winning bidders. It is undisputed that PNV complied with these rules. With respect to this matter, Johnson's allegations again are directed toward PageNet, not PNV. Concerning the information contained in the S&P report, the report did not find PageNet insolvent or lacking the financial qualifications to build and operate a PCS system. We therefore conclude that Johnson has not established a prima facie case with regard to this issue because even if the statements concerning the level of debt carried by PageNet are true, there is nothing in the Commission's rules that prohibits a licensee, or the parent of a licensee, from taking on debt or that requires that the parent maintain a certain S&P rating outlook. Moreover, there is nothing in the Petition that establishes that PNV and PageNet are not financially qualified to build and operate a nationwide narrowband PCS system, or that granting PNV's application is contrary to the public interest. 3. Completeness of PNV's Application (a) Positions of the Parties 20. Johnson also argues that PageNet's application is not complete. Johnson contends that Section 24.413(a) of the Commission's Rules requires PageNet to list the names, addresses, and citizenship of any person holding 5 percent or more of each class of debt security. Johnson asserts that PageNet offered $300 million in senior subordinated notes due 2006 at par, yet has failed to identify the entities holding these debt securities. Johnson further argues that while PageNet listed two shareholders with a 5 percent or greater interest, PageNet omitted the Golder Thoma Fund which, according to S&P's report, owns 7 percent of PageNet. Johnson states that in January 1994, the Golder Thoma Fund reported that it had distributed 12.8 million shares of PageNet to the fund's 22 limited partners. Johnson argues that PageNet should have listed the identity and citizenship of these limited partners. Johnson also asserts that PageNet's response to question 14 of FCC Form 401, where the applicant indicated that ``one or more applications may have been denied'', is incomplete. Johnson insists that PageNet is required to report any instance where a license, permit, or application has been revoked or denied. 21. With regard to Johnson's allegations of incompleteness, PNV asserts that it has provided more information than required by the Commission's rules because Section 24.413 requires the applicant, not the parent, to list the name, address, and citizenship of persons holding 5 percent or more of each class of debt security. PNV asserts that it has provided the required information by advising that it is a wholly-owned subsidiary of PageNet. Further, PNV contends that it has no outstanding debt securities. PNV admits that PageNet issued $300 million of notes to the public earlier this year but questions why the Commission would be interested in such debt instruments since they do not have a conversion feature and therefore do not represent a future ownership interest. Moreover, argues PNV, Section 24.413(a) is modelled after Section 22.13(a)(1) of the Commission's Rules which the Commission has interpreted as being aimed at ensuring disclosure of other ownership interests involving other mobile radio services. PNV insists that it has identified all parties holding 5 percent or more of the stock of PNV and PageNet. Concerning Johnson's demand that PageNet reveal the identities of the limited partners receiving distributions of PageNet stock from the Golder Thoma Fund, PNV replies that the distribution was made pursuant to Commission approval and upon application. 22. With regard to its answer to question 14 on FCC Form 401, PNV replies that it did submit a complete response. PNV contends that it has had no applications revoked or denied by the Commission. PNV also asserts that no applications of any PageNet subsidiaries have been denied for matters relating to the basic qualification of that subsidiary or of PageNet to be a licensee, but might have been denied for technical reasons. PNV argues that the Commission is unlikely in this proceeding to have an interest in applications denied because the site selected was too close to another site, but that PNV will furnish such information to the Commission upon request. (b) Discussion 23. Section 24.413 of the Commission's Rules requires all applicants to list certain ownership information, including all partners, subsidiaries, affiliates, and all persons holding 5 percent or more of the stock, warrants, options, or debt securities of the applicant. It is undisputed that applicant PNV, a wholly-owned subsidiary of PageNet, complied with this rule by identifying PageNet as owning 100 percent of PNV's stock, and listing all of its affiliates. The dispute between the parties centers around whether PageNet revealed all companies holding 5 percent or more of the stock of PageNet. As described above, Johnson's claim that PageNet failed to list one stock holder owning 7 percent of PageNet, is based on an S&P report. At this stage we are required to examine the petition and supporting affidavits ``for concrete factual assertions which if proved in a subsequent hearing would alter the Commission's public interest calculus.'' Johnson, however, does not claim to have personal knowledge of PageNet's ownership composition. Additionally, Johnson did not submit an affidavit from an individual with personal knowledge of these facts. Therefore, this question is not properly before us because Johnson has not established a prima facie case. 24. With regard to the alleged incompleteness of PNV's answer to question 14 on FCC Form 401, it is the case that, as a general matter, applicants are required to answer all questions in the application. Question 14 reads as follows: Has applicant or any party to this application had any FCC station license or permit revoked or had any application for permit or renewal denied by this Commission? PNV responded in the negative, but then attached Exhibit 2 to Form 401, in which PNV states that: [i]t is possible that one or more applications filed by a subsidiary may have been denied for technical or other similar reasons, but none has been denied on the ground that Paging Network, Inc. or its subsidiary lacked the basic qualifications required for a grant. Johnson argues that this answer is incomplete. We disagree. PageNet asserts that it has never had a permit or license revoked or denied because it did not meet the Commission's qualification requirements. This response is substantially complete and satisfies the Commission's rules. Therefore, Johnson has not established a prima facie case that the public interest would not be satisfied if we grant PNV's application. 4. McCaw/PageNet Resale Arrangement (a) Positions of the Parties 25. Johnson also argues that PageNet's resale agreement with another PCS auction high bidder, McCaw Cellular Communications (McCaw), raises questions as to whether the intended aggregate limit on PCS spectrum holdings was circumvented. Johnson contends that a hearing is required to determine the public interest of this pre-auction agreement. 26. PNV objects to Johnson's allegations regarding the arrangement recently entered into between PageNet and McCaw. PNV asserts that under the arrangement McCaw will resell PageNet's paging services, not its PCS services, in markets where PageNet operates but McCaw does not currently do business. PNV asserts that the private carrier paging and common carrier paging frequencies involved in the McCaw arrangement are not part of the personal communications services and, therefore, are not subject to an aggregation cap. In any event, argues PNV, any concern about exceeding the aggregation cap would relate to McCaw, not PageNet. Moreover, contends PNV, the Commission has preliminarily concluded that spectrum used by resellers will not count against the reseller's spectrum cap. (b) Discussion 27. With regard to PageNet's agreement with McCaw, Johnson's expressed concern is groundless. The arrangement concerns PageNet's paging services, not PNV's narrowband PCS service. The Commission's spectrum aggregation limits do not include spectrum for paging providers or resellers. Therefore, there is no violation of the Commission's rules and no reason to conclude that this arrangement would some how force us to conclude that a grant of PNV's application would be prima facie inconsistent with the public interest, convenience, and necessity. 5. Loan Covenants (a) Positions of the Parties 28. Johnson asserts in his Reply that PageNet has violated the Commission's rules, which require that the applicants have unfettered control, by entering into written covenants with the unidentified security holders which limit the ability of PageNet to incur new indebtedness, engage in mergers and limit PageNet in any acquisitions. Finally, Johnson asserts that it has made its prima facie showing that a license issued to PNV would be inconsistent with the public interest. 29. PNV also argues that Johnson offers no support for his view that lenders hold ``debt securities'' as that term is contemplated under the Commission's rules. PNV contends that the Commission has never treated financial institutions lending money to regulated entities as owners or quasi-owners of those entities. PNV further asserts that the fact that the stock of PNV may be pledged in support of such loans in no way suggests that PNV has issued ``debt securities.'' (b) Discussion 30. There is nothing in the Commission's rules that prohibits applicants or licensees from securing financing in order to do business. PageNet's annual report indicates that PageNet's assets and stock are security for the credit agreement in question. This security interest in and of itself does not violate the rules since, despite Johnson's allegations to the contrary, there is nothing in the annual report that indicates that PNV has relinquished the management and control of its business. Therefore, there is no reason to conclude, based on these allegations, that a grant of PNV's application would be prima facie inconsistent with the public interest, convenience and necessity. IV. CONCLUSION 31. Having reviewed the application and the pleadings filed in this matter, we conclude that grant of the subject application will serve the public interest, convenience, and necessity, and that the petitioner has not sufficiently alleged facts establishing that grant of the application would be inconsistent with the public interest, convenience and necessity. V. ORDERING CLAUSES 32. Accordingly, IT IS ORDERED that the Petition to Deny filed by Edward M. Johnson IS DENIED. 33. IT IS FURTHER ORDERED that the Motion to Strike filed by Edward M. Johnson IS DENIED. 34. IT IS FURTHER ORDERED that the Motion to Accept an Addendum to the Petition to Deny filed by Edward M. Johnson IS DISMISSED. 35. IT IS FURTHER ORDERED that the application of Paging Network of Virginia, Inc. (File No. 28046-C-P/L-94) IS GRANTED. FEDERAL COMMUNICATIONS COMMISSION Regina M. Keeney Chief, Wireless Telecommunications Bureau